Do What I Say, Not What I Do: Levels of Diversification

People are funny. If you tell them that you buy and hold a basket of stocks that isn’t the S&P 500, they look at you like you are crazy. Yet, someone who adds gold to their portfolio looks down on just owning S&P 500. It’s all about the levels of diversification. Below is the rough way I think about this:

  • All One Stock: Concentrated risk but the potential for a high reward if the stock performs well.
  • Add Some Crypto: High-risk, high-reward with potential for significant volatility.
  • A Basket of Different Stocks: Reduces individual stock risk by spreading it across multiple companies.
  • Different Industries: Further diversification by spreading investments across various sectors to mitigate industry-specific risks.
  • Mix in Bonds: Adds stability and income, reducing overall portfolio volatility.
  • Global Exposure: Diversifies geographical risk and capitalizes on international growth opportunities.
  • Add Gold: A hedge against inflation and currency devaluation, providing a store of value.
  • Commodity Trend Following: Potential for profits in various market conditions by following commodity price trends.
  • Non-Standard Assets: Investments in art, land, etc., can provide unique returns and further diversification.

I get balancing this with simplicity, but I struggle with the idea that the S&P 500 or the 60/40 portfolio is the logical end spot. Where do you stop? That’s all up to you, but I’d go past just bonds and US stocks.

Why Diversify?

Below is a quick example of why to diversify. For a small reduction in performance, you can get a significant reduction in volatility.


Do What I Say, Not What I Do

Do I follow this? Not really… I have a high level of my wealth in my employer’s stock, my income from my employer, Bitcoin, and a few tech stocks. I do try, though. I have international exposure via index funds, some gold, and bonds. Where I’m good, I’m good… but that is only half the time.

Author: fatbabyfunds