Over the weekend I was asked to explain a basic financial concept to someone like they were a 5yr. old. I have decided to make this into a series. If you have a financial question or concept you do not understand, email me at nancy@financialgroup.com and I will put into terms a 5yr. old could understand.
I was asked to explain diversification, here it goes:
Let’s say you have a bag of milk chocolate M&M’s that you pour on the table. You see brown, green, and blue M&M’s, but inside they are all milk chocolate. They are all actually the same thing = no diversification. If some of the M&M’s were dark chocolate or almond, there would be diversification.
I see this in the mutual fund portfolios people bring to me. They may have 3 different funds with 3 different companies, but all of the securities within the funds are Large Cap Growth stocks. There is no diversification here. If one fund was Small Cap Value, and the other was a Bond fund, there would be diversification.
Send me you questions, I will put them into 5 yr. old language.

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