COLLECTION: INVESTING 101

The amateur's guide to diversification

Diversification is key when it comes to your investment portfolio. But what does it exactly mean, and how do you do it wisely?

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

THE BACKGROUND:

Diversifi-huh? If that’s your first reaction to the word "diversification," or you just don’t think it’s for you, don’t go running in the opposite direction quite yet. Because the truth is, it can be one of the smartest ways to help manage your exposure to risk as an investor. And here’s the good news: It doesn’t have to be as complicated as it may seem. This article takes the concept of diversification and breaks it down into a few small, digestible bites. But for a much deeper dive into the subject, take a look at the full Fidelity Viewpoints® article, “The Pros' Guide to Diversification.”

THE BREAKDOWN:


What on earth is diversification?

Basically, it’s a strategy of spreading your portfolio across a bunch of different kinds of investments, like U.S. and foreign stocks, bonds, and short-term investments (e.g., money market funds). The thinking behind it is simple: If you buy a mix of stocks, bonds, and funds, the mix of investments may help offset each other. So when one investment doesn't do so well, other investments that might be doing a little better can help balance it out. Alternatively, if you put all your eggs into one kind of investment and it tanks, the losses could affect your portfolio in a big way. The goal of diversification isn’t to boost performance—it won’t ensure gains or guarantee against losses—but it can help set the appropriate level of risk for your time horizon, financial goals, and tolerance for portfolio volatility.

Why does it matter?

If you’re like a lot of investors, it can be tempting to check on and adjust your investments during market highs and lows. But timing the market can cost you. That’s why Fidelity recommends setting up a long-term mix of all different kinds of investments—and staying the course. As John Sweeney, executive vice president of Fidelity Investments, suggests, “Being disciplined as an investor isn’t always easy, but over time it has demonstrated the ability to generate wealth, while market timing has proven to be a costly exercise for many investors.”

How do I diversify?

Consider looking over your investment mix (i.e., stocks, bonds, and short-term investments) to make sure it lines up with your investment time frame and risk tolerance. You may also want to take a look at the chart called "When allocating your portfolio, consider the return and volatility trade-offs" in the Fidelity Viewpoints® article to learn how blending different types of investments can help you achieve different levels of risk and return.

I have my mix. Now what?

Fidelity encourages you to check in on and rebalance your investment mix at least once a year, or whenever your financial situation changes (think a job loss or a big bonus). Rebalancing helps you keep your risk tolerance at a level you’re comfortable with. So let’s say, for instance, your stock prices run up and your bonds go down. That extra stock could mean more risk for your portfolio.

THE BOTTOM LINE:

You’ve heard the age-old adage, “Don’t put all your eggs in one basket.” Sounds cliché, but it could be a smart move when it comes to investing. As John Sweeney puts it, “Choosing the right mix of investments, and then periodically rebalancing and monitoring your choices, can make a big difference in your outcome.” In short: Diversify. You’ll be happy you did.

Take the next step

Watch this video to learn how diversification can help you manage risk in your portfolio.

Topics:
  • Financial Planning
  • Investing Strategies
  • Financial Planning
  • Investing Strategies
  • Financial Planning
  • Investing Strategies
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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 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.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
661155.2.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

Here's what we suggest you explore next

Keeping the harMONEY alive: When investment styles collide

When it comes to tying the knot, couples have a number of different requirements. Some insist on living together; others insist on having the families meet. But what happens when you have different ways of handling money?

Invest affordably and simply

Professional online money management for less.

Also in this collection

Five basics about the stock market

Considering investing for the first time? It's important to get the basic information down before you make your first trade.

Split Decisions: Save or invest

Money guru Jean Chatzky can help you answer the question of whether you should save or invest your money. Watch the video. (2:13)

Investing tips: How to get started

When you're just starting out in your investing journey, there are some important things you should know. Read more.

Investing and Risk

Managing risk is crucial when you're learning how to invest. Watch this video to understand how to do it. (1:38)

4 simple tips for investing better

See 4 tips that every investor could consider vital for their decision-making.

The amateur's guide to diversification

Diversification is key when it comes to your investment portfolio. But what does it exactly mean, and how do you do it wisely?

What you need to understand about digital advisors

Want to learn about finance from the comforts of your own home? Read here to learn more about digital advisors, who can advise you on asset and money management from anywhere with internet access.

Start budgeting: Meet Cinch

Introducing CinchSM from Fidelity, a simple way to track your saving and spending. Just answer a couple of questions to get started.