Let's explore 3 simple, time-tested ways to help manage risk:
- Diversification : spreading your money across different types of investments
- Asset allocation : setting a target mix of stocks, bonds, and cash that aligns with your goals and timing
- Rebalancing : moving money after market shifts, to align with your asset allocation and goals for the money
OK, let's be clear. Stock prices fluctuate. But losing money is less likely if you are a long-term investor. That is why one of the most important things to consider is when you need your money, referred to as your time horizon.
Consider how stocks have performed over time. In the short term, there can be sharp downturns and wide variations in returns. But if you examine 10 to 20-year periods, the stock market has risen over 93% of the time.1 Of course, with reduced risk may come reduced returns. Since 1926, the average return for large stocks was 10% a year, while long-term government bonds returned between 5% and 6%.2
Diversification: Spreading out your money
In terms of investing, diversification is just a fancy way of saying "Don't put all your eggs in one basket." If you spread your money among different types of investments that don't move together, you are more likely to be able to cushion the blow of any single poor performer.
Diversification won’t guarantee you’ll make money or ensure you don’t lose money. But by spreading your money among and within different types of assets—stocks, bonds, and cash—you may help manage risk of loss and increase long-term returns for the chosen risk level (for example, conservative with mostly bonds and cash, aggressive with mostly stocks, or something in between).
Asset allocation: Finding the right mix
Asset allocation involves dividing your investment portfolio among the different asset classes—stocks, bonds, and cash. The process of picking which mix of assets to hold in your portfolio is a very personal one, depending largely on your goals, time horizon, and ability to tolerate risk.
If you need the money soon, you may consider investing conservatively and focus on lower-risk investments like certificates of deposit (CDs) and short-term bonds. If you have 10+ years, consider taking on more risk for greater potential growth with a mix of stocks and longer-term bonds.
The key is to choose an asset mix that aligns with your goals, time horizon, and tolerance for risk—and stick with it. As your needs in life change, so may the help you require. At every turn, Fidelity is here to help you plan—from choosing investments to managing your portfolio.
Rebalancing: Staying on target
Nothing stays the same forever—in life or in markets. Markets go up and markets go down. From time to time, that may leave your original investment mix out of balance.
For example, perhaps you decided to limit stocks to 40% of your investment portfolio, but a big rise in the stock market pushed them to 60%, exposing you to more risk than planned. In this case, it may be time to rebalance back to your 40% target, perhaps by selling some stocks or buying more bonds.
Rebalancing can help you maintain a level of risk that aligns with your goals, risk tolerance, and time horizon.
Check your calendar
Set a reminder to review your asset allocation at least once a year or any time your financial picture changes significantly—for instance, if you lose your job or get a big bonus. A financial checkup is a good time to look at your mix of investments. If the way you invested has drifted too far from your original plan or your goals have changed, consider rebalancing.
- Asset allocation refers to the mix of assets—stocks, bonds, and cash—you've chosen. It should align with your goals, time horizon, and risk tolerance.
- To manage risk, it's important to diversify your stock and bond holdings.
- Check your asset allocation and investments at least once a year, or any time your financial picture changes significantly.
- When markets shift, your asset mix may drift from your target. Consider rebalancing to return your asset allocation to what you originally chose.