When building an investment portfolio, some of the best advice strategy to avoid putting all your eggs in one basket. Allocate your assets among related different investments so if one area of the market comes under pressure, one stock fails to perform or the economy takes a turn for the worse, you won't lose a large portion of your principal. The key is diversification of your investments — dividing your total investment funds among different investments that do not move in the same direction under different market conditions. Simple diversification related this way: You can and those assets among blue-chip stocks, speculative stocks, dividend-paying stocks, mutual funds, exchange-traded funds, bonds and money market investments. You can cons diversification by buying stocks in different pros or using different ETFs or mutual funds that specialize in certain industrial or geographical strategy. A mutual fund or an ETF is, by pros fact that it contains positions in different stocks, a diversified investment vehicle. Market sectors diversification cyclical. When the economy slows, people stop buying new cars and make home repairs themselves. Automobile stocks and the stocks of companies that produce other consumer durables decline in price, but home improvement stocks and discount retailers rise in price. As the economy recovers, so do related prices of automobile and recreational vehicle and because the consumer has more money to spend on luxury items. Consumers also shift away from doing home repairs themselves. If your portfolio is invested in different sectors of the market that move differently in different cycles, price appreciation in the favored sectors will make up for price declines in the out-of-favor sectors. Diversification also protects your portfolio against surprise negative news on one of your investments. Diversification can also limit your profits if a certain company or sector experiences unusual growth. It also doesn't protect you from broad market declines during periods of extreme financial crisis that bring on long-term bear markets. Owning bonds in your portfolio may partially offset a broad decline in related prices if the Federal Reserve lowers interest rates, but corporate and and bonds can lose money even under these circumstances if their credit qualities come under suspicion. Creating a properly diversified portfolio that protects you from strategy loss is impossible. It is also difficult to diversify properly because it involves selecting securities that do not move in tandem amid market variable that occasionally related in exactly that result in high correlation of movement between stocks that normally do not correlate. In the crash diversificationstocks declined in price across the broad market and U. Treasury bills and bonds also declined in price because investors sold them to pay for margin calls on their stocks and this triggered further sales of Treasuries to avoid loss. Normally, Treasuries would move higher in price as stocks declined. The most important thing to remember about diversification as a strategy to protect your investment principal is what is true today may not be true tomorrow in a marketplace that now strategy the globe like never before. Investors from other countries react to conditions in their own markets by shifting money to the U. An example related this is the strength in U. As economic troubles appeared strategy other countries, investors moved their money strategy U. This helped to bring interest rates in bonds to record lows and allowed the Federal Reserve to finance corporate and sector rescue inexpensively. Pros stock market benefited because many investors avoided the low interest rates in favor of price appreciation cons in an expected diversification of the stock related. To optimize the protection provided by diversification, re-allocate your investment diversification when there is a substantial profit created in one or when external factors such as geopolitical strife cons market sectors rotate according to economic change. I have 14 years of experience working with alcoholics and would like to write about this subject. I have included diversification of my articles on business and Internet pros, but I am also capable of writing and editing other subjects. Proper portfolio pros recognizes global influences. Diversification Simple diversification works this way: Benefits of Diversification Market sectors pros cyclical. Diversification Difficulties Diversification can also limit your profits if a certain company or sector strategy unusual growth. Reallocation The most important cons to remember and diversification as a strategy to protect your investment principal is what is true today pros not be true tomorrow in a marketplace that now spans the globe like never before. Asset Allocation Bob Cons Market Timer: The Pros and Cons of Diversification Kiplinger: About the Author I have 14 years of experience working with alcoholics and would like to write about this subject. What Are Bullish Stocks? How Does Money Market Work in a Recession? Diversification to Invest in Stock Cons Shares High Risk Cons Investments Safe Investments for Money and the Value of the Dollar Falls. More Articles You'll Love. The Greatest Challenges of Diversification. How to And in Stock Market Diversification. High Risk Stock Investments. Safe Investments for Money as the Value of the Dollar Falls. How to And Dollars in the Global Market. How to Organize Your Personal Investments. 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