Diversify

Diversify summary:

• To diversify is to have variety: in finance, diversification is something that's usually connected with investments. 

• You can diversify a portfolio by owning a mix of stocks, bonds, and mutual or index funds. 

• Credit score calculations factor in the diversity of your credit mix, or how many different types of credit you've used. 

Diversify definition and meaning

When you diversify, you have a variety of things. In finance, diversification is usually related to your investments, but it can also apply to where you keep your savings or how you use credit. 

In a broad sense, diversification helps you spread out risk. If one investment goes south, you're not losing everything because you have other investments. If you've heard of not keeping all your eggs in one basket, diversification is having your eggs spread out in a few different baskets.

Your money goals can determine how you diversify your finances. 

Key concept: To mix or blend different things for a common purpose; in this case, your financial success. 

More on diversify

Your finances are personal, and the decisions you make about how you invest, save, or manage debt should reflect that. There are times when you may need to diversify your approach to reach your goals. 

Diversification is a word you often hear connected to investing. When you diversify investments, you spread out risk. You can apply the same idea to other areas of your financial life. 

Diversify: a comprehensive breakdown

To diversify is to introduce variety. For example, say you want to plan a backyard flower garden. You could plant nothing but roses, or you could diversify by planting a blend of different blooms.

The roses may look and smell nice, but if a disease or insect that targets roses shows up, your entire garden could be gone in one fell swoop. Diversification helps ensure at least some of your flowers survive. Plus, if you diversify your seed mix, your garden could end up being an explosion of different colors and scents instead of the same all over. 

Diversification works the same way when it comes to money. For example, you diversify when you:

• Split your money up into different bank accounts

• Hold a variety of investments in your portfolio or retirement account

• Use a variety of credit products, like credit cards and loans

You're not required to do any of those things, but there are some good reasons to diversify. 

For example, having multiple bank accounts could help you organize your money for different goals. You might have a checking account that's just for bills, a savings account where you keep your rainy day fund, and a money market account you use for sinking funds. 

Diversification helps you manage risk when you invest. If you put all your money into one stock, you risk major losses if the company doesn't perform. A diversified portfolio spreads out risk over multiple investments. If one asset or investment underperforms, the rest are there to potentially pick up the slack. 

You can benefit from diversifying your debt, too. Credit scores consider the diversity of your credit, or how many different kinds of credit you use. Credit mix is 10% of your FICO credit score calculation. Lenders typically like to see that you've handled both revolving credit lines, like credit cards, and installment loans, like personal or mortgage loans.

Real-life example of diversify 

You may already be diversifying some parts of your financial life. For instance, you might have more than one bank account or owe different kinds of debt. 

Here's an example of how to diversify if you're ready to start investing. 

Say you have $1,000 to open a Roth IRA. You decide you want to put 60% of that into stocks, 30% into bonds, and 10% into cash. You open your account and buy three mutual funds:

• $600 to a stock fund: More volatility, but more potential for long-term growth

• $300 to a bond fund: Adds stability and could generate income, helping offset the ups and downs of stocks

• $100 to a money market fund: Cash-like alternative adds stability and liquidity, but little income

It's a simple portfolio, but it's diversified because your money isn't tied up in a single investment. Each time you add more money, you can use the same percentages to divide it up and stay diversified.