MOLDENHAUER & CO., INC.

FREQUENTLY ASKED QUESTIONS

What is Diversification and why is it so important?

Webster defines "Diversify" as follows: "to balance (as an investment portfolio) defensively by dividing funds among securities of different industries or of different classes"

Diversification of an investment portfolio is one of the (perhaps most important) cornerstones of prudent money management. None of us has the ability to see into the future, so none of us can predict with certainty what might happen to a particular investment as time marches by. For this reason, among many others, placing all of a nest egg into one kind of asset disregards the possibility that the choice of that particular investment was a bad one - or at least not as good a choice as it could have been. Diversification is one of the best tools we have to prevent what could be a minor mistake (and we all make them) from turning into a disaster for our investment portfolio.

As simple as the concept might seem, establishing the right diversification can become complex as the size of the portfolio increases or the needs of the portfolio owner become more complex. Also, the owner's psychology plays a big hand in how the portfolio ought to be diversified.

A portfolio invested 100% in insured CD's might be pretty safe but it is not diversified. Sometimes extreme safety is important and overrides the need for diversification, but that situation is prudent in fewer instances than one might think. A few investors opt for ultimate safety because they simply don't know what else to do and embrace safety as their prime objective because they don't want to recognize their inability to become more efficient managers. Many times, this psychology results in giving up superior returns on their investments.