Whether you are an old hand at investing, or you’re new to the investment world, you’ve likely heard the term ‘diversification’ somewhere along the way. But what is it, and why does it matter?
What is diversification?
Diversification is a core principle of most long-term investment strategies. At its most basic, diversification is a way of managing risk by spreading out your investments among a variety of investment vehicles or opportunities. So instead of investing in only one company, where your fortunes depend on the success of that particular company, you might seek to invest in a multitude of companies instead in order to attempt to spread out the risk. Basically diversification is investor-speak for the old adage, don’t keep all your eggs in one basket.
The goal is not necessarily to boost performance, and diversification won’t necessarily guarantee higher returns or protect you against losses. What diversification can do is potentially counterbalance poor performance in one area of your portfolio with better performance in another.
Why is diversification important?
The one constant in the financial markets is change. We have never seen straight lines of performance trends; the markets are constantly shifting up and down, even if only slightly. The need for diversification arises because we never know when those shifts will occur, how long they will last, how big they will be, and in which direction the market will adjust – up or down.
Diversification may allow the opportunity to potentially lessen the volatility of more narrowly focused portfolios. For example, bonds and equities may help balance each other out: bonds can dampen the risk posed by equities, and equities can help raise the potential return of a bond portfolio. Geographic diversity, like investing in both U.S. companies and international companies, may help protect investors from volatility in one country.
While some risk cannot be managed by diversifying, other risks – like business risk and financial risk – tend to be more specific to a particular company, industry, market, or country, and these risks can be reduced through diversification. The idea is to invest in a variety of assets that will react differently to the same set of events.
Why use broadly diversified mutual funds?
Broadly diversified mutual funds, like the Green Century Funds, may offer a relatively simple and cost-effective way for investors to diversify without having to spend a lot of time researching, purchasing, and selling investments individually.
When you purchase shares in a mutual fund, your money gets pooled with other investors, and then invested by the mutual fund manager in a variety of securities. For the individual investor, this means that you can potentially invest in many different companies and industries for far less than what it would cost you to invest in them directly. In addition, the portfolio managers decide which securities to buy and sell, and when, which means individual investors don’t have to spend time thinking about it.
The Green Century Funds is the first family of broadly diversified, responsible, and fossil fuel free funds. If you are interested in learning more about investment opportunities in our no-load mutual funds, take a minute to let us know. We would be happy to send you more materials to review at your leisure. And if you’re ready to get started investing today, you can open an account right online.
Investment strategies such as diversification do not ensure a profit and cannot protect against losses in a falling market.
You should carefully consider the Funds’ investment objectives, risks, charges and expenses before investing. To obtain a Prospectus that contains this and other information about the Funds, please click here for more information, email firstname.lastname@example.org or call 1-800-93-GREEN. Please read the Prospectus carefully before investing.
Stocks will fluctuate in response to factors that may affect a single company, industry, sector, or the market as a whole and may perform worse than the market. Bonds are subject to a variety of risks including interest rate, credit, and inflation risk. The Funds’ environmental criteria limit the investments available to the Funds compared to mutual funds that do not use environmental criteria.
This information has been prepared from sources believed to be reliable. The views expressed are as of the date of this writing and are those of the Advisor to the Funds.
The Green Century Funds are distributed by UMB Distribution Services, LLC, 235 W. Galena Street, Milwaukee, WI 53212. 8/16