Managing Risk and Return Through Diversification

Experience has shown long-term investors are more likely to achieve consistent results and grow their assets over time if they hold a diversified portfolio.

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2016 was a solid year with most asset classes posting positive returns. U.S. small cap equities had the best performance, while bonds in general underperformed.

Investing only in the top-performing asset class each year would likely generate the best returns, however, such a feat is extremely difficult, if not impossible, to do consistently, even for seasoned investors.

Because forecasting market performance is challenging, we believe it’s important to hold a diversified portfolio, even though it will produce a lower return than if you were able to pick the best performer in any given year.

Among its potential benefits, diversification is likely to generate more consistent returns. As a result, over the long term, a diversified portfolio may increase more in value than one that produces more volatile returns, which is the likely result of being concentrated in a single asset class. Of course, diversification does not guarantee a profit or protect against losses in a declining market.

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Wells Fargo Investment Institute, Inc., is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.