BONDS

CASH EQUIVALENTS

RISK

STOCKS

DIVERSIFYING 

YOUR PORTFOLIO

Diversification involves 

investing in a number  

of investments within 

each asset class. It’s the 

same logic as not putting 

all your eggs in one  

basket. For example, you 

might divide the money 

you allocate to stocks 

among those issued by 

companies of different 

sizes and in different 

industries, both domes-

tic and international.

Often the easiest way 

to diversify, especially as 

you start to invest, is by focusing on broad-based 

mutual funds and ETFs that own a substantial 

number of investments within an asset class. In 

fact, many people choose index mutual funds,  

like the ones offered in TSP accounts, or ETFs 

linked to broad market indexes because they are 

not only diversified but also among the lowest cost 

investments you can own. Remember, the less  

you pay in fees, the more of your return you get  

to keep.

The reason to diversify is to protect your  

portfolio value against losses in a single  

company or companies affected in a similar way 

by a change in market conditions. Like asset  

allocation, diversification is a useful strategy for 

managing risk but not a guarantee of success.

BUYING AND SELLING

Investing usually works best as a long-term  

proposition. 

If you follow a buy-and-hold approach,  

you build a diversified portfolio by purchasing 

investments that meet your criteria for being  

good choices in their own right and good addi-

tions to what you already own. Then you hold on, 

through market ups and downs, unless there is 

good reason to think an investment is no longer 

as valuable as you originally thought and seems 

unlikely to recover its value. For example, a  

company whose business was renting DVDs could 

be expected to falter in the era of streaming  

video unless it changed its business model.

Alternatively, you might set goals for invest-

ment performance and sell certain stocks or  

funds that have gained 15% or 20% in value,  

using the proceeds to make a new investment. 

Either way, you want to be sure all your  

investment earnings are reinvested to buy more 

shares or additional bonds. That way, you can  

take advantage of the power of compounding to 

build your investment account. 

LOOK FOR HELP

If you’re having trouble making a plan or 

selecting investments, finding a reputable 

financial planner, registered investment 

adviser (RIA), or stockbroker may help.  

You can check out an RIA with the 

Securities and Exchange Commission 

(www.adviserinfo.sec.gov). You can  

investigate brokers at FINRA BrokerCheck 

(www.finra.org/brokercheck)and both 

RIAs and brokers with your state regulator, 

which you can locate at www.nasaa.org.

stocks and some bonds (or a balanced mutual 

fund), you increase the probability that some 

investments will be gaining value even if others  

are flat or losing value. That’s the reason for 

including several asset classes in your  

investment portfolio.

Just remember, though, that allocating  

doesn’t ensure a profit or provide total protection 

against losses.

veterans HanDBOOK