You've likely heard the adage that you "shouldn't put all your eggs in one basket." This age-old wisdom can apply to your investments as well. Diversification is a strategy that involves spreading your investments across various assets and investment types to manage risk. A diverse investment portfolio is typically better able to provide returns in both stable and turbulent economic times.

Imagine you invested all your money in a single company's stock, only to see its stock price plummet. In this scenario, you would likely lose some, if not all, of your investment. Or consider if you were to put all your funds into one bond, only for the issuer to declare bankruptcy. In this case, you could also lose some or all your invested money.

Now, imagine spreading your investments across a variety of different types of assets. When one investment does poorly, others may be outperforming, helping you mitigate risk. While diversification doesn't guarantee returns or eliminate the risk of loss, especially in a declining market, it can help cushion the blow if something goes wrong.

Two ways to manage the ups and downs of the market

1. Diversify across investment types

A robust portfolio is one that combines different types of investments, and asset classes, each with varying levels of risk. The primary asset classes include stocks, bonds, and cash alternatives.

Stocks, while offering a greater potential for growth, carry higher risk. Bonds are typically less volatile but provide more modest returns. Cash alternatives are generally the least risky but also tend to yield the lowest returns. Each asset class reacts differently to market conditions. Again, while one asset class is up, another might be down. Dividing your investments among different categories is a key part of diversification.

You will typically allocate a percentage of your portfolio to various asset classes based on factors like risk tolerance and years until retirement. For instance, if you're nearing retirement, you may have less time to weather market volatility that can have a big impact on your investments. As a result, you might shift a portion of your portfolio from stocks or other risky assets to bonds or cash for a more conservative approach.

2. Diversify within asset classes

Once you've diversified across broad asset classes, you may then consider diversifying within them. For stocks, this means considering factors like company size (large-cap, mid-cap, or small-cap stocks), geography (domestic or international), and industry sectors.

You may want to consider mutual funds or exchange-traded funds (ETFs) that hold shares in numerous companies, often providing built-in diversification. There are also funds, known as target-date funds, that periodically shift your asset allocation away from stocks as you approach a certain target date, usually your retirement date.

Your diversification strategy should be tailored to fit your financial goals, risk tolerance, and time horizon. If you're unsure about how to diversify effectively, consider consulting a financial advisor. They can help you navigate the complexities of investment categories and tailor a strategy that is in line with your goals.

*On behalf of Wells Fargo, Versta Research conducted a national survey of 3,403 U.S. adults and 203 U.S. teens age 14 to 17. Sampling was stratified and data were weighted by age, gender, race, ethnicity, income and education to achieve accurate representation of the current population based on estimates from the U.S. Census Bureau. The survey was conducted from September 5 to October 3, 2023. Most findings are reported based on the full sample of adults. Comparisons and data from teens are noted separately.