Three Assets to Diversify Your Financial Portfolio

Diversification is a risk management technique that mixes a wide array of investments inside one portfolio. You could make a solid argument that diversification is the single most important aspect for an investor to grasp inside finance. While most think of diversification being a term used only when putting together a stock portfolio, the truth is it is every bit as important to diversify and reduce your risk in your overall personal finance portfolio.

I'm a strong believer that stocks and mutual funds are a great starting point in a portfolio, but it simply isn't wise to rely on one particular asset class for your financial well-being. How do you go about finding other types of assets that will help diversify you? Look for an asset class that isn't closely correlated to the movement of another. Historical price charts and some basic research will do wonders in helping you find these. The goal is to get together a portfolio where different pieces do well in different economic situations. You'll reduce volatility and help yourself sleep much better at night if you are able to do this.

Let's take a look at three assets that can be used to diversify your personal finance portfolio:

1. Bonds: Wall Street and the bond markets do not trade closely together at all. Often, bond yields and stocks go in different directions. The safety of assets such as treasury bills is great to steady a portfolio and lower the risk in a big way. I recommend staying away from junk bonds, as those can be like dealing with penny stocks.

2. Real Estate: The Real Estate market couldn't have been more popular a few years ago. Now investors are very skittish of the real estate market. It's a market that goes through cycles just like others, but with so many individuals and families owning real estate the level of participation is high. If you don't want to buy real estate directly, consider investing in a real estate investment trust.

3. Gold: As decades of financial turmoil come and go, gold has continued to be the ultimate safe haven for investors. Overexposure to gold can be a negative, but gold is such an amazing commodity to own when there is any economic uncertainty. Consider purchasing gold directly or even investing in a exchange traded fund that specializes in gold. Gold often has a negative correlation with stocks, which is exactly what you are looking to find.