How to diversify your resources among various resources – Part 2

Diversification: the base case

This is the second part of the post I started last week. Last week I touched on Part 1 of how to diversify your resources among various resources, so by now you know which assets to include in your asset allocation or diversification plan and which to exclude. And you know the six different categories of investment assets you can choose from in diversifying your resources.

So how do you diversify?
Let’s ignore you personal circumstances for a moment and build an allocation model that assumes a moderate, stable level of inflation.
You might divide you assets equally among the six investment categories on the theory that equal investment provides equal protection against all kinds of risk – and particularly guards you against the ravages of inflation and deflation.

But since real estate, natural resources, and tangible assts usually move up or down in value together, it makes some sense to lump them into one category. Let’s call that category hard assets.
However, keep this point mind. Putting your money in real estate is usually less risky than putting your money in either natural resources or tangibles. The exceptions, if you have some special knowledge or experiences dealing with natural resources or tangible assets or have advice from a trusted expect

Now an equal division looks like this:
Cash and cash equivalents………………....………….25%
Fixed-income vehicles……………………….....………25%
Equities……………………………………………….....25%
Hard assets……………………………………………..25%
100%
But you really shouldn’t give cash equal treatment when it comes to allocating your resources. In most cases, an investment in cash is short term. Ghana cedis or dollars you have ‘parked’ in cash or cash – equivalent investment vehicles are cedis or dollars waiting to be invested more profitably.

So your cash investment actually represents your non commitment to some other investment category. It’s what’s left over after you’ve made your investment selection.
Reducing the percentage of assets you keep in cash results in this more realistic model for moderate inflation:
Cash and cash equivalents………………………..………..10%
Fixed-income vehicles…………………………....………….30%
Equities…………………………………………… ..........….30%
Hard assets…………………………………………........…..30%
100%

Now you’ve neutralize the potential impact of inflation. Cash is relatively unaffected by changes in inflation rates. But equities- investments, such as shares, that represent an ownership interest – are mixed bag. For example, whether or not a particular share moves in the direction of inflation depends on a variety of factors. Among them: the industry in which the company operates and the company itself.

Fixed-income securities

are a hedge against deflation. And hared assets are a hedge against inflation. (Remember, to make sure your hedges are truly effective, you must also diversify investment within your asset allocation categories)

Now suppose you expect inflation to be very low – or conversely very high. Here’s how our model might look in each of these situations:

Asset............................Moderate inflation..........Low inflation..........High inflation
Cash and cash equivalents............10%....................10%.................10%
Fixed-income vehicle.................... 30%....................45%.................15%
Equities ......................................30%.................... 30%.................30%
Hard assets .................................30% ....................15% ...............30%
Total............................................100% .................100% ..............100%

Diversification: the personal case
By now you should feel comfortable with the general principles of diversification. So let’s turn to the second part of our assets- allocation discussion: building a model that takes into account your own unique circumstance – the financial profile, goals, and objectives that you developed so far
To see how you might diversify your own resources, take a look at these sample asset allocations. There are six of them – I will be treating these in my next post beginning with the profile of a young professional.

Remember , there are no hard and fast allocation rules. But these models should give you a good idea of how to create your own diversified portfolio.

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