Diversify Well for Successful Long-Term Investing

Spreading your portfolio across a variety of assets allows you to hedge your bets and boost the odds you’re holding a winner at any given time over your long investing timeframe. “We don’t want two or more investments that are highly correlated and moving in the same direction,” Schulte says. “We want our investments to move in different directions, the definition of diversification.”

Your asset allocation likely starts with a mix of stocks and bonds, but diversifying drills deeper than that. Within the stock portion of your portfolio, you may consider the following types of investments, among others:

1. Large-company stocks, or large-cap stocks, are shares of companies that typically have a total market capitalization of more than $10 billion.
2. Mid-company stocks, or mid-cap stocks, are shares of companies with market caps between $2 billion and $10 billion.
3. Small-company stocks, or small-cap stocks, are shares of companies with market caps below $2 billion.
4. Growth stocks are shares of companies that are experiencing frothy gains in profits or revenues.
5. Value stocks are shares that are priced below what analysts (or you) determine to be the true worth of a company, usually as reflected in a low price-to-earnings or price-to-book ratio.
Stocks may be classified as a combination of the above, blending size and investing style. You might, for example, have large-value stocks or small-growth stocks. The greater mix of different types of investments you have, generally speaking, the greater your odds for positive long-term returns.