When investing, don’t put all of your eggs in one basket. Use diversification to manage risk and potentially enhance performance.
In today’s market environment, diversification is more important than ever.(1) But what is the thinking behind this big word? The process of diversifying — or dividing your money among different types of investments — is based on the idea that different asset classes tend to react differently to similar market conditions. So by diversifying your portfolio, you may help reduce the risk that a loss in one asset class will drag down your entire portfolio.
The Right Mix May Help You Manage Risk
Diversification: Diversify Within and Among Asset Classes
To diversify your portfolio, first select among major asset classes, such as stocks and bonds.(2) The chart above shows how diversifying your portfolio with stocks and bonds may help reduce risk over time, although past performance is no guarantee of future results. Second, consider diversifying within an asset class, such as stocks. For example, if your primary objective is growth, you might choose to invest the majority of your money in “blue-chip” stocks and small-cap stocks.(3) You may also want to consider adding foreign investments to your portfolio mix.(4) Foreign investments make up more than half of the world’s total market, so if you are not investing overseas, you may be limiting your opportunities.
Diversification: Sometimes Less Is More
Diversification is often described as putting your eggs in different baskets. The mix of “baskets” you choose should depend on your goals, time frame for those goals, and ability to tolerate risk. Longterm investors may choose more stock investments, while shorter-term investors may select a mix weighted toward bonds and cash investments such as certificates of deposit.(5) No matter what combination you choose, make sure each investment plays a specific role in your overall objective. In investing, more is not always better — strategic diversification is the key. This communication is not intended as investment advice and should not be treated as such. Each individual’s situation is different. You should contact your financial professional to discuss your personal situation.
Next Step: Speak to a Financial Advisor
Source/Disclaimer:
1 – There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
2 – Investing in stocks involves risks, including loss of principal. Bonds are subject to market and
interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are
subject to availability and change in price.
3 – Securities of smaller companies may be more volatile than those of larger companies. The illiquidity
of the small-cap market may adversely affect the value of these investments.
4 – Foreign investments involve greater risks than U.S. investments, including political and economic
risks and the risk of currency fluctuations, and may not be suitable for all investors.
5 – CDs may be FDIC insured and may offer a fixed rate of return if held to maturity.
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