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Retire With Confidence is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
When people hear the word diversification, many imagine spreading money across lots and lots of investments, almost like grabbing one of everything from the investment buffet so you don't miss anything. But real diversification is not as many holdings as possible. It's not own every fund you can find, and it's definitely not collect them all like Pokemon. Diversification is about spreading your holdings across different asset classes and doing it in a way that aligns with your goals, your time horizon, and your ability to handle market ups and downs. Let me give you an analogy.
Josh:Imagine your portfolio is like a house. You don't build a stronger house by adding more rooms at random. You build a stronger house by having the right structure, the right materials, and the right foundation. In investing, the materials are your asset classes. US based equities, developed international equities, emerging markets, real estate, and bonds.
Josh:Each one plays a different role. Some provide expected growth. Some provide aggressive growth. Some zig when others zag, which is what reduces long term volatility, but it does not eliminate it. But if you own 10 different large cap US funds, you're not diversified.
Josh:You just own the same asset class 10 different ways. It's like putting different labels on the same can of soup. So the first key idea today is this. Diversification is not about quantity. It's about purpose.
Josh:If an investment doesn't serve a specific purpose in your portfolio, it's clutter, and clutter is the enemy of clarity. Let's talk about why simpler portfolios work well for investors. You've probably heard the phrase, don't put all your eggs in one basket. That's true. But that doesn't mean you need 20 baskets.
Josh:Sometimes you just need four or five very good baskets. There are three big reasons simplicity works better for most investors. Reason one, less overlap. Many investors unknowingly own the same underlying stocks multiple times. For example, you might own an S and P 500 index fund in your IRA, a total US market fund in your four zero one k, and a blue chip growth fund in a taxable account.
Josh:Guess what? A huge portion of those funds hold the exact same companies. Apple, Microsoft, Amazon, Nvidia, and so on. So instead of three different asset classes, you just have three wrappers around similar holdings. A simple portfolio helps you avoid this mistake.
Josh:Reason two, easier to monitor and maintain. When you own too many funds, it becomes harder to understand your overall asset classes. You're more likely to forget why you bought certain investments. Rebalancing gets complicated, and taxes can get messy. Meanwhile, a portfolio with five or six funds is incredibly easy to monitor.
Josh:You know what you own, why you own it, and how it all fits together. Reason three, simplicity helps you stay the course. So one of the biggest threats to investment success is emotional decision making. Complex portfolios with lots of moving parts make it easier to panic, second guess, or try to optimize too often. But when you have a clear, simple structure, you can trust it.
Josh:You can stick with it, and you can avoid unnecessary changes. Staying the course is one of the most powerful strategies in long term investing. Simplicity supports discipline. Discipline supports success. Let's break down the building blocks of a well diversified yet simple portfolio.
Josh:There are many ways to slice the investment universe, but most long term investors really only need five or six core components, depending on your goals and volatility tolerance. Let's walk through them one by one. Building block number one is large cap US equities. So for most investors, stocks of large US companies will be the growth engine of the portfolio. A US large cap fund gives you exposure to hundreds of companies in a single holding.
Josh:You do not need one blended large cap fund, one growth fund, one value fund, one mid cap fund. That's unnecessary complexity. A US large cap fund already owns what you need. So your first component can simply be a US large cap fund. Now building block two is US small cap equities.
Josh:So small companies historically grow faster than large companies. This is because they started from nothing and are plowing profits back into the business for growth. You're not likely to find many dividend payers in this asset class, but they do behave differently than the large US equities. And that is the point, to achieve growth while reducing volatility. Your second building block is a US small cap fund.
Josh:Building block number three, developed international equities. Now many US investors are significantly under diversified globally. They might believe The US is the best or the strongest, which may feel true. But remember, diversification isn't about confidence. It's about resilience.
Josh:Plus, many large US based companies derive a large portion of their profits from international markets. International stocks help reduce volatility because different countries grow at different times, currencies move differently, economies respond differently to global events. A developed international fund gives you exposure to developed international markets across the world. And that is your third building block. Building block four, real estate.
Josh:Many investors already own real estate through their home, but your home is not an investment. It's an expense. Adding a real estate investment trust fund or REIT can increase diversification by giving you exposure to commercial properties, shopping centers, warehouses, data centers, and more. REITs behave differently than the rest of the stock market, which makes them a helpful diversifier. This is your fourth building block.
Josh:Building block five, emerging markets. Now, technically, emerging markets are part of the broader international stock category, but they behave differently enough that breaking them out into their own slice can add meaningful diversification. Emerging markets include countries like China, Brazil, Mexico, Taiwan, South Korea, and others that are still developing economically. So why include them? Well, because emerging markets often experience faster growth than developed countries.
Josh:And while that comes with more volatility, it can also offer higher long term return potential. The key thing to understand is this, emerging markets don't always move in sync with US stocks or developed international stocks. And this is your fifth building block. Building block six, bonds or fixed income. Think of bonds as the shock absorber of your portfolio.
Josh:When stocks fall, bonds often hold steady or even rise, helping cushion the ride. However, bonds do not provide the long term return that equities do. I have another video on this. Here again, you don't need a corporate bond fund, a treasury bond fund, a short term fund, an intermediate term fund, and a long term fund. You can simplify dramatically by using an intermediate term bond fund.
Josh:That usually includes corporate bonds with some government and treasury bonds. This is your sixth building block. So grand total, five or six funds. So beautifully diversified, yet incredibly simple portfolio might look like this. One US large cap fund, one US small cap fund, one developed international fund, and one real estate fund, and one emerging market fund, and optionally, one US bond fund.
Josh:That's it. Not 20 funds, not 30 funds, just five or six. And with those few funds, you will own thousands of companies across the world, real estate, and the major economic regions of the global economy. The simplicity is powerful. The diversification is real.
Josh:This next idea is one of the biggest mistakes people make. They try to build the perfect portfolio inside each separate account. So their four zero one k has one portfolio, their IRA has another, their spouse's Roth has another, their taxable brokerage account has its own thing. This approach creates redundancy, overlap, confusion, and tax inefficiency. Instead, you should build one portfolio at the household level, meaning all accounts combined make up one unified strategy.
Josh:You decide on your overall target allocation, then spread the building blocks across accounts in the smartest way. Why does this matter? Because different asset classes belong in different accounts. Let me explain. Taxable accounts are typically best for US stock funds, international stock funds, and tax efficient ETFs.
Josh:These can generate qualified dividends and long term capital gains, which are taxed more favor favorably. Now tax deferred accounts like traditional IRAs or four zero one k's are best for bond funds, REITs, high yield investments, anything that produces ordinary income. Why? Because interest and REIT income are taxed at higher rates, so you want them sheltered when your income has you in a higher tax bracket. Roth accounts, where growth and income from investments are tax free, are good for REITs as they distribute their income.
Josh:Higher volatility, higher growth investments, and things like small cap funds or international stocks. By viewing your entire household as one portfolio, you can put each asset class in its most tax efficient location, and this can help you reach your goals faster. Let's look at an example. Imagine your overall goal is 40% US large cap equities, 20% US small cap equities, 20% developed international equities, 10% emerging markets, and 10% real estate. Instead of building that same ratio in every account, you might structure it like this.
Josh:Your taxable account holds some of your US large cap developed international equity and some US small cap funds. Your four zero one k holds all US large cap. Your IRA holds all of your emerging market fund. Your Roth IRA holds some REIT and US small cap fund. Your spouse's Roth is 100% REIT fund.
Josh:When you look at each account separately, they each look different. But when you zoom out at the household level, they combine into one beautifully balanced portfolio. This is how to build your portfolio, not by multiplying funds, but by strategically placing them. Now that we've covered the building blocks and the framework, let's talk about a few extremely common mistakes investors make and how you can avoid them. So mistake one, buying funds based on performance.
Josh:The hottest fund of the last three years is really the best performer of the next three. Chasing past performance is one of the most reliable ways to build a poorly diversified portfolio. Stick to your strategy, not the headlines. Mistake number two is owning too many redundant funds. Some people believe that if one fund is good, 10 funds must be better.
Josh:But a US large cap equity fund already owns thousands of stocks. Owning more large cap funds doesn't improve diversification. It just increases overlap. Mistake number three, believing you need to increase bond holdings with your age. Bonds typically respond differently than equities, but they cannot beat inflation.
Josh:Inflation is your biggest enemy to purchasing power. Purchasing power is what allows you to maintain your lifestyle throughout retirement. Don't be fooled by the talking heads on the Internet telling you to increase your bond holdings as you get older. This could very well help you outlive your money. Mistake four, trying to build the same portfolio in every account.
Josh:We already covered this, but it's worth repeating. Don't build many portfolios inside each account. Think household wide. Mistake five, forgetting to rebalance. Even a simple portfolio will drift over time.
Josh:Rebalancing at least once per year helps keep your portfolio aligned with your plan. Simple portfolios make rebalancing much easier. Mistake six, believing complexity means sophistication. The financial industry sometimes tries to impress you with complexity. I call this the confuse and conquer method.
Josh:But complexity sells products, not results. The world's best institutional investors, endowments, and pension funds use simplicity and discipline. Your portfolio should do the same. Just to tie this all together, here's what a five fund all equity portfolio looks like in practice. Remember, this is not a recommendation, just a framework.
Josh:40% US large cap fund, 20% US small cap fund, 20 developed international fund, 10% emerging market fund, and 10% real estate investment trust or REIT. Again, you can tweak this based on your volatility tolerance and goals. If you want some bonds, add them and adjust the remaining allocations proportionately. But the structure remains simple. One exposure for each major asset class, one purpose for each fund, one cohesive portfolio across all accounts.
Josh:That's simple diversification. That's intentional planning. Alright. Let's wrap this up. Today, we covered a topic that trips up a lot of smart people, even people who've been investing for decades.
Josh:How to build a diversified portfolio without owning twenty, thirty, or 40 different funds. Here are the core takeaways I want you to remember. First, diversification is about spreading volatility across asset classes, not collecting different funds that all do a similar thing. Purpose beats quantity. Second, simplicity is your friend.
Josh:A well designed portfolio built with five or six funds can be well diversified, easier to maintain, and more tax efficient than a cluttered portfolio with 20 plus holdings. Third, think about your investments at the household level, not account by account. This allows you to place each asset class in the most advantageous type of account and avoid unnecessary redundancy. Fourth, rate balance periodically and ignore the temptation to chase whatever fund is currently hot. And finally, remember that a simple portfolio is not a beginner's portfolio.
Josh:It is a disciplined, intentional, and highly effective strategy used by sophisticated investors all over the world. I hope you found this helpful to help you either begin investing or to simplify your portfolio. I'm Josh Duncan, partner at f five Financial Planning. If you would like to learn more about how we help our clients achieve financial freedom for personal significance, please visit our website at www.f5fp.com. Thanks for watching, and I'll see you in the next video.