Diversifying Your Portfolio

The saying "Don't put all your eggs in one basket" may have had its place on Wall Street during the past century, but with today's range of investment choices, that old axiom needs some rethinking.

You don't have to be a farmer's daughter to know that eggs come in different colors and sizes. And if you've tried creating a diversified portfolio based on that egg idea, you've probably learned that there's more to it than first meets the eye.

Joseph Flaherty, manager of the MFS Asset Allocation Funds, says there are two levels of diversification that investors need to remember when constructing their portfolios. The first is across the major asset classes: stocks, bonds and cash. The second level is within those classes. For example, among equity funds, diversification might include a large-cap value and a small-cap growth fund. Or within bond funds, a government and a high-yield fund.

Creating a well-rounded basket of funds means covering all the asset classes, diversifying within each asset class, and, over time, tossing out the broken eggs.

Dian Vujovich is an author, syndicated columnist and publisher of fund-investing site www.fundfreebies.com.

This article was originally published in the January 2005 print edition of Entrepreneur with the headline: Basket Case.