The importance of diversification When it comes to investing, sometimes it seems like the only constant is change. Different types of investments fall in and out of favour as different forces affect the economy. So how can you reduce the amount of ups and downs in your retirement account over time? Diversification by asset class One of the best strategies is to diversify your investments among different types of asset classes. Since different asset classes typically behave differently in any given market state, holding investments in a variety of asset classes can help to smooth out your returns. Predicting the next best performing asset class to any degree of success is extremely difficult to accomplish. In an effort to minimize the potential negative impact of putting all your eggs in one basket, it's important to diversify across a variety of asset classes. To help you choose your investments, we have colour-coded each investment to represent its asset class. This will make it easier to follow the investing guidelines for your investment style. Here are the different colours and their associated asset classes. Guaranteed Interest Accounts and Money Market funds Group IncomePlus Investment Portfolios Asset Allocation Canadian Bond Balanced Canadian Equity International Equity and Global Equity U.S. Equity In addition to diversifying by asset class, there are other things to consider when choosing your investments. Volatility Generally, the greater the return you want to earn on your investments, the greater risk you have to assume. A fund with high volatility will experience larger fluctuations of returns than a fund with low volatility. While higher risk funds may be more volatile in the short term, over the long term (10 years or more) a higher risk fund will generally earn more than a lower risk investment. This increased gain is what investors expect in exchange for assuming the higher risk of these volatile investments. Fund managers Investing with more than one fund manager will allow you to take advantage of the various approaches to investing. Different fund managers use different sets of research and tools, and have different perspectives on the economy. Investing styles Different investing styles typically generate different performance results over time. By choosing investments that use different styles (e.g. value, blend, or growth), you may be able to reduce the overall volatility of your portfolio.