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How is diversification different from asset allocation?

The two are very similar in that they both can help reduce risk by spreading your investment dollars among different categories. Spreading your money among different asset classes through asset allocation is a great start, but you need to go another level deeper – diversifying within each of the asset classes.

For example, you probably wouldn’t want all your stock investments in the same sector – such as technology or energy. That’s because events in the market can impact an entire sector. If all or most of your money is in that one sector, you’re putting yourself at higher risk than with a portfolio of diversified investments.