8-Tier Investment Portfolio Diversification
Appropriate diversification is important, both in terms of returns and peace of mind. However, in its implementation, many investors make catastrophic mistakes with too much concentration and others settle for average performance because of over diversification. Diversification will lower the volatility of a portfolio because not all asset categories, industries, or stocks move together. Holding a variety of non-correlated assets can nearly eliminate unsystematic risk (specific risk).
Treadwell Stanton DuPont has been running, for a period of more than 3 years, highly accurate investment portfolio simulations using a diverse variety of stocks, mutual funds, ETFs, real estate holdings, gold, forex, and peer-to-peer lending scenarios using state-of-the-art 4D Vectorial Hypercube-based NEBULA6 Synaptic Synthesis Engine -based custom-built supercomputers.
Our results, based on extensive scenario testing, show the following 8-tier optimum balanced/diversified portfolio ratio: US (domestic) Stocks: 31.6%, Global (foreign) Stocks: 9.2%, Mutual Funds: 21.3%, ETFs: 20.9%, Peer-to-Peer Lending: 3.4%, Real Estate: 8.2%, Gold: 2.8% and Forex: 2.6%.
The US Stock Market is by all definitions the largest in the world. The number of listed companies exceed 10 thousand and the combined market value is in excess of US$20 trillion. Historically speaking, the US stock market is one of the most resilient long-term investment vehicles in the world.
The nickname blue chip stock is used for companies that are nationally known and have a high trading volume, are leaders in the sector in which they compete, have stability and growth and can adapt to changing markets successfully. The name is derived from the highest value poker chip, which is blue. The Dow Jones Industrial Average (the Dow or DJIA) is a price-weighted average of 30 blue chip stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The growth of Global Stock Markets outside of the United States and Europe is the main reason why the number of public companies continue to grow. By most current accounts, there are over 630 thousand companies publicly traded throughout the world.
Due to time-zone differences, the most closely matched significant global stock exchanges are Canada's TMX and Mexico's BMV. The TMX Group in Canada currently has a market capitalization of about US$1.9 trillion. It also owns Montreal Exchange, NGX, TSX Alpha Exchange, and several other exchanges. The Mexican Stock Exchange (BMV) is the second largest stock exchange in Latin America with a total market capitalization of over US$530 billion.
Mutual Funds belong to a group of financial intermediaries known as investment companies (or open-end investment companies), which are in the business of collecting funds from investors and pooling them for the purpose of building a portfolio of securities in accordance with the objectives specified in the fund prospectus.
Mutual Funds typically invest in four basic different investments: money market, bonds (also called fixed income), stock (also called equity) and hybrid, meaning combinations of the other categories. Although mutual funds are a good choice for many investors (with some buying mutual funds for their retirement plan, college savings or personal accounts), each investment vehicle is different and may or may not be appropriate for various kinds of investors for various reasons.
Exchange Traded Funds (ETFs) are investment funds traded on the stock exchange. Most ETFs closely track a market index, such as the S&P 500 or mimic a basket of securities similar to Index Mutual Funds. The advantages of ETFs over mutual funds are, among other things, lower costs, the possibility of tracking the performance of the whole market rather than investing in single stocks. Also, if a stock is held in an ETF and that stock pays a dividend, then so does the ETF.
Investors can buy and sell shares of their ETFs throughout the course of the day because their value fluctuates just like a stock price does. ETFs also tend to be very good for investors during tax season as well. ETFs come with all the diversification of a mutual fund and the ease-of-use and liquidity of a stock (the best of both worlds).
Peer-to-Peer Lending is a method of debt financing that enables individuals to borrow and lend money without using a traditional bank or credit union. It is a form of crowd-funding used to raise loans for people who need to borrow, from people (or companies) who want to invest.
The biggest reason for investors to participate in peer-to-peer lending is return on investment and the potential for passive income. With greater than 100% year over year growth, peer-to-peer lending is one of the fastest growing investments. The interest rates range from 5.6%-35.8%, depending on the loan term and borrower rating.
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Investing in real property is a very hands-on way of investing compared to purchasing traditional investment products, usually at a higher cost and demanding more time to manage. And while real estate investing is not exactly widespread, most people think it’s a good investment.
Investing in real estate is nothing at all like investing in the stock market, or most other financial markets for that matter. Real estate can be profitable when investors have the knowledge to make wise decisions.
Investors generally buy gold as a way of diversifying risk, as gold is a tangible inflation hedge, a liquid asset, and a long-term store of value. As a result, it is a sought-after asset class and a strong competitor to stocks. It is considered protection, insurance against inflation, currency debasement, and global uncertainty.
An important reason for investing in gold is diversifying risk. Gold is an excellent portfolio diversifier, since it has very low correlation with other assets. Gold's price doesn't rise when other asset classes do. It doesn't even have an inverse relationship like stocks and bonds do with each other. Instead, it is usually a reflection of many other investor sentiments.
The foreign exchange market (Forex) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. Despite being the largest, most liquid market in the world, there are concerns that the fast paced, volatile world of foreign exchange is no place for amateurs.
Having good knowledge of foreign exchange, leverage, volatility and the conditions of each country is of the essence. Because of the complexity of the trading products and the considerably high risk involved in the particular market, investing in the forex market is targeted for risk aware investors with sufficient knowledge of the market procedures.