Financial Tools & Resources

Diversification & Asset Allocation

Two terms you'll hear when looking for an investment strategy are "diversification" and "asset allocation." While they may have similar meanings, they are different approaches to investing.

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Diversification is spreading your risk across asset classes of similar securities. The core asset classes are stocks, bonds and cash equivalents. Within each of these groups are classes based on the varying characteristics of the core class.

For example, stocks can be from large, small or foreign companies, while bonds may be issued by corporations or government entities and have long- or short-term maturities. Diversification does not assure a profit or protect against a loss in a declining market.

One way to diversify a portfolio is to purchase shares of three or four stock mutual funds with different objectives. Each mutual fund offers a diverse portfolio, but you can get even more diversification by purchasing shares of funds with differing objectives. When objectives differ, the chance of two or more mutual funds holding the same stocks is less.

Diversification Example

A mutual fund made up of the stocks of larger companies, should not have the same stocks as one investing in small— or mid—sized companies. The same could be said of a mutual fund that invests primarily in foreign stocks compared with a domestic stock mutual fund.

Different objectives doesn't necessarily mean different underlying securities. For example, purchasing two funds that both invest in the stocks of large companies may not offer the diversification you're looking for.

By distributing your investment among different types of stocks or bonds, you're less likely to be affected by the volatility of the different markets. If small company stocks are down, your losses may be offset by gains in large company stocks and vice versa.

Asset Allocation

By dividing your assets among the different asset classes, you're able to take advantage of a wide variety of investments. You can invest some assets in higher risk stocks while placing others in corporate or government bonds, which are lower risk. Asset allocation does not assure a profit or protect against loss.

Asset Allocation Example

An example of asset allocation would be to purchase shares of a stock mutual fund, along with shares of a bond mutual fund. Bonds and stocks will each have periods of highs and lows, but may not experience them at the same time. During periods when stocks are performing poorly, bond yields may increase.

You may also purchase shares of a money market fund, generally considered a lower risk than stocks or bonds, as part of an asset allocation strategy. Money market funds attempt to keep a set price and hold short—term investments such as government and high quality corporate debt securities.

By dividing your assets among a number of investment vehicles with varying risks, you may lessen the effects of market volatility. As your goals change, your investments may also change to become more or less aggressive and assume more or less risk.


Mutual Funds are not insurance products and are distributed through representatives of State Farm Investor Services (Canada) Co. State Farm Investor Services (Canada) Co. is a separate legal entity from State Farm Mutual Automobile Insurance Company, or any of its insurance affiliates.

Please read the applicable Fund Facts before investing. Commissions, trailing commissions, management fees, and expenses may be associated with mutual fund investments.

Mutual Funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.

Neither State Farm nor its agents provide tax or legal advice. Please consult a tax or legal advisor for advice regarding your personal circumstances.

State Farm Investor Services (Canada) Co. Aurora, Ontario.