First Federal Bank Blog

All investing exposes you to a certain level of risk. Committing all your money to a narrow range of stocks, bonds, or other assets is especially perilous, exposing your portfolio to the market’s volatility and making it less resilient — and potentially hampering growth as well. However, diversification is a good way to keep one poor-performing asset from dragging down your entire portfolio. Start with these tips to diversify your investments and put them on the path to greater stability and success:
 
Invest in a variety of assets
 
It’s generally wise to include a variety of assets in your portfolio. Stocks and bonds are the most prominent asset classes for investors. Most importantly, they have what’s known as a low correlation, meaning they tend to move in opposite directions when exposed to the same market factors. Stocks have more potential for big returns than bonds when the economy is thriving, but they’re also riskier and more volatile. Bonds tend to have lower returns than stocks, but they’re also more stable when the economy is ailing.
 
Beyond stocks and bonds, other asset classes can also play a role in a well-balanced portfolio. Cash (and cash investments like a money market or a certificate of deposit) is a low-risk, low-return asset class. You could also consider investments in commodities (like precious metals and crops) or real estate.
 
Diversify within asset classes, too
 
It’s also important to diversify investments within each asset class that you hold. Writing for NerdWallet, Tiffany Lam-Balfour, James Royal, and Elizabeth Ayoola lay out the key diversification options for stocks and bonds. The stocks you hold can be diversified by industry or sector — think tech firms, consumer products, and financial services. They can also be diversified by company size and value, also known as market capitalization. In addition, you can buy stocks in the growth category (more expensive, more potential for growth) or value category (less expensive, possibly undervalued).
 
Lam-Balfour, Royal, and Ayoola note bonds can be diversified based on who issues them (like the federal government, a municipality, or a corporation). Other diversification factors include the bond’s level of credit risk and whether it offers short-term, intermediate, or long-term maturity. Stocks and bonds can both be diversified according to geography with international investments.
 
Take advantage of diversification shortcuts
 
Diversifying your portfolio doesn’t require you to do intensive research into individual stocks and bonds. Instead, you can invest in mutual funds or index funds that package together multiple stocks. Mutual funds are actively managed by a portfolio manager who chooses which stocks to include and works to beat the market. Index funds are passively managed with automatically chosen stocks, aiming to match returns from a specific index like the S&P 500.
 
As an even simpler way to diversify your portfolio, U.S. News & World Report contributor Coryanne Hicks suggests an asset allocation fund or target date fund. An asset allocation fund maintains a proportional blend of assets: for example, 75% stocks and 25% bonds. A target date fund takes this idea one step further, adjusting allocation proportions over time to lower your risks as you approach retirement.
 
With a well-diversified investment portfolio, you can balance risk and growth as you work toward your long-term financial goals. Consult with a financial advisor to learn more about the best diversification options for your specific financial needs.