Have you heard the saying ‘do not put all of your eggs in one basket’? If so, you will understand that this is a common phrase used when referring to the diversification of the assets in your investment portfolio. Selecting investments across different assets and asset classes is important in leveraging your portfolio. Instead of relying on one investment to generate a return, you will increase your investment exposure and ensure that not one individual event can impact the totality of your portfolio. If one investment experiences a loss, the other investments within your portfolio will hopefully make up for the loss.
So, which asset classes can I diversify my portfolio in?
- Publicly traded investments
- Stocks
- Bonds
- Mutual Funds
- Private Alternative Investments
- Real Estate (Investment Property/Raw Land)/REITS/Trust Deeds
- Private Placement Securities
- Private Debt/Unsecured Promissory Notes/Secured Promissory Notes
- Digital Currency
- Precious Metals
- Natural Resources
It is equally important to diversify across various investments within each asset class and ensure they're not too alike. For instance, when investing in real estate, you have the option to allocate parts of your portfolio to commercial and residential properties. Consider diversifying across different geographic areas and economic cycles. Also, consider different maturity lengths, tangible and intangible assets, as well as private and publicly traded investments.
What is a tangible asset? Real estate, gold, or land – investments that you can physically touch or hold in your hand.
What is an intangible asset? Equities or digital currency – investments you can’t physically touch, but that can offer liquidity.
What is the 5% rule of diversification?
The 5% rule for diversification applies to your entire investment portfolio. No single investment should make up more than 5% of your total holdings. Each asset class should represent no more than 5% of your portfolio, and within that class, further diversification is key. Use this as a simple guideline if you're a first-time investor or just beginning to diversify more intentionally. This strategy helps reduce risk by ensuring that no one investment can significantly impact your retirement savings. It also helps protect against potential losses when a single stock or investment underperforms.
What is the 70/30 investment diversified strategy?
The 70/30 investment strategy involves allocating 70% of your portfolio to stocks and 30% to fixed-income investments, such as bonds or trust deed notes. This approach emphasizes growth through stocks, which historically offer higher returns but come with greater volatility. The remaining 30% is dedicated to fixed-income assets, which generally carry lower risk and can provide more stable, predictable income. While fixed-income investments are not risk-free, they can help reduce overall portfolio volatility. In this strategy, trust deed investing would fall within the 30% allocation, with funds placed into secured promissory notes. That portion could also be diversified across multiple notes or borrowers to further manage risk within the asset class.
Conclusion
These guidelines are meant to serve as a starting point, but your individual investment goals and risk tolerance should ultimately guide your decisions. If you're not familiar with investing or diversification strategies, it's essential to consult with a CPA or financial advisor. They can help ensure your portfolio is properly aligned with your financial objectives and risk tolerance.
Diversifying your portfolio is one of the most effective ways to manage investment risk and build long-term wealth. By spreading your investments across various asset classes, and further diversifying within each class, you create a buffer against market volatility and unexpected losses. Whether you’re following the 5% rule, exploring the 70/30 strategy, or simply starting out, the key is to align your diversification plan with your financial goals and risk tolerance.
