English Guide Portfolio Management

How to achieve asset diversification

Risky money should provide you with (erratic) growth and safe money will limit the overall short-term changes of your wealth

New investors should divide their portfolio into risky money and safe money. Risky money should provide you with (erratic) growth and safe money will limit the overall short-term changes of your wealth. You should first set some money aside as a safety buffer and you can then begin investing in diversified risky long-term securities such as stocks. You should then focus on building progressively a solid equity portfolio as a key constituent of diversified wealth. By adding risky (but not fully correlated) assets to a portfolio, you can decrease risks without sacrificing returns.

Beside your safety buffer and your core equity portfolio, you should also consider real estate: Despite the concentration risk of your property and the time commitment required, you should own your home before retirement. Moreover, Real Estate is one of the few asset classes that usually had a low correlation with the traditional asset classes (stock and bonds). 

Other alternative options are subject to debate, but as Rick Ferri pointed out in “All About Asset Allocation”, “A good rule of thumb for all alternative investments is, when in doubt, stay out.” Here are some examples

  • Despite having existed for ages, Gold does not generate cash and its price is based on different assumptions and speculation, not on economical use, since the annual industrial requirement of Gold are much lower than the volume available;
  • Most commodities or cryptocurrencies are very volatile for speculative purpose but produce no cash flow and are difficult to value.
  • Hedge Fund: Despite some success stories such as Renaissance, usually not available for retail investors, investors should generally avoid Hedge Funds because of asymmetrical risks, high fees, limited exit options and low transparency.

Diversification across many companies allows limiting losses in case of a sharp decline in performance or company failures. In practice, there are opportunities for diversified investments that cover the whole world and you should consider a global portfolio as a starting point. The overweight of the United States in global market capitalization can be limited by supplementing the portfolio with exposure to more specific markets and currencies. If you wish to make a medium-term investment involving a payment in another currency, if your currency is under-represented in existing investments or if your retirement expenses require a particular currency, you can also put your money in an investment exposed to a specific currency (e.g. EUR or CHF passive funds).

This basic guidance should help you construct your portfolio based on the types/ classes of investments, particularly equity and real estate. You can then choose the specific vehicles for the former, ideally low-cost passive ETFs and funds.