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How to Get the Most Out of Diversification

AngelaRoberts

Written by Angela Roberts

May 12, 2022

On May 11, 2022, Forbes published an article regarding alternative assets and their importance in a portfolio. But knowing what to do and knowing how to do it are very different. With so many options and strategies, how can you know you’re making the best decisions for your unique financial situation? As the writer of the article, Andy Zhao, points out, “It’s a crowded field out there, leaving many novice [portfolio owners] wondering where to start.”

For this week’s Gold News & Views then, I’d like to discuss some basics of diversification and what you may be able to do to get the most from your diversification efforts.

Diversification doesn’t end with having more than one asset type.

hand pointing at digital image of various icons labeled “ASSET MANAGEMENT”Diversification is all about reducing your overall risk exposure to a level you feel comfortable with. Traditional assets like stocks and bonds are all impacted by different market factors. In some cases, the same market factors can impact traditional assets in the same way. For example, on May 3, 2022, The Wall Street Journal wrote that “stocks and bonds are falling in tandem at a pace not seen in decades,” with the S&P 500 down 13% and the Bloomberg U.S. Aggregate bond index down 10% as of May 2, 2022. Cash is also considered a traditional asset, but because of inflation and slow U.S. economic growth, cash continues to lose its purchasing power.

To help preserve your wealth then, you may consider complementing traditional assets with alternative assets that may respond differently to market factors. This practice is known as “hedging”—when some assets go up, others may go down, resulting in a more balanced portfolio.

Real estate, precious metals, commodities like wheat and corn, and corporate debt are all considered alternative asset classes. There are many to choose from, and each has its own unique properties to consider.

While exploring your many options may seem like hard work, I’ve always believed there’s no such thing as too much work when it means building a better future for yourself and your loved ones.

Everything depends on your unique financial situation and goals.

Arrow hitting bullseye on dartboardWith so many options available to you, you may find it hard to decide which assets should go into your portfolio. Each asset has its own level of associated risk, and how much risk you’re willing to accept can depend on a variety of factors, including your income, retirement goals, and plans for creating generational wealth.

In the article mentioned above, Forbes details a few aspects you can consider when deciding which assets to include in your portfolio. Two of these factors are time horizon and liquidity—how long you plan to hold a certain asset and how easy it is to buy or sell. Gold, for example, may see strong increases in the short term but is more often considered a strong long-term asset and a vehicle for generational wealth because of its impressive growth over long periods of time. Gold is also considered fairly liquid in that it can be bought and sold nearly anywhere in the world.

Another factor to consider, according to Forbes, is any specific market or industry each asset is tied to. For example, if you were to consider real estate as an alternative asset, you may wish to explore properties in multiple geographic areas to reduce the chances of all properties being impacted by the same market factors. This same principle can be applied to precious metals: Some factors that affect the price of palladium, for example, may not affect gold. This is why at U.S. Money Reserve, we often suggest creating a precious metals portfolio that offers additional protection by including more than one precious metal.

There are, of course, many other factors you may wish to consider when choosing the assets for your portfolio. But as Mr. Zhao says in his article for Forbes, “It’s important that [portfolio holders] interested in this strategy take the time to understand as much as they can about portfolio diversification through alternative [assets]…. This knowledge will help you choose alternative [assets] that mitigate the overall risk of your portfolio while increasing your returns.”

Diversification can be a powerful tool for any portfolio. That’s why I believe so strongly in making sure that every one of our clients has access to as much knowledge regarding precious metals as possible. As you continue your own journey into the world of portfolio diversification, I encourage you to explore our free resource library and discover the benefits that come from diversifying with precious metals.

To learn more about the benefits of physical gold ownership, CLICK HERE to request a FREE copy of our Gold Information Kit.

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