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Repair Windows errors before they cause bigger problemsFix Now →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Clear out junk files and repair common Windows errorsFree Scan →To reduce the risk that one company dominates your results, spread investments across companies and industries, check the underlying holdings of any funds you own, and choose an overall mix that fits your goals, time horizon, and risk tolerance. Then review that mix periodically and rebalance with fees and taxes in mind. Diversification can limit the impact of a company-specific setback, but it cannot prevent losses when markets fall.
What diversification can—and cannot—do
If a large share of your portfolio depends on one company, that company’s poor performance can have an outsized effect on your savings. Owning investments across different companies and industries reduces that single-company dependence. Diversifying across asset categories, such as stocks, bonds, and cash, can spread exposure further.
Diversification does not eliminate risk or guarantee a profit. The SEC says it may improve the chances of limiting losses compared with an undiversified portfolio, but a diversified portfolio can still lose value when markets decline. SEC: Diversify Your Investments.
How do I diversify away from one stock?
Build the portfolio around the purpose of the money rather than starting with a target stock count or a percentage formula. The SEC says there is no single asset-allocation model that is right for every financial goal. A practical sequence is to set the goal and time horizon, assess your risk tolerance, choose an allocation, and then check that each part is diversified.
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1. Define the goal and when you will need the money
Your time horizon is the period you plan to invest to meet a financial goal. Money needed sooner may call for less risk or volatility than money invested for a longer period, though that general principle does not set a precise allocation for any particular person. Consider whether the money is for a near-term expense, a long-term goal, or something in between. SEC: Asset Allocation, Diversification, and Rebalancing.
2. Assess both willingness and ability to take risk
Risk tolerance includes your willingness and your ability to lose some or all of your original investment in exchange for the possibility of greater returns. Your financial circumstances and comfort with losses both matter. An online questionnaire can help you think through trade-offs, but Investor.gov warns that questionnaires sponsored by financial firms may be biased toward products or services the sponsor sells.
3. Choose an asset allocation
Asset allocation divides a portfolio among categories such as stocks, bonds, and cash. Diversification spreads investments within and across those categories. A stock allocation can still be concentrated in one company, industry, or market segment; a mix of asset categories does not automatically solve concentration within the stock portion.
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There is no universally suitable stock-and-bond percentage. The mix should reflect the goal, time horizon, and risk tolerance, rather than an age-based rule or a generic model presented as right for everyone.
4. Spread exposure within each category
Within stocks, look at how much of your portfolio depends on individual companies and sectors. Within other asset categories, consider whether your holdings are similarly concentrated. Different asset classes and segments can behave differently under market conditions, but no combination guarantees protection from loss.
Can index funds reduce single-stock risk?
A broad pooled fund can make it easier to own a range of investments. The SEC describes mutual funds as pooling investors’ money to invest in stocks, bonds, and other instruments; it gives a total stock market index fund holding thousands of companies as an example of broad stock exposure. But a fund’s label or the number of funds in your account does not establish that your portfolio is diversified.
- Check the fund’s focus. A sector-specific fund may leave you heavily exposed to one industry rather than spreading risk broadly.
- Look through to holdings. Several funds may own many of the same companies, so adding another ticker might not add much diversification.
- Check asset categories. Multiple stock funds can still leave the portfolio concentrated in stocks; review the overall mix in light of your goal and risk tolerance.
- Compare costs. Review product fees and any transaction or professional-advice fees before investing.
Compare holdings, company and sector concentration, asset-category exposure, and costs—not just the number of funds. A fund’s prospectus and other disclosures can help you understand its strategy, holdings, and expenses.
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How often should I rebalance my portfolio?
Rebalancing brings a portfolio back toward its chosen target mix after market movements cause the proportions to drift. The SEC describes two common ways to decide when to review: use a calendar schedule or act when allocations cross pre-set thresholds. It says rebalancing generally works best relatively infrequently; that is not a prescribed interval for every investor.
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For illustration—not as a recommended allocation—the SEC describes a hypothetical portfolio whose stock share rises from 60% to 80% after market gains. That drift shows why a portfolio may no longer match its original plan even when no new investments have been made.
Ways to rebalance
- Sell some holdings that have grown beyond their target share and use the proceeds to buy underweight holdings.
- Direct new contributions toward underweight holdings, which may help adjust the mix without selling.
- Use a combination of sales and new contributions, after considering the costs and tax consequences of any transactions.
Before making trades, consider transaction fees and potential tax consequences. Review the plan and the holdings that have drifted; do not change the target mix simply because an asset has recently performed well or poorly.
What costs and specialized products should you check?
Fees reduce the amount of money in a portfolio that can earn a return. Compare the expense and fee disclosures for funds and accounts, as well as any professional-advice fees, so you understand what you will pay. The SEC’s July 23, 2025 bulletin illustrates the long-term effect with a hypothetical: a $100,000 portfolio growing at 4% annually for 20 years would be approximately $208,000 with a 0.25% annual fee, $198,000 with a 0.50% fee, or $179,000 with a 1.00% fee. These are illustrative calculations, not a forecast of investment performance. SEC: How Fees and Expenses Affect Your Investment Portfolio.
Leveraged and inverse ETFs are not substitutes for diversification. The SEC staff bulletin says these products generally pursue daily objectives and can diverge from those objectives over periods longer than a day. Single-stock ETFs seek results based on one stock, so they do not provide diversification from that company; leveraged versions can amplify volatility and risk. The bulletin reflects SEC staff views and has no legal force or effect. SEC staff bulletin: Leveraged and Inverse ETFs.
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