Diversify your Financial Portfolio
Why Diversify and How to do it properly?
Diversifying your financial portfolio involves spreading your investments across various asset classes, industries, and geographical areas.
This strategy helps mitigate risk while offering potential for stable returns.
Here are a few exmaples of where you can diversify:
Let's cover the most obvious investment vehicle, Stocks.
Investing in individual stocks does gives you ownership in a company and the chance to benefit from its growth. But investing in individual stocks instead of a basket of low cost index funds or ETFs are still considered more concentrated. Also if you want to hold single stocks, you need to practice prudence and actually do real research. For most, investing in index funds are the way to go.
By investing in a low cost index fund you can hold hundreds of stocks, instantly diversifying across industries and even geographies with minimal effort.
Examples of these indices are VOO, VTI, VT, FXAIX, SWPPX, SCHG, etc. These are examples. Remember that you still need to do your own research. Also remember that it doesn't matter how great an investment is, you won't get great profits if you buy them at their peak prices.
For the more conservative investor, Bonds are an option. They provide a fixed income and preserve your capital. However, remember the saying, low risk, low reward.
Government bonds, such as U.S. Treasuries, are considered safe, while corporate bonds like those from Coca-Cola provide higher returns at higher risk.
Including bonds in your portfolio balances risk by providing a steady, and predictable income.
For most, their homes are their largest investment.
Their home makes up a big chunk of their net worth, possibly around 70-90%. However, a primary home is not really an investment most of the time. In some cases, you end up spending more money due to continues maintenance. Some underestimate the cost of home ownership and end up becoming house poor or even worse, they lose their home. Some buy their house at an unfortunate timing due to high mortgage interest rates or they suddenly lose their job.
However, actual real estate investing can yield rental income and long-term appreciation. Whether you purchase residential properties or invest in Real Estate Investment Trusts (REITs), real estate can diversifies your portfolio with a physical asset that often appreciates over time and performs independently of the stock market.
Another way to diversify is to invest in Commodities.
I am not a fan of this type of investment for three reasons:
They are more volatile and can be driven by factors out of an investor's control, such as geopolitical tensions, natural disasters, weather events, or supply chain disruptions.
They don't generate income. You make money when you sell the investment.
They require storage fees, insurance, and a bunch of annoying associated costs such as fees, transportation and spoilage of the products.
Some examples of commodities are gold, oil, and agricultural products. They can serve as a hedge against inflation.
For example, gold, typically rises when stocks fall, possibly providing some balance.
Remember that a portion of your portfolio should be in liquid, low-risk investments like high-yield savings accounts or Certificates of Deposit (CDs). These provide safety and liquidity, ensuring you have funds available for emergencies or near-term needs without exposure to market volatility. The amount of liquidity in a portfolio is highly individualized and subjective and there is no one size fits all rule.
There's plenty of unfortunate risks for not diversifying. If all your money is tied up in one asset class, a downturn in that sector could cause significant losses. Remember the housing crash of 2008? Also, if you only invested in one company, relying on a single company’s stock exposes you to the risk of poor performance or bankruptcy, which could wipe out your investment. The US economy is still great compared to other countries, but if you only invest in domestic markets, your portfolio is vulnerable to national economic crises, while global diversification might mitigate this risk.
Without inflation-hedging assets like real estate or commodities, rising inflation could erode the purchasing power of your portfolio.
Concentrating your investments in a single asset class could mean missing out on growth opportunities in other sectors or regions.
Diversification is the most intelligent strategy for building real, sustainable wealth. By spreading your investments across multiple asset classes and markets, you minimize the risk of catastrophic loss and increase the likelihood of consistent returns. No one can predict market movements, but diversification protects you from the full brunt of downturns while still allowing you to benefit from growth in thriving areas. In the long run, this balance is what will let you sleep better at night, lead to financial security and the potential to grow your wealth, even in the most uncertain economic times.
Concentrating your investments in a single asset class could mean missing out on growth opportunities in other sectors or regions.
Diversification is the most intelligent strategy for building real, sustainable wealth. By spreading your investments across multiple asset classes and markets, you minimize the risk of catastrophic loss and increase the likelihood of consistent returns. No one can predict market movements, but diversification protects you from the full brunt of downturns while still allowing you to benefit from growth in thriving areas. In the long run, this balance is what will let you sleep better at night, lead to financial security and the potential to grow your wealth, even in the most uncertain economic times.
That is all for now.
See you on the next one!
-Pam
As a reminder, I created this blog to share information and to increase everyone's financial literacy. This serves as my notebook that I willingly share publicly to help others increase their curiosity and knowledge in wealth building and money management. I am not an official financial advisor, lawyer, or accountant. You will not find legal advice in this blog. Read the full terms and conditions here.
