The case for diversification

Diversified investments—stock and bond mutual funds and real estate, for instance—correlated with higher net worth among the retirees in our survey. Those who invested in three or fewer investment vehicles had a median net worth of $496,000 compared with $861,000 for those with four to six. Over the long haul, variety worked in our readers' favor.

But diversification is your friend even in the short term. In recessionary times, diversifying among just four asset classes—large- and small-cap stocks, long-term Treasury bonds, and shorter-term Treasury bills—reduces the risk that everything will decline together.

Lessons from the past

When the Consumer Reports Money Lab analyzed investment returns two years after the official ends of three past recessions (those ending in March 1975, July 1980, and March 1991), we found that conservative, moderate, and aggressive portfolios all made money. How they were allocated didn't much matter; total returns of conservative portfolios (one-quarter in all four asset types) and aggressive ones (40 percent small-cap stocks, 35 percent large-caps, 15 percent long-term Treasuries, and 10 percent Treasury bills) varied by no more than 4.3 percentage points.

Still, it's important that you don't put all your eggs in one basket. In the two-year slow-growth recovery after the 1991 recession, short-term Treasury bills were up only 1.9 percent while long-term Treasury bonds gained 27.5 percent. Both are considered safe. Among stocks, large-caps rose 23.2 percent and volatile small-cap stocks were up 46.7 percent.