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Within the stock asset category, you'll find that there
are opportunities to diversify across different styles and
sizes. For instance, your stock holdings should cover all
segments of the U.S. stock market – including stocks of
small, midsize, and large companies. The reason for this is
that large companies tend to perform better during market
slowdowns while small and midsize companies tend to
outperform in expanding markets. Hence, they can perform
different through the economic market cycle.
Now take it one step further.
Because these two investment styles also move in cycles, investors can benefit from having both in their portfolio. The historical example below shows you how these styles have moved in relation to one another.
Consider adding the growth potential of foreign stocks.Incorporating international companies may also make sense for investors to further diversify their portfolios. Considering adding foreign stocks to your portfolio when the international markets experience a downturn may allow you to take advantage of potential growth in these markets. Foreign investments are especially volatile and can rise or fall dramatically due to differences in the political and economic conditions of the host country. These risks are generally intensified in emerging markets.Identify your stock fund category.If you are unsure which category or style a stock fund belongs in, a style finder box can be useful. See the diagram below. A stock fund is typically categorized by size and style.To diversify properly, you'll want to make sure that your stock holdings are not overly concentrated in only one or two boxes. If your style finder box is more completely filled, the stock portion of your portfolio is more widely diversified in size and style. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. In general, when interest rates rise, bond values fall and investors may lose principal value. Some funds, including nondiversified funds and funds investing in foreign investments, high-yield bonds, small- and mid- cap stocks, and/or more volatile segments of the economy, entail additional risk and may not be appropriate for all investors. Consult a fund's prospectus for additional information on these and other risks. |
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