Get Comfortable with Being Uncomfortable, Part 2: Maximum Diversification

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This is the second of a three-part series we’re affectionately calling “How to Get Comfortable with Being Uncomfortable.” The series covers the tremendous headwinds investors in traditional portfolios are likely to over the next decade or more, and the steps required to turn a bad situation into a great opportunity.  These steps – set realistic expectations, diversify as much as you can handle, and take advantage of others’ mistakes with factor investing – are designed to help investors through whatever the future holds.

Reminder: Valuations are a Problem

In Part 1 of this series, we addressed how valuations on stocks and bonds remain extremely lofty. As a result, it is unrealistic to expect the portfolios that investors have grown comfortable with over the past few decades to produce the returns investors need to achieve financial independence.  In fact, after adjusting for inflation and fees, we estimate that investors will be hard-pressed to earn more than 2% per year on traditional portfolios of domestically focused stocks and bonds over the next decade.

One incremental solution to this issue is to embrace a strategy of extreme diversification.  But this is much easier said than done.  Read more