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Capital Ideas™ 
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Categories
Participant Education
Demystifying diversification: Help participants build a more stable portfolio

Saving for retirement is one thing; building a retirement portfolio is another. One of plan participants’ biggest questions—and roadblocks—is how to construct a diversified mix of investments and avoid putting all of their eggs in one basket.


Studies show that asset allocation often has greater impact on long-term results than individual investment choices. The asset allocation decision directly shapes participants’ potential for return and level of risk. Helping them make informed choices is one of the most valuable roles plan sponsors can play. Capital Group can help plan sponsors educate participants with a range of easy to understand materials that show the historical benefits of portfolio diversification.


Common questions from participants


Employees look to you for guidance. While you can’t tell them what to invest in, you can share well-established ideas about diversification and point them to resources that can help them identify what’s right for them.  Here are some common participant questions:


With so many types of investments to choose from, how do I know if I am adequately diversified?


To start, it is important to help ensure that your participants have a good grasp of the basic ideas of diversification. For example, you can provide participant education materials to explain that a diversified portfolio typically has a mix of stocks and bonds, because those major asset classes react differently to market and economic events. Together, they can blunt the overall volatility in a portfolio and improve the chances that at least some part of the portfolio is benefiting regardless of the market environment.


Explain how vehicles like target date funds offer built-in diversification, which could reduce the impact of price swings in individual securities, and offer professional oversight.


I’m concerned that I may have invested too much in stocks. But I’m also worried that if I invest less in stocks, I won’t have enough money to last throughout retirement. What is the right balance between stocks and other investments at my age?


Explain that their age is indeed a primary consideration in their asset allocation. While investing in stocks is integral for portfolio growth at every age, it may be appropriate for the percentage that participants have in stocks to be higher when they are young and decline as they approach retirement. For example, an 80% stocks/20% bonds mix might be selected by participants with a long investment timeline. But by the time participants reach retirement, their portfolio may be more heavily weighted with bonds. Ultimately, the right balance depends on the participant’s time horizon, comfort with risk, and overall financial situation.


Once I decide on my mix of investments, is it best to simply leave it alone after that?


Let participants know that it is a good idea to check their portfolios periodically to make sure their asset allocation is still appropriate for their age and investment goals. Over time, market gains can make one segment or type of investment much more prominent, which can drastically change the risk and return potential of the entire portfolio. An option to consider is rebalancing — trimming investments that have increased in value and using the proceeds to bring the asset allocation back in line. 


Rebalancing my portfolio between stocks and bonds seems very complicated. Is there an easier way to maintain a properly diversified portfolio?


Let your participants know they might want to consider investing in a target date fund. These funds are professionally managed and designed to become more conservative as the approximate retirement year (the target date) approaches. A target date fund follows a “glide path” that gradually shifts its allocation from stocks to bonds and cash equivalents. This approach seeks to gradually reduce risk and make the portfolio more income oriented as investors near retirement. In addition, be sure to inform participants that they can utilize an automatic rebalancing feature if it's offered by your plan's recordkeeper.


Learn more about
Participant Education
Plan Design
Asset Allocation

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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 prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Although target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met.
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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.