Diversification is the idea of having a variety of exposure to many different kinds of investment vehicles. It is a strategy that is said to sacrifice returns to better manage risk. The idea is to spread your money around, buying parts and pieces of different asset classes. Usually this discussion revolves around the idea of a 60/40 portfolio (that is 60% stocks and 40% bonds). Then you reach further diversification by splitting your stock holdings into small caps, large caps, emerging markets, growth, value, and all other manner of industries or sectors.
Wall St has developed all manner of terms to make investing look complicated. If something looks complicated enough, regular people will then pay someone to help them navigate it. This is the whole idea behind; growth vs value stocks, ETFs vs mutual funds, 60/40 portfolios, large vs small caps, emerging vs developed markets, and portfolio diversification. If that last sentence was barely comprehensible, have no fear. Those words mean very little when we talk about true diversification.
I believe that there are 5 asset classes that everyone should be exposed to:
Cash
Cash alternatives, that can be used as alternative means of exchange such as gold, silver, bitcoin, foreign currencies, numismatic coins, etc.
Business investments like public company stocks or private business equity
Bonds & Loans
Real Estate
I believe that when you have true diversification into these 5 asset classes you can build long-term, generational wealth. I know that I focus a lot on public company stocks but I feel that it is time to take a more expansive approach and incorporate these other topics.
In the meantime, here is an update on where my portfolio is at: