What Advice Do You Give Clients for Diversifying Investment Portfolios?
In the quest for a robust investment portfolio, we've gathered wisdom from top wealth management professionals. From considering mutual fund diversification to simplifying with non-correlated asset classes, here are four key pieces of advice offered by a CFP®, a Private Wealth Advisor, and more.
- Consider Mutual Fund Diversification
- Explore Intellectual Property Investments
- Avoid Overlap Risk for True Diversification
- Simplify with Non-Correlated Asset Classes
Consider Mutual Fund Diversification
A single mutual fund can have far more diversification within it than what may seem on the surface. People sometimes forget these days—boring works.
Explore Intellectual Property Investments
One unique tip I often share with clients looking to diversify their investment portfolio is exploring the potential of intellectual property rights. Investing in patents, copyrights, or trademarks can offer a distinctive avenue for growth that's not tied directly to traditional stock market movements.
This kind of investment requires some specialized knowledge and a strategic approach, as it involves understanding legal frameworks and market potential. However, for those who are willing to delve into this niche, it can be incredibly rewarding. Intellectual property can generate passive income through licensing fees or can be sold at a premium as the market for certain technologies or creative works evolves. It’s a way to tap into innovation-driven gains and potentially benefit from the burgeoning demand in various sectors, offering a unique blend of creativity and investment.
Avoid Overlap Risk for True Diversification
Meaningful diversification is not achieved by just owning a bunch of stocks, bonds, mutual funds, or ETFs. If your assets are not working together in a thoughtful way, then you are not truly diversified. Too many clients come to us with what they think is a diversified portfolio, but their top four to five funds all have the same holdings. Overlap risk is the kryptonite to true diversification. To achieve meaningful diversification, you have to reduce correlation between your investments. A truly diversified portfolio has the correct mix of stocks and bonds to match the client's risk tolerance. Inside of those two broad asset classes, you should own large-, mid-, and small-cap stocks both domestically and internationally, as well as a broad mix of bonds based on the tax needs and time horizon of the client.
Simplify with Non-Correlated Asset Classes
In investment theory, there is such a thing called the “efficient frontier,” on which you can expect the maximum return for the minimum amount of risk. While this sounds nice, in my opinion, it is just another example of Wall Street making the world of finance too complicated for ordinary people.
The reality is this: if you have 8-12 different asset classes that behave in a non-correlated fashion, then at least a few areas of your portfolio should lean bullish at any given time. Then you can periodically rebalance, rotating sectors, selling high and buying low. It is not meant to be complicated! But most financial advisors won’t offer anything outside of the traditional 60% equity and 40% bonds.
Seeking private equity, credit, land, collectibles, digital assets, precious metals/jewelry, and other alternative asset classes is an increasingly popular way to effectively diversify a portfolio.
