Diversifying Your Investments Is as Much Common Sense as Science.

Provided by Russell Investment Group

Diversification—spreading your money among many different investments—takes a middle road through the highs and lows of market performance, allowing money the opportunity to grow regularly with fewer fluctuations along the way.

The reason for diversification is simple: By including a variety of investments in your portfolio, your risk is less than if you put all your money in one type of investment.

All securities behave differently from one another, going up and down in separate cycles and to varying degrees. An individual stock is affected by a combination of different elements, including the overall stock market, health of the industry the company does business in, and the company's own performance. Though stocks generally vary more than fixed-income investments, fixed-income prices can be affected by changes in interest rates and the overall fixed-income market.

Because investments react differently to market conditions and other factors, you may want to keep a well-diversified portfolio in order to balance out the ups and downs. Though you are not as likely to make a killing with a highly diversified portfolio, you are protecting your savings from short-term losses and allowing them the opportunity to grow over time.

Diversification can be achieved in two ways: within an asset class (such as stocks) or across asset classes (such as stocks and bonds). In the first case, you are likely to have smaller swings of value over time in a portfolio that holds stock in a dozen different companies instead of one. You are likely to have still smaller swings of value if you add fixed-income investments, such as bonds, to your stock portfolio.

Risk, or variability, of different markets can depend on national and international developments. Economic factors, such as production, employment, monetary policy, and levels of investment, influence markets for equities and fixed-income securities in different ways. How you diversify across asset classes, therefore, has a direct effect on the amount of risk, or variability of returns, you are likely to have.

Mutual funds that invest in both stocks and fixed-income investments (balanced funds) offer one way of diversifying both across and within asset classes.

Another way of diversifying is to choose your own mix of investments, rather than invest in a fund where the mix is determined by someone else. However, if you take this route, you need to be more diligent about evaluating your choices and may want to get assistance from a professional advisor.

You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money.