5 Assets You Should Own Now

A diversified portfolio consists of investments in various asset classes, including stocks, fixed income, and commodities, aiming to maximize returns while minimizing risks. Diversification is effective because different assets react differently to economic events, reducing overall risk, as some assets may perform well when others do not. This diversification is a strong defense against financial crises since not all assets would suffer from a single event.

Stocks perform well during economic growth, whereas fixed-income securities like bonds are preferred during slowdowns due to their stable returns. Commodities, such as wheat, oil, and gold, fluctuate based on supply and demand, independent of business cycles, providing additional stability to a portfolio.

Key asset classes for diversification include U.S. stocks (small-cap, mid-cap, large-cap), fixed income (bonds, savings bonds, municipal bonds, corporate and foreign bonds), and international investments. Alternative investments can consist of real estate, commodities, hedge funds, and more. Commodities like gold are uncorrelated with stocks and bonds, serving as a hedge against market crashes and inflation.

Asset allocation depends on individual risk tolerance, goals, and life stage, and should be determined with a financial planner. Rebalancing the portfolio according to the business cycle is crucial to avoid asset bubbles. Mutual funds and index funds offer some diversification by holding a variety of securities but should not replace a well-balanced portfolio tailored to specific needs.

In sum, a diversified portfolio spreads investments across different asset classes to safeguard against market volatility and change according to economic conditions, optimizing returns while managing risk.