Even several years out from the COVID-19 outbreak, continued economic uncertainty, rapidly-changing consumer habits, and decelerated supply chains continue to challenge and shift financial markets on a daily basis.
If these facts haven’t yet made you rethink how you invest and how you protect your wealth in a rapidly-changing world, they really should.
What do the most forward-thinking investors and high-net-worth individuals (HNWIs) do — and what can you do today — to ride out whatever financial storms this strange new reality has in store?
And we’re not talking just your standard old diversification strategy, either. In this guide, we’ll share some key tips to help you build a modern diverse portfolio in a world where diversification likely means something completely different than it did when you first started investing.
What is Portfolio Diversification?
Portfolio diversification is the practice of investing in uncorrelated asset types and investment vehicles within one portfolio.
Diversification is a cornerstone of personal finance because it protects portfolios from extremes. The idea is that the good performance of certain assets at certain times will balance out — and over time, outweigh — the poor performance of other assets at other times.
Diversification is essentially a risk management strategy that enables portfolios to ride out the natural fluctuations that impact all asset classes — and get more unpredictable by the day.
Popular Asset Classes for Diversification
These are the most popular asset classes investors and financial managers think about when it comes to asset allocation:
- Stocks: shares on the stock market from publicly-traded businesses
- Bonds: Debt instruments for government and corporate organizations
- Real estate: Encompasses land, buildings, natural resources, and more
- Exchange-traded funds (ETFs) and mutual funds: similar pooled securities that roll diversification into the product
- Commodities: goods used in the production of products and services
- Cash and cash equivalents (CCE): Certificates of deposit (CDs), money market vehicles, etc.
Notice anything missing?
Digital assets are tokens of value that typically exist in the digital realm.
Cryptocurrency, a virtual currency, is one kind of digital asset that most HNWIs have heard of and even dabbled in. Virtual properties like websites and platforms like SaaS software are also digital assets. And newer examples of digital assets included DeFi and NFTs. In fact, there are thousands of types of digital assets worth hundreds of billions. Later in this article, we’ll talk more about diversifying your portfolio by investing in, and effectively managing, this modern asset class.
Why Is it Crucial to Have a Modern Portfolio Diversification Strategy Today?
What exactly is it that makes diversification such an essential element of investing? There are a few core benefits that every interested investor should know about.
Avoid Major Capital Loss
We mentioned diversification as a method for reducing volatility. But how exactly does it do that? It essentially creates a “buffer” against wild market swings and, therefore, permanent capital loss.
Diversification works because it’s extremely unlikely that every asset class — from stocks and bonds to real estate, currencies, and some more modern ones like digital holdings — will crash at the same time.
The more thoroughly your wealth is spread across asset classes, the less likely it is that you’ll come up against notable losses when any one class momentarily loses value.
Generate Higher Returns
On average, investment portfolios with a thoughtfully-diversified mix of asset types will encounter less risk, generate higher returns, and experience lower losses over time — when compared to individual holdings or portfolios with a narrow asset allocation.
Take Advantage of Today’s Best-Performing Asset Classes
Home improvement, gaming, at-home fitness, food subscriptions, and delivery everything — while many of us may not have put our eggs in these baskets a few years ago, today they’re some of the most profitable products and services in a post-pandemic environment.
As for big-name retailers, hotels, and travel-adjacent businesses? Holding equity in these traditional high-performers has been and continues to be a wild ride.
It only took a matter of months for everything we thought we knew about “good investments” to flip upside down. But when you expand to a modern portfolio diversification strategy that is full of variety and even some non-traditional assets, you’re more likely to increase your returns as the unexpected continues to unfold.
The Downsides of a Diversified Portfolio
Of course, like with any investment strategy, there are some drawbacks of portfolio diversification that must be considered before anyone dives in headfirst.
Lots of Assets = Lots of Time Spent on Management
While diversification across different asset classes makes a lot of sense on a lot of fronts, it doesn’t make sense if you’re manually managing your portfolio — or paying someone else to. The more holdings you rack up, the more time it takes to make sure your portfolio is balanced and everything is performing the way you want it to.
And even if you are using some kind of financial management software, you might have found it isn’t a great fit for some of your more cutting-edge assets. But that doesn’t mean a platform that can doesn’t exist. We’ll introduce you to Kubera, the premier all-in-one wealth tracker, later in this article.
Fees and Commissions Add Up
Keeping a portfolio diversified and balanced means you’ll be buying and selling holdings on a somewhat regular basis. Typically, these transactions incur fees and even brokerage commissions. If you’re not ready for these additional expenses or very carefully planning your transactions to minimize fees, the amount you're shelling out could get dangerously close to outweighing your returns.
Short-Terms Gains Are Mitigated
The mitigating effect of diversification goes both ways. While it lessens the risk of losses, it also lessens your chances of making a once-in-a-lifetime investment.
For example, you might spread $100,000 across five real estate or stock market holdings, but only one of them grows significantly over the course of a year. Let’s say one doubles while the others are basically a wash. Sure you grew your $20,000 to $40,000, but you could’ve grown your original amount a lot more had you invested in that one asset that doubled.
Of course, you had no way of knowing which assets would grow — or if any of them would at all. This is how diversifying protects you but can also lessen your chance of “hitting it big” — at least in the short term.
It’s crucial to understand that evidence has shown that, on a long-term basis, diverse portfolios generate higher returns.
Ready to reap the benefits, manage the downsides, and join the ranks of today’s thriving investors? Here are the key strategies you need to practice.
4 Strategies for Building a Diversified Portfolio
The modern diversified portfolio doesn’t just have a couple of different types of assets — it has a thoughtful, ever-changing concentration of asset types across different countries, and it of course dips into the digital realm!
Create your own diversified and resilient portfolio using the following tips.
1. Use the Barbell Approach to Create a Balanced, Diversified Portfolio
Many investors are familiar with the “60/40 rule” of investing, which dictates that a diverse portfolio is 60% stocks (which tend to be more volatile) and 40% bonds (which tend to be more stable).
While that’s a fine rule of thumb, we recommend a more thoughtful and active approach to balancing your investments when it comes to modern portfolio diversification.
Sure, you’re probably right that some of your investments in Silicon Valley startups will perform well eventually — as long as another pandemic doesn’t take them out or Google doesn’t dominate their space first, of course.
To protect yourself against wiping out if things don’t go according to plan, we like an active “barbell” approach to investing in which a larger portion of lower-risk assets (cash, savings, etc.) continually tempers a smaller percentage of higher-risk, but higher-reward, assets (holdings in emerging markets, the stock market, etc.).
2. Consider Which Asset Classes Are Best for You: Dividend Stocks, Growth Stocks, or Both
Dividend stocks pay a dividend, or a percentage, of a company’s profits to stakeholders — such as you, the investor.
While this makes for a pretty reliable asset, it also indicates that the company, as well as its dividends, probably won’t be growing substantially anytime soon. Dividend stocks steadily yield 2 to 3% returns, so even if you invest $100,000 you can only expect to make $3,000 max per year.
On the flip side, growth stocks are issued by companies that still see opportunities for growth and therefore reinvest most of their profits. This makes for a more volatile stock without any guaranteed payoff — but if growth stocks like Netflix and Tesla are any indication, the investment may yield a hefty reward.
Dividend stocks are ideal for risk-averse investors, older investors or those on a fixed income looking to generate regular but modest (and therefore lower-taxed) returns, and investors who fear a bear market is approaching. Growth stocks are a good match for investors who are willing to take a risk as well as younger investors who have plenty of time to make up for any big drops the stocks take.
One of the coolest things about building a modern, diverse portfolio is that you can choose to invest in dividend stocks, growth stocks, or even both types — and switch back and forth any time you like depending on stock performance and your current goals.
3. Open up to Emerging Markets (Carefully!)
In the very volatile times in which we live, the U.S. dollar is similarly volatile.
In addition, the U.S. share of global GDP (gross domestic product is the monetary value of finished goods and services) has steadily declined and will likely continue to do so as other countries step forward to play on the global stage.
It seems there’s no better time than now to move away from the USD and diversify into foreign and emerging markets. Tread carefully to avoid overexposing yourself to too much risk, but don’t wait too long and miss what’s very likely to be a worthwhile opportunity.
4. Go Beyond the “Big 3” with Digital Alternative Investments
Stock market holdings, bonds, and cash might still be the “big 3” when it comes to investment strategy, but less and less are they the be-all and end-all of the modern portfolio.
Today, best practice dictates allocating up to 20% of your portfolio to alternative assets — just enough to make an impact without dominating your portfolio.
An alternative investment is almost anything you can put money into that isn’t a traditional stock, bond, or cash asset: Real estate, collectibles, private equity, ETFs, and more. But the most interesting alternative investment — and the type with the most growth opportunity — is the digital asset.
Digital assets include websites, digital currencies, domain names, trademarks, software platforms, revenue-generating social media accounts, and more. KPMG estimates that there are more than 2,000 digital assets in existence. And, a survey by Fidelity Digital Assets found that institutional investors are “very interested” in digital assets. The most popular digital asset among these investors? Bitcoin, a cryptocurrency.
All one has to do is look at the large financial institutions that are going all-in on various types of digital assets for motivation to dive into the world of crypto and other digital alternative investments.
Fidelity has developed an entire subsidiary to support digital assets — Fidelity Digital Assets, which we mentioned above. J.P. Morgan Chase has launched a business division devoted to blockchain (a cryptocurrency “wallet” and exchange program). And the investment advisory firm Cambridge Associates has even encouraged institutional investors to explore digital assets.
Track, Balance, and Optimize Your Modern Investment Portfolio with Kubera
Today, a well-diversified portfolio contains a variety of different investments — some of which can be especially hard to keep track of (hello, DeiFi and NFTs!) thanks to the volatile nature of cryptocurrency value.
In a sea of software that can’t even begin to account for non-traditional and digital assets, there is only one financial management platform that modern investors should choose: Kubera.
DIY users and financial professionals alike can use Kubera’s modern interface to input — automatically or manually, depending on the asset type — every pertinent detail about an asset, including cost, value, and cash flow in and out. Kubera takes these factors into account and then layers on holding time to automatically calculate the IRR of any asset — even when the value of the currency you used to buy them has fluctuated!
This is especially helpful when purchasing assets like NFTs using crypto. Kubera automatically calculates the return in your preferred currency, so you can understand whether an asset has gained or lost value no matter how much the value of NFT or the crypto you used to purchase it has changed.
Then, Kubera benchmarks the IRR of your assets against mainstream indices and tickers (like the S&P 500, Tesla, etc.) to help you understand their performance and make trades that align with both your ROI and diversification goals.
To round out these features, unique stock market and cryptocurrency tickers as well as integrations with leading asset experts (Zillow, EstiBot, etc.) keep investor dashboards up to date with the real-time value of stocks, crypto, homes, web domains, and more.
Start managing your modern, diverse portfolio today: Sign up for your Kubera subscription or learn about our white-label solution to work with Kubera as a financial professional or with the help of your financial professional.