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 4-5 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 2 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.
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 proctors, 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.
A single mutual fund can have far more diversification within them than what it may seem on the surface. People sometimes forget these days - boring works.
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.
I offer my clients a counterintuitive piece of advice for portfolio diversification: create a "Contrarian's Calendar" and diversify when everyone else is consolidating. This strategy has consistently outperformed traditional approaches in our analyses. Here's how it works: We maintain a calendar marking periods of market consensus. When most investors are flocking to "safe havens" during downturns, we strategically diversify into overlooked sectors. Conversely, when the market is bullish and everyone's diversifying, we concentrate on high-conviction positions. I recall advising a client to diversify into renewable energy stocks during the 2020 market crash when oil prices went negative. While it seemed risky, this move yielded a 200% return within a year as the sector rebounded strongly. This approach requires nerves of steel and deep market insight, but it's been a game-changer for our clients. It's not about blindly contrasting the market, but rather using periods of mass market movement as opportunities to find value in neglected areas. In wealth management, timing isn't just about when you buy or sell, but also when you diversify. You can turn market consensus into your greatest diversification tool by zigging when others zag.