We’ve all heard it before.  Diversify, diversify, diversify.  This is the part that most people can not get right.  They fail to understand the true meaning of diversification and how it relates to investing.  If you look up the definition of diversification; you will find it stated as, “A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.”

Here’s the problem I see that most people do.  They simply choose different products within the same asset classes.  That is not diversification.  Doing so will set you up for major disappointment.  Robert Kiyosaki has the same belief as mine on how to diversify.  The idea behind diversification is not to choose or pick between the blue, the yellow, the purple mutual fund brochures.  It is not having 100% of all your investments strictly in mutual funds and stocks.

It also is not about having only real estate.  True diversification would be dividing all of your assets between different asset classes.  A perfect example would be to have money invested in real estate, individual stocks, government or corporate bonds, some commodities, certificate of deposits, money market accounts, life insurance, and tax sheltered annuities above and beyond your mutual funds.

You can not make money on mutual funds when the market goes down.  You can however buy options as insurance for individual stocks or even get some inverse exchange traded funds if you anticipate a major correction.  This however does require planning and effort and we’ll dive into that at a later date.

If all you had were stocks and mutual funds; a major recession can leave you hanging in the red for years.  The same would apply if you were only in real estate and the real estate market were to burst.  Do both of the above sound familiar to you?  Is it possible that there will be another tech, stock market, or real estate bubble explosion?

The best thing to do is to come up with a strategy and design a plan on where you want to invest and when you plan to exit the investment.  Without a plan, how diversified are you?

Need Help With Your Diversification Plan?

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Binh Nguyen

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