Your Final Answer: Diversification

Some questions are easier to answer than others. Should you take an umbrella if it looks like it’s going to rain? The answer generally would be, “Yes.” How many investments should you have in your retirement account? That question is harder to answer.

More Than One

Investors generally should hold a number of different investments because diversification* helps protect against the risk of loss. Each fund or portfolio available through your plan already holds many different securities. Even so, unless you select a fund or portfolio specifically designed to be an all-in-one investment (like a retirement target date series portfolio), you’ll probably want to choose funds or portfolios investing in different asset classes (stocks, bonds, and cash equivalents). Because investments in various asset classes may react differently to changing conditions, diversifying across asset classes can help you weather different investing climates.

Let’s say your account is 100% invested in a stock fund that generally tracks the overall stock market. If the stock market goes down, the value of your investment will probably fall. But, if the stock market drops and you’re holding a stock fund and a bond fund, the bond investment may provide a cushion and limit your overall loss. Of course, bond prices also fluctuate due to interest rate changes and other factors, so an investment in a bond fund is not risk free.

How Diversification Works

Investment Mix

  100% Stocks 

  50% Stocks / 
50% Bonds

40% Stocks /
35% Bonds /
  25% Cash Equivalents 

Amount Invested

$1,000

$1,000

$1,000

Value if STOCK Prices Drop 20%    

$800

$900

$920

Value if BOND Prices Drop 20%

$1,000

$900

$930

This is a hypothetical example used for illustrative purposes only. The example assumes that cash equivalent prices remain constant. The example does not represent any specific investments. Your investment performance will be different.

Breaking It Down

You can further diversify by investing in different categories within the same broad asset class. Take stocks, for example. Let’s say you invest in a fund or portfolio that holds the stocks of large companies (large-cap). You may want to add a stock fund focused on the stocks of smaller companies (small-cap) because the economic conditions that encourage large companies to grow may be different from the conditions that help small companies thrive. By investing in both large- and small-cap stocks, you’re positioned for success in a broader range of economic conditions.

Should you invest in every fund or portfolio your plan offers? Probably not. Some of the investments available through your plan may be very similar. For instance, your plan may offer more than one large-cap stock fund. If you invest in each one, you’ll be duplicating, not diversifying. Choosing an international stock fund and a large-cap stock fund, on the other hand, will increase diversification.

Just About Right

How many investments should you have in your retirement account? Enough to have a well-diversified mix. Managing risk through diversification can give your retirement savings a better chance to grow — and give you a better chance of having the retirement you want.

*Diversification does not ensure a profit or protect against loss in a declining market.

Source: NPI
Investments are not bank deposits, are not obligations of, or guaranteed by Genesee Valley Trust Company and are not FDIC insured. Investments contain risk, including market capitalization risk, political and country risk and/or credit and interest rate risk. Investments may lose value. Past performance is not a reliable indicator or guarantee of future results.