The general investment portfolio diversification looks like this:
Spread your investments over stocks, bonds, and mutual funds and do not touch it but let it grow over the years until you will have enough money to retire. This strategy derives from the strong belief that over time markets rise higher and higher.
If there is anything to be learned from the history of the financial markets, e.g. with the Great Depression and more recently with the Great Recession, it’s that nothing is guaranteed. And that includes mutual funds, stocks, and bonds. Many people who were counting on the consistent, long-term growth of these markets had a horrible realization that short-term market effects can devastate you financially if you’re not prepared to act. Many people who were ready to retire during the Great Recession were instead financially ruined after years of buying into the advice to build a diversified investment portfolio for the long term.
Real portfolio diversification looks like this:
True diversification is investing across different asset classes, not different stocks, bonds or mutual funds only. My paper investment portfolio might look divers, but they’re all still paper assets. Additionally, I should also be invested in real estate assets (apartments, condos, houses, commercial properties), commodities assets (like gold and silver), crypto-currencies and business assets (like your own or other private companies).
When everything you’re invested in is still on paper, it’s based on the same fragile economy and the same investment model. When the stock market goes down, it goes down everywhere, not just in certain places. Investing in Amazon, Apple, Wells Fargo and/or McDonald’s won’t make any difference. If the stock or bond market tanks, everything goes down.
If you do not have the cash at hand, to invest in real estate or buy a gold bullion yourself, use ETF`s. There are ETF’s for anything around nowadays. Use these tools to truly diversify your investment portfolio.
Sven Franssen