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Is Your Portfolio Properly Diversified?

Do you know what’s one of the biggest predictors of how your portfolio will perform? If you’re a long-term investor, history has shown that how you divide your money among cash investments, bonds, and stocks is one of the key factors in determining your investment results. So it’s important that you select the right mix of investments.

Diversify Among Asset Classes
There is no one-size-fits-all answer when it comes to investing for your financial goals. However, most long-term savings programs use a combination of the following asset classes:
  • Cash investments for predictable returns, as well as interest income.
  • Bonds for higher interest income than cash investments, but with added risk.
  • Stocks for the highest potential returns from dividends and capital gains, but with substantial short-term risks.
Identify Your Goals and Time Frame
To make sure you choose the right mix of investments for your portfolio, you have to determine what you are saving for and how long you have to reach your goal. Are you investing for retirement or to purchase a home or both? The answer to this question is important because it determines if you have short-term or long-term goals.

Money for short-term goals must be available quickly, so you need to invest it more conservatively. The more time you have to invest, the greater risk you can assume because you have the opportunity to ride out short-term market losses in hopes of greater long-term returns.

Determine Your Risk Tolerance
Everyone has his or her own comfort level with risk. Complete Vanguard’s Investment Questionnaire to figure out your risk tolerance.

Create Your Investment Mix
Based on your time frame and risk tolerance, the Investor Questionnaire will lead you to a mix of cash investments, bonds, and stocks that is right for you. Here are a few basic guidelines to help you choose specific funds:
  • Most of your stock investments should be in broadly diversified funds that invest in large U.S. companies.
  • Higher-risk stock funds, such as those that invest in smaller companies or foreign companies (look for more information on these types of investments next month), should make up only a small part of your overall stock holdings. These funds expose you to additional risks, so make sure you can withstand the down periods.
  • Your bond investments should be in high-quality, intermediate-term bonds.
For More Information
If you want additional information or have questions, visit Vanguard.com® or call Vanguard® Participant Services at 1-800-523-1188 Monday through Friday from 8:30 a.m. to 9 p.m., Eastern time.

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