If only the S&P500 had continued to build on — or even just stabilize at — the 5% growth it had achieved as of February 2020.
Instead, the outbreak of COVID-19, a conspicuous election year in the U.S., and the economic uncertainty these events triggered around the globe sent the S&P500 spiraling as far as -30% at its lowest point.
While policy-based bandaids are propping up the stock market for the time being, this shock to the financial system made many high-net-worth individuals (HNWIs) rethink how they invested and how they protected their wealth in a rapidly-changing world.
What did the most forward-thinking investors do — and what can you do now — to better ride out whatever financial storms this strange new decade has in store?
And we’re not talking just standard old diversification. In this guide, we’ll share some key tips to help you build a modern and diverse portfolio in a world where diversification likely means something completely different than it did when you first started investing.
Why Does Portfolio Diversification Matter?
Diversification is the art of investing in varied sectors to protect your portfolio from the unpredictable but natural fluctuations that impact all asset classes, traditional stocks and bonds included.
Diversification works because it’s extremely unlikely that every asset class — from stocks and bonds to real estate, currencies, and some more modern ones that we’ll explore later — will crash at the same time. The more thoroughly your wealth is spread across asset classes, the less likely it is that you’ll experience notable losses when any one class momentarily loses value.
Generally speaking, investment portfolios with a balanced mix of assets generate higher returns and lower losses over time than portfolios with a narrow asset allocation.
How Portfolio Diversification Has Changed for the Modern World
Home improvement, gaming, at-home fitness, food subscriptions, and delivery everything — while many of us may not have put our eggs in these baskets at the beginning of 2020, today they’re some of the most profitable businesses thanks to our prolonged time at home as we ride out COVID-19.
As for big-name retailers, hotels, and travel-adjacent businesses? Buying stock in these traditional high-performers is feeling riskier by the day.
It only took a matter of months for everything we thought we knew about “good investments” to flip upside down. A willingness to pivot and creative diversification decision-making are the main skills that today’s thriving investors have in common.
Ready to join their ranks? Here are the key tactics you need to practice.
How to Achieve Modern Portfolio Diversification
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 even dips into the digital realm! Create your own diversified and resilient portfolio using the following tips.
Actively Balance Your Portfolio Using the Barbell Approach
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 continually tempers a smaller percentage of higher-risk, but higher-reward, assets.
Consider Which is 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 looking to generate regular but modest (and therefore lower-taxed) income, 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.
Open up to Foreign Markets (But Do So Carefully!)
In the very volatile times in which we live, the U.S. dollar is similarly volatile. Unfortunately, most banks think the U.S. dollar will close out 2020 on a weak note in relation to other currencies.
In addition, the U.S. share of global GDP (gross domestic product is the monetary value of finished goods and services) is declining as countries like India, Brazil, China, and others take a bigger bite.
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.
Go Beyond the “Big 3” with Digital Alternative Investments
Stocks, bonds, and cash might still be the “big 3” when it comes to investing, 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, 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 today.
In a 2020 survey by Fidelity Digital Assets (yes, that Fidelity), institutional investors reported being “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 already developed an entire subsidiary to support digital assets — Fidelity Digital Assets, which we mentioned above. J.P. Morgan Chase just launched a business division devoted to blockchain (a cryptocurrency “wallet” and exchange program). And in 2019, the investment advisory firm Cambridge Associates even encouraged institutional investors to explore digital assets in their report “Cryptoassets: Venture into the Unknown.”
Track, Balance, and Optimize Your Modern Investment Portfolio with Kubera
The many benefits aside, there is one big downside to modern portfolio diversification — keeping track of it all!
And that pain point is exactly why we created Kubera.
Kubera is an all-in-one wealth tracking and management tool for the modern investor. Using an easy, spreadsheet-like form, investors can add, manage, and optimize every single one of their assets — from the traditional like cash (in any currency!), stocks, and bonds to the digital like domains, websites, cryptocurrency, and more.
Get started today: Sign up for a free trial or start your affordable subscription to Kubera (no ads or upsells here!) and easily manage your modern, diverse portfolio that’s ready for 2020 and beyond.