The old adage “don’t put all your eggs in one basket” is a good strategy for financial investing, because it’s risky to put all your money into one type of investment. If you invest heavily in one company’s stock, for instance, and that company abruptly goes bankrupt, you could lose a lot of money.

Plus, as we’ve seen in recent years, a variety of factors (the pandemic, the 9/11 terrorist attacks, a recession, a change in administration) can impact the economy — and our personal investments. Therefore, we need to diversify our investments.

Unfortunately, we don’t have a crystal ball that can accurately predict how any individual investment — like a stock — will perform over time, and there’s no guarantee that one specific investment will perform well. That’s why diversification is so important.

When you diversify, and spread your money across multiple asset classes, if one investment drops in value, the others can help balance out these losses. This strategy helps mitigate risk and sets you up for long-term financial flexibility and growth. This means that, even if you lose money in the stock market, your other investments can help balance out these losses. Diversification helps you better tolerate fluctuations in the market, increasing the chances that you’ll reach your long-term financial goals.

A diversified portfolio may include a combination of these types of assets:

• Stocks can potentially provide the highest return over time, but can fluctuate dramatically in the short term, due to market volatility.

• Bonds may offer steadier returns, but can vary as interest rates fluctuate.

• Mutual funds allow investors to instantly diversify, investing across dozens (or more) stocks, bonds or other securities. Historically, these large groups of diversified stocks tend to perform better — despite market volatility — versus individual stocks.

• CDs and savings accounts typically don’t fluctuate in value, growing steadily based on interest rates.

• Real estate values may grow over time, and can offer additional income streams, but it can be expensive and time-consuming to maintain real estate.

• Insurance products are uncorrelated to the market, income guarantees and death benefits.

To create a diversified portfolio, consider doing the following:

Develop a diversification strategy. There’s no “one-size-fits-all” approach to building wealth or developing a successful diversification strategy since each person’s circumstances, goals and risk tolerance are different. Therefore, it’s essential to create a customized plan to meet your individual needs. Remember: A good offense is often your best defense, so diversify your portfolio to withstand the inevitable economic ebbs and flows.

Assess your situation. Consider your age, financial goals, income, debt, risk tolerance, etc. For instance, someone just starting out in their career may be more risk-tolerant than someone who is approaching retirement age and has less time to wait for their money to grow.

Work with a qualified financial advisor. A qualified financial professional can help guide you to diversify your portfolio based on your personal facts and circumstances.

Consider your risk tolerance. If you have a high risk tolerance and/or you’re a younger investor, you might opt to invest most of your money in stocks (which have the potential to grow dramatically but also have the potential to drop dramatically) and less in other asset classes. Stocks tend to offer higher expected returns over time, but they can be volatile in the short-term, with performance swings that can make more conservative investors nervous. A conservative investor — perhaps nearing retirement age or not having the stomach for the ebbs and flows of the stock market—might allocate money more evenly between stocks, bonds and other assets. Investing in bonds, for instance, may provide more stability but with lower long-term returns.

Review your portfolio. Regularly (at least annually) review your assets and their performance. Market fluctuations, shifts in the economy and changes in your own personal circumstances (e.g., the death of your spouse, birth of a child, loss of a job) may require you to adjust your portfolio to accommodate your new reality. Determine which assets are performing well over time — and which are underperforming — and adjust accordingly. Periodically review and re-balance your portfolio to increase your wealth, control risks and remain aligned with your long-term goals.

While diversification does not guarantee profit or protect against market loss, it may help you better tolerate market fluctuations and increase the chances you’ll reach your long-term financial goals.

Joseph H. Guyton, principal of The Guyton Group, has more than 35 years of experience providing professional knowledge in retirement income planning, pension, profit sharing and business succession. Visit guyton-forge.com for more.