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Green Peak Advisors

Diversifying my portfolio (and life!)

Adapting our swing

I ended my last post talking about the importance of creating diversification, not just in a portfolio context, but also in other life choices.

If Covid-19 has taught us one thing, it is that life can throw us curve-balls, and we must be able to stand in and swing but adapt our swing to make contact with the ball. It does not have to be a home-run, but making contact is key. Hopefully, it will be a single or a double!

So, employing the tool of diversification in everyday life is very important because it can enable you to adapt better to challenges that arise.

Diversifying my income

An example that comes to mind is when making a career choice. Some people stick to one thing their whole career. They may even become a specialist or an expert in that field. There is value to this approach, and it has many benefits. However, one can also become “pigeon-holed” or stuck in one professional area. Risks arise when working in a field or company that grows obsolete or decides to hire younger talent. To avoid this, people can diversify and pivot their career, or seek out a side-hustle or hobby that allows them to become multi-disciplined. This could allow for more career opportunities and growth in new areas of one’s life.

When it comes to financial planning, having multiple streams of income is often very important. I see this a lot with my clients.  Those that have multiple income streams are better positioned to grow their wealth and avoid financial stress.  It does not have to be income coming from two salaries. It can be income coming from investments, real estate holdings, a consulting job on the side.

This relates back to this principle of diversification. Not being solely reliant on one source of income can not only help you to generate more wealth, but it can give you peace of mind in other areas of your life. This is what happens when one finds ways to reduce risk. It also will reduce the overall stress that one feels during times of economic uncertainty.

Tips on applying diversification to your portfolio

When we maintain diversification within our financial portfolio, we are in essence not relying solely on the returns of one investment opportunity. This can help us to lower volatility and smooth out the returns on our investments in the long-run.

So, how do I achieve diversification when constructing a portfolio? After deciding on an asset allocation model (please refer to this post that discusses asset allocation), let us talk about simple ways to diversify within an asset class.

I find it helpful to break down each asset class into several sub-asset classes. Again, if we are talking about a relatively small portfolio, you may not want to get too nuanced here – just select a few well-diversified passive instruments to invest in.

There are various approaches that you can take in breaking down an asset class. Some examples that come to mind include breaking it down by:

(1)  Geographical exposure
(2) Investment instrument
(3) Sector/industry exposure
(4) Size (i.e. what size companies to invest in – large cap/mid-cap/small-cap)
(5) Investment strategy (value, or growth stocks for example)
(6) Specific parameters (like only looking at companies that have consistently issued a dividend and grown it in the last 5 years)
(7) For bond allocations – duration or yield or another risk variable.

The bottom line is that there are more than one way to skin a cat here!

Please speak to us at Green Peak Advisors to discuss your financial goals and receive tailor-made holistic guidance on your investment portfolio and how to achieve proper diversification!