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Building a diversified portfolio is a key strategy for managing risk and working toward your long-term financial goals. By allocating your investments across different asset classes, you can reduce exposure to any single area of the market. The right diversification mix depends on your personal goals, time horizon and risk tolerance. To help you get started, here are five common diversified portfolios examples and how they work.
A financial advisor can also help you develop a strategy that will fit your individual needs for a balanced investment approach.
1. 60/40 Portfolio
The 60/40 portfolio allocates 60% of an investor’s assets to stocks and 40% to bonds. This balanced approach aims to provide a mix of growth and stability, leveraging the higher potential returns of stocks while mitigating risk through the relative safety of bonds.
To construct a 60/40 portfolio, an investor would typically start by selecting a diversified mix of stocks, which might include large-cap, mid-cap and small-cap equities across various sectors. This diversification within the 60% stock allocation helps to spread risk and capture growth opportunities from different areas of the market.
The remaining 40% is allocated to bonds, which could include government bonds, corporate bonds and municipal bonds. The bond portion is intended to provide income and reduce overall portfolio volatility, as bonds generally perform more predictably than stocks.
Historically, this strategy has delivered solid returns with less volatility when compared with an all-stock portfolio. However, it’s important to note that the effectiveness of the 60/40 portfolio can vary depending on market conditions. Investors should regularly review and adjust their asset allocations to ensure the portfolio remains aligned with their financial goals and risk tolerance.
2. The Permanent Portfolio Allocation
The permanent portfolio is an investment strategy designed to provide stability and growth across various economic conditions. Pioneered by investment analyst Harry Browne in the 1980s, this portfolio aims to protect investors from the unpredictable nature of financial markets. The core idea is to allocate assets in a way that balances risk and reward, so that at least one asset class performs well regardless of the economic climate.
A typical permanent portfolio is constructed with four equal parts: 25% stocks, 25% bonds, 25% gold and 25% cash. Stocks are included to capitalize on economic growth, while bonds provide income and stability during deflationary periods. Meanwhile, gold acts as a hedge against inflation and currency devaluation, and cash offers liquidity and safety during economic downturns. This diversified approach helps to mitigate losses in any single asset class, ideally providing a smoother investment experience over time.
3. Dividend Portfolio
A dividend portfolio is a collection of stocks specifically chosen for their ability to pay regular dividends to shareholders. Dividends are portions of a company’s earnings distributed to investors, typically on a quarterly basis.
Constructing a dividend portfolio involves selecting stocks from companies with a track record of consistent dividend payments and the potential for dividend growth. Sectors known for reliable dividends include utilities, consumer staples and financial services. It’s important to diversify across various industries to mitigate risk and ensure a stable income flow. Additionally, investors should consider the dividend yield, the payout ratio and the company’s financial health to ensure sustainability.
This type of portfolio is particularly appealing to those seeking a steady income stream, such as retirees or conservative investors. By focusing on dividend-paying stocks, investors can benefit from both the potential for capital appreciation and the reliability of periodic income.
However, while dividend portfolios can provide a steady income, they are not without risks. Companies may reduce or eliminate dividends during economic downturns or financial struggles. This is why it’s a good idea to regularly review and adjust the portfolio to maintain its performance.
4. All Weather Portfolio
The all weather portfolio differs from other types of portfolios by focusing on an asset allocation that thrives in any economic environment, while many portfolios are tailored for specific market conditions or risk tolerance levels.
Developed by Ray Dalio, founder of Bridgewater Associates, the primary benefit of the all weather portfolio is its ability to provide consistent returns in various market conditions. Typically, the portfolio includes a mix of stocks, bonds, commodities and cash.
A common allocation might be 30% stocks, 40% long-term bonds, 15% intermediate-term bonds, 7.5% gold and 7.5% commodities. This diversification helps to ensure that if one asset class underperforms, others can compensate, providing smoother overall performance.
By spreading investments across different asset classes, investors can reduce the impact of market volatility on their portfolios. This strategy may be particularly appealing for those seeking a hands-off, long-term investment approach that prioritizes stability and gradual growth over high-risk, high-reward tactics.
5. Large-Cap Blue-Chip Portfolio
A large-cap blue-chip portfolio focuses on spreading investments across multiple sectors like technology, healthcare, consumer goods and finance to reduce risk.
Constructing a large-cap blue-chip portfolio involves selecting stocks from companies that meet specific criteria, such as a market capitalization of $10 billion or more, a strong track record of earnings growth and a history of paying dividends.
These companies are often household names, such as Apple, Microsoft and Johnson & Johnson, which have demonstrated resilience and the ability to generate consistent profits.
Common benefits can include lower volatility, reliable dividend income and long-term growth, which make it appealing for conservative investors looking to preserve capital. However, you should also note that blue-chip stocks can still be affected by market shifts, so regular reviews and adjustments are important to stay aligned with financial goals.
Why Diversification Matters
Diversification is a core principle of sound investing, and it’s one of the most effective ways to manage portfolio risk. At its heart, diversification means spreading your investments across different asset classes, sectors and even geographic regions so that no single investment can significantly impact your overall returns.
There are two types of investment risk: systematic and unsystematic. Systematic risk is tied to the overall market and cannot be eliminated through diversification — think interest rate changes, recessions or geopolitical events.
Unsystematic risk, on the other hand, is specific to individual companies or sectors and can be greatly reduced by holding a broad mix of investments. For example, if you only invest in airline stocks and oil prices spike, your entire portfolio could suffer. But if you also hold consumer goods and technology stocks, those may perform well and help offset the losses.
A well-diversified portfolio doesn’t guarantee profits or prevent losses, but it can help smooth out returns over time.
Common Diversification Mistakes to Avoid
While diversification is crucial, it’s easy to implement incorrectly. Here are a few common mistakes investors make when trying to build a diversified portfolio.
Over-Diversification
Yes, you can have too much of a good thing. Holding dozens or even hundreds of positions across mutual funds, ETFs and individual securities may seem safe, but it can actually dilute your potential returns. At a certain point, adding more investments does little to reduce risk and can increase costs and complexity.
Ignoring Correlation
A portfolio might appear diversified but still be overly reliant on similar-performing assets. For instance, investing in five different large-cap tech stocks or multiple ETFs that all track the same index isn’t truly diversified. It’s important to look at how your investments behave in relation to one another. Ideally, your assets should not all move in the same direction under similar market conditions.
Failing to Rebalance
Your portfolio’s asset mix will shift over time as some investments outperform others. Without periodic rebalancing, your original diversification strategy can become skewed, potentially increasing your risk. Regularly reviewing and rebalancing your portfolio helps maintain your target allocation and keeps your risk level in check.
Confusing Similar Assets
Holding both growth-focused ETFs and individual growth stocks may seem like diversification, but if they’re all concentrated in the same sector (e.g., technology), your risk exposure remains high. True diversification requires spreading your investments across sectors, asset classes, and ideally, investment styles.
Bottom Line
Diversifying your portfolio is a smart way to manage risk and enhance potential returns, especially in unpredictable markets. By spreading investments across asset classes such as stocks, bonds, gold and cash, you can cushion against volatility while positioning for growth. Regularly reviewing and adjusting your portfolio helps ensure it stays aligned with your financial goals, risk tolerance and the current market environment.
Tips for Investment Planning
- If you’re interested in creating or building out an investment plan, a financial advisor can work with you to identify investment opportunities and manage risks. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your retirement savings could grow over time, SmartAsset’s retirement calculator could help you get an estimate.
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