A. You should have different considerations for stocks and bonds.
Among individual stocks and stock funds, for example, your holdings could include a mix of investments in each of the following categories:
- Size: Consider stocks of small, medium, and large companies, because different-sized companies tend to lead the market at different times.
- Style: Different investment strategies, such as growth and value, tend to trade market leadership. Holding both types means you can help minimize volatility in your portfolio, and potentially benefit in all types of environments.
- Sector: You may want to include investments tied to many different parts of the economy.
- Geography: You may want your portfolio to include exposure to domestic and international stocks, including those from emerging markets. Financial markets around the world respond differently to regional and global events.
Your bond and bond fund holdings can be diversified within the following categories:
- Sector: Consider investing in various types of government and corporate bonds.
- Maturity: Bonds of different maturities provide diverse levels of yield and interest rate risk. Choose to diversify, or target maturities that make sense for your strategy.
- Credit quality: Bonds of different qualities may perform very differently as the business and credit cycles evolve. Make sure your mix of credit quality offers an appropriate balance of risk and reward for your goals and financial situation.
- Geography: Consider holding both domestic and foreign bonds, possibly including emerging markets debt, to gain exposure to the opportunities and spread out the risks offered by various regions.
Keep in mind the risks associated with the different types of holdings, and remember that just creating a diverse mix isn't enough. You also need to make sure that your individual investments remain in line with your plan and to adjust them as necessary. For instance, a small-cap portfolio can grow to become mid-cap, or a period of high returns in one region of the world can leave you over-exposed to the fortunes of that part of the market.