In investing, diversification is the concept of attempting to reduce the effect of volatility by adding one or more asset choices to a portfolio because the ups and downs of the market cannot be controlled. It can be as simple as buying stock in two companies instead of just one, or using a mutual fund or UIT.

Diversification can be accomplished to varying degrees. Owning stock in multiple companies, even in the same industry, creates some diversification as not all companies in an industry may react the same to some given financial or economic news. A greater degree of diversification can be attained by investing in vehicles with low or even negative correlations. This might include mutual funds that invest in different size companies, use different investment styles (growth vs. value), invest in different geographic areas (U.S. vs. Europe or Asia), and/or different instruments such as stocks, bonds, money markets and real estate.

Asset allocation is similar to diversification but involves more strategy. Proper asset allocation can help you build a portfolio that helps you reach your goals while maintaining a level of risk that matches your personality. Allocating your investments among different asset classes is one of the most important strategies you can take to achieve the balance of risk and return.

By implementing an asset allocation model, you are likely to use any number of different stock, bond and/or cash instruments in your portfolio.

Cash includes money market investments, such as Treasury Bills and short-term certificates of deposit. Because money market securities have short maturities (typically 90 days or less), they usually provide lower returns than stocks or bonds, but also fluctuate less in price. They make suitable investments for money you may need for short-term or unexpected expenses. There is no risk of loss of principal with insured certificates of deposit and Treasury Bills.

Bonds are IOUs issued by corporations, governments and federal agencies.* They provide income in the form of interest payments, and the return of principal if held to maturity. Compared with money market investments, bonds typically provide a higher level of current income, but their values can change significantly when interest rates rise and fall, or if the issuer's credit worthiness changes.

Stocks represent ownership, or equity, in a company. Although stocks usually experience more volatility than other types of financial assets, over the long term they have provided the highest returns.

Because these vehicles act differently under various market conditions, and over varying time frames, understanding your goals and objectives, investment time frame and aversion to risk taking is imperative in utilizing asset allocation in devising an investment portfolio.

No investment strategy can guarantee a profit or protect against a loss.