When Some Of Your Investments Zig, You Want The Other Ones To Zag

How do I account for…

1. Company diversity?
   Answer: Buy a low-fee broad market index fund.
2. Industry/sector diversity?
   Answer: Buy a low-fee broad market index fund.
3. Asset class diversity?
   Well, it depends which asset classes we're looking at.

If we're just speaking about stocks and bonds, the general idea is while you're young you want to have as much growth as possible (stocks over bonds) because you have time to withstand volatile periods in the market. As you get older and approach retirement, your investment portfolio should become more conservative and more income producing (bonds over stocks).

Consider following one of these rules of thumb…

Rule 1: Own as many bonds as your age. The idea is that as you get older you want your portfolio to have a higher allocation to bonds, which are generally considered safer and less volatile. For example, if you're 20 years old, you would have 20% bonds and 80% stocks.

Rule 2: Another common rule is to take 110 minus your age to determine your stock allocation. So, if you're 20 years old, you would have 90% stocks 10% bonds.

There are tons of these types of rules that all get you to the same place, which is start out with mostly stocks and gradually transition to mostly bonds as you get closer to retirement. These rules are somewhat flawed as they don't account for other types of asset classes such as: cash, real estate, crypto, or inflation linked products.

But for people just starting out, the message remains the same – start out with mostly stocks with the goal of ending up with more stable income producing assets later in your investing life.

To answer the question of how to manage asset class diversity, consider a roboadvisor that will manage your stock/bond allocation for you.