Hi, I'm John Ameriks of Vanguard Investment Counseling and Research.

For many investors, it's been hard to keep a long-term perspective lately with the markets fluctuating so much—particularly when it's been a mostly downward slide. But when the financial news seems gloomy, that's exactly when investors need to keep their balance, both emotionally and financially.

So in this segment, we'll look at one of the most time-tested principles of investing—the importance of spreading your investments broadly across stocks, bonds, and cash to help you manage your risk.

The past year or so has been a very rough ride for stock investors. And even some parts of the bond market suffered losses, although not nearly as steep as stocks.

This is an especially good time to look at the benefit of balance and diversification.

While stock returns have been disheartening, if an investor held a balanced portfolio with a diversified mix of holdings spread across the entire stock and bond markets, the broad U.S. bond market would have provided a cushioning effect, making the losses less severe. And if money market investments were included in the portfolio—which we encourage everyone to consider holding as an emergency fund—overall returns would have been even slightly better.

So, when a financial storm hits, having investments spread across the different asset classes in funds that are broadly diversified will typically deliver less severe ups and downs—and you'll probably feel a little less queasy, too.

That's important, because good risk management includes knowing your own tolerance for risk. When you've decided before the storm which percentages of stocks and bonds best fit your situation and personality, then you can better tolerate losses and stick to your long-term plan when the winds are blowing the strongest.

If you've been holding a balanced portfolio, you can feel a bit reassured about your position, even if your bottom line is down for the year. And if you're just realizing now that you should have a better mix of stocks and bonds, it's never too late to take a good look at your goals and your tolerance for risk, and then decide on the asset mix that's best for you.

For some more insight on how to do that, you can read the article that accompanies this video on Vanguard.com.

And, in coming weeks, we'll continue to look at other important questions, such as what to look for when choosing funds, and how to keep your portfolio on track.

Thanks for watching.

Narrator:

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

For more information about Vanguard funds, visit Vanguard.com or call 800-662-2739 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Investments are subject to risk. Investments in bonds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Past performance is no guarantee of future returns.