Asset Allocation and Diversification

Asset allocation is an investment management strategy that divides your investments among the major asset classes of equities (e.g., stocks or stock mutual funds), fixed income securities (e.g., bonds, bond mutual funds, CDs, or annuities), and money market instruments (e.g., cash or money market funds). Since these investment categories have unique characteristics, they rarely rise and fall at the same time. Therefore, a combination of these asset classes can help reduce risk and improve overall portfolio return.

On the other hand, diversification is a strategy that divides your investments among different securities or instruments within each asset allocation category. By diversifying your investments (among, say, five different mutual funds), you can further reduce risk.

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