Discover simple, formula-backed strategies to create a balanced portfolio that protects and grows your wealth over time.
1. What Is a Diversified Investment Portfolio?
Diversification means spreading your investments across different asset types to reduce risk. It ensures that if one investment underperforms, others can offset the loss.
2. The Asset Allocation Formula
The core of diversification is asset allocation โ choosing how much to invest in stocks, bonds, real estate, and cash.
๐งฎ Suggested Rule of Thumb:
Stock Allocation = 100 - Your Age
Example: If you are 30 years old: 100 - 30 = 70% in stocks, the rest in safer assets.
Use this as a starting point and adjust based on your risk tolerance.
3. Diversify Within Asset Classes
Don't just buy one stock or one bond. Diversify within each category.
๐ Example: Stock Portfolio
- 40% U.S. Large Cap (e.g., S&P 500)
- 20% U.S. Small Cap
- 20% International
- 20% Sector Funds (Tech, Energy, Healthcare)
๐ก Risk Reduction Formula:
Portfolio Risk โ (ฯ21 + ฯ22 + 2ฯฯ1ฯ2)0.5
Where:
ฯ: Standard deviation of each assetฯ: Correlation coefficient between assets
By combining uncorrelated assets, you reduce overall risk without sacrificing returns.
4. Rebalance Your Portfolio Regularly
Over time, certain investments will grow faster than others. Rebalancing means selling some of the winners and reinvesting in underperformers to maintain your target allocation.
๐ Rebalancing Calculation:
New Investment = (Target % - Current %) ร Total Portfolio Value
Example: Your goal is 60% stocks, but they now make up 70% of your $10,000 portfolio:
(60% - 70%) ร $10,000 = -$1,000 โ Move $1,000 out of stocks into other assets.
5. Include Alternative Assets (Optional)
Consider adding assets like real estate, REITs, gold, or crypto to further diversify.
๐ Sharpe Ratio Formula (to evaluate additions):
Sharpe Ratio = (Return - Risk-Free Rate) รท Standard Deviation
A higher Sharpe Ratio indicates better risk-adjusted returns. Only add assets that improve your overall ratio.
๐ Final Thoughts: Diversification Is Your Defense
A well-diversified portfolio shields you from volatility and maximizes long-term growth.
