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Chapter 14. Betting on the Right Horse > What Type of Investor Are You? - Pg. 138

Betting on the Right Horse Options American Funds EuroPacific Growth Fund--A shares Comparative Indices Consumer Price Index Lehman Bros. Intermediate Term Govt/Corp. Bond Index Lehman Bros. Aggregate Bond Index Custom Blend Index (60% S&P 500/40% LB Aggregate) S&P 500 Index S&P 400 Mid-Cap Index Russell 2000 Index MSCI EAFE Fund Index 3.2 4.1 3.6 15.0 23.1 19.2 16.5 6.4 1.7 7.9 9.7 23.6 33.4 32.3 22.4 2.1 1.6 8.4 8.7 21.0 28.6 19.1 ­2.6 20.3 2.7 0.4 ­0.8 12.3 21.0 14.7 21.3 27.3 3.4 10.1 11.6 8.6 ­9.1 17.5 ­3.0 ­14.0 1996 18.6 1997 9.2 1998 15.5 1999 57.0 2000 ­17.8 138 YTD ­3.5 2.0 3.7 3.2 ­1.1 ­4.4 1.4 3.3 ­10.8 If you circle the best-performing fund for each year, you'll notice that the circles are all over the place. As you can see, it is very difficult to pick the winning fund every year. Two very important lessons can be learned from your circles: 1. Asset allocation--Spread your money around to different types of investments in different asset categories because each investment reacts differently to what's going on in the econ- omy. Some investments decrease in value at the same time that others increase or maintain their value. By allocating your investments into cash, bonds, and stocks at the same time, you spread your risk of loss. Diversification--The same strategy holds true with investments within an investment category, 2.