[MUSIC] Welcome, we're going to be talking this time a little bit about a strategy that'll help us work with that risk that we've been talking about investments in investing. And there's lots of different strategies for minimizing risk but I think this one is really key. And if you don't remember anything else, I want you to remember this one, so we're going to focus on that. And what we're really talking about here is diversifying your investments. Because in diversifying your investments is a great way to just kind of provide us with a way of protecting ourselves against any one company's rise and fall and that's what we're really looking to do. So what diversification means is that you're looking at investing in more than one company, or even across industries, and we want to lessen the impact of that one investment. So if we think back to our example, with Sam and his tennis shop, if you put all your dollars into Sam's shop, and then he did badly, all your dollars go away. And that's not, we don't want that, we don't want that with our personal wealth, right? We want to have overall a gain even if one company falters, we want to keep moving forward with our on investment growth. And so the versification can really help us reduce business risk, when we think about the example of Sam's tennis shop, as well as reducing market risk by investing in across different kinds of investments. But let's look at a concrete example of this. Let's say that you were really interested in technology and you decide that you want to invest and purchase stocks and shares in a company that sells technology. So I'm going to just use some names of companies so that we can have a way to have a conversation. But again I'm not endorsing any of these, I really don't mean for you to go out and purchase these. I don't mean anything by it, okay? [LAUGH] So, the very least diversified portfolio will be essentially if you went out and you bought all of one company's stock. Let's say for example that you bought Dell computer, okay? That would be an undiversified portfolio, that's all you own. A more diversified portfolio, slightly but still all in the same industry would be if you bought three different companies that made computers like Dell, Apple and Lenovo. Okay, so little more diversified but really not what we'd call truly diversification. A diversified stock portfolio will actually look at having different industries in your portfolio. So you're portfolio is like all your investments that you have. And in that portfolio you might have stocks from different companies like some from pharmaceuticals, some fiance companies, some auto-manufactuirng, some agribusiness all kinds of different possibilities. And now we're trying to move towards a more diversified stock portfolio. We might want though to have a little bit more diversification. We know that, so far, we'll say that you've been just investing in U.S. companies, if you were a U.S. citizen, you might want to pull in some foreign investments, that would also, kind of, give you that international diversification. That might help if the U.S. market doesn't do so well, but, some other countries, markets are doing better, that can help you with that forward growth of your own personal portfolio. The other thing to think about is that most people would look at having a portfolio investments that goes across investment types or investment classes. So yeah, you might have stocks but you might also have some bonds, you might have some cash, you might have real estate. All kinds of other options, to again, give you a more diversified portfolio. That way, if something is happening in the economy that's holding down one investment class, then with hope that the other classes will be doing better and pull your portfolio along during that time period. So this is a way to think about it, you really want diversification as much as it seems reasonable. You want to not think about investing in just one company but looking across many companies and different industries and possibly in even different kinds of investment options, different ways of investing. So, it used to be that a lot of people, though really the main way to invest, was to go out and make these selections of different individual companies, and build your own diversified portfolio. But was has evolved is now what we call Mutual Funds. And Mutual Funds is where you take your dollars, and there's other investor dollars that are put into a pool and the manager of that mutual fund will handle the buying and selling of the investments for you. It means that individuals don't have to be so involved with that buying and selling and essentially you have somebody else who's working on that full time doing it for you. Sometimes it's a little confusing to think about this, how this really look. And one analogy that a colleague uses is to think about a swimming pool and you're one of the persons in that pool investing money and so are other people in that same swimming pool investing money. And the overall piece, that swimming pool, is your mutual fund. I don't know if that helps you give you a mental picture that you can remember by but perhaps it will. As we move through talking about investment, we're going to talk about retirement plans at different U.S. companies and how often the retirement plans, you're not really choosing stock so much as you're choosing mutual funds, that are groupings of these different investment things like stocks. So, mutual funds can be made up of all kinds of investments, it doesn't really dictated that mutual funds are always stocks that's not true. Sometimes you can have a bond mutual fund that has different kinds bonds in it and you can have a stock mutual fund. There's a lot of different ways these mutual funds are kind of put together. And sometimes you'll see names, things like growth, meaning it's a mutual fund that's been put together of an investment mix that's really focused on growing the value of it. Maybe you want to only be investing in companies that are smaller, a small capitalization, small cap mutual fund might be good for you. International companies, maybe that's what you're interested in, then international mutual fund might fit that need. But there's another kind that's coming out that's been out for a bit here that are really interesting to people and that's what's called target date retirement mutual funds. And what that is is that people can say well I want to retire in this year. So let's say you want to retire in 2055. Then that mutual fund would be designed to change its mix as you age to take advantage of more growth while you're younger and then less risk as you get older and getting closer to that age where you'd be pulling money out of the mutual fund. And so again, something that we're seeing a lot in retirement plans are these target date retirement mutual funds. Another type of mutual fund is what's called an index mutual fund and these mutual funds, really there's not a lot of management going on in them. There's not a lot of buying and selling all the time. What you see instead is that they are designed to match sort of the performance of a benchmark. We mentioned the S&P 500. So you could get an S&P 500 index mutual fund which would be comprised of the same companies and the same ratios as the S&P 500. And there's lots of different index mutual funds too that are matching up with different benchmarks. So that's another thing to consider, something that is out there that's available to people. One of the advantages of index mutual fund is it reduces again business risk, right, because we talked about lots of diversification there. But also investing costs which we know is an important part of kind of our return to as an investor is how much is it costing us to invest? So index mutual funds tend to have low fees. So mutual funds do have risk, they essentially they have the risk of the investments that they hold and so you need to keep that in mind. So sometimes I think people hear, well stock's are risky but mutual funds are safe. And we can't really make that generalization because it depends on what the mutual fund has within it, is it stocks, is it bonds, is it a mix? So again we would have to know that in order to make a judgment about the risk of a particular mutual fund. All right, so that's kind of helps us think about the different kinds of risk that are out there and what we're looking at and how we can also start thinking about diversification and minimizing the risk that we might have for our overall investment portfolio. [MUSIC] [SOUND]
