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If the Enron and WorldCom scandals have taught investors something, it is that betting your future solely on one particular company's stock is a enormous error.

In reality, speak to any financial adviser and the mantra these days is diversify, diversify, diversify. But to typical investors, that's not so basic. What specifically does that mean and how do they go about carrying out it?

Asset allocation implies spreading out your income across various asset classes (such as stocks, bonds and money) and within every single asset class (not getting just a single variety of stock, bond or mutual fund). The notion is that when a single asset class falls, yet another could rise, which cushions the portfolio.

"At minimum, a moderate investor would most likely want to hold five asset classes: big-capitalization stocks, little-capitalization stocks, international stocks, bonds and money," said Roger Ibbotson, chairman and founder of the asset allocation firm Ibbotson Associates and finance professor at the Yale College of Management.

But diversification is not always easy or cheap. About 75 % of mutual funds have minimum investment needs of $1,000 or far more, according to the Investment Firm Institute. For a moderate investor, creating a diversified portfolio can imply a massive initial investment.

"A reasonable allocation may be 38 percent huge-cap, 7 percent small-cap, 15 percent international, 30 % bonds and 10 % money," Ibbotson said. "But if the minimum investment is $1,000 per mutual fund, you would need to have more than $14,000 to invest in those proportions."

But fear not, there may be a easy resolution: a fund of funds. Typically named lifecycle funds, way of life funds, target maturity funds or balanced funds, these investment merchandise are complete diversified portfolios. Investors can choose a fund of funds primarily based on time horizon (when you happen to be going to retire) or how considerably risk you can tolerate.

With 1 acquire, investors can get access to a diversified portfolio made by specialist money managers such as Old Mutual, Pioneer Investments and AIG SunAmerica, who have partnered with Ibbotson Associates to aid create these fund offerings. Funds of funds can be thought of as one-cease purchasing for your investment dollars. - NU worth reading