If you’re investing to build wealth, planning for retirement, or simply trying to make your money work harder for you, one of the most important principles to understand is diversification. It’s the key to reducing your investment risk—while still leaving room for growth.

Below, we’ll break down how to diversify by asset class and within asset classes, so you can build a portfolio that supports your financial goals with a risk level you’re comfortable with.

What Is an Asset Class?

The 6 main forms of asset classes are:

1. Cash
2. Fixed income (bonds)
3. Equities (stocks)
4. Real estate
5. Commodities (gold, oil, etc.)
6. Alternative investments (private equity, cryptocurrency, etc.)

Each of these asset classes provides you the opportunity to invest with varying degrees of risk and potential return associated with each of them, which is why spreading your investments across multiple types is so important for risk management.

Asset classes make up your asset allocation. An example of an asset allocation would be—10% Cash, 20% Fixed Income, 60% Equities, 10% Alternative Investments. 

You are able to direct your asset allocation by diversifying your assets across multiple different asset classes in an effort to manage risk, liquidity needs and to achieve your financial goals. 

What Is Diversification and Why Does It Matter?

Diversification is the practice of spreading your money across different types of investments to minimize the impact of any one asset’s poor performance.

There are two key levels of diversification:

1. Diversification by asset class – Investing in multiple types of assets (e.g., cash, stocks, bonds)
2. Diversification within each asset class – Spreading your investments across different options within an asset class (e.g., different kinds of stocks or bonds)

Both approaches help you reduce investment risk and increase your chances of steady, long-term returns because let’s face it—no single investment performs well ALL of the time.

The stock market, for example, can deliver high returns, but also comes with high volatility and ups and downs. On the flip side, cash may feel “safe,” but inflation can quietly reduce your purchasing power over time.

By diversifying your investment portfolio, you’re not betting everything on one thing. You’re balancing risk vs. reward based on your financial goals, risk tolerance, and investment time horizon.

So before you invest in any one of these asset classes it’s important to have a general understanding of what they are, the risks associated with them and what type of income is generated from them. 

Diversifying By Asset Class

Diversification by the TYPE of asset class is the process of investing across multiple different asset classes – cash, fixed income, equities, etc.

For most of us, our retirement funds and future lifestyle will depend on our ability to earn an income – through our employment and also by way of our investments. Our investments will require a level of risk in order to achieve future goals. How you choose to diversify by asset class will indicate the level of risk you are willing to take and also your earning potential.

If you were to place all of your money into cash – you would have little to no risk at all and in turn, little to no reward. (Although one could argue, your risk is in the fact that you are holding all your assets in one asset class that is diminishing in value over time due to inflation).  

If you were to place all of your assets into equities – you would be exposing yourself to much greater risk with the potential for much more reward. 

Diversification by asset class is a balance of risk and reward through your selection of investments. 

There is not one specific asset class that outperforms another year in and year out. It will vary over time. No two asset classes respond and react in the same way to world events. Which is why diversification is key.

Here’s how each asset class behaves differently:

• Cash: Very low risk and high liquidity. Examples include checking accounts, savings accounts, or money market funds. Your money is safe—but offers minimal growth.
• Fixed Income (Bonds): These provide steady, predictable returns. You lend money to governments or corporations and earn interest in return. They’re generally less risky than stocks.
• Equities (Stocks): These offer ownership in companies. They carry more risk, but also greater potential for long-term growth.
• Real Estate: You can invest directly (buying property) or indirectly through REITs (Real Estate Investment Trusts), which are more accessible and liquid.
• Commodities: Things like gold or oil. Often used as an inflation hedge but can still be volatile.
• Alternative Investments: These include private equity, hedge funds, and even crypto. Higher risk, more expensive, often less liquid, but potentially high reward.

This link provides an excellent breakdown of asset class performance over the past 20 years and makes a strong case for the value that diversification provides.

Diversifying WITHIN an Asset Class

Then the next thing to consider once you have determined what level of risk you are willing to take on and your investment time horizon – you then drill down to determine how best to invest within that asset class.

A few examples of drilling down within each asset class would be the following:

Within Cash

You may not think cash is an investment, but holding your money in cash is an investment decision. Alternative options to your checking account for cash would be as follows:

High-Yield Savings Accounts

Certificates of Deposit (CDs)

Treasury Bills

Money Market Accounts

Within Fixed Income (Bonds)

Fixed income is investing in other entities through financing their debt. You, as the investor, loan money to an issuer of a bond. This allows the issuer to finance whatever project it is they are working on and in return they promise to pay you your principal back and an income at fixed intervals at a fixed rate.  

There are 3 major types of bonds and the biggest difference between them is who is issuing them and how they are taxed.

• Municipal Bonds – is a bond issued by a state or local government to support state and local projects.
• Government Bonds – the federal government needs funds for roads, infrastructure, defense, etc. and will raise money through government bonds to be able to afford such projects.
• Corporate Bonds – a corporation will issue bonds to finance projects related to the ongoing operations of the company, growth projects, mergers & acquisitions, etc.
  

You can buy individual bonds or invest through bond ETFs and mutual funds to get instant diversification.

Within Real Estate

You don’t have to be a landlord to invest in property. Investing in real estate could hold many forms:

Direct Ownership: Purchasing commercial or residential property

Real Estate Investment Trusts (REITs): Invest in a diversified portfolio of real estate assets in the stock market

Real Estate Crowdfunding: Pooling money together with other investors to access larger real estate deals and investments

Within Equities (Stocks)

When you invest in equities, you become a shareholder in the company or fund.  There are many ways to diversify within equities:

By Investment Type: Individual Stocks, Index Funds, ETFs, Mutual Funds

By Sector: Technology, Energy, Healthcare, Financials, etc.

By Region: United States, Europe, Emerging Markets, Asia, etc.

By Size of Company: Large Cap, Mid Cap, Small Cap or Micro Cap

📌 Tip: ETFs (Exchange-Traded Funds) are a great way to gain exposure to many companies in one investment.

How to Know What’s Right For You

The options are not laid out to overwhelm you. I don’t expect any one of you to be able to recite and feel confident in everything I just wrote about. But I do want you to know you have options and those options will provide you the opportunity to invest in a way that makes the most sense for you.

Everyone has a different risk tolerance and investment timeline. Some people are comfortable riding out market swings; others prefer more stability and capital preservation.

Ask yourself:

• What are your financial goals?
• How long until you need access to this money?
• How much risk are you willing to take?

Once you know your answers, you can build an investment portfolio that’s aligned with your life, not just the markets and not just by what people are telling you to do.

Reduce Your Investment Risk with Smart Diversification

You don’t need to be an expert to build a strong, low-risk investment strategy. Start simple:

• Understand each asset class
• Choose a mix based on your goals
• Diversify within those asset classes

The goal isn’t to beat the market every year. It’s to build a portfolio that grows steadily, allows you to stay invested, withstands volatility, and helps you reach your personal financial goals—with less stress and lower risk.

If you’re looking for guidance around how best to create an investment allocation and strategy that suits you and your lifestyle – apply to work together here!