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To reduce dependence on one company, spread investments across companies and industries, and consider how stocks, bonds, and cash fit your goal. Choose a mix based on when you need the money and how much risk you can tolerate, then check what your funds actually hold. Diversification can limit the effect of a single holding, but it cannot prevent losses when markets fall.
Start with the goal and when you’ll need the money
Before choosing investments, identify what the money is for and when you expect to use it. Investor.gov defines your time horizon as the period you plan to invest toward a financial goal. A shorter horizon may make less risky or less volatile investments more suitable; a longer horizon may allow more time to withstand market swings. These are general considerations, not a formula based on age or a recommendation for a particular allocation.
Also assess your risk tolerance: the SEC describes it as both your willingness and ability to lose some or all of your original investment in pursuit of potentially greater returns. Your financial circumstances matter alongside your comfort with volatility. Online questionnaires can help organize your thinking, but Investor.gov cautions that questionnaires sponsored by firms selling products or services may be biased.
Investor.gov’s guide to asset allocation, diversification, and rebalancing explains these concepts and why no single allocation fits every financial goal.
Set an allocation, then diversify within it
Asset allocation is how you divide a portfolio among broad categories such as stocks, bonds, and cash. Diversification is how you spread investments within and across those categories. A portfolio can hold several asset categories and still have too much exposure to one company or industry through its stock holdings.
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Think about diversification at two levels:
- Across asset categories: Stocks, bonds, and cash have different characteristics and may behave differently in different market conditions. The balance should reflect your goal, time horizon, and risk tolerance.
- Within categories: Spread stock exposure across companies and industries rather than relying heavily on one name or sector. Diversifying bonds, where applicable, also means looking beyond a single issuer or narrow segment.
The SEC says, “There is no single asset allocation model that is right for every financial goal.” Avoid treating a commonly cited stock-and-bond split as a universal rule or as an SEC-endorsed target.
How do I diversify away from one stock?
First, look at the whole portfolio—not just the number of positions in one account. Identify how much of your total investment exposure depends on the company in question, including any exposure through funds. Then decide on a target mix suited to your goal and risk tolerance, and reduce the company’s share of the portfolio by building broader exposure across companies, sectors, and, where appropriate, other asset categories.
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Review fund descriptions and holdings to understand both concentration and overlap. Count neither tickers nor funds as a substitute for checking what you own. A broad stock fund can diversify company-specific exposure within the stock portion of a portfolio, but it does not by itself spread exposure across asset categories.
Investor.gov’s ETF overview provides background on exchange-traded funds; check each product’s own disclosures and holdings for its actual focus.
How many stocks do you need to be diversified?
There is no universal number of stocks that makes a portfolio diversified. The number alone does not reveal whether holdings are concentrated in the same industry, share similar risks, or overlap with investments held through funds. A broad pooled fund may own many companies, while a portfolio of individually selected stocks can still depend heavily on a few businesses or sectors.
Assess breadth by asking what companies and industries you own, how much each contributes to your overall exposure, and whether funds duplicate the same holdings. Consider asset-category exposure separately: owning many stocks does not create bond or cash exposure.
Check specialized products before treating them as diversification
Leveraged and inverse ETFs are generally designed to meet daily objectives. Their results over periods longer than a day can diverge from those objectives. Single-stock ETFs seek results based on one stock and do not provide diversification; leverage can amplify volatility and risk. These products are not a way to solve dependence on one company.
The SEC’s bulletin on these products says it represents SEC staff views and has no legal force or effect. Read the product’s objectives, risks, and disclosures before investing. Read the SEC staff bulletin on single-stock ETFs.
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Monitor concentration and rebalance toward your target
Market movements can cause the portfolio’s actual mix to drift away from your chosen allocation. Rebalancing means bringing holdings back toward that target. The SEC describes three approaches:
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- Add money to underweight holdings rather than selling overweight ones.
- Direct new contributions toward underweight holdings.
You can review on a calendar schedule or when your allocation crosses a threshold you set in advance. The SEC says rebalancing generally works best relatively infrequently; it does not specify one review interval that is best for every investor. Before trading, consider transaction fees and possible tax consequences.
As an educational illustration—not a recommended allocation—the SEC shows a hypothetical portfolio whose stock share rises from 60% to 80% after market gains, illustrating how rebalancing can restore a chosen mix. The example does not establish that either percentage is suitable for you.
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Fees reduce the amount of money in a portfolio that can earn a return. Compare fund expenses and other product costs, and understand any fees charged for professional advice or account services. Review fee disclosures before investing; the SEC’s July 23, 2025 bulletin says, “Fees impact your investment, so it’s important you understand them.”
To illustrate the effect of fees, the SEC’s 2025 bulletin gives a hypothetical calculation: a $100,000 portfolio growing at 4% annually for 20 years would be worth approximately $208,000 with a 0.25% annual fee, $198,000 with a 0.50% fee, and $179,000 with a 1.00% fee. These are hypothetical figures, not a forecast of investment returns or a prediction of what a particular portfolio will earn. See the SEC’s fee and expense bulletin, dated July 23, 2025.
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What diversification can—and cannot—do
Spreading exposure can reduce the damage a poor outcome at one company may cause to the overall portfolio. It does not remove broader market risk or guarantee a profit. The SEC states, “Diversification can’t guarantee that your investments won’t suffer if the market drops.” A diversified portfolio may improve the chances of limiting losses compared with an undiversified one, but losses remain possible when markets decline. Investor.gov’s diversification guide explains the distinction.
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