In personal investment, It is extremely important to diversify amongst many types of investments. One mistake that many investors make is to invest solely in stocks (via their 401k etc…) and never move their assets into more stable and less-risky investments like real estate or low-risk bonds.
Take a look at the performance of stocks since 1928:
As you can see, there is an obvious pattern of long-term growth. However, there are periods of significant loss — such as what we are currently experiencing now.
Since 2007, stocks have seen an incredible drop in value. Bonds however, have fared a bit better (as measured by the Vanguard Total Bond Index – BND)
There appears to be an inverse relationship between the performance of stocks and bonds since 2007. This relationship is even further illustrated by this scatterplot:
One passive investment strategy is to invest in both stocks and bonds — using the bonds to hedge the perforance of stocks. Certainly when you get closer to retirement it is important to move more assets into more stable and less-risky investments.
