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Diversification and Risk Don't Put all your Eggs in One Basket Diversification and Risk Don't Put all your Eggs in One Basket If you place all of your savings in a single savings or investment instrument, such as a single company's stocks or bonds, and that company fails, you could lose everything, much like dropping the basket that holds all of your eggs. Diversification and Risk Portfolio a collection of financial investments held by an individual or financial organization Diversification investing in various financial instruments in order to reduce risk Diversification and Risk Would you bet $100 on a coin flip if the deal were that you keep your $100 and receive an additional $5.00 for heads, but lose $100 for tails? Would you bet $100 on a coin flip if the deal were that you keep your $100 and receive an additional $100 for heads, but lose $100 for tails? Would you bet $100 on a coin flip if the deal were that you keep your $100 and receive an additional $400 for heads, but lose $100 for tails? Diversification and Risk Forms of Saving and Investing: Some Benefits and Costs ·Checking accounts ·Savings accounts ·Certificates of Deposit ·U.S. Government Bonds ·Municipal Bonds and Special Purpose Bonds ·Corporate Bonds ·Mutual Funds ·Stocks ·Real Estate ·Collectibles ·Commodities Diversification and Risk The Pyramid of Risks and Reward Highest Risk - Highest Potential Return or Loss 10. commodities 9. collectibles 8. real estate 7. stocks 6. mutual funds 5. corporate bonds 4. government bonds 3. certificates of deposit 2. savings accounts 1. cash and checking accounts Lowest Risk - Lowest Potential Return or Loss Diversification and Risk Invest only what you can afford to lose. Invest at your comfort level. Invest according to your age. Diversification and Risk Mutual Funds A mutual fund pools investors' money. The fund puts its investors' money into the market on their behalf. In effect, investors own small amounts of many different assets. Mutual funds enable investors to avoid the risk that comes from owning any one asset. In other words, mutual funds make it easy to diversify. Diversification and Risk Investment Situations You received $1,000 in gift money for your 8th-grade graduation. You have no need for this money anytime soon. You have $18,000 that you'll need for college next year. You inherited $10,000 from your great aunt that you would like to use as a down payment on a house you plan to buy next year. savings account vs. U.S. government bond Back checking account vs. certificate of deposit Back certificate of deposit vs. U.S. government bond Back U.S. government bond vs. municipal bond Back municipal bond vs. special purpose bond Back special purpose bond vs. corporate bond Back corporate bond vs. growth mutual fund Back growth mutual fund vs. blue chip stock Back blue chip stock vs. real estate Back real estate vs. gold and silver Back art collection vs. income mutual fund Back stuffed animal collection vs. gold and silver Back gold and silver vs. savings account Back income mutual fund vs. growth mutual fund Back penny stock vs. blue chip stock Back