5 Portfolio Diversification Techniques Millionaires Use — and You Can Use, Too
Written by
Laura Bogart
Edited by
Kristen Mae
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When you think about a millionaire investor, you likely imagine someone extraordinarily brilliant. A real Wolf-of-Wall-Street type, only on the up-and-up. Someone whose knowledge is as dazzling as the cars and wardrobe they can afford. But here’s the reality: Not every expert investor is a figure out of Hollywood. In fact, many of them rely on techniques that you can apply to build your own portfolio.
Smart investors know the value of diversification. They want a portfolio that represents a broad mix of assets and industries, and they know how to walk the tightrope between risk and long-term rewards. But diversification isn’t just for the ultra-wealthy — these techniques are accessible to anyone. Here’s how to get started.
They Diversify Across Asset Classes
If assets are the building blocks of your portfolio, then you’ll want a variety of blocks to play with. Millionaires and other high-net-worth individuals spread their investments across multiple asset classes, including stocks (equities), fixed income investments (bonds), cash and cash equivalents, and real assets like real estate and commodities.
These high-earning, savvy investors know that different asset classes perform differently and help balance overall risk. To get started, you’ll want to include at least two or more asset classes in your portfolio.
They Diversify Within Asset Classes
Wealthy investors achieve a deeper layer of diversification by spreading their investments within each asset class. In the stock market, for example, they invest across multiple sectors. The energy sector alone covers a broad range of industries, so wealthy investors spread their investments across tech, utilities and retail, among others. That way, if one company is having a rough go, their portfolio will be buttressed by other stronger-performing stocks.
Millionaire investors also diversify their bond holdings by selecting different maturities and issuers, ranging from the U.S. government to individual corporations. They’re also eager to diversify within their funds. They apply the same strategy to mutual funds and ETFs, investing in some index funds that track the broader market while also selecting sector-specific funds. They regularly review their fund holdings to avoid overconcentration in a single investment category.
They Diversify by Geography
Wealthy investors know that locking themselves into a single country’s market increases risk. If all their investments are in the U.S., they’re entirely dependent on the ups and downs of the U.S. market. A portfolio that includes foreign stocks and bonds can offer a buffer against potential domestic downturns.
Think of it this way: Yes, investing internationally introduces risks specific to each country, from political instability to tax differences. But at the end of the day, we live in a global economy. Smart investors take advantage of global opportunities, ensuring their portfolios benefit from diverse markets.
They Diversify With Alternative Investments
No, “alternative investments” isn’t the name of a ’90s grunge show on MTV. These non-traditional assets can help diversify portfolios and offer additional growth opportunities, and they’re popular among wealthier investors.
Alternative investments include real estate investment trusts, or REITs, which own and manage various properties like office buildings, shopping centers and apartment complexes. When you own a share in a REIT, you receive a share of the earnings from these businesses in the form of dividends.
Rich investors also look to commodities, purchasing them either directly or through commodity funds. A commodity is an investment in a physical good like gold, natural gas or even livestock. Alternative assets can provide a hedge against inflation and market volatility.
They Rebalance Their Portfolios Regularly
Above all, wealthy investors know that managing a portfolio isn’t a set-it-and-forget-it strategy. Instead, they treat it as a dynamic process, adjusting based on life events, market conditions, and changing financial goals. You can do the same by reviewing your portfolio every so often and tweaking things to keep your investments balanced and on track.
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