Deciding how to invest your retirement savings can be challenging for people of all ages. And as you move toward your retirement years, you should consider trying to strike an appropriate balance between growth potential and preserving your savings. One thing most financial professionals agree on is that diversifying—or mixing—your retirement investments may help you build your savings and manage risk over the long term.

What’s diversification?

Diversifying your retirement savings means spreading it across a mix of investments so that you're not too concentrated in any single investment. Think of it as putting your eggs (money) in multiple baskets (investments). Diversification is important because no single investment can provide consistently high returns, year over year. 

On any given day, some investments will increase in value, while others will decrease. Having a mix of investments can smooth out your returns over time. That's because the investments that go up can help offset the ones that go down, which can lead to better long-term investment results with less risk.

Choosing varied investments for retirement

As a retirement saver, you’ll want to consider spreading your savings across a variety of  investment categories. The goal is to choose a combination that works for your financial needs, risk tolerance, and time horizon. Here are a few categories you should know about.

Asset classes

The first step in diversifying is to choose among the three primary types of investments, also known as asset classes—stocks, bonds, and cash or cash equivalents, which all have different levels of risk and return.. Stocks can provide greater long-term growth opportunities but can also rapidly go up or down in value. Bonds, on the other hand, generally tend to provide smaller returns but also may have a lesser risk of large losses. Cash and cash equivalent investments, which can include things such as money market funds or certificates of deposit, are generally the safest of the three asset classes. But they also offer very low returns.

Company size

In choosing stock investments, think about mixing companies of varying sizes and business tenure. Large, established companies may offer stability, while small, newer firms trying to grow their business may provide upside potential.

Industries/sectors

Look at investments across various industries—often called “sectors”—such as technology, healthcare, real estate, and energy. By investing in multiple sectors, you may capture gains when specific industries perform well and help limit your risks when they don’t.

Geography

Investing in companies from around the world can provide opportunities that aren’t available in this country and could help spread the risk of holding U.S.-only investments. These can include regional funds, emerging market funds—those specializing in companies with developing economies—and broad-based funds that span various parts of the globe. Keep in mind that international investments can expose you to geopolitical and exchange-rate risks.

To diversify your savings, you should consider all four of these categories, among others. In deciding how much money to put in each, consider your willingness and ability to take on risk and how much time you have until you need the money. Short-term needs call for a different approach.

We can’t predict the future, but diversification may help

Since we can’t determine where the markets and economy are headed, a good place to turn for help can be diversification. There are two ways to accomplish it:

• Creating a diversified retirement account—and rebalancing it periodically to your original investment mix—can help you avoid large fluctuations in value and continue to build your retirement savings over time.
•  Investing in a target-date fund or a managed account, a portfolio that’s managed by professionals to help meet your objectives, can help keep your investments diversified with minimal effort on your part.

If retirement is near, you may not be able to afford to lose a significant amount of money by putting your eggs in the wrong basket. Whichever method you choose, balancing your savings across various industries, asset classes, and geographies may help reduce investment risk and improve your chances of achieving your ongoing retirement goals. 

For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.

Neither asset allocation nor diversification guarantees a profit or protects against a loss. An asset allocation investment option may not be appropriate for all participants, particularly those interested in directing their own investments.

It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.

Although the target-date funds are managed for investors on a projected retirement date timeframe, the fund’s allocation strategy does not guarantee that investors’ retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals.