What does a diversified portfolio look like?
Putting all your investment capital in one type of investment is the surest way to risk losing all your money. Spreading your investment capital among different assets (creating a diversified portfolio) helps minimize the risk of loss. What does a diversified portfolio look like? Find out in this article.
Imagine if you bet all your savings on airline stocks, only for COVID-19 to strike.
Planes stopped flying and stock prices hit historical lows. You would have lost everything. If only you’d made a more diverse portfolio, you wouldn’t be in the pickle you’re in today.
So what does a diversified portfolio look like? There’s more to diversification than just holding a handful of stocks and bonds. Before we look at examples of a diversified portfolio, let’s first understand what portfolio diversification is.
What is portfolio diversification?
Portfolio diversification is putting together a combination of investment assets that earn you the highest return at the lowest risk.
There is no one-size-fits-all portfolio. You can tweak your holdings depending on your affinity to risk and your investment goals. If you are nearing retirement, for example, you may want to go with less risky investments.
- Bonds— Fixed-income loans to companies or government agencies.
- Stocks—Shares or equity in publicly-traded companies.
- Real estate—Land and buildings either in the form of lease income or mortgage interest income.
- Exchange-traded funds (ETFs) and Index funds—Baskets of securities that follow a sector, an index, or a commodity.
- Commodities—Goods that produce other goods such as agricultural products, natural resources, minerals, gas, and livestock.
- Cash and other short-term investments—High-yield savings accounts, certificates of deposit (CDs), and treasury bills.
- Alternative investments like peer to peer (P2P) lending – Direct lending to individuals or institutions online.
Diversification is a strategy used to mitigate risk.
Throwing all your money into stocks can be fine, but what happens when the global economy suffers? A properly diversified portfolio performs no matter the market.
For more reasons why to diversify, check out our blog.
5 recommended portfolio diversification tips
To pick the ideal types of investments for your portfolio, here are 5 factors to consider:
1. Pick investments with different rates of return
If you have a bunch of stocks, go for stocks with different growth and income potentials. If you pick several types of bonds, ensure that they have varying credit qualities and maturities.
2. Don’t always pick correlated assets
Diversification only holds if the assets held react differently to market situations. Most alternative investments like P2P lending and real estate tend to have a low correlation with traditional assets like stocks and bonds. Mixing alternative investments and traditional investments in a single portfolio is a genius way to diversify your investment.
3. Mix domestic and foreign investments
Foreign securities are not always closely correlated with domestic ones. For example, hold stocks from economies largely insular from each other like Russia and America.
4. Consider a bouquet of investments over a single asset
It is better to go for large clusters of investments like ETFs, index funds, or bond funds rather than individual stocks. These investments expose your capital to a wider market and carry a lower risk compared to single stocks or bonds.
5. Rebalance your portfolio each year
Your portfolio is not cast in stone. Make annual checks to see if your returns are still in line with your goals.
Examples of a diversified portfolio
According to Bob Rice, the investment strategist for Tangent Capital, and renowned investment consultant, Alex Shahidi, the classic 60/40 (60% stocks and 40% bonds) diversification investment strategy is outdated.
While this portfolio performed well in the 80s and 90s, changes in market interest rates, monetary policy, equity valuations, bond risks, and general prices have made this strategy ineffective.
So, what does a diversified portfolio look like? Below are examples of some diversification strategies from experts:
1. Warren buffet’s 90/10 high-risk portfolio
Warren Buffet, famed investor and founder of Berkshire Hathaway doesn’t need an introduction. His 90/10 portfolio outlined in his letter to Berkshire Shareholders in 2013 consisted of:
- 90% Vanguard S&P 500 low-cost fund
- 10% short-term government bonds.
Many sources consider funds holding more than 70% in one asset as high-risk. The high percentage of stocks (90% in this case) make this portfolio a high-risk one.
Low-risk government bonds attempt to cushion a bit against the risk. Only try a portfolio like this if you know your way around the stock market.
2. Dana Aspach’s 50/50 diversified medium-risk portfolio
Dana Aspach was named one of the top 100 advisors in 2018 by Investopedia. She is a certified financial planner and consultant and the CEO of Sensible Money, an investment firm in Arizona.
Her suggestion for a medium-risk diversified investment is a combination of:
- 50% Treasuries (bonds)
- 50% S&P 500 (stocks/equities).
The high risk associated with holding S&P 500 equities is because they are based solely in the US. This can be diluted by combining holdings with highly-secure treasury bonds.
3. Alex Shahidi’s low-risk portfolio
Alex Shahidi is a renowned investment consultant who manages multi-billion dollar portfolios. In his June 2015 publication on building a balanced portfolio, Shahidi says that the traditional 60/40 portfolio (40% bonds or other fixed income and 60% equities) isn’t diversified.
Instead, Shahidi goes with the following portfolio which he claims can yield similar returns while being much less volatile:
- 30% Treasury bonds
- 30% Treasury inflation-protected securities (TIPS)
- 20% equities
- 20% commodities
The portfolio is better because TIPS and commodities perform well during inflation periods. At least two of the above class of assets are also likely to do well in all the economic cycles.
4. David Swensen’s low-risk diversified portfolio
Davis Swensen has been the chief investment officer at Yale since 1985. This is what his asset allocation portfolio looks like:
- 15% TIPS
- 15% government bonds
- 20% real estate funds
- 5% emerging markets equities
- 30% domestic equities
- 15% developed-world international equities
The Swansen portfolio is highly diversified, combining a carefully-balanced percentage of domestic and international equities as well as safe treasury bonds and high-yield real estate funds.
While classic institutional investors are a great starting point, a lot of these asset types and strategies above are the same kind of things your parents or grandparents could have invested in.
And many of them don’t return what they used to.
Wouldn’t it be nice if there was something new you could diversify into?
Diversify your investments with alternative assets like P2P lending at rates as high as 7%.
Adding collateralized P2P investments to your high or medium-risk investment basket can be a great fall-back in periods of high market volatility.
We also offer 4% APY and anytime free withdrawals through our Flex account, where your interest is compounded and paid every second.
Sign up for a free account with MyConstant today and give your portfolio some easy diversification.
**Disclaimer: the content of this article gives general information about money management and how it relates to MyConstant. It should not be relied upon as investment advice. It’s important that you do your own research before entering into any investment venture.
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