Understanding Asset Allocation

Why Does Having a Diversified Portfolio Matter?

As a time-tested principle, diversification is the cornerstone of a sound investment strategy. It involves spreading your money across many kinds of investments to help manage volatility.

What Is Asset Allocation and How Can It Help Me?

Rather than chasing performance, a better long-term strategy may be to position your portfolio allocation for a variety of market conditions by allocating a percentage of your assets among a variety of investments. A proper asset allocation mix is based on your goals, risk tolerance and time frame.

How Asset Allocation Portfolios Work

Asset allocation funds (aka fund-of-funds) invest in other mutual funds rather than individual stocks, bonds and money markets. They've grown increasingly popular, especially during volatile market times, because they offer:

  • A balanced portfolio
  • Professional money management
  • One convenient package
  • The goal of helping investors reduce overall risk in their portfolios

Because they include a complete mixture of stock, bond and money market funds, we also refer to them as asset allocation portfolios.

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One Fund – Includes all Growth Stocks

Cola X Company Stock
Hi-Tech Company Stock
ABC Car Company Stock

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One Fund – A Mix of Underlying Funds

Underlying Bond Funds
Inflation Protection, International, High Yield, Diversified

Underlying Stock Funds
Growth, Value, International, Small Cap, Large Cap, Sectors

Underlying Money Market Funds

For illustrative purposes only, does not represent an actual standard mutual fund or asset allocation fund.

Consider the Benefits

Asset allocation funds offer advantages that aren't necessarily available through a mutual fund that invests in underlying securities.


More Balance

Your portfolio gets exposure to more securities by spreading your investments across a number of mutual funds. The underlying funds invest in different types of assets across market sectors, industries and securities. This diversification has the potential to reduce your portfolio's overall risk and volatility.



You can invest in many different kinds of assets and only have one fund minimum to worry about. You would need to invest significantly more by investing in several funds to achieve the same asset mix on your own.

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You make one investment choice. Professional money managers construct the portfolio, decide how much of each asset should be in the portfolio and provide ongoing oversight and rebalancing. There's also less paperwork and recordkeeping for you to manage.

Asset Allocation Fund vs. Designing Your Own Portfolio

Asset Allocation Fund

  • Diversification in one investment
  • Simple record-keeping
  • Monitor one fund's performance
  • Professionals rebalance
  • Managed to specific risk levels

Traditional Mutual Fund Portfolio

  • Diversification through many funds
  • Record-keeping for many funds
  • Monitor performance of many funds
  • You rebalance your own portfolio
  • Risk depends on which funds you choose

Choosing a Portfolio

Generally, there are two ways to choose an asset allocation fund:

  • Risk-Based Portfolios: Choose the fund based on the amount of risk you want to take. Risk-based portfolios have a pre-set allocation and are periodically rebalanced to keep the allocation and risk level consistent.
  • Target-Date Portfolios: Choose the portfolio by the approximate year you will need the money. Each year the asset mix and weightings are adjusted to become more conservative as the target-date approaches. With target-date portfolios, the principal value of the investment is not guaranteed at any time, including at the target date.

Understanding performance and risk

The performance of an asset allocation portfolio depends on how its underlying funds perform. Underlying funds are subject to the volatility of the financial markets, and depending on the types of assets in which they invest, may be subject to additional risks that come with investing in specific market sectors or foreign securities. If an underlying fund also includes international securities, the portfolio may also be subject to currency and exchange rate risks. As with any investment, the value of the asset allocation fund's shares will fluctuate and may fall below your original investment

The Bottom Line

Investing in an asset allocation fund can give you the benefit of a balanced portfolio that's managed by professional money managers, in one convenient fund choice. It may be the kind of investment that can help you manage risk and potentially weather the markets' natural ups and downs.

One Choice Portfolios®

Signature target-date and target-risk asset allocation fund-of-funds from American Century Investments®

Learn More

A One Choice Target Date Portfolio's target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.

Each target-date One Choice Target Date Portfolio seeks the highest total return consistent with American Century Investments' proprietary asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio's allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and cash equivalents.

Diversification does not assure a profit nor does it protect against loss of principal.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.