There's always been a debate about how many different investment asset classes are needed to reduce risk while maintaining a high return.
Some conventional theories state that a portfolio of just twenty stocks are enough...
but how many stocks can a portfolio have before they overlap? Plus, if most of your portfolio is allocated to equities, you're not truly diversified.
That's the main problem with this theory.
At best, you can diversify using indexing, mutual funds, and ETFs, but the price you pay for these types of investments over time is a lower profit.
Add to that inflation and taxes and most of your profits are eaten up - ouch! On the flip side, investing in mostly higher-risk investments could cause you to lose all or some of your investment capital and your earnings if you're not careful.
Just like the stock market, many alternative investments can be risky, so it's important to have a clear understanding of how each of them works and the varying degrees of risks involved.
Obviously owning five asset classes is better than owning one, but there can come a point when adding more asset classes to your portfolio ceases to make a difference.
Once again, the amount of diversification you're able to manage in your portfolio is going to be based on your age, risk tolerance, and the amount of risk capital you have to work with.
The secret to sustainable profits is to spread your money out over a wider spectrum of globally diversified asset classes in both the traditional and alternative categories.
That way you'll always be in a better position to weather any financial storm you may encounter compared to someone who's got all their money tied up in closely correlated asset classes like we discussed earlier.
Depending on how much you have to initially invest and the kind of lifestyle goals you envision for yourself, you may have to start with just one type of investment, and invest in other asset classes as time goes on.
So it may take time to diversify your portfolio, but it's the proper way to do it.