Show How Proper Diversification Can Help Manage Risk | American Funds

Client Conversations


Show How Proper Diversification Can Help Manage Risk

Explain how to spread investment dollars among different types of assets.

Diversification matters. Yet it’s an unfortunate reality that many investors don’t know how to properly diversify their investment portfolios. And some of those who do have lost faith in diversification since the market crash in 2008.

That’s where you can make a big difference, as their personal financial advisor or the financial professional associated with their employer’s retirement plan.

Open a Dialogue With Your Client

You can make diversification easier to understand by explaining it in terms of your client’s goals and financial situation. This will make it “real” to them.

Talking points you can use:

  • Start by asking your clients about their financial objectives, goals and feelings about risk.
  •  Explain that diversification is:
    • A long-term strategy
    • Intended to help reduce risk and help minimize losses — so investors may benefit when the market is up but lose less when the market is down.
    • Applied by spreading investment dollars among different types of assets (equities, bonds, cash-equivalents, domestic securities, global/international securities, etc.). So, for example, proper diversification would have helped an investor avoid a portfolio solely invested in (then popular) tech stocks just before the market decline in early 2000.
  • Explain that diversification is not:
    • About the number of funds in a portfolio — it’s about the kind of funds one is invested in and the securities held by each fund.
    • A foolproof approach, as evidenced by the number of investors affected by the market decline of 2008. (This will help you manage unrealistic expectations.)
    • An exact science, since nobody knows how the market will do in the days, weeks and years to come. However, certain general principles tend to benefit investors whose portfolios are properly diversified and remain that way, even during volatile times.
  • Describe how diversification can reduce risk using The Investment Company of America as an example. Use pages 4–6 of the ICA Guide (PDF): The ICA Guide | Quarterly Statistical Update.

Assist Your Clients in Building Their Portfolios

Few investors really understand how to diversify the investments in their portfolios, and many are looking for help. You can build and strengthen valued relationships by extending personal assistance. Of course, that’s not always possible and you’ll likely have some “do-it-yourself” clients who prefer to choose their own investments, with a little guidance from you.

Talking points you can use:

  • Have you considered a target date fund? This kind of investment combines a group of mutual funds into one fund designed to act as a complete, diversified portfolio (a fund of funds). It’s easy to select the right target date fund for you — all you need to know is when you expect to start taking withdrawals from your account. American Funds offers target date funds as a means to help investors save for college and plan for retirement.
  • Have you heard about the American Funds Portfolio Series? One investment combining different American Funds (a fund of funds) can act as a complete, diversified portfolio or an integral part of your overall investment strategy. The funds are easy to select because they’re based on objective.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.