"Diversification... One from column A, one from column B." Choose diverse foods from a menu and you're an adventuresome diner. Choose diverse investments and you're just plain smart. Investors are diversified when they have money invested in at least three investment classes – stability of principal, income, growth & income, growth, aggressive growth, and global/international. Here's how diversification works and why the pros recommend it.

You allocate a percent of your savings to different investment classes.

Your investments perform based on factors such as interest rates, industry trends, economic conditions, the value of the dollar, etc. The same factors (for instance, rising interest rates) may affect different investments differently.

Results in one sector tend to offset those in another.
For example, when growth investments do well, income investments may lag.

Be aware, though, using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.

"You can get too much of a good thing." Most people just love ice cream, but an entire half-gallon can make you sick. Same, too, with investments. Some retirees put so much emphasis on preservation of capital that they tie up all their money in conservative, low-interest accounts. Even if you’re a conservative investor, you may want to put a portion of your money in slightly riskier vehicles. This may help your return beat inflation and act as a longevity hedge.