Diversification That Helps

Why bother diversifying at all?

Diversification can’t remove risk. It just makes your portfolio less dependent on any one asset or event.

• Single-asset risk: one sector, country, or bond issuer can suffer a long, ugly period.
• Sequence risk: big losses early in your investing or retirement phase hurt more than later ones.
• Behavior: smoother portfolios are easier to stick with, which matters more than squeezing out the final percent.

Example mix: 60/25/5/10

One sample structure (you can adjust percentages, not the logic):

• 60% broad US stock index.
• 25% high-quality bond index.
• 5% international stock index.
• 10% cash or very short-term bonds.

The idea is not perfection. The idea is to avoid “100% in one risky thing” while staying mostly in productive assets.

How to implement this in real accounts

• Step 1: pick funds for each sleeve (US stock index, bond index, international, cash).
• Step 2: map each account (taxable, IRA, etc.) to hold the most tax-efficient assets you can.
• Step 3: set contributions to roughly hit your target weights instead of guessing each month.
• Step 4: once or twice per year, rebalance back to target bands (for example if stocks drift from 60% to 70%).

Common diversification traps

• Owning many funds that hold the same things: 10 US large-cap funds are not real diversification.
• Chasing “non-correlated” fads: complex products marketed as hedges often add cost and confusion.
• Never rebalancing: diversification drifts over time; without rebalancing, risk creeps up silently.