Diversifying Your Portfolio
Diversifying Your Portfolio

You've heard the expression, "Don't put all your eggs in one basket." The reason is that if the basket falls, you could lose everything in one fell swoop. But if your eggs are in multiple baskets, you have a much better chance of getting home safely with enough eggs to make that omelet. The same principle applies to your investment portfolio.
Keeping all your money in one basket, whether that's stocks, bonds, or real estate, exposes you to the risk of losing more during a market downturn or geopolitical event. A diversified portfolio, on the other hand, spreads your money across multiple investments. If one drops in value, the others can help offset the losses and stabilize your portfolio. Diversification is one of the most fundamental strategies for building an investment portfolio focused on long-term growth.
This article will explain the benefits of portfolio diversification and the steps you can take to ensure you have a diversified portfolio.
AT A GLANCE
- Portfolio diversification is a key to long-term investment success.
- A well-diversified portfolio includes a mix of stocks, bonds, and potentially, alternative investments across various sectors, company sizes, and geographic regions.
- The right asset allocation depends on your individual risk tolerance, time horizon, and financial goals.
- Mutual funds and ETFs (exchange-traded funds) offer ways to achieve the benefits of portfolio diversification.
- Regular portfolio rebalancing is crucial to maintaining a diversified portfolio over time.
In addition to rebalancing, you should also consider revisiting your overall asset mix since your circumstances and goals can change over time. Your target mix of stocks, bonds, and other assets should reflect your age, risk tolerance, income needs, and investment horizon.
For example, you may want to reduce the risk profile of your portfolio in the years leading up to retirement by allocating more of your portfolio to bonds and cash than when you were younger. A financial advisor can help you determine the right asset allocation for your specific situation.
Discover the plans and accounts Vanguard offers.
All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against loss.
For more information about Vanguard mutual funds or Vanguard ETFs, visit vanguard.com to obtain a mutual fund or an ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
Although the income from municipal bonds held by a fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.