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By diversifying your investment portfolio among stocks, bonds and money market securities, you can lower your overall investment risk. Diversification can help even out price swings during the normal ups and downs of the stock market, although it cannot ensure against loss.
One way to diversify your portfolio is by investing in mutual funds. Mutual fund managers pool your money with the money of many investors to create a portfolio of investments. You'll need to review a mutual fund's objectives to see if it will help you reach your investment goals.
Investing in stocks lets you participate in the potential growth of individual companies and the economy in general. By investing in stock mutual funds, you benefit from professional portfolio management and eliminate the sometimes difficult process of choosing individual stocks.
It's important to remember that investment return and principal value will fluctuate, and it is possible to lose money by investing.
You can select stock funds based on a variety of characteristics.
Market capitalization represents the value of a company's outstanding shares of stock. In general:*
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Historically, small cap stocks and mid cap stocks have been more volatile than the stock of larger, more established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Due to the limited focus of these funds, they may experience greater volatility than funds with a broader investment strategy. They are not intended to serve as a complete investment program by themselves.
Bonds essentially are loans from you to issuers, such as governments, agencies or corporations. These entities agree to pay you back with interest within a certain time period.
Bond mutual funds pool many bonds into a single investment portfolio. Their prices generally fluctuate less than those of stock funds, so investing in bond funds can add a measure of stability to your portfolio. Generally, as interest rates rise, bond prices fall.
Key factors to consider with bond funds include the issuer, maturity and tax treatment.
Money market funds hold securities, such as U.S. Treasury bills, that mature in less than one year. These funds can be suitable if you need relatively easy access to cash because many offer check writing privileges. They can provide a higher return than bank Certificates of Deposit or savings accounts and can add stability to your portfolio. Keep in mind that there are fees for investing in a mutual fund.
Money Market Fund: An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Diversification does not assure a profit nor does it protect against loss of principal.
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This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.