The term "assets" refers to everything that has a specific financial value, owned by an investor to obtain a greater financial value after a period of time. Known assets: Cash, Bonds, Commodities, Real Estate, Equities.
Why diversify among them?!
Historically * stocks were the highest in terms of returns (10% annually) and therefore the most important in the components of investors' portfolios, but what's the catch?! It's known that the higher the expected returns, the higher the risks, the volatility of stock market in the past period was large (+34%/-37%), while bonds were relatively stable (+18% / -5%) and with a fairly acceptable average return (4% annually). The main objective of asset diversification is therefore to reduce those risks.
Portfolio Types
Portfolios can be classified mainly into 3 types according to risk tolerance:
- Growth Portfolio: Suitable for taking high risks and for long term investment. Stocks in growth portfolio are not less than 70%.
- Balanced Portfolio: Suitable for taking medium risks and for mid term investment. Stocks and bonds are equal in it.
- Income portfolio: Suitable for taking low risk and for short term investment. Bonds in Income portfolio are not less than 70%.
How do we easily apply diversification?!
An easy option in investing is low-cost ETFs The idea of entering a single fund will follow the single asset index with all its components, thus achieving diversification within the single asset in addition to managing your portfolio easily.
Examples
Let's say we want to apply a balanced portfolio with 50% equity components and 50% bonds . This can be easily done as follows:
50% Vanguard Total Stock Market ETF (VTI)
50% Vanguard Total Bond Market ETF (BND)
Another example of a growth portfolio:
70% iShares Core S&P Total US Stock Market ETF (ITOT)
30% iShares Core U.S. Aggregate Bond ETF (AGG)
Other Assets
If you feel that further diversification may be more appropriate in a given period by purchasing assets other than stocks and bonds, you can do so through ETFs as well. Gold, for example:
SPDR Gold Shares (GLD)
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*https://themeasureofaplan.com/investment-returns-by-asset-class/
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Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing.
Baraka is not a financial adviser and therefore does not provide investment advice. Our content is informational only.
