Why diversification matters for retirement planning

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

On any given day, some investments increase in value, while others decrease. Having a mix of investments can smooth out your returns over time. 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.

How to balance risk and reward across your investments

As a retirement saver, consider spreading your investments across a variety of categories. Your goal is to select a combination that aligns with your financial needs, risk tolerance, and time horizon. Here are four categories to consider:

1 Asset classes

You can start to diversify by choosing among the three primary types of investments. Stocks, bonds, and cash or cash equivalents are asset classes that all have different levels of risk and return. 

• Stocks are shares of ownership in a company. They can provide greater long-term growth opportunities but can also fluctuate rapidly in value due to economic changes, company performance, or investor sentiment. This can lead to significant gains but also losses. 
• Bonds are a loan made by an investor to a company. The company promises to pay back the amount the investor lent (the principal) by a specific date (maturity). The investor is also usually paid a stated interest rate (usually fixed) until maturity. Generally, bonds generally provide smaller returns and offer more potential stability. They can lose value if interest rates rise, the issuer faces financial trouble, or the issuer has trouble repaying the money or interest owed. 
• Cash and cash equivalent investments, which can include money market funds or certificates of deposit, are generally the safest of the three asset classes. But they also offer very low potential returns.

2 Company size

When selecting stock investments, consider diversifying among companies of varying sizes and business types. Large, established companies may offer more stability, while small, newer firms trying to grow their business may provide more upside potential in exchange for higher relative risk.

3 Industries

Consider looking at investments across various industries, which are 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.

4 Geography

Investing in companies from around the world can provide opportunities that aren’t available in the U.S. and can help spread your risk. This can include regional funds, emerging market funds that specialize 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.

A diversified portfolio should consider all four categories, among others. When 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.

Building a diversified retirement portfolio

Since we can’t predict where the markets and economy are heading, diversification can be a helpful strategy. There are two ways you can do this:

• Create a diversified retirement account—Rebalancing your savings periodically to your original investment mix can help you avoid large fluctuations in value and continue to build your retirement savings over time.
• Consider investing in a target-date fund or a managed account—Having a portfolio that’s managed by professionals can help keep your investments diversified with minimal effort on your part.

If you’re close to retirement, 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. Remember that it's your responsibility to select and monitor your investment options and revisit your investment strategy at least annually to make sure it still aligns with your goals. You may also want to consult your own independent investment professional, tax advisor, or legal counsel to ensure your decisions align with your personal circumstances.

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.

Investments in stocks, bonds, and other securities involves risk. There is no guarantee that any investment strategy will achieve its objectives.

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.

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.