Successfully investing your money in financial markets does not require insider knowledge.
But far too many investors fail to take advantage of portfolio diversification. Instead, they go straight to the asset class that provides the best returns.
If you expose all your wealth to just one asset class, like US equities, your portfolio could get hammered by a sudden, unexpected drop in the markets.
- Historically, the US equities market is a reliable place to grow your wealth.
- But it’s not immune from losses
Do you really want to risk wealth that has taken decades to build?
Remember the Global Financial Crisis of 2008/09? So many investors were exposed to excessive risk and watched their wealth plummet. It can happen again. Could you survive it?
I like to think of portfolio diversification as free insurance. You truly do get a free lunch for zero cost.
My formula for portfolio diversification
Start with an equity portfolio of large and small cap stocks. An SPX 500 fund is very well diversified, as is the Russell 2K.
If you are buying individual stocks, look for those that are not correlated for better portfolio diversification.
For example:
Want NVIDIA? Who doesn’t! But that should be the only microchip company you own. Throw in some Union Pacific, Walmart, Disney, Apple, Pulte Homes, HCA, Amgen, and Goldman Sachs – all companies from different sectors.
That is a nicely balanced, well-diversified, simply constructed portfolio.
Expanding Beyond Equities with Portfolio Diversification
Different asset classes should also be part of your portfolio diversification strategy, such as:
- Gold, silver, oil
- Real estate (always a great diversifier)
- Do not forget the more safer asset classes like fixed income (bonds) and cash
Weighting these asset classes depends upon your tolerance for risk and age (the older you are the less risk you should have). Equities pose the most risk on the efficient frontier (your landscape of asset classes), so build around them.
And then sit back and watch your wealth grow, safely.
