Mixing up your investments with a diversified retirement account

Deciding how to invest your retirement savings can be challenging. Employer-sponsored retirement plans, such as 401(k)s, often provide dozens of options to choose from, and individual retirement accounts (IRAs) can offer many, many more. 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 account assets means you’re spreading your money across a mix of investments that aren’t associated with one another. Think of it as spreading your eggs (money) among many baskets (investments). You’re not putting all your savings in one investment because no single investment has consistently high returns, year over year. This strategy aims to help:

  • Decrease the risk of holding individual investments
  • Reduce sharp fluctuations in value
  • Offer greater potential for long-term investment returns 

Some investments will increase in value, while others will decrease. Diversification doesn’t help you pick the single best investment, but it does help protect your overall asset balance if you choose the single worst one. It could help smooth out your investment returns over time by choosing a mix of higher risk and reward investments—such as stocks—and lower risk and reward investments—such as bonds. Combining investments with varying risk and reward profiles can help reduce drastic changes in price over time.

“The only investors who shouldn’t diversify are those who are right 100% of the time.”

- Sir John Templeton

Are mutual funds diversified for you?

Since managing a diversified retirement account on your own could take a lot of time and effort, investment products such as mutual funds have grown in popularity—they’re professionally diversified for you. Whether you’re saving money in your 401(k) or IRA, mutual funds are available to you. 

Mutual funds are professionally managed funds made up of many investments. A single mutual fund can consist of hundreds of individual stocks and bonds, plus some cash—in other words, they’re already diversified. Each mutual fund investment has a specific strategy to help you pick what you want. For example, an “international stock fund” is designed to be invested primarily in stocks of non-U.S. companies. 

For retirement savers, target-date funds (TDFs)—a specific type of mutual fund—can further simplify diversification. These investments “target a date” when the investor would typically start withdrawing money (i.e., retire). The fund manager will gradually shift to more conservative investments as the year grows closer, seeking to reduce the risk of loss. The year is right in their name—like “Fund Company 2055 Portfolio”—so it’s easier to choose a TDF based on when you expect to retire.

If you have a 401(k), your employer goes through the process of choosing a quality mix of investment options from which you can choose. Think about a balance of different fund strategies that works for you when deciding how to invest your retirement plan savings.

Picking an asset mix for retirement

For IRA owners who have nearly endless investment options, think about how you can spread your savings across a few different categories of assets. Choose a combination that works for your financial goals, risk tolerance, and time horizon.

Asset classes

Consider choosing among the three primary asset classes—stocks, bonds, and cash or cash equivalents. Stocks can provide greater long-term growth opportunities but can also rapidly change in value. Bonds, on the other hand, generally tend to have smaller returns, but also may have lesser risk of large losses.


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

Company size

Think about picking 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.

Geographical regions

Know where the companies you invest in are located around the world to help lessen the possible impact of geopolitical changes. 

To help diversify your retirement account, you should consider all four of these categories, among others. Before you start 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.

How diversified portfolios can perform: a simple example 

Let’s look at how James and Michelle invested their money and the impact of a loss in investment value. Both invest $100—James put it all in Investment A, while Michelle split her money evenly between Investment A and Investment B.

If Investment A decreases in value by 30%, James and Michelle both lose money. But because Michelle diversified her savings across multiple investments, her retirement account doesn’t lose as much value. 

The graph shows James with $100 in Investment A being reduced to $70 when it decreases 30% in value. Michelle also has $100 invested, but split evenly between Investments A and B. When Investment A decreases by 30%, her investment total only declines 15% by having money in multiple investments.
Hypothetical examples are for illustrative purposes. The illustration shown may not be reflective of your situation. Diversification does not guarantee a profit or assure against a loss.

A tip to help you stay diversified

Over time, investments change in value. To help keep your retirement account diversified, as you intended, you can use this investing technique.


Even if you don’t change how you want your investments diversified, you may need to rebalance your investments from time to time to maintain your desired mix because the market is constantly changing. 

Let’s say your desired mix is 50% stocks and 50% bonds. After a year, the stock portion increased in value and now it makes up 65%, while bonds are 35% of your assets. To rebalance, you’d need to sell the extra 15% in stocks and use the money to buy more bonds to reach your desired 50/50 split again.

Many retirement plans offer the ability to automatically rebalance for you each quarter or year.

If you can’t predict the future, diversification can help

Maybe fortune tellers and time travelers can do without diversification—they know what the future holds and can invest their money where it’ll gain the most value. Most of us can’t predict the future, so we tend to turn to diversification for help. Creating a diversified retirement account—and rebalancing it periodically—can help you avoid large fluctuations in value and build your savings over time. Balancing your savings across various industries, asset classes, and geographies may reduce investment risk and improve your chances of achieving your retirement goals. 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.

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.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

All mutual funds are subject to market risk and will fluctuate in value.

There is no guarantee that any investment strategy will achieve its objectives.

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.

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