3 things you should know about diversification

Risk is the potential for an investment to lose value. Return is the change in value on an investment.  Different asset classes  (such as stocks and bonds) come with different levels of risk and return. That idea is broken down even further when looking at the sub-asset classes within those asset classes.
 

For example:

• The Large-Cap (invested in large, established companies), Mid-Cap (invested in medium sized companies) and Small-Cap (invested in small or startup companies) sub-asset classes relate to the size of the institution in which the fund is investing.
• The Value, Growth and Blend sub-asset classes refer to the mathematically calculated value of the fund in relation to certain other factors, such as earnings and dividends.
• There are also specialty stocks, such as Real Estate and International stocks.
   

Having a good mixture of options with different levels of risk and return can help to stabilize your portfolio against ups and down in the economy.

Understanding your personal attitude toward risk will help you find a suitable mix for your portfolio. Maybe you are a little more conservative when it comes to your finances, and prefer to feel like your investments are more stable.  Or perhaps you enjoy the thrill of a risky investment in hopes of a larger potential pay-off.
 

One thing that could have a big impact on your investor profile is the amount of time you have until retirement. This is called your “time horizon.”

• Investors with more time until retirement may be more comfortable with riskier investment choices because they have more time to potentially recuperate from losses.
• On the other hand, investors whose retirement is right around the corner may consider avoiding those risky options in an effort to preserve their assets, since they will need them much sooner.

There are a few options that are available to some retirement plan participants to help with investment diversification:
 

• Asset allocation funds: These options provide investors with a portfolio of a fixed or variable mix of the three main asset classes. Asset allocation fund types include:
  • Balanced funds - Generally implies a fixed mix of stocks and bonds
  • “Life-cycle”/“target-date” funds: Usually have a mix of stocks, bonds and cash equivalent securities that start out with a higher risk-return position and gradually become less risky as the investor ages
  • “Life-style”/“target-risk” funds: Underlying asset classes are actively managed in response to market conditions to maintain a risk level that is consistent with that of the original objective
• Rebalancing: Even if you have not made a single adjustment to your investment choices in years, it’s possible that the allocation of your portfolio is far from where it was when you set it up. This is due to some investments outperforming others. Over time, this can cause your portfolio to shift away from your initial allocation. If left unadjusted, your portfolio could become either increasingly risky or conservative.
• Professionally managed accounts: Some plans offer investment management services through a third-party, who works to keep your investment portfolio in line with your goals and risk level. These services often include a fee.