Get Good at Diversified Investments

In an ever changing economy that has recorded great growth as well as harsh setbacks, diversified investments are ways to spread your money across different assets such as stocks, bonds and real estate. This helps keep your money safe and boosts the opportunities to make it grow over time.

Picture your investment portfolio as a strong house built with different materials to withstand various environmental forces and conditions. Just as a strong building needs different types of blocks, investment portfolios also thrive when they come from various sources. This blog post on diversifying your investments provides useful insights on how diversified investment works.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

Key Takeaways
  • Simple diversification strategies include investing through ETFs, mutual funds, and index funds; these funds give access to various asset classes.
  • A comprehensive diversification strategy should invest beyond assets, across industries and in various regions.
  • Regular portfolio rebalancing is required to ensure investment stability and to align your asset allocation with your goals which may also evolve over time.
  • Working with a trusted financial advisor is crucial to keeping healthy financial goals and strong investment portfolios.

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here.

Diversified investment services and advisors

advisor showing client their services

Diversified investment services encompass a range of strategic approaches to help investors manage risk and optimize returns. By diversifying, the aim is to limit the impact of changes in any single investment, and to support stable and sustainable growth over time.

Trusted financial advisors are the primary providers of diversified investment services which may include expert analysis, tailored investment plans, and continuous monitoring to adapt to changing market conditions and investor goals.

For optimally diversified investments, it is in your best interest to work with experts. While you can and should learn as much as you can, beyond knowledge and information, investment decisions require intuition rooted in experience.

Experts such as William Huston and Ila Corcoran have been at the front line of the investment industry for over a decade. They have guided several clients on their investment journey in various asset classes including private equity and real estate, and have remarkable results that tell a beautiful story.

William is founder and Chief Investment Officer at Bay Street Capital Holdings, one of the fastest growing Black-owned investment firms in the US with nearly $500 million AUM. He prioritizes managing overall risk and volatility, and can help you diversify your portfolio into reliable assets in whatever asset class you wish.

Diversified investments

Simply put, diversification means not putting all your eggs in one basket but spreading your investments across different asset classes. For instance, some assets like bonds tend to be less risky than things like stocks. When stocks go down, government bonds might go up in value. There are also commodities such as gold or oil which consistently gain value and yield good returns.

A diverse investment portfolio usually has four main parts: domestic stocks, foreign stocks, bonds, and cash. Sometimes, as an alternative to international stocks, you might use investment instruments such as mutual funds to diversify your portfolio. These help you invest in many different companies without needing to buy each company's stock separately.

Diversified portfolio example

investment portfolio charts

A good illustration of a diversified investment portfolio involves allocating funds across multiple asset classes to achieve a balanced and risk-limiting investment strategy. For instance, an individual's diversified portfolio might include a combination of the following:

1. Stocks: shares of companies from various sectors and industries, both domestic and international, to capture growth potential.

2. Bonds: government or corporate bonds with different maturities to provide steady income and stability.

3. Real Estate: real estate investment trusts (REITs) or properties that offer potential rental income and a hedge against inflation.

4. Mutual Funds and ETFs: these funds pool money from different investors to invest in a diversified mix of stocks, bonds, or other assets.

5. Cash and Cash Equivalents: liquid assets like money market funds or short-term government bonds that provide safety and liquidity.

6. Alternative Investments: commodities, hedge funds, or private equity, which can offer further diversification and potentially higher returns.

Alongside any alternative investment you may choose, always include these 5 asset classes to diversify your portfolio.

By diversifying across these asset classes, you minimize the impact of poor performance in any single investment, while potentially maximizing overall returns. This approach helps navigate market fluctuations and economic cycles, contributing to a well-rounded and resilient investment portfolio.

As with all investments, the appropriate percentage for each asset class within a portfolio is based on an investor's goal and their risk tolerance.

For example, beginner investors who need regular passive income from their investments might procure a substantial amount of fixed income securities. On the other hand, long-term investors could have small amounts of fixed income investments and a large percentage of high ROI investments that mature over long periods.

Here's an example of recommended percentage allocations for a well diversified portfolio:

  1. Domestic stocks: 40%

  2. International stocks: 10%

  3. Bonds: 20%

  4. Real estate: 20%

  5. Cash or Cash Equivalents: 10%

In this scenario, the investor allocates 40% of their portfolio to domestic stocks for potential growth, 10% to international stocks to capture global opportunities, 20% each to bonds and real estate for stability and income, and reserves 10% in cash or cash equivalents for liquidity and safety.

This diversified mix aims to balance risk and potential returns, in keeping with the investor's financial goals and risk tolerance. Keep in mind that these percentages can vary based on individual circumstances and market conditions. It's advisable to consult with a financial advisor to tailor the allocation to your specific needs.

Tailoring your investments

advisor and client customizing investment plan

One important step before you diversify your investments is conducting a thorough assessment of your financial goals, risk tolerance, and time horizon. Such an analysis allows you to determine the appropriate asset allocation that aligns with your specific circumstances.

It's essential to understand how comfortable you are with different levels of risk and how long you plan to keep your investments. With this foundational understanding, you can then strategically allocate your funds across a diversified range of assets to help achieve your financial objectives while safeguarding against excessive risk exposure

Why it is important to diversify your investments

Diversifying your investments is crucial for several reasons. The main function of diversified investments is to spread your money across various types of assets, industries, and geographic regions.

Diversification is like having a variety of tools that help with four main things: optimal allocation of capital, minimizing agency conflicts, making full use of interest tax shields, and taking advantage of all growth opportunities. In simple terms, diversification does these:

  • It makes your investment safer by reducing risks and helping you make more money compared to the risks you take.
  • It keeps your financial balance in check, making sure you don't put everything in one place.
  • It affords the chance to make money from different things that can grow financially.

This strategic distribution helps reduce the impact of poor performance in any one investment, working as a shield against potential losses. By having a mix of investments, you can potentially achieve a more consistent and stable growth trajectory over time, while minimizing the overall risk to your portfolio.

How to diversify your investment portfolio

investor checking out investment options

There are several ways to diversify one's portfolio. ETFs, mutual funds and index funds are simple ways to procure asset classes that diversify your portfolio (Note: investing through these funds comes with costs and commissions).

For example, buying shares in a S&P 500 index fund grants you assets in 500 of the largest public U.S. companies. This is especially suitable for investors who do not have the time to research each stock or asset class.

For investors who wish to know about their fund manager, or who wish to carry out due diligence and directly research various asset classes and industries, it is wise to work with a fiduciary financial advisor. They will lead and guide you through the research and offer investment advice that is in your best interest.

In any case, whatever diversification strategy you adopt, it is important to go global with your investments, and it is necessary to regularly rebalance your portfolio.

Now let's take a brief look at diversification by asset class and portfolio rebalancing.

Diversification within asset classes

Within a specific asset class, such as stocks or bonds, diversification is equally essential. Instead of investing in just one company, you might invest in a variety of companies spanning different sectors. This approach spreads risk and can help counteract losses from a poorly performing investment.

However, it's also important to invest in different types of asset classes. Buying shares in a number of well-known tech companies might seem like a good idea, but that doesn't really give you proper diversification.

Diversification beyond asset classes

Going beyond asset classes, diversification extends to investing in different types of investments altogether. For example, you might have a mix of stocks, bonds, real estate, and even commodities in your portfolio. This broader diversification aims to provide stability across various economic conditions and potentially enhance overall returns.

By diversifying within an asset class and beyond an asset class, you can better position your portfolio to achieve long-term growth.

Rebalancing your portfolio

Rebalancing your portfolio is a strategic process of adjusting your investment holdings to restore your desired asset allocation. Over time, as different investments within your portfolio grow at varying rates, your original balance can shift, potentially exposing you to more risk or deviating from your intended goals.

To rebalance, you analyze your current investments, compare them to your target allocation, and then make necessary adjustments. This could involve selling some investments that have become overrepresented and using the proceeds to buy assets that are underrepresented.

Rebalancing aims to bring your portfolio back in line with your initial risk tolerance and investment objectives, ensuring that your investments remain aligned with your financial strategy. Regular rebalancing helps you maintain a consistent risk level and maximize the potential for long-term returns.

Benefits of portfolio diversification

diversified portfolio with good ROI
  1. Diversification across assets, industries, and regions reduces the impact of poor performance in any single investment, and enhances overall portfolio stability.

  2. Allocating investments to different asset types taps into diverse growth opportunities, potentially boosting overall portfolio returns.

  3. Combining various investments that react differently to changes in the economy helps to offset losses and to maintain smoother portfolio performance.

  4. Diversification positions your portfolio to benefit from sustained growth trends across sectors and markets over time.

  5. A diversified portfolio makes it easy to navigate market shifts and changing economic conditions.

  6. Diversification reduces impulsive reactions to market volatility, and allows for a more rational and disciplined investment approach.

Spread the wealth

Diversified investments are your ticket to a stronger and more secure financial future. Just as you wouldn't put all your eggs in one basket, you shouldn't rely on a single investment. By spreading your funds across different types of assets and industries, you're giving yourself the advantage of stability and growth.

Remember, a well-balanced portfolio can weather the storms and seize the opportunities that come your way. More importantly, the investment journey is one best taken with a guide, hence, you should endeavor to reach out to a trusted financial advisor as you seek to diversify.

So, spread the wealth, diversify your investments, and watch your wealth grow steadily!

Bay Street Capital Holdings

Bay Street Capital Holdings

Bay Street Capital in Palo Alto excels in wealth management, focusing on risk management alongside returns. Led by William Huston, among Investopedia's Top 100 Financial Advisors, it's a notable Black-owned firm.

Their partnership with Resthaven Properties earned them a finalist spot in 2023 Awards. In 2021, Bay Street was a CSR finalist among 900 firms, showcasing their commitment to diversity and impact.



Let's Talk

Schedule a complimentary consultation with one of our advisors to learn more about Bay Street and how we can help you achieve your goals for your financial future.

form img