Diversification

At its core, diversification* is the practice of spreading capital across various asset classes—like stocks, bonds, and cash—to reduce risk and help support sustainable, long-term investing. Think of diversification as the opposite of putting all of your eggs in one basket. 

When applied to your 401(k) investment account, diversification can help manage risk and potentially smooth the effect of market swings. This can translate to holding different securities or types of investments in your retirement portfolio. The goal isn’t to chase profits quickly, but rather to help protect your portfolio during volatile market periods.

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

Why is diversification important? 

Financial markets can be unpredictable, and spreading investments across asset classes may help reduce the impact of market volatility. Different market sectors may react differently to external factors like economic or political shifts. A drawdown in one sector of the market could potentially be offset by the stability of a different sector, helping to reduce the effect of volatility in your portfolio.

For example, if you invest all your money in a single technology company’s stock and something negative happens to that company or the broader technology industry, your portfolio could experience significant losses. However, diversifying exposure across various areas of the market can help to lower your vulnerability to any single industry’s downturn.

How can you diversify your portfolio? 

There are several ways to incorporate diversification into your 401(k) investing strategy.

• Model portfolios: Some retirement providers, like Human Interest, provide a selection of model portfolios1 that diversify assets in low-cost mutual funds and collective investment trusts (CITs), and rebalance them to help your portfolio remain within its target allocations.2 This can help reduce the burden of hand-picking from all the options available in your lineup. Savers can customize allocations to align with personal investment goals, risk tolerance, and time horizon. 
• Target-date funds: Savers can choose a more hands-off approach by investing in a target-date fund, which is designed with a specific retirement year in mind. 401(k) target-date funds automatically rebalance your investment mix as you age. This often means your portfolio shifts from higher-risk assets such as stocks to generally less volatile investments like bonds.
• Self-managed portfolio: Investors who prefer a hands-on approach can self-select investments. Managing your own portfolio means you are responsible for maintaining asset allocation and regularly rebalancing your portfolio to account for market fluctuations.3

By avoiding over-concentration in any single company and rebalancing your account annually, diversification can help your portfolio remain aligned with your retirement timeline.