| By Michael Jappell CRPC

Most of us have heard the saying: “Don’t put all of your eggs in one basket.” For years, financial experts have urged investors to spread their money across different types of asset classes—such as stocks, bonds and cash—in order to help reduce risk and enhance long-term returns.

Yet, all too often, investors ignore this advice, pouring the bulk of their funds into a relatively narrow handful of investments—or even into a single stock. Although diversification does not insure against loss, it can be an important factor to helping you achieve long-term financial success.
As with tennis, let’s relate this to a player with one strength. In this case, we’ll use the player’s forehand as an example. If all this player has is that one strong point and never works on any of his/her weaknesses (serve, backhand or volley), this player could potentially let themselves fall victim to an opponent that can exploit these weak points on a consistent basis.
 
Modern portfolio theory
The concept of diversification finds its roots in the Modern Portfolio Theory. This theory states that portfolios created using a mix of different asset classes and investment styles should deliver higher returns with less risk than any one asset class would by itself.
 
Asset allocation process

Developing an asset allocation strategy requires an in-depth statistical analysis of asset class performance. While this process begins with an analysis of historic risk and return results, it shouldn’t end there. The capital markets are constantly evolving, and what occurred yesterday, might not happen tomorrow. With many different variables and strategies impacting diversification decisions, many investors may find it difficult to chart an appropriate course.

Michael Jappell CRPC

<p>Michael J. Jappell, CRPC is a Smith Barney Financial Advisor and Chartered Retirement Planning Counselor, located in Garden City, N.Y. He may be reached at (516) 227-2808 or visit www.fa.smithbarney.com/jappell.</p>
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