Investor Education
Diversification
Learn more about the foundation of asset allocation.
Before exploring just how you can put an asset allocation strategy to work to help you meet your investment goals, you should first understand how diversification works hand in hand with asset allocation. Diversification is the process of helping reduce risk by investing in several different types of individual funds or securities. When you diversify your investments among more than one security, you help reduce what is known as "single-security risk," or the risk that your investment will fluctuate widely in value with the price of one holding. Diversifying among several asset classes increases the chance that, if the return of one investment is falling, the return of another in your portfolio may be rising (though there are no guarantees). For example, in 2002, large-company stocks lost 22.1 percent, while long-term government bonds returned 13.8 percent.¹ Keep in mind that past performance cannot guarantee future results.
Choose different-sized companies.
- Large companies (large-cap) usually offer more stability but slower growth.
- Mid-size companies (mid-cap) may grow faster than large-cap and be more stable than small-cap.
- Small companies (small-cap) can offer faster growth but more volatility and risk.
Use different investment approaches.
- Value investing involves buying companies that are currently undervalued and may show promise for the future. This may involve less risk.
- Growth investing focuses on expanding companies with expected above-average increases in earnings. This style accepts more risk in exchange for potentially rapid growth.
- Blend investing combines the two styles to reduce risk and still work toward growth.
Mix domestic and international stocks.
- Domestic companies are headquartered in the U.S. and tend to follow fluctuations in the U.S. economy.
- International companies may perform well when U.S. companies are low, but can be affected by currency rates, international politics and local economies.
Consider adding bonds to your portfolio.
- They can be issued by federal, state or local governments, or sponsored agencies.
- Bonds may also be issued by private corporations.
- Usually, bonds are less volatile than stocks and are designed to add income to your portfolio
¹Source: Standard & Poor's. Stocks are represented by total returns of the S&P 500, an unmanaged index generally considered representative of the U.S. stock market. Long-term government bond yields are constructed from yields on long-term (10+ years) government bonds published by the Federal Reserve. Past performance cannot guarantee future results. Individuals cannot invest directly in any index.