Diversifying Beyond Asset Allocation

By now most of us are familiar with the benefits of diversification.  We’ve lived through the Enrons and the Worldcoms, the tech and real estate bubbles, and various forms of international monetary crisis. We’ve all seen a segment or two of Jim Cramer’s “Am I Diversified” on Mad Money.  But when a deep recession hits, little is safe from being affected regardless of how well you are diversified. That’s why it is more important than ever to diversify beyond market sectors or brokerages.

Think Bigger When Diversifying

It’s no longer enough to spread your money across a variety of stock funds, such as international, growth or value.  Think bigger.  How else can you broaden the diversification of your portfolio outside of traditional index mutual funds? Here a few places to consider.

P2P lending. I’m convinced peer-to-peer lending is the next generation financial product that will even the playing field between big banks and the average borrower (and lender). I like the idea of funding loans for causes I believe in, and at a level of risk acceptable to me personally, not a banker.

I recently signed up for a lending account at Lending Club and plan to dabble with a small investment to get to know the lay of P2P lending land.  Of course, I’ll put together a post when I do.

Cold, hard cash. Beyond having a solid emergency fund in place, there are good reasons for keeping a significant amount of cash on the sidelines.  First, it is an additional hedge against a catastrophic event such as death, job layoff, or serious illness.  Second, having some available cash on hand makes it easier to react to investment opportunities when and if they arise.

CD ladder.  With at least a portion of your cash it might be a good idea to create a CD ladder, which is a great way to average out changes in interest rates over a period of time.  Divide your money into four CDs at various terms (3 months, 6 months, 9 months, 12 months).  When the three month CD matures roll the proceeds into a new 12 month CD.  When the 6 month CD matures roll it into a 12 month CD, and so on.

Real estate.  If you are fortunate enough to have a significant amount of cash on hand, this is a terrific time to hunt bargains in the real estate market.  Rates are low and sellers are motivated, which provides a golden opportunity to buyers with cash and good credit.  We are pretty well established in our own home and are not quite ready to take on any additional properties, but it is something I would consider down the road if we see a similar real estate environment.

Small business.  Do you have a side hustle you could convert to a full-fledged business?  Now is a great time to invest a little cash in an idea that could result in a stream of income earned outside of your full-time gig.  Try to avoid using debt to fund the operation, so if you have to back out down the road you won’t be left with a mountain of debt as a constant reminder of your failed attempt at entrepreneurship.

Stocks.  Yes, there is still a place for stocks in your overall portfolio.  I’m not sure the idea of being 100% in stocks at an early age is still valid, but I leave that up to the experts.  I personally plan to continue investing in stocks, particularly in retirement accounts, but for any additional investing I will spread money around the various investment options noted above.

Morningstar Stock Fund Investment Research


  1. Sometimes we forget that cash investments, like CD ladders and what-not, are investments. I’m with you on the stocks for my retirement account. Value stocks are great…values…right now, and I’m loading up!

  2. I like the CD ladder idea. Folks can get good interest rates and still have available money in 3, 6, and 12 month time frames. I also like CD’s because they make you behave! If you try to get to the money earlier, there is a penalty. Great idea!

  3. I’ve been waiting to get in on some real estate, but I think I’ll do it via a REIT index fund like what Vanguard offers. I figure that’ll give me the exposure I want without having to deal with actual properties and tenants.

  4. I like your thought process here frugal dad. We often forget about the other types of investments we can put our money towards.

    Also consider buying the muni bonds of your local governments to support the building and expansion of your area. My state is considering bonds to replace a bridge I cross every day. I would gladly buy a bridge bond like that.

    I’m with you on P2P lending as well. In a few years you’re going to see hedge funds get in on this.

  5. Great list of ideas. A lot of people are getting into commodities like gold, silver etc as well. They are well off their highs and usually provide a decent hedge against the market.

    If you’re not hard core enough to have gold bullion in your basement then gold stocks are the way to go.

  6. That’s an interesting strategy with the CD’s. Why set it up that way and diversify instead of just putting all the money into a higher 12 month CD?

  7. @Craig: I think the idea is that you will have access to a portion of your money every three months as the CDs expire, rather than locking them all away for 12 months, initially. After one year all of your money will be invested in 12-month CDs at the higher rate.

  8. I understand that philosophy, it’s kind of a safety belt just in case you need the money after 3 months, if not then put it back into the CD. My thinking was that if you are thinking about putting money into a 12 month CD, then this is money you don’t need to touch, and have other emergency cash on hand if need be.

  9. I view cash as a strategic investment class. During wild bull markets, people come to think that it is all about stocks and that nothing else really counts. I believe that the reality is that investing in non-stock investment classes makes investing in stocks that much more rewarding. There are times when asset classes with far less risk than stocks offer far better long-term returns.

    Some invest in different types of stocks and call that diversification. True diversification is combining stock investing with non-stock investing in effective ways.


  10. Real estate, cash, CDs (laddered or not), Bonds, are all standard components of asset allocation. Gold and commodities are somewhat more controversial, but many include them. A good asset allocation will also consider your job and small business(es) – for example if your job is in tech, you would want a low allocation of tech stocks for safety. If you set up an asset allocation and force yourself to stick to it, then you are making yourself buy low and sell high – roughly the opposite of what all the hysteria on TV guides you to do.

    Frugal Dad, you mentioned doing everything you could to get IN to stocks in the late 1990s and 2000 but an asset allocation would have had you getting OUT at that time. I was selling like crazy in 2000 to keep my asset allocation balanced because my tech heavy stock portfolio had been advancing at over 100% per year for the previous 6 years or so. Likewise, I was selling my gains of the last few years and avoided much (though never all) of the pain of the latest crash.

    I rebalance once a year so I’ll be buying my losers in a few months. I made one exception to my annual rebalance cycle and bought TIPS a few months ago because I couldn’t believe how cheap they had become.

    My cash, gold and treasuries did great for me last year but I try to never to get attached to last year’s winner.

  11. I have heard a lot lately about Lending Club. I am not quite convinced that it is what everyone says it is. Maybe I will win one of those $100 contests floating around and have some money to play with. Great post, CD Ladders are great way to increase the returns on you stagnant cash.

  12. I think TIPS are a good place to store some of your cash. They help deal with the essential problem associated with holding cash – inflation. Good post.

  13. @ Dave

    That is totally what I need to force myself to do. For some reason I get emotional with my investments and hold on to them way too long. Especially if it’s been a winner in the past.

    Setting up a rebalance plan would fix that.


  14. Please explain, I don’t understand how “cold, hard cash” is a way of diversifying an investment. If you just have cash stored away somewhere you’re not really investing so why would this be considered diversifying? Plus with inflation and the dollar devaluing – it doesn’t sound too good.

  15. We’re CD laddering as well. The rates pretty much stink, but they’re better than savings accounts. We finally chucked our separate savings account when new fees kept getting tacked on each month. At least CDs are less punitive!

  16. Pev, I have been investing the almost the max IRA contribution in growth mutual funds since 1984. Based on my 61K contribution, I took the income and figured out a 1.7% return over these past 25 years. My wife has been investing the almost the max since ’89. Her return is better, 2.7%. This does not count dividends added over the years. Just what was invest vs what I have today. I decided to invest out remaining IRA contributions into cds starting this year. a 4.39% apy for the next 7 years on this years contribution is better that I did listening than I have done listening to the wall street types. In hindsight I would have done better putting the money into cds from the start.

  17. Instead of CDs see if there is a Rewards Checking account in your area.


    I recently opened one up in Iowa that is paying 4.5% interest, easily beating CD rates. These typically have some rules to them – like online statements only and a certain number of check card transactions per month. But nothing that I wasn’t already doing with my .2% checking account.

    So I moved my 2.4% ING savings and my old checking account to my new 4.5% checking account, which will generate a decent amount more of income.

  18. Stocks, yes, that’s my thing. I think this is the best time to invest, you can make a lot of short term profit from the instability of the market. Keep your eyes on DCGN ($0.28) this week.