Diversification means: Don't put all your eggs in one basket. Investment experts say it is safer to invest in a number of different instruments. There are also certain advantages in investing gradually rather than all at once, i.e., don't invest all your money in one shot. These are two basic strategies that can help you to reduce the risk in your retirement portfolio. These two strategies can be accomplished by saving through your company's retirement plan, where you contribute money gradually through payroll deduction and you have the opportunity to invest in different funds.
This strategy of systematically investing a fixed dollar amount over time is called dollar-cost averaging. For example, if you have $1,200 to invest in your retirement program this year, you would invest $100 per month instead of investing the whole $1,200 at the beginning of the year. The benefit of dollar-cost averaging is that it may reduce the risk of buying shares at the wrong time, e.g., when stock prices are high. With this strategy, you tend to buy fewer shares when the price per share is higher and more shares when the price per share is lower. Dollar-cost averaging works in your favor because the average price per share that you end up purchasing is typically lower.