How To Diversify Your Portfolio: 5 Assets To Invest In 2024

by Hunter Robillard

Want to know how to diversify portfolio investments?

Distributing your investments across multiple asset classes with different returns is an investment strategy that experts have recommended for decades. You don’t want to put all your eggs in one basket and risk losing money if the market crashes.

Assets like fine wine and real estate are great for portfolio diversification because they have a low correlation to the stock market.

Let’s explore what portfolio diversification is, how you can diversify your investment portfolio, and five fantastic assets for a well diversified portfolio.

What Is Portfolio Diversification?

Diversification is a common investment strategy where you distribute your investment portfolio across different asset classes and securities.

Diversification helps reduce the risk of suffering losses due to market volatility, and if you distribute your assets across multiple asset classes, the risk of all of them crashing simultaneously decreases exponentially.

You can decrease your risk even further by going for an asset mix that has little or even a negative correlation to other assets in your portfolio. So, a different investment could generate greater returns when one asset loses out on.

For example, imagine you invest in both Coca-Cola and Pepsi stocks. Since both companies are eternally battling for market share in the beverage industry, what is good for Coke stock may necessarily be bad for Pepsi stock and vice versa. So, if you own both stocks and Pepsi releases a new product that increases its market share, this offsets the loss in your Coke investment.

But, diversification and intelligent asset allocation can go even further than investing in competing stocks.

There are various asset classes that are far more removed from one another. For instance, stamps and gold, fine wine and a bond fund, or a real estate investment and fine art are all different asset classes that can help diversify your portfolio.

Let’s take a look at how you can begin diversifying your investment portfolio.

How To Diversify Portfolio Investments

Here are some helpful tips on how to add diversification to your portfolio and spice up your asset allocation.

Assess Your Risk Preferences
Spread Your Wealth
Know When To Sell

1. Assess Your Risk Preferences

You can use a few different techniques to minimize the unpredictability of your investments in various asset classes.

Qualitative risk analysis: This strategy assigns a pre-defined rating to an investment’s success, usually to stocks and collectibles like wine. To do this, evaluate your investment using specific parameters like brand value, the integrity of senior management, corporate governance, and effective risk management practices.

60-40 split: A 60-40 split is an investment technique where 60% of your investments go into stocks and 40% into bonds. Stocks offer higher returns but have a greater market risk factor than bonds. So, this technique helps offset risky stock investments with safer bond options.

Age: Another diversification strategy is to subtract your age from 110 and invest the result in stocks and the rest in bonds. So, if you’re 40 years old, 70% (110-40) of your investments should be in stocks, and 30% should be bonds since you likely still have decades to invest.

Dollar-cost averaging: This diversification strategy involves investing equal amounts at regular intervals, regardless of the price of an asset. A prime example of this is contributing a set amount of your salary each month to a retirement fund like your 401(K).

2. Spread Your Wealth

As an investor, you need to distribute your wealth and ensure proper asset allocation. But, there’s more to it than simply investing in different assets. There’s also diversification within asset classes.

Stocks: To help diversify the stocks in your portfolio, you’ll need to make an investment decision about which shares in the stock market you want. You can invest in stocks in different sectors in the stock market to minimize market risk. If you invest in one tech stock, balance it by investing in a healthcare stock. So, if one sector is hit by any global event, you can rely on other stocks.

Bonds: Abond index fund has many forms, and owning different types helps improve your portfolio’s diversity. Integrate bonds from various issuers, combine bonds with various credit risks, and blend short and long maturity rates into your bond index fund investments.

Alternative Investments: Start investing in a mutual fund or ETFs that invest in various types of alternative assets like a gold Exchange Traded Fund that invests in gold mining companies, gold smithing companies, and physical gold itself. You can also invest in tangible assets like fine wine that offer a great hedge towards inflation.

3. Know When To Sell

If you’re a new investor, you need to understand the factors that influence the movements of various financial markets.

Every asset class and different investment is affected by external forces like the interest rate, inflation, global supply and demand, and geopolitical tension. So, it’s important you make an informed investment decision about when to exit the market.

For example, you should sell a stock when its price rises dramatically, when it reaches your target price, or when the market looks unstable due to rising inflation or drastically changing interest rates.

For a wine investment, the best time to sell is a year or two before your wine reaches peak maturity. Avoid selling a bottle of wine when its market value is low, and try not to ship wines during the summer or winter. Adverse weather conditions increase the chances of your bottles becoming damaged.

For efficient wealth management, speak to your financial advisor for investment advice. A financial advisor will utilize modern portfolio theory to generate a diversified portfolio and improve your asset allocation so you can reach your long-term financial goal.

Now, let’s look at some different assets that will help diversify your entire portfolio.

5 Assets To Invest In To Diversify Your Portfolio

These 5 assets provide excellent diversification to any investment portfolio:

Fine Wine
Stocks
Bonds
Real Estate
Cash & Cash Equivalents

1. Fine Wine

Fine wine is an alternative investment option that provides excellent portfolio diversification because of its low correlation with other asset classes.

For instance, while the S&P 500 declined more than 16% in 2022, Burgundy wines generated 14.62% investment returns in the first quarter of 2022.

Furthermore, this asset class offers incredible stability, which helps offset losses from your riskier investments. It even maintains its stability through recessions and acts as a fantastic inflation hedge.

There’s also diversification within the wine industry since there are so many different types of wine to buy, like Merlot, Chardonnay, Cabernet Sauvignon, and many more.

But how do you begin your wine investment journey?

You can buy, store, and sell bottles yourself.
You could purchase wine stocks.
You can invest in wine bonds.
You can purchase en primeur wines still in barrels.
Or, you could ask a wine broker to purchase bottles for you.

Better still, you can entrust a trusted wine investment company like Vinovest. It offers the easiest way to procure, manage, and authenticate a well diversified portfolio of fine wines from anywhere in the world.

Vinovest’s advanced AI-based algorithm takes thousands of wines into account, and its Master Sommeliers then hand-select the best wines to generate an entire portfolio based on your risk preferences. You can even have your wines stored in temperature-controlled bonded warehouses and sold to the highest price buyer at the right time.

2. Stocks

Stocks allow you to invest in company shares, so you own a small portion of a company. Stocks offer high returns but suffer from market volatility.

This asset category is a go-to option for many investors and can provide diversification because there are so many different companies to invest in.

For example, as an investor, you can purchase stocks in different sectors like tech, mining, energy, and many more. So, if your tech stocks decline, your energy stocks may grow.

Furthermore, you can purchase a mutual fund that invests in different stock options on the stock market and have a mutual fund manager make an investment decision about which stocks to buy.

3. Bonds

Bonds are funds that pay an interest rate at set increments and offer incredible stability.

There are various fixed income investments and bonds that track different indexes, which help provide diversification, such as Treasury bonds, corporate bonds, or municipal bonds.

One potential drawback of this asset class is its passively managed nature. Fixed income investments or a bond fund are generally inexpensive, but you could earn greater investment returns from a different asset class like fine wine.

4. Real Estate

Real estate is an alternative asset class, so a real estate investment already provides diversification compared to more traditional investments.

However, there’s also plenty of diversification within this asset class to add to your real estate portfolio.

Here are some of the different ways to invest in the real estate asset class:

Purchase and renovate a house to sell it later
Rent out a property you own
Buy income-producing real estate like an office building
Add REITs to your real estate portfolio
Purchase a real estate mutual fund or Exchange Traded Fund

5. Cash & Cash Equivalents

Cash is an asset category that refers to the money in your savings account, your wallet, or stored under your pillow! Storing your money in cash is a low-risk investment with low returns, but any investor can do it.

Cash equivalents aren’t a different asset class from regular cash and include money market instruments like certificates of deposit, commercial papers, and treasury bills. The biggest advantage of cash equivalents is the liquidity they provide.

Although cash and cash equivalents provide sub-optimal returns compared to other investments, storing some money in the form of cash provides diversification. It could also save you during an economic crisis.

It’s always helpful to have some cash stored in an emergency fund in case you lose your job or the economy suffers a recession.