How do I truly diversify my investments?

asset diversification, how diversify investments, eggs one basket financialQ: What’s the best way to truly diversify?

A: Most people who think they are diversified don’t even know what the word actually means. Let’s clear up some of the confusion. True portfolio diversity means to spread your wealth between the three asset classes, which are: paper assets (stocks, bonds, mutual funds, cash), real estate, and hard assets (gold, silver, commodities). A mutual fund or other similar collective assets that are all in one class – i.e., stocks in different industries or bonds in different areas – still place all your wealth in that one class. This is not diversification.

The truth is, owning mutual funds, even multiple mutual funds, puts all of your assets in one asset class: paper.

If everything is invested in the stock market, it doesn’t matter how many different stocks you have, the market direction determines your portfolio. If the market goes down in equities, your whole paper portfolio drops.

Physical Gold and Silver, Not Paper

Gold and silver can be owned in physical form, where you can hold it in your hands, or you can have something called paper gold and silver. One type of paper gold and silver is an ETF (Exchange Traded Fund), essentially a mutual fund that’s supposedly backed by a big bunker full of gold or silver. You hold paper that is supposedly a type of receipt representing actual physical metal, except there’s no guarantee and you can’t convert the paper into real gold or silver.

ETFs are much more heavily affected by the stock market and the spot price than physical gold and silver are. Wall Street continues to propagate a huge myth that you’re well diversified if you have stocks in different industries or if you hold mutual funds. All of these assets are still just paper and all are affected by the global financial markets. By truly diversifying, you spread risk into different classes and sectors.