Per ally customer service: "All accounts that Ally offers are FDIC insured."

"Diversification" has several dimensions. The first is really asset allocation. You'll want to spread your investments across different asset classes...some in stocks, some in bonds, some in cash. How you do that depends on your comfort level (risk tolerance). Generally, the younger you are, the more aggressive you can be (more in stocks). This diversification mitigates the risk you'll take losses when whole markets decline. It also depends on your time horizon as stocks may decline in value for several years and a longer time horizon gives you the time to weather those periods, stay invested and not take permanent losses when you need the money. Target date funds will attempt to do this for you, but your risk tolerance may or may not be well represented by their composition. The second is diversification within asset classes. Even if you're buying in a specific asset class, you will always want to be diversified in this dimension. Your stock investments should be in many companies (stock mutual funds or ETFs will do this for you by their nature). Your bonds should be from many issuers. This reduces your risk that you will take excessive losses if a company or bond issuer goes bankrupt (e.g. Enron or Lehman Brothers).