Why diversification matters

Read time: 3-4 minutes

Diversification is a common strategy of investing in different asset classes (stocks, bonds, and cash), industries, and companies to lower overall investment risk. Diversifying means having different types of investments. It doesn’t guarantee you’ll make a profit or that you won’t lose money. There's always a risk of losing money when you invest.

The good news is that you can avoid one type of risk—the risk of investing everything in a company that performs poorly or goes under—by diversifying and buying hundreds or thousands of securities at a time.

Let’s take a closer look at investment diversification—what it is, and how you can achieve it and benefit from it:

How it works

Diversification works best when you buy into multiple industries and include companies of all different sizes, because this variety helps even out the ups and downs of the market. The more stocks and bonds you own, the more protection you have against loss—and the more chances you have to pick winners. Another key to diversification is owning investments that perform differently in similar markets. When stock prices are rising, for example, bond yields are generally falling.

How to diversify

As an investor, it would be difficult, time consuming, and expensive to build a diversified portfolio of individual stocks and bonds on your own. That’s why many investors turn to mutual funds, which help make it easier to get the diversification you seek.

Benefits of mutual funds

Mutual funds hold hundreds or thousands of stocks, bonds, or both. The portfolio manager does the hard work so you don’t have to. This allows you to hold a diversified investment portfolio—even if you don’t have hundreds of thousands of dollars to invest.

Target-date funds: instant diversification!

Another easy way to get a diversified portfolio that’s designed to reduce risk over time is to choose a target-date investment. A target-date investment—usually selected based on the year you plan to retire—contains a collection of mutual funds that create a broadly diversified mix of stocks and bonds. So you can pick just one option and be done with selecting investments. Learn more about target-date investments.

Get help if you need it

If you don’t want to handle choosing and managing investments on your own, advice from Vanguard can help. See if professional financial advice is right for you.

See what advice options may be available in your employer’s retirement plan at Vanguard to help you select and manage your investments for you.

Learn about advice

See what advice options are available if you have a personal investor account with Vanguard.

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Whenever you invest, there’s a chance you could lose the money.

Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date.

Advice is provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor. Eligibility restrictions may apply. VAI cannot guarantee a profit or prevent a loss.