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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Getting started

Asset allocation and diversification

A mix of investments is typically better than one

Asset allocation and diversification can help you strike the right balance between risk and return in your portfolio. Holding a broad range of investments can help lessen the impact that any one economic or market event will have on your portfolio. That’s because different investments gain or lose value at different rates and at different times.

A healthy mix

Asset allocation refers to the different weightings of stocks, bonds and cash in your portfolio. Because these three asset classes have tended to have varying rates of return and risk profiles, asset allocation plays a role in helping you achieve your investment goal. Learn more.

Diversification takes this process one step further by spreading your money across different investments within the same asset class. Rather than trying to figure out which type of stock or bond will perform best, you’ll invest in many types. Over time, the ups of one investment have the potential to balance out the downs of another, with the goal of reducing the risk level in your portfolio. Learn more.

Here’s how asset allocation and diversification shape a portfolio.

Here’s how asset allocation and diversification shape a portfolio

The pie charts depict two portfolio asset allocation strategies. The chart to the left displays a portfolio allocated across three main asset classes: stocks, bonds and cash. The chart to the left displays more than half of the portfolio allocated to stocks, the second highest allocation to bonds and the least allocation to cash.

Across asset classes

This portfolio is allocated across the three main asset classes. Your asset allocation will depend on your investment goal, time horizon and risk tolerance.

The chart to the right displays the same portfolio allocated across the same three main asset classes and equally breaks down the stocks asset class allocation into four categories: U.S. large cap, international, U.S. small cap and emerging markets.

Within an asset class

While stocks still have the same percentage allocation, this shows how stocks are now diversified across investments that vary by size and geography.

Spread out your money

Asset allocation can have a big impact on your portfolio’s rate of return. In general, stocks are riskier than bonds, though most investors may need both. Your investment goal, risk tolerance and time horizon help determine the best asset class mix for you.

Because the asset classes don’t typically grow at the same rate, you’ll need to periodically rebalance your portfolio. Rebalancing helps maintain your intended asset allocation. Many investment firms offer the option of signing up for automatic rebalancing.

Fine-tuning your portfolio

It’s hard to diversify by geography, size and industry using individual investments. That’s why so many investors rely on mutual funds. It would take a lot of time and resources to construct a portfolio similar to a mutual fund’s. 

A typical stock fund holds 75 to 100+ different investments. And the investment minimum for most bond mutual funds is usually less than what you’d need to purchase a single bond.

Putting diversification to work

While numbers count in diversification, it’s a bit more complicated than that. Here’s what diversification is and isn’t. 

FICTION: If I own a couple of mutual funds and a few stocks, I’m diversified.
FACT: Not necessarily. It depends on the funds’ investment strategies and largest holdings. For example, if your portfolio consists of two U.S. large-cap funds and you hold a high percentage of shares in Apple, Amazon and Alphabet, you may not be diversified.
FICTION: The main reason I should diversify my portfolio is to improve my returns.
FACT: Diversification’s primary role is to lessen the impact of volatility on your portfolio. Instead of experiencing the market’s extreme highs and lows, having many different investments can help to smooth your ride and reduce overall risk in your portfolio.
FICTION: I’ve done well investing my "play money" and it’s not diversified. Diversification doesn’t seem that important.
FACT: Even if this is money you can afford to lose and you are willing to take bigger risks, your goal is still to make money. Diversification helps to minimize the impact of losing money in a single investment. For investments designated for an important goal, such as college or retirement, consider diversifying by asset class and investment type.

Learn more about investing

Now that you understand asset allocation and diversification, explore these other important investment concepts.

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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.