Diversification: The key to managing risk

Diversifying your portfolio is one of the most important things you can do to manage risk when you invest. In this video, we explain what that means—and how we define the risk levels of our funds.

Have more questions? Learn more about choosing an asset mix that’s right for your risk attitude.

Transcript

What can you do to control risk when you invest? This is a question many people have, and luckily, there’s a straightforward answer.

It’s all about diversification. That means making sure your portfolio holds a balanced mix of low-risk, moderate-risk, and high-risk investments. This gives your money enough of a chance to grow while also creating a buffer that can help shockproof your portfolio when markets are down.

At Vanguard, we categorize the potential risk in our funds in levels from 1 to 5. Level 1 mutual funds are conservative, with a recommended investment time frame of 3 years or less, and their prices are expected to remain stable or fluctuate only slightly. We consider their risk level low because they lean heavily on cash investments, and cash is the lowest-risk asset class.

On the other end of the spectrum, we consider level 5 funds very aggressive because they’re made up of investments from the highest-risk asset class: stocks. These funds are subject to very wide fluctuations in share prices, so we recommend an investing time frame of 10 years or more. More time gives stock investments a better chance to weather down markets.

We’ve covered the lowest- and highest-risk funds here, but we’ve got funds for every level in between too. Everyone’s risk tolerance is different, and at the end of the day, it’s all about finding a balance between risk and reward that works for you.

Vanguard can help you get started on your investing journey with an asset mix that’s right for you. Visit us today at vanguard.com/LearnAboutRisk.