Diversified Investment Portfolios: How To Build One (+ examples)

While asset
allocation and
diversification
are
often
referred
to
as
the
same
thing,
they
aren’t.
These
two
strategies
both
help
investors
to
avoid
huge
losses
within
their
portfolios,
and
they
work
in
a
similar
fashion,
but
there
is
one
big
difference.

Diversification
focuses
on
investing
in
a
number
of
different
ways
using
the
same
asset
class,
while
asset
allocation
focuses
on
investing
across
a
wide
range
of
asset
classes
to
lessen
the
risk. 

When
you
diversify
your
portfolio,
you
focus
on
investing
in
just
one
asset
class,
like
stocks,
and
you
go
deep
within
the
class
with
your
investments.

That
could
mean
investing
in
a range
of
stocks that
have
large-cap
stocks,
mid-cap
stocks,
small-cap
stocks,
and
international
stocks
and
it
could
mean
varying
your
investments
across
a
range
of
different
types
of
stocks,
whether
those
are
retail,
tech,
energy,
or
something
else
entirely
but
the
key
here
is
that
they’re
all
the
same
asset
class:
stocks.

Asset
allocation,
on
the
other
hand,
means
you
invest
your
money
across
all
categories
or
asset
classes.
Some
money
is
put
in
stocks
and
some
of
your
investment
funds
are
put
in bonds and
cash
or
another
type
of
asset
class.
There
are
several
types
of
asset
classes,
but
the
more
common
options
include:

There
are
also
alternative
asset
classes,
which
include: 

• Real
  estate,
  or
  REITs
• Commodities
• International
  stocks
• Emerging
  markets

When
using
an
asset
allocation
strategy,
the
key
is
to
choose
the
right
balance
of
high-
and
low-risk
asset
classes
to
invest
in
and
allocate
the
right
percentage
of
your
funds
to
lessen
the
risk
and
increase
the
reward.

For
example,
as
a
30-year-old
investor,
the
rule
of
thumb
says
to
invest
70%
in
riskier
investments
and
30%
in
safer
investments
to
ensure
you’re
maximizing
risk
vs.
reward.

Well,
you
could
allocate
70%
of
your
investment
to
a
mix
of
riskier
investments,
including
stocks,
REITs,
international
stocks,
and
emerging
markets,
spreading
that
70%
across
all
these
types
of
asset
classes.
The
other
30%
should
go
to
less
risky
investments,
like
bonds
or
mutual
funds,
to
lessen
the
risk
of
losses.

As
with
diversification,
the
reason
this
is
done
is
that
certain
asset
classes
will
perform
differently
depending
on
how
they
respond
to
market
forces,
so
investors
spread
their
investments
across
asset
allocations
to
help
protect
their
money
from
downturns. 

Learn
how
to
optimize
your
investments
based
on
your
age
with
our Asset
Allocation
By
Age article.