Diversification is a risk management strategy that creates a mix of various investments within a portfolio—ensuring variety in type of investments to reduce market volatility. Diversification relies on building wealth through variety and prevents investors from putting all their eggs in one basket (concentrating all investments in one area). A fundamental part of investment risk management, diversification plays a critical role in building an investment portfolio.
But effective diversification requires more than just purchasing a random bundle of investments. The U.S. Securities and Exchange Commission recommends that investors diversify by asset category and within the asset category. In today’s blog, we’ll examine these two strategies as well was a few ways you may be able to put these concepts to work in your own investment strategy.

Diversifying by and within Asset Categories
Asset allocation is the practice of dividing up your capital among different asset categories and includes three main classes: stocks, bonds, and cash. Separating investments into asset categories can help in managing market risk, cushioning them against market volatility, but cannot guarantee that market losses won’t occur.
Once you’ve separated investments into categories, you’ll want to consider diversifying within these categories. For example, purchasing multiple stocks but from several different companies.

Applying These Concepts
As you draw nearer to retirement age, it will be increasingly important to manage your investment risk. Here are a few tips to consider:

1. Choose your investment style.
Investment styles can affect how you diversify your portfolios, making it imperative to find one that works best for you. More common options include small-cap vs. large-cap; sector vs. industry; growth vs. value; and domestic vs. foreign.
2. Determine your asset allocation.
Deciding on how much of your capital to invest in each category depends on a number of factors, such as your personal ability to tolerate risk and how soon you may need to liquidate investments. As an example, younger people may want more risk exposure, while people closer to retirement may want to err on the side of caution.

Overall, your general tendency for risk determines how best to diversify your investments. Contact Member Investment Services for more information on ways to find the right portfolio balance.