Final answer:
Tony and Angela are subjecting their investments to higher risk by not diversifying, as focusing on single-company stocks or bonds makes them vulnerable to company-specific issues. Diversification helps in balancing the investment risk and often provides more stability by spreading investments across various entities. Mutual funds are a common way to achieve diversification in an investment portfolio.
Step-by-step explanation:
When Tony and Angela decide to invest all their money in individual bets, such as choosing stocks or bonds from a single company, they are taking on significant risks. These include exposure to unfavorable events that may affect the company's performance, such as poor supply and demand dynamics or management mistakes. The old adage of not putting all your eggs in one basket explains the principle of diversification.
By spreading investments across various companies, investors can mitigate the risks associated with any one company underperforming. This is because while some firms may perform better than expected, others may fare worse, and through diversification, the overall investment is more likely to experience stable growth, with gains in some areas offsetting losses in others.
Furthermore, the consideration of mutual funds as an investment option reflects this strategy of diversification. Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. This allows individual investors to own a slice of a larger, diversified investment portfolio, which has the potential to iron out the volatility usually associated with single stock investments, thus providing a more balanced and less risky investment path.