What is Diversification? A Definitive Guide for Kids, Teens & Beginners


Introduction to Diversification for Kids and Teens

This video explains the concept of diversification in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about diversifying investments, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.

Suitable for students from grade levels:

  • Kindergarten
  • Elementary School
  • Middle School
  • High School

The topics covered are:


Howdy Wall St. Willy! In the newspaper I read about diversification.

What is diversification anyway?

Diversification is investing money in different things instead of investing all of your money in just one or two things.

Why would I need diversification?

You need diversification to reduce the risk of losing money or getting negative returns.

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Well, who needs to diversify?

All investors need to diversify. Remember the old saying, “Don’t put all your eggs in one basket”?

If I want to diversify, what factors should I consider?

One factor that you should consider is the asset class. You should generally spread your investments among stocks, fixed income, cash equivalents, real estate etc.

What is Diversification? A simple explanation for kids
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Another factor to consider is geography. You should divide your investments among US, developed markets – US, Europe, Australia etc., and emerging markets – China, India, Brazil etc.

Once more factor to consider for diversification is tax. Whenever possible, you should try to make tax-advantaged investments with pre-tax money like a 401k or with post-tax money like a Roth IRA. You can also make non-tax-advantaged investments like your regular brokerage account.

One more factor that you should consider is liquidity. You should spread your investments between liquid assets like cash or money market securities and not-so-liquid assets like CDs or certificates of deposit and real estate.

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But, when we say diversification, the most important factor is investing in different asset classes.

Well, why do I need to diversify across asset classes?

You need to diversify across different asset classes because things within an asset class generally show very similar risks and returns but different asset classes have different risks and returns.

When you invest your money in different asset classes, even if one asset class does not perform well, another asset class is likely to make up for the loss. This means that over time, your overall return would fluctuate less and will be more predictable.

Benefits of Diversification - Explained to kids
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Can you give me an example of predictable returns due to diversification?

Sure. If you have $1000 to invest, you can invest 75% or $750 in stocks and 25% or $250 in fixed income.

This way, if stocks perform well, the bulk of your portfolio gives a great return. But, if stocks do not perform too well, you still get a predictable return from your fixed income investment.

Well, is this proportion of 75% and 25% the same for everyone of all ages?

No. I will cover that in detail when we talk about asset allocation. But that’s a topic for another time.

Thank you very much for telling me about diversification, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!


Conclusion

What do you think about diversification? What have you done to achieve diversification in your portfolio? Please let us know by leaving a comment below!

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Video Featured in the Below Financial Literacy Course for Kids and Teens


Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids and Teens


Podcast: What is Diversification?

What is Diversification
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