Ric Edelman: Hi! I am Ric Edelman, Barron's number one ranked independent Adviser.

Every investment has risks, bank CDs are subject to inflation risk and tax risk. Bonds face interest-rate risk and credit risk and stocks of course, are sensitive to market risk. Every investment has risks, there is no way to avoid it and that's why achieving your investment goals means limiting your exposure to each type of risk and the best way to do that is to diversify your investments.

Imagine that you have $25,000 to invest for 25 years. If you choose a 3% CD for the whole amount, your account would grow to about $52,000. On the other hand, let's say that you split your 25,000 evenly into 5 piles of 5 grand to each. With that 1st pile you buy 5000 lottery tickets, like everyone else, you lose it all. With the second pile, you bury it under your mattress; you earn no interest for 25 years.

The third pile of 5 grand, you open a bank account at 1% interest and your 5 grand will grow to about $6,400 over 25 years. With the fourth pile you buy a U.

S. Treasury bond. It earns the same 3% as the bank CD and that 5 grand grows to about 10 grand and with your fifth and last pile, you invest in the stock market. You earned 8% per year, that's well below the 10% that the S&P 500 Stock Indexes earned on average since 1926 according to Ebit & Associates.

At that rate 10% a year your 5 grand will grow over 25 years to more than $34,000. In total, you have about $3800 more than if you had invested the entire amount in CDs. You know you lost everything on the first pile, earned nothing on the second pile, invested in a bank account with a third and super save government bonds with the forth. Then you only gambled with the stock market with 1/5th of your money.

This result is possible, thanks to diversification that allows you to take small calculated risks and even though some of your money might fall in value or earned just a small amount. You only need one part of your money to earn above-average returns that can boost your overall portfolio. Surprisingly simple, yes of course, rather than invest in lottery tickets or mattresses, I recommend that you create a portfolio using up to 19 major asset classes and market sectors to help you achieve true diversification.

In our next video, I'll show you how to maximize your portfolio's returns with rebalancing.