A key part of a long-term investment strategy is diversification. The benefit of investment diversification is that it can reduce risk by spreading your investments among various asset classes, industries and other categories. By diversifying across different types of investments, your portfolio’s overall returns should fluctuate less, as different asset classes will experience gains and losses at different points in the market cycle.
To start, investors may achieve diversification by spreading their assets among three main categories: stocks, bonds and cash. Within each of those categories, investors may diversify further. For example, your stock investments may include companies among different industries, sectors, countries and market capitalizations. Similarly, your bond investments may include different maturities, durations and investment types such as municipal and corporate.
Mutual funds are an effective way to diversify assets because investors can own hundreds of stocks or bonds with a small investment. A financial advisor can help you choose the right mix of mutual funds to help meet your long-term goals.
Keep in mind that diversification is not a one-time undertaking. It’s important to periodically review and rebalance your portfolio with your advisor to ensure your investments are still aligned with your goals, time frame and risk tolerance. Changes in your personal situation could mean your portfolio needs to be adjusted.
While a diversified investment strategy does not eliminate risk or guarantee above-average returns, it provides a better chance of having a better long-term outcome than if all of your eggs were in one basket.
Since 1926, stocks have provided a higher return than bonds in 59 of 93 calendar years* — far from an overwhelming advantage. Bonds had a higher return in the other 34 years, so you need to put money in stocks, as well as bonds, if you want the opportunity to benefit from both.
Comparing Annual Total Returns 1926-2018
Stocks had a higher total return 59 of 93 years
Bonds had a higher total return 34 of 93 years
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
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.
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.
Past results are not predictive of results in future periods.