23 May The Four Ways to Diversify a Portfolio
We’ve all heard that you should diversify and that you should put all your eggs in one basket. But how do you diversify? There are four basic ways. When done well, your wealth will grow faster. Plus you won’t have to endure the stress of wild swings in your portfolio’s value.
1.) Diversify across asset classes. Asset classes include stocks, investment real estate, bonds, mutual funds, currency, cryptocurrency, gold, fine art, and collectibles. It’s wise to spread your holdings across more than one asset class. Imagine if you owned rental real estate, stocks, bonds, and cryptocurrency. The rental properties would produce cash flow, price appreciation, and tax deductions. Stocks could go up in value, and some would pay dividends. Bonds could likewise appreciate in value while offering guaranteed interest payments. Cryptocurrency could appreciate in value over time, if you’re able to stomach the short-term ups and downs.
2.) Diversify within asset classes. Instead of owning just one stock, own a basket of stocks. There are stories of people who went all-in on one company’s shares. Maybe it was their employer’s shares or perhaps some hot stock they heard about. As too many stories go, the stock price crashes and the person’s wealth evaporates. So, instead of owning stock in just one or two companies, you should own shares in perhaps five to 10 companies. Even if one stock goes down, another one or two could skyrocket.
3.) Diversify across countries. Different countries and regions have different growth rates and prospects for future growth. There are ways to invest in other countries or regions. One way is to own real estate in other countries, although that may difficult to manage. An easier way is to invest in Exchange Traded Funds (ETFs) or mutual funds that cover a particular country or region. For example, let’s say you felt that India was a hotbed for growth and innovation. After all, they have more honors students than the U.S. has students! You could buy into the iShares India 50 ETF (ticker: INDY) or the iShares MSCI India ETF (ticker: INDA). You could also buy into any of the Vanguard Emerging Markets mutual funds. A simple way to be invested globally is to own S&P 500 companies that do business overseas. For instance, Apple, Tesla, Johnson & Johnson, Pfizer, and Google all do extensive business overseas.
4.) Diversify over time. This may be the most powerful force of all. There is something magical about owning an asset a long time. You could even own an asset for life. If you have dividend-paying stocks and automatically reinvest those dividends, then you put the power of compounding to work for you. If you own a rental property for life, your tenants will pay off your mortgage while you receive tax deductions. You can even pass your assets on to your heirs at a stepped-up tax basis. When you play the long game, you will win. I would rather invest my money in a sure thing that makes me get rich slow instead of a risky opportunity that could lose value quickly.
Here is one more important tip. When one asset class does well, re-balance your portfolio. For example, let’s say you hit it big with cryptocurrency. That’s a volatile asset. Sell some crypto and buy investment real estate. Having some rental income and the price stability of real estate will help overcome the wild swings that crypto can create. If you have lots of cash from your rental income, buy some stock. In other words, trim your winners periodically and use the profit to acquire some beaten-down assets. I suggest you rebalance your portfolio at least once per year.
A special thanks to Tony Robbins who first gave me the notion of the four ways to diversify. His book Money Master the Game: 7 Simple Steps to Financial Freedom is worth reading. He writes about diversification and so much more in the book. I’ve read it several times in the past decade, and my wealth has growth dramatically during that time!
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai made colossal mistakes in investing (and learned some things along the way). Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com.
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