To Diversify, Think Beyond the Basic Stock-Bond Portfolio

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Diversification will always be a cornerstone of investing, but what that means for smart portfolio management continues to evolve.

In a world of rising uncertainty, geopolitical instability and increasingly complex financial products, it's no longer enough to hold a basket of stocks and bonds and assume your portfolio is protected from risk.

Yes, I know: Those two basic investment options are supposed to provide the balance required to weather the ups and downs of the markets — and the overall economy.

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The stocks are meant to give you the growth you want, so you can keep building your wealth. The bonds, considered less risky, are there to contribute a predictable income stream and much-needed stability when markets get shaky.

For decades, if you had a "60/40 portfolio" (or some slight variation on that stock-and-bond mix), you probably considered yourself all set as a long-term investor.

But the long-held notion that bonds can always be counted on to serve as a dependable buffer — an investor's port in a stock-market storm, so to speak — is no longer a reliable strategy.

With interest rates at historic lows for much of the last decade, bond yields have often failed to provide the cushion they once did.

The negative correlation investors have been told to expect between stocks and bonds (when stocks go down, bonds go up, etc.) isn't always a given.

During the 2022 market downturn, for example, both stock and bond markets took it on the chin simultaneously. That happens more than you might think.

Inflation and uncertainty are typically the culprits when this occurs — and it looks as though both will stay with us in 2025.

Why risk management is critical to investment savings success

What's the answer?

To protect yourself in these uncertain times, your portfolio choices need to be increasingly intentional, personal and risk-focused.

That means it's crucial to allocate funds to a level of risk that's uniquely right for you and to create a truly diversified portfolio with components that operate independently of one another.

The good news is that finding your "fit" isn't any different than it's ever been. You might want help from a knowledgeable financial adviser who can walk you through what your best- and worst-case scenarios look like as an investor.

Finding your fit is about:

Knowing your objectives. Are you mostly interested in growth, preservation or, as many investors, something in between? If you're unsure, a financial adviser can help you nail down your short- and long-term goals.

Knowing your personal tolerance for risk. Every investor has a different capacity to handle losses. This might be linked, at least in part, to how much money you have or your age and how close you are to retirement.

But it's also psychological. Some investors panic at a 5% loss, while others see a downturn as a buying opportunity.

Knowing where you stand right now. Stress-testing your portfolio can help you determine if it's set up to suit your needs. Stress-testing programs use hypothetical market conditions to analyze how your portfolio might act under pressure.

It's possible your portfolio isn't invested as conservatively (or as aggressively) as you think.

Diversification today requires broader thinking

The idea behind the 60/40 stock-bond portfolio is still legitimate. Finding a way to hedge against a stock market downturn can keep a short-term slump (or plunge) from hijacking your long-term goals.

This is especially important when you're in or nearing retirement: If you're counting on your portfolio for income, and you have to sell at a loss, you could risk running out of money long before you planned.

It can also be a consideration when you're saving for a house or some other major purchase.

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For real protection, though, it's time to look beyond bonds for safety.

If recent market volatility has increased your appetite for options that can help lower your risk, you might want to talk to your adviser about looking at defined income strategies that can help preserve your money.

These funds are designed to give investors equity-market index exposure with built-in downside protection in exchange for a certain amount of upside potential. Though they're not exactly new, they're becoming increasingly popular.

There's no one-size-fits-all solution to shield your investment savings, and these products are not for everyone. But with help from an adviser, you might be able to create a customized plan that's built around your needs.

Do your research and get a second opinion. Assess the risk and reward before you invest. Don't forget to compare the pros and cons with similar investment options that could help provide the safety you seek.

Start with your goals and your personal risk tolerance and use those as your guide. The ultimate objective of investing isn't just to grow your money — it's to do so in a way you can live with day to day and into the future.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

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.

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As a fiduciary investment adviser with Freedom First Retirement Design, Dustin Tait is dedicated to guiding people toward financial security. He earned a degree in accounting from the University of Tennessee and began his career at one of the world’s largest tax management firms. Then it was back to New York, where he worked as a financial adviser at one of the biggest banks in the U.S. After honing his skills through various roles on Wall Street, Dustin founded Atlanta-based Freedom First Retirement Designs, a firm committed to providing personalized financial plans that can help his clients pave the way to financial freedom.