That's similar to how diversification works. You want to combine assets that are desirable individually, but work better together because they perform well in different circumstances.
Different investments do well in different economic environments. If growth is booming in Brazil and commodity prices are rising, then emerging market stocks are likely to do well. If US growth is falling, then US bonds do well. There are a host of factors that impact investments (war, oil prices, and inflation rates—to name a few). At FutureAdvisor, we construct portfolios from 12 different assets (including low-cost ETFs) to maximize your return and hedge your risk. If you’re curious about what we’d recommend for you, personally, check out our interactive website. We offer free, customized recommendations.
Two Key Diversification Categories
Merely adding more investments to a portfolio won't necessarily make it more diversified unless there are meaningful differences between the investments. The two categories that matter most in diversification are asset classes and geography.
1. Asset Classes
Different asset classes do well in different situations. The main asset classes we use at FutureAdvisor are stocks, bonds, real estate and inflation-protected securities. Bundled correctly, these should offer growth as well as the potential to preserve capital in weaker markets.
It’s not unusual for the market to be doing well in one place and not-so-well elsewhere. For instance, things may be great in China, but bad in France. Having broad international exposure can help manage this risk and expose you to bull markets wherever they occur.
For true diversification, it's important to have exposure in both developed and emerging markets across the globe. While it may be tempting to weight the country you live in higher within your allocation, this could be a mistake. For example, if you live in California, it would be strange to limit your holdings to local companies like Amgen, Qualcomm, and Disney, when you could diversify within the entire US and own a broader mix of companies. The same logic is true of international investing.
Ultimately, having a diversified portfolio should help smooth your returns over time. It will also make you more likely to be able to stay the course in the bad times.