Why diversify?

Your music playlists aren't just one artist on repeat. And neither is that mix of nutrients you're packing into your favorite lunchtime burrito. Diversity is at the core of your daily life—and it's just as critical to your finances.

Diversification in investing is the practice of spreading your investments around, resulting in 3 core benefits: 1) minimizing risk because your exposure to any one type of asset is limited; 2) avoiding short-term mistakes by lowering fluctuations that can be caused by a single asset; and 3) earning long-term value by capturing gains from a bunch of assets.

While diversification can't guarantee a profit or prevent a loss, it balances risk and reward with your hard-earned money. Here are the 4 primary components of a diversified portfolio you should know:

Ways to diversify

Domestic stocks

Tossing on your preferred workout gear? Just back from your grocery store chain of choice? You can own equity in the US-based companies you enjoy by buying their shares in the stock market. Stocks are the most aggressive part of your portfolio, providing the opportunity for higher growth over the long term. But with greater potential gain comes greater risk—stocks are generally more volatile than other assets as their value fluctuates with trading. So you can further diversify within this asset class by purchasing stock in companies in various industries.

International stocks

Don't limit your stock friendship to just Uncle Sam—foreign companies also issue stock. Owning international stocks provides exposure to opportunities not offered by US companies, as shares of an Indian pharmaceutical company or Brazilian energy conglomerate will give you financial access to those growing markets.


The "b" in bonds doesn't stand for "boring," but they are generally less volatile than stocks. Bonds can provide regular interest income and cushion against stock market volatility because they typically behave differently than stocks. Investors who are more focused on safety than growth often favor high-quality bonds (like "Treasurys" guaranteed by the mighty US government), accepting lower long-term interest returns because bonds are lower risk. But riskier bonds (like international bonds from developing countries) will offer higher yield for their greater risk.

Short-term investments

You'll need to park that extra cash somewhere, and it might as well be in a more stable investment, but still earn interest. For those looking for a minimal risk asset, money market funds and short-term CDs (certificates of deposit) are conservative investments that offer stability and easy access to your money. In exchange for that level of safety or stability, money market funds usually provide lower returns than bonds, but neither the Federal Deposit Insurance Corporation (FDIC) nor the fund's sponsor (like Fidelity) insures them. While CDs are insured, they are less liquid and require 3-month, 6-month, or even annual commitments to not withdraw your cash.

Now here's how you can uber-diversify:

  • Sector funds Need exposure to "tech" or "consumer goods" stocks? Sector funds invest in a variety of stocks focused on one industry in the economy. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
  • Commodity-focused funds Since experienced investors are licensed to trade commodities like oil, gas, sugar, or even cocoa beans, you can gain exposure to them through equity funds that invest in commodities.
  • Real estate funds It isn't exactly easy to buy a chunk of land to get exposure to the real estate market, so you can do so through real estate investment trusts (REITs) that purchase and bundle a variety of buildings, apartments, or land. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
  • Asset allocation funds We know—you're busy. So if you don't have time or experience diversifying, you can buy asset allocation funds. Fidelity even manages a number of different types of these funds with specific goals and strategies, like target dates or income-generation income.

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Diversification and asset allocation do not ensure a profit or guarantee against loss.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment of your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.

Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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