6 Strategies to Build Portfolio Diversity

Investors need to cover their bases with a good variety of financial vehicles that reach beyond the old stock-and-bond game.

Learning how to his the baseball with Grandpa.Rural Alberta in the Spring
(Image credit: Copyright 2012 Ambre Haller)

Imagine if the general manager of your favorite baseball team filled his roster with only pitchers and catchers.

Would that work for you as a fan?

Probably not. Even if they were all among the best in the game, you’d still want the top player in each of the other positions out there working toward a win, not to mention a strong bench to back them up. If your team’s GM was ignoring all the other options available, you’d likely be screaming at your TV or foaming at the mouth on Facebook.

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And yet, if you’re like so many investors, your portfolio may be made up almost exclusively of two kinds of players: stocks and bonds.

Perhaps you’re aware there are other choices out there, but it seems like a lot of work to explore them. Maybe you’ve decided to just go with what you know. Or it’s what your financial professional recommended, and who are you to ask questions?

Typically, most of the portfolios we see when prospective clients come to our office — at least three-quarters of them — are 80% to 100% constructed of stocks and bonds. And when I analyze them, I find they aren’t even very well diversified within the different categories and sectors available.

I get it. Twenty years ago, individual investors had to stick to mostly large-cap stocks and high-grade bonds because their opportunities were limited. But times have changed; the financial industry keeps evolving and creating solutions to suit the needs of individual investors and savers. Diversifying your portfolio no longer means owning a couple of mutual funds and a certificate of deposit.

The 60-40 split wasn’t a bad guideline a generation ago, but it’s outdated — and sticking to such a narrow plan could lead to a big loss if there’s a market correction. So why not take some time to review what you have and scout out a few game changers?

  • Annuities. Annuities come in all shapes and sizes and enable contract owners to enjoy some market upside (up to a set cap) but avoid the downside (you won’t earn interest credits but you won’t lose any of your principal). There are immediate annuities and deferred annuities, each with their own benefits and drawbacks. And depending on the annuity there may be additional features such as income or death benefit riders, although it should be noted that those generally come with additional costs.
  • Exchange-traded funds (ETFs). The most common ETFs are designed to track the performance of a market benchmark or index, such as the S&P 500, the Nasdaq or the Russell 2000. An ETF is a diversified collection of assets (like a mutual fund) that trades on an exchange (like a stock). ETFs are growing in popularity because they’re easy to use, low in cost and tax efficient. And they’re evolving — many now involve much more than just benchmark mirroring.
  • Real estate. It’s getting easier for everyday investors to include real estate holdings in their portfolios. You don’t have to be a landlord fixing toilets at midnight or sit on a piece of land for years. You can put your money into a real estate investment trust (REIT), a company that owns income-producing real estate (warehouses, office parks, shopping centers, etc.). The combination of current income and long-term growth potential may make a REIT worth looking into, especially for a retirement plan.
  • Life insurance. The insurance industry continues to come up with new products to appeal to consumers. Though many still think of life insurance strictly as a way to take care of loved ones when they die, it can be an important player on your financial team. While not a replacement for long-term care insurance, some policies offer accelerated death benefits if the holder has a terminal, long-term or incapacitating illness that requires specialty care. There also are policies that offer income tax free loans from which you can pull money in retirement. However, as with other financial vehicles, policy loans and withdrawals will reduce the available cash values and death benefits and may cause the policy to lapse.
  • Emerging and foreign markets. These investments have been around for a while, but they’re gaining in popularity as awareness of our global economy grows. As U.S. interest rates rise, some investors appear to be looking overseas to generate returns.
  • Management styles. Just as the definition of diversification is changing, so is the way managers handle money. Buy and hold isn’t always the way to go anymore; tactical asset allocation is a more active management style that shifts the holdings in various categories to build and, perhaps more important, preserve a portfolio as the market changes.

Of course, an important factor for any winning franchise is how the team members play together — so talk to your financial adviser about the role some of these strategies might have in your portfolio. Each should have a purpose you understand and fit within your comfort level. Then you can decide if there are some changes you want to make to your roster.

Kim Franke-Folstad contributed to this article.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Eric Fritts, Chartered Financial Consultant CHFC®
Owner, Elevated Wealth Management

Eric Fritts is a Chartered Financial Consultant CHFC® with Elevated Wealth Management in Franklin, TN. He holds his Series 65 as well as his life and health license.