- Diversification is a wealth strategy that reduces risk by spreading investments across asset classes, sectors, geographies, and more.
- Core strategies include asset class diversification, sector and industry exposure, global vs. national investments, and a mix of investment styles.
- Balanced portfolios smooth out volatility while keeping you liquid enough to seize opportunities or handle emergencies.
We hear the term ‘diversification’ all the time, but it’s often misunderstood. Many believe it’s simply about owning a bit of everything. In reality, true diversification involves a systematic approach to spreading investments across various asset classes, sectors, and regions.
This is crucial because markets don’t move in sync. When one part of your portfolio is struggling, another might hold steady or even gain. This is the power of correlation, or rather, the lack of it. When done right, this wealth strategy cushions the blow of downturns and allows for consistent growth.
Now, here’s the paradox: diversification might not make you wealthier sooner. It could even slow you down if you have great investing instincts. But, for most investors, it’s a resilient and balanced approach with lower risk and long-term rewards.
If you’re wondering how to start diversifying your portfolio, here are some core strategies.
Asset Classes
Building a sound wealth strategy starts with spreading your investments across different asset classes. The ideal technique is to select assets with either a negative correlation—meaning they move in opposite directions, such as gold prices typically rising when stock prices decline—or no correlation, where there is no clear relationship between their movements.
In short, each asset class in your portfolio should have a unique set of risks and opportunities.
These classes include:
- Stocks, including shares or equity
- Government and corporate bonds
- Real estate
- Commodities
- Exchange-traded funds (ETFs)
- Cash and short-term cash-equivalents (CCEs) like treasury bills, certificates of deposit (CDs), money market funds
Each of the above responds differently to market fluctuations. For example, stocks often perform well during economic growth but are more volatile. Bonds, on the other hand, tend to be more stable and can provide a cushion during market turbulence.
Since no single asset class wins all the time, a diversified wealth strategy that includes different types will even out your investment journey.
Sector and Industry Diversification
If you’re looking into how to diversify your portfolio with stocks, don’t forget that you also need to pick companies across sectors and industries, like finance, tech, healthcare, energy, and consumer goods.
This is because sectors grow and decline differently in economic cycles, so concentrating your investments in a single sector is not the smartest wealth strategy. For instance, tech stocks surged in value during the post-2008 recovery and again from 2020 to late 2021, driven by innovation and the rise of remote work.
In contrast, oil industry investors suffered huge losses in a very short period due to COVID-19, even more severe than during the 2008 global financial crisis.
Meanwhile, healthcare and utilities remained relatively stable during the pandemic. These sectors are often referred to as “defensive stocks” because people will always need essential services like medication, electricity, and water, regardless of market conditions.
Geographic Diversification
A well-rounded wealth strategy is one that extends beyond our national borders. Global investing reduces dependence on the U.S. economy and opens up opportunities across Europe, Latin America, Asia, as well as emerging markets in Africa.
The world is a hub of innovation. In fact, over 60% of global market capitalization comes from international companies, meaning investors who limit themselves to national options are missing out on more than half of the world’s investment opportunities.
And while many U.S.-based companies operate globally, that isn’t a full substitute for holding foreign assets directly.
That said, investing internationally introduces extra variables like currency risk, political instability, and sometimes less transparency. For example, countries offering the highest interest rates on their government bonds are most likely to default, so it’s better to steer clear unless you have a high-risk tolerance or real expertise—Argentina’s situation serves as a cautionary example.
Investment Style Diversification
A robust wealth strategy isn’t just about what you invest in but also how you do it. Diversifying through investment styles means using a mix of approaches, such as index vs. active management, income-generating assets vs. growth-focused ones, or value vs. growth stocks.
Each style responds to the market in its own way. Some thrive in volatile periods, others are slow and steady gainers. A good example of how to diversify your portfolio investment style is combining real estate investment trusts (REITs), which give you reliable income, with private equity funds targeting long-term growth.
Alternatively, you could combine municipal bonds for tax-efficient cash flow with alternative assets like commodities and infrastructure investments—these typically perform well in inflation as their prices adjust with the cost of living.
Applying a wealth strategy that integrates different investment styles is key for financial independence planning as it reduces the risk of your entire portfolio underperforming at once.
Liquidity Diversification
Diversification also has the advantage of maintaining a healthy balance between liquid and illiquid investments. Certain assets, like ETFs and stocks, can be sold within minutes. Others, like real estate and private equity, may take weeks, months, or even years to liquidate.
To make sure you’re not caught flat-footed during emergencies or when a golden opportunity arises, think of accessibility as a tiered wealth strategy: money for your immediate needs should sit in highly liquid investments, while your long-term goals can be supported by illiquid vehicles that don’t require frequent access—retirement savings or education funds in 529 plans, for instance.
This mix will protect you from needing to sell long-term assets in a pinch, while your more liquid holdings will keep you nimble in a dynamic market.
Build Smarter, Grow Steadier
With the multitude of wealth diversification strategies available, it’s clear that a one-size-fits-all financial and retirement plan simply won’t suffice. Instead, a good balance of opportunity and risk, stability and growth, access, and discipline will do.
Remember, diversification won’t make you rich overnight, but it can keep you from losing your footing when markets shift.
To learn more about how to diversify your portfolio, schedule a free consultation with a WealthArch Investment Services private wealth management advisor today. We offer intuitive yet safe investing tailored to your goals.
Alternatively, sign up for 30 days of free advisory emails, where we dissect national and international markets and explore diverse strategies for growing your wealth.
