Building a portfolio

Understanding different investment types is only half the challenge—knowing how to put them together into a portfolio is where the rubber meets the road. Dividing your portfolio among different kinds of investments—stocks, bonds, short-term investments, etc.—is called asset allocation. Just as different investment types come with varying levels of risk and growth potential, so do different investment mixes. Generally speaking, the more risk you're willing to tolerate, the larger the gains you can reasonably expect over the long term—but those will be accompanied by more volatility. This is why your goals, time horizon (aka when you need to access the money), and tolerance for risk are key to choosing an asset allocation that can work for you.

For example, investors focused on longer-term goals (think: retirement) may be able to be more aggressive and invest in a mix that has a larger portion of stocks because time may let them ride out any bumps in the market. On the other hand investors who expect to be in the market for less time (think: a goal of enough money for a house down payment) may be more concerned with protecting what they have from a drop in value and so choose a more conservative blend with a higher allocation to bonds and short-term investments. As you move closer to your goal, you’ll want to consider adjusting your asset allocation to build in more protection from the market’s ups and downs. But remember, asset allocation can never guarantee that you won’t experience a loss.

Choose an investment mix you are comfortable with

The next layer to consider when choosing investments is what to put into each bucket. This is where diversification comes in, or the idea of spreading your investments across multiple investment types and kinds of investments within those types. It’s typically smart not to put all your eggs in one basket—if one investment or part of the market goes down, you’d want to have a diversity of other investments that potentially remain stable to level out your portfolio. The goal of diversification is not necessarily to boost performance—it won't ensure gains or guarantee against losses. Diversification does, however, have the potential to improve returns for whatever level of risk you choose to target.

Diversification: Spreading your investments within investment types

Baskets of investments like mutual funds and ETFs can help make asset allocation and diversification easier because they come with a built-in mix of investments already. You can combine various diversified funds to get the overall mix you want—though the simplest solution could be to choose just one fund that is aligned to your goals, strategy, or objectives. If you’re looking for a more customized mix of funds or investments, Fidelity has several options to help you build a portfolio, such as the ETF Portfolio Builder⁸ or—for a small fee—Fidelity Basket Portfolios or our robo advisor service Fidelity Go^®.⁹

Don’t want to do all this alone? You don’t have to. Investment providers such as Fidelity can help you form an investing strategy or manage your investments for you.