Minimizing investment risk
Although there is no way to completely eliminate investment risk, there is one way to potentially minimize your exposure to it — through diversification.1 By spreading or diversifying your retirement plan contributions across a variety of investment types — such as stocks, bonds or fixed interest accounts — when one type of investment hits a rough spot, your other investments can help lessen the impact of these short-term setbacks.
For example, historically when stocks are on the rise, bond prices often slump (and vice versa). So when you own both stocks and bonds (or funds with both stocks and bonds), they can stabilize each other if one peaks and the other dips. This method is commonly known as asset allocation, and it is based on placing your retirement plan contributions into various investments (or assets) to help reduce risk. Keep in mind that past performance is never a guarantee or prediction of future investment results and both stocks and bonds could lose value at the same time.
1 Diversification of an investment portfolio does not assure a profit and does not protect against loss in declining markets.
