313 | Are You as Diversified as You Think You Are?

<div class= "elementor-element elementor-element-15da9379 elementor-widget elementor-widget-theme-post-content" data-id="15da9379" data-element_type="widget" data-widget_type= "theme-post-content.default"> <div class="elementor-widget-container"> <ul> <li>The goal of diversification is to ensure access to a lot of upside without being exposed to an unacceptable downside. But are you as diversified as you think you are?</li> <li>Long-time community member, Frank Vasquez says there are three roles bonds have in your portfolio, income, stability, and diversification.</li> <li>The Holy Grail Principle focuses on what the concept of diversification really means. It doesn’t mean different, it means uncorrelated.</li> <li>Investors can use online websites to calculate the correlation of two assets that results in a number ranging from 1 to -1.</li> <li>The closer the number is to 1, the more highly correlated they are. A number close to 0 indicates the assets are uncorrelated and move randomly with respect to each other. A negative result means the assets are negatively correlated and typically go in opposite directions.</li> <li>Why would an investor want assets that are negatively correlated if that means while one is doing well, the other is not? In the accumulation phase when an investor is trying to build wealth, they probably would want negatively correlated assets. Upon reaching FI, they may be helpful when attempting to ensure the highest safe withdrawal rate.</li> <li>Safe withdrawal rates for each portfolio will vary slightly and range from 3-5.5%. There are websites online to help calculate the rate for different portfolios.</li> <li>Frank has three adult children who he advises to max out their retirement accounts in basic index funds. The next bucket to fill is an emergency fund, followed by a taxable brokerage fund to used toward a down payment on a house.</li> <li>His son’s brokerage account used a risk parity-style portfolio, which is good for intermediate-term savings.</li> <li>When first starting out,