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Lesson 4 · Written for kid, teen, and little

Spreading your bets

Why one bad pick shouldn't sink everything you own.

The idea

Diversification means owning different investments so you depend less on any one of them. If you own only one company's stock and it becomes worthless, you could lose all the money in that stock. In a fund spread across many companies, the effect of one company failing depends on how much of the fund it makes up. Diversification can reduce some risks, but it cannot prevent every loss. The kid version: don't put all your eggs in one basket.

A

Words to know

5

Diversification

Spreading investments across different holdings can reduce dependence on any one of them. The effect of one loss depends on its weight, and diversification cannot prevent all losses.

Concentration

Putting a large share of your money in one investment makes you depend heavily on it. If a $500 stock investment becomes worthless, that investment loses $500.

Volatility

How much an investment’s price varies over time. Both individual stocks and funds can have large price changes.

Correlation

How investment returns move together. Two investments affected by the same news may move similarly, but that relationship can change.

Index fund

A fund designed to follow an index. Its holdings depend on that index; a broad stock index fund can spread money across many companies.

Try it — no accountBuild a portfolio

Split a hypothetical $10,000 across stocks, bonds and a 'hot pick'. Run 20 simulated paths using example assumptions, not market forecasts.

Try 100% Hot Pick first. Look at the lowest of these 20 simulated outcomes. Then try a mix and compare.

Goal: keep the worst simulated ending balance at $8,000 or more.

Your allocation

100%

US Stocks7% ± 15%34%
Bonds3% ± 5%33%
Hot Pick12% ± 55%33%

In the full lesson

  1. 1Sort into groups
  2. 2Build a portfolio
  3. 3Make the call

Vine has 107 lessons like this one, each written three ways so a 7-year-old and a 17-year-old both get a version that fits.

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The practice portfolio is open.

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