3 benefits of diversification and asset allocation


Key Points

  • Diversification and asset allocation are time-tested investment strategies.
  • Use them to invest with more intention, objectivity and confidence.
  • Your Ameriprise advisor can provide personalized advice to help you achieve your long-term investment goals.

To help mitigate risks, preserve the value of your portfolio and enhance growth opportunities over the long-term, you and your Ameriprise financial advisor can lean on the time-tested strategies of diversification and asset allocation.

Here’s a primer on how they can help you achieve your goals.

The definitions

  • Diversification is an investment strategy that spreads dollars across a variety of assets, including stocks, bonds, alternative investments and cash for the purpose of mitigating risk. Think of the adage, “Don’t put all your eggs in one basket.”
  • Asset allocation is another strategy that can help you customize your mix of asset types across a range of investments. The right asset allocation will factor in your goals, risk tolerance, time horizon and tax sensitivity while also keeping you focused on realistic return expectations.


How can you benefit?

Diversification and asset allocation — coupled with personalized advice from your Ameriprise financial advisor — can help you invest with more intention, objectivity and confidence. It also can help you:   

Mitigate risks. Rather than investing in only one asset class — and accepting all the related risks — diversification can help you spread risk so investments that do poorly may be offset by those that do better. As the following table of two hypothetical portfolios shows, a broadly diversified portfolio delivers less risk than a basic two-asset portfolio. Less risk could make you less prone to emotionally driven, counterproductive decisions.   

Preserve the value of your portfolio. Over time, asset classes perform differently from one another, and no single asset class has consistently outperformed the rest. As the table of hypothetical scenarios highlights, with a diversified portfolio your investment gains can help offset your investment losses. Additionally, when your portfolio loses less of its value in a market decline, it has less ground to make up in a subsequent market recovery.

Enhance growth potential. When you have a wide array of investments in your portfolio and remain invested, you can benefit from outperforming segments of the market over time. As the chart below illustrates, continuing to invest a fixed amount at regular intervals — especially when stock prices fall — can help you benefit when markets eventually bounce back, as they have historically done. This is called dollar-cost averaging, an investment strategy that enables you to buy fewer shares when the cost is high and more shares when the cost is low. Over time, the average cost of your shares will usually be lower than the average price of those shares.

 

Your advisor can help you with a diversified asset allocation strategy

  • Do you have a mix of investments that support your goals?
  • What asset classes make the most sense for you?
  • Are you comfortable with the amount of risk in your portfolio?

Your Ameriprise financial advisor can provide personalized advice for a balanced, diversified investment portfolio. Regularly revisit your portfolio with your advisor, including when your financial goals or personal circumstances change.

Mitigate risks and stay on track in markets during 2020

How can you invest with more intention, objectivity and confidence in 2020? Anthony Saglimbene, Ameriprise Global Market Strategist, sums up the key actions that can help you weather a variety of market conditions.