My personal diversification strategy and 3 simple tips for your portfolio

Diversifying your portfolio can be as simple or as complex as you’d like to make it. My personal advice is to not over do it. There is such a thing as too much diversification. Extreme diversification can spread your risk so much that you may not lose money, but you won’t have many gains either.

The trick is to find the right balance and it all comes down to your risk tolerance and having a good mix of stocks and bonds. So, don’t put all your eggs in one basket but don’t give each egg its own basket either.

Here’s my personal portfolio strategy, but before I jump in to sharing it please keep in mind that I am not recommending this same strategy for you. I’m not aware of your goals and risk tolerance. Diversifying your portfolio is a very personal thing. My purpose for sharing is to demonstrate what has worked for me based on my personal goals, risk tolerance, and commitment to keep investing regardless of the ups and downs in the market place. 🙂

My portfolio strategy

My personal goal is to gain at minimum 7% annual gains across all of my accounts. If you haven’t read my recent post, my goal is to retire with a minimum $4.7M because it will allow Vania and I to live with our desired income during retirement. With that being said, I’m obviously in it for the long run and I’ve got a 401(k), Roth IRA, and a general investment account as my vehicles to get me there.

I have both my Roth IRA and general investment account with the Stash app. Between both accounts, I have the same strategy:

10% Bonds

    • iShares National Muni Bond ETF

10% Asian markets

  • Vanguard FTSE Pacific ETF
  • SPDR S&P China ETF

10% European markets

  • Vanguard FTSE Europe ETF

70% American markets

  • Vanguard Mega Cap ETF
  • Vanguard Financials ETF
  • Schwab US Dividend Equity ETF
  • Vanguard Information Technology ETF

I started to use Stash in mid-2017 and my portfolio gained 12.17% since. Not too shabby.

As for my 401(k), it is with Wells Fargo and here is my portfolio breakdown:

  • 4% Stable value fund
  • 6% Diversified bond index
  • 40% U.S. Large Market Cap Equity Index
  • 20% Small/Mid Cap Equity Index
  • 20% International Equity Index
  • 10% Employer’s company stock

In 2017, this strategy fueled 19.11% growth in my portfolio and I was very pleased with these returns!

As a side note, if you have not enrolled in a 401(k) check with your employer and take advantage of the benefits they offer. My employer offers 6% match and profit sharing…these types of perks will only accelerate your savings!

Getting back on track, you may have noticed that my risk tolerance is aggressive because I have 90% of my cash in stocks and the remaining 10% are between bonds and stable funds. As you may know, stocks are riskier investments than bonds and a money market account (stable fund) but I’m very comfortable with the ups and downs in the market place.

Overall, it is a risk to be so aggressive with my portfolio mix but I am confident in the long term market gains. As of right now, we are in a bull market and it obviously feels great riding this wave so lets see how things are when the market pulls back. History has demonstrated since the 1920s the average annual return for the Dow Jones and S&P is between 7% – 10% and a lot of historic lows happened between now and then that were catastrophic for the economy. I’m not worried about it because we have always bounced back and that gives me confidence in a long term strategy.

3 tips for creating your own diversification strategy

If your looking to revamp your portfolio strategy or maybe you’re just getting started with investing, here are my 3 tips to diversifying your portfolio:

  • Create measurable goals

Don’t invest just to invest. I suggest having a clear goal for yourself. Whether it is a specific portfolio value you want to achieve or yearly annual returns. Creating measurable goals will help you mold the rest of your strategy.

  • Create a timeline

Simply put, are you investing for the long run or is this a short term venture? Typically, if you’re projecting to invest for the short term, you may want to consider a moderate or conservative portfolio mix. This will reduce risk on the cash you want to use in the short term for a large purchase (I’m assuming).

Now, if you’re investing for the long term like retirement, you may want to consider moderate / aggressive strategies since time is in your favor to take advantage of compounding interest and averaging the annual rate of returns.

  • Understand your risk tolerance

Depending on your investment / retirement goals and how long you plan to remain investing in the market, reflect on whether or not you plan to take a conservative, moderate, or aggressive investment strategy. To give you some food for thought, here is my personal guideline for each risk tolerance:

Conservative

  • 70% – 75% bonds
  • 15% – 20% stocks
  • 5% – 15% stable fund (cash or money market)

Moderate

  • 35% – 55% stocks
  • 35% – 60% bonds
  • 5% – 10% stable fund (cash or money market)

Aggressive

  • 65% – 100%
  • 0% – 25% bonds
  • 0% – 10% stable fund (cash or money market)

Decide what’s right for you

I’ll end it here by saying don’t invest without a clear strategy. Create a portfolio strategy that will support your personal goals. Keep in mind that no diversification strategy is perfect and it shouldn’t be permanent either. Make adjustments as you see fit and remember that investing is a risky business. Also, what I’ve mentioned here are basics. You can get WAY more granular with portfolio management, but if you know me I like to keep things simple.

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