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