12 Oct What’s the difference between diversification and asset allocation?

Q. I’m a new investor. What’s the difference between diversification and asset allocation?
— Learning

A. We love to hear from new investors. Keep learning, and keep your questions coming.

The idea behind diversification is to make sure you don’t put all your eggs in one basket.

The eggs are your money and the basket is one stock, company or investment. You should try to have many different kinds of baskets to offset anything negative that happens to one of them.

Diversification reduces individual company stock risk by owning dozens or hundreds of companies.

That’s the concept behind a mutual fund.

Asset allocation is more about spreading your risk among very different types of investments.

The main idea is not so much that if one asset class crashes you still have two or three others that remain — like in the diversification explanation — but that these three or four diverse asset classes will not move in tandem.

You can reduce the overall risk in the portfolio by spreading the funds across several diverse asset classes like cash, bonds and stocks.

Think of asset allocation as what percentage of stock you have compared to how much you have in bonds. Then diversification is how your money is split into different sub-categories.

For example, let’s assume that your appropriate asset allocation is 60 percent stock and 40 percent bonds. The diversification for stocks may include portions in the following categories: large-cap U.S. stocks, mid-cap U.S. stocks, small-cap U.S. stocks, international and emerging markets.

Email your questions to .

This story was originally published on OCt. 12, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.