“Diversification does, however, have the potential to improve returns for whatever level of risk you choose to target.” “To build a diversified portfolio, you should look for investments—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction and to the same degree,” states the Fidelity team. However, there are also more encompassing and simpler ways to do this. 2. Focusing your efforts on diversification, dividends and interest, and on companies in industries with high barriers to entry can help you reduce risk in your portfolio. Doe. A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual funds and ETFs. Diversification can help manage risk. Domestic stocks are represented by the S&P 500. The ideal goal with proper asset allocation is to maximize the risk-adjusted returns of a portfolio, and tailor its growth potential and risks for an individual investor’s needs and goals. It’s important to keep track of your asset allocation and regularly rebalance your portfolio.If one part of your portfolio is under-performing or over-performing, it will skew the asset allocation percentages that you decided upon. "Is 60/40 Rule Dying? However, large-cap stocks usually offer less potential for high growth than mid- or small-cap companies as they already make up a large part of the market share, and as such, growth opportunities are smaller.. It is a violation of law in some jurisdictions to falsely identify yourself in an email. Dividend-Heavy ETFs for Retirees, What Is the Difference Between Large Cap & Small Cap Stocks. The overall volatility of Portfolio 1 was previously computed as 21.7%. These risks are particularly significant for investments that focus on a single country or region. Why? On the surface, given stocks historical out performance, you would expect the portfolio holding a greater percentage (67%) in stock funds to outperform the portfolio with a smaller percent (60%) in stock holdings. I talked about this in-depth with David Thomas from Shares and Stock Markets, and in the video we share that the positive benefits of diversification really diminish after 20-25 stocks. This way, even if a portion of your portfolio is declining, the rest of your portfolio is more likely to be growing, or at least not declining as much. Large-cap companies also often offer dividend payouts, which can make a large-cap stock more attractive, generating higher overall returns for an investor. From peak to trough, the portfolio has lost only 4.1% compared to the S&P 500's much more worrisome 12.4% nosedive. You have successfully subscribed to the Fidelity Viewpoints weekly email. to reduce the risk of their portfolio. Rebalancing is a key to maintaining risk levels over time. This chart's hypothetical illustration uses historical monthly performance from January 1997 through December 2018 from Morningstar/Ibbotson Associates; stocks are represented by the S&P 500 and MSCI EAFE Indexes, bonds are represented by Barclays US Intermediate Government Treasury Bond Index, and short-term investments are represented by US 30-day T-bills. Unfortunately, many investors struggle to fully realize the benefits of their investment strategy because in buoyant markets, people tend to chase performance and purchase higher-risk investments; and in a market downturn, they tend to flock to lower-risk investment options; behaviors which can lead to missed opportunities. Why is it so important to have a risk level you can live with? Data source: Fidelity Investments and Morningstar Inc, 2020 (1926-2019). 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