25 Sep What’s the difference between asset allocation and diversification?

Q. What is the difference between asset allocation and diversification? It seems like it’s the same thing.
— Investor

A. This is a great question.

Asset allocation and diversification are in fact very intertwined.

Think of diversification as the goal and asset allocation as the plan to achieve the goal, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

It’s similar to the idea of losing weight and how diet and exercise might help you reach the target.

Diversification is often described as “not putting all your eggs in one basket” and can be true of many things in life, but especially investing or managing a portfolio of assets, Mott said.

“By owning a number of securities — stocks and bonds — mutual funds or exchange-traded funds (ETFs) of varying types, overall risk in the portfolio should be reduced,” Mott said. “The asset allocation should be designed with risk in mind, but may also consider these factors as well; type of assets (retirement vs. taxable), the time horizon over which the portfolio will be invested and possible income needs.”

When it comes to investing, there are many different asset classes that can be used to create a diversified portfolio and the amounts, usually a percentage target, dedicated to each investment type is defined as the asset allocation, she said.

For example, a balanced portfolio may contain 50% in stocks and equity mutual funds and 50% in bonds, she said. Within each of these broad groups can be a variety of different categories of stock or bond investments that would be assigned a fixed percentage to fulfill the desired allocation and create the portfolio’s diversification. Within the stock portion there might be funds that invest in large-cap, small-cap or international stocks while the bond sleeve could include funds of varying maturities or bond types such as Treasuries, corporates and municipals, Mott said.

Mott said target date retirement funds are an excellent example of a diversified portfolio that is created with an asset allocation which is appropriate for the retirement age of the fund holder.

“As time goes along, the exposure to stock market risk is reduced and the percentage of income-generating fixed income is increased,” she said.

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This story was originally published in September 2025.

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