Many investors believe they have achieved diversification by spreading money across stocks, bonds, mutual funds, ETFs, and savings accounts. Yet stocks, bonds, mutual funds, and ETFs all trade in the same markets and respond to the same market forces, so they move together during downturns. In 2022, the S&P 500 lost roughly 18% and the broad U.S. bond market fell about 13%, demonstrating that bonds do not reliably cushion stock declines.
True diversification requires assets that are not highly correlated, meaning their values do not rise and fall together in response to the same conditions. The article proposes spreading investments across three categories based on which of three attributes each prioritizes: reward, safety, and liquidity.
The Market World includes publicly traded stocks, bonds, ETFs, and mutual funds. These offer reward and liquidity, with daily trading access and long-term growth potential. They provide no guaranteed safety, as principal is always at risk and returns are never promised.
The Protection World emphasizes safety and varying degrees of liquidity. It includes FDIC-insured CDs and savings or money market deposit accounts, as well as insurance-based products such as annuities and certain life insurance structures. Principal can be protected by FDIC insurance or by contract. Annuities can provide principal protection and lifetime income regardless of market conditions. The trade-off is a ceiling on reward and sometimes limited liquidity.
The Alternative World prioritizes reward and stability through private credit, private real estate, and structured income strategies. These operate outside public markets and do not swing daily with market headlines. Limited liquidity creates that stability. Redemptions may occur only during set windows, and these investments carry credit risk and potential for loss.