Wealth Insights

Guide to portfolio diversification at every age and stage

Balancing risk and reward in your investments is critical to meeting your goals. Here’s how to do it.

Key takeaways

• Portfolio diversification could help manage risk over time, though it does not guarantee positive returns.
• Risk tolerance changes with life stage, goals and financial responsibilities.
• Diversification historically works well when aligned with your investment goals, time horizon and risk tolerance.

Whether you’re saving for retirement or hoping to build generational wealth, knowing how and where to allocate your money may help you pursue success. However, if you’re like many investors, you may struggle with both.

According to a 2025 report from the Philadelphia Federal Reserve, fewer than half of Americans surveyed correctly identified the role of diversification, with only 45% of men and 34% of women selecting the correct answer.

For the vast majority of investors, diversification is critical to long-term investment success because of its role in managing risk, even though it does not guarantee positive returns.

“Diversification is key,” explains Brandon Thurber, Chief Market Strategist at Regions Bank. “It's a simple concept, but that's the key tenet upon which our portfolios are built.”

What is portfolio diversification? Why does it matter?

In simple terms, portfolio diversification is the practice of not putting all of your eggs in one basket. A diversified portfolio is one in which your investments are spread across various asset classes with varying degrees of risk and potential for growth. Ultimately, the goal of a diversified portfolio is to balance risk vs. growth, while also helping investors withstand periods of market volatility.

In short, diversification is about reducing exposure to any single asset type, which in turn reduces the potential for volatility.

Diversification remains one of the most effective tools investors have for managing risk, but its role has become more nuanced in recent years. Periods of high inflation, rapidly rising interest rates and heightened market volatility have reminded investors that diversification does not eliminate losses. Instead, it helps manage how risk shows up in a portfolio over time.

In certain market environments, asset classes that historically behaved differently—such as stocks and bonds—may move more closely together for short periods. That dynamic can be unsettling, particularly for investors who relied on bonds for stability. However, diversification is designed for long term resilience, not short term protection. It’s about building portfolios that can recover, adapt and stay aligned with long term goals across very different market cycles.

By combining assets with varying risk profiles, growth drivers and sensitivities to inflation and interest rates, investors can better withstand uncertainty while remaining positioned for future opportunity.

What are asset classes?

An asset class is a grouping of similar investments. The three main asset classes are:

• Equity investments (stocks)
• Fixed income investments (bonds)
• Cash equivalents (money market funds, CDs, etc.)

Because stocks represent a share in the ownership of a publicly held company, they may have potential for appreciation — however, they often come with the greatest risk. Bonds, on the other hand, represent a loan to an entity — typically a government or a corporation. Because the bond issuer agrees to pay you back at a set interest rate on a set date, they may carry a lower amount of risk and typically produce lower returns. This is why bonds are often referred to as “fixed income.”

“When you invest in a stock or bond, you're investing with the expectation of different returns and different risks,” explains Alan McKnight, Chief Investment Officer.

Compared to stocks and bonds, cash equivalents are less risky. However, because cash equivalents such as money market holdings, certificates of deposit (CDs), and savings accounts generally don’t fluctuate in price, they have limited growth potential. Nonetheless, because they may be easily converted into cash, they may be appealing options for those who would like to maintain liquidity while still earning some amount of interest.

What are alternative asset classes?

In addition to equities, fixed income and cash equivalents, some portfolios may include alternative investments such as real estate, commodities, private equity or hedge style strategies. These investments may behave differently than traditional asset classes and, in some cases, may offer additional diversification benefits.

However, alternatives are not appropriate for every investor. Many require longer time horizons, have limited liquidity and may carry higher levels of complexity and risk. In addition, access to certain alternative investments may be restricted to accredited or qualified investors and often involve different regulatory considerations.

Because of these factors, alternatives are typically used in moderation and within the context of a broader, well diversified portfolio. Professional guidance is especially important when evaluating whether alternatives align with an investor’s goals, risk profile and liquidity needs.

How to diversify a portfolio

While most diversified portfolios include some combination of asset classes, the manner in which they are distributed will depend on three important factors:

• Your financial goal(s)
• Your timeframe for achieving your goal(s)
• Your risk tolerance

You probably know what your goals are and when you’d like to achieve them. Risk tolerance, though, can be harder to assess. Simply put, your risk tolerance is the amount of loss you’re willing to endure in your portfolio in exchange for potentially higher returns.

“It's important to understand the risks,” explains McKnight. “Investments can go up or down, and when there's a high risk, there’s usually a potential for high reward.”

How to assess risk tolerance

While there are many online quizzes designed to help investors assess their risk tolerance, those who are working toward a significant goal may find it helpful to work with an investment advisor. In Thurber’s experience, many investors have difficulty assessing their individual risk tolerance. “You have some investors who think they can take on a lot of risk, but once you dig in, you realize they may not be as equipped to do so,” he explains.

Not only will risk appetite be unique to each individual investor, but the amount of risk you’re willing or able to bear will likely fluctuate throughout your lifetime. For example, a young investor with a long runway to retirement will likely be in a better position to withstand volatility than an individual who is nearing retirement.

“It's crucial to understand goals, aspirations, and risk tolerance for each and every client on an individual basis,” Thurber explains. “When an individual is nearing retirement, they may be entirely in bonds. Conversely, if someone is at the start of their career and taking risk is something that they're comfortable with, it's possible they may not have fixed income or bonds in their portfolio.”

Examples of diversified portfolios at every age

Early adulthood

For those just starting their career, student loan debt and low earnings are two common barriers to investing. However, with more time to benefit from compound interest, even seemingly small investments may result in a significant difference long-term. With a long runway to retirement, many people in this age group are likely to have a greater risk appetite, resulting in portfolios that are more aggressive and built for long-term growth. “That translates to having a higher proportion of your portfolio in stocks rather than just in bonds or cash,” says McKnight.

Mid-career

Once many people have settled into their career, they often face new variables such as homeownership, marriage and children, meaning that most are likely to have a moderate risk appetite. As a result, a diversified portfolio for this group might balance both aggressive and conservative investments. However, McKnight notes that your actual allocation may vary based on other factors. “There may be different levers depending on if you own a business, or if you are a caregiver to elderly family members. All of those factors are critical to consider,” he explains.

Retirement

During retirement years, financial stability is important—particularly for those relying on their savings. As a result, one of the most common types of portfolios for this age group is low-risk and conservative. When balancing your portfolio in retirement, it may be tempting to invest more heavily in cash equivalents. However, with retirements and life expectancies longer than ever, it will likely be just as important to ensure you have a balanced, inflation-aware portfolio built to last as long as 20 or 30 years.

Diversifying your investments

If you’re working with an investment advisor, he or she can take the time to understand your goals, assess your risk tolerance, and evaluate influencing factors such as time horizon before constructing your portfolio.

“It starts with the foundational element of knowledge and understanding of a client’s assets and the liabilities in order to ensure it's a holistic plan,” explains McKnight. “The advisor should then better understand what the goals of the client would be and how much risk they should take on to meet their goals.”

If you’re not quite ready to work with a wealth advisor or investment advisor, mutual funds and exchange-traded funds (ETFs) are two popular ways to diversify on your own. Both ETFs and mutual funds give individual investors access to professionally managed collections of assets that include equities (stocks), bonds and other types of securities. These funds range from conservative to aggressive, making them an appealing option for individual investors.

For new investors, investing in ETFs or mutual funds through a digital trading platform may serve as a great starting point. A select handful of online trading platforms provide advisor-assisted digital trading. This offers a mix of both worlds: the flexibility of a digital trading platform with the support of a human advisor.

However, for those with a clear goal in mind, building a relationship with an advisor can help assess whether you’re on track to achieve it. “If you are looking to ensure that you may have an opportunity to meet your goals over that time period, and by having an advisor, you can develop a comprehensive plan that helps meet those needs,” says McKnight.

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