Simple Investing Skills for Diversifying Your Portfolio and Managing Cash

In his book The Little Book of Safe Money, Jason Zweig, the investing and personal-finance columnist for The Wall Street Journal, says that “Like dieting, investing is simple but not easy.” It’s not so much about who is the smartest at picking stocks and timing portfolio moves, it’s more about having the discipline to stick with a long-term asset allocation.

Failure to stick with the right asset mix is perhaps the most common reason for not succeeding. As Larry Swedroe says in Wise Investing Made Simple, if you want to see the greatest threat to your financial future, go home and take a look in the mirror.

All this amounts to a piece of simple advice, that the key to investing is to diversify, keep the costs low, and buy and hold.

That said, here is simple advice on how to diversify your portfolio, manage cash, and why liquidity matters, according to a Twitter Thread shared by a user.

Simple Investing Skills You Should Know About

The ideal portfolio is both solid & liquid – If decades of historical evidence indicate that it is highly unlikely ever to lose most of its market value, this is why a portfolio should always be a solid one. And if you can transform it into pure cash any time you want without losing more than a few drops.

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Always keep a reservoir of liquidity in your portfolio. Just as travelers die in the wilderness without water, investors perish if they have no liquidity. The biggest risk to your money is the inability to turn an asset into cold, hard cash when you need the cash.

No matter how valuable an investment may be, it’s of no practical value to you unless it’s liquid when you need to cash out. More often, the culprit in a liquidity crisis is leverage or borrowed money. If you owe you do not really own.

For safety’s sake, you must erect the foundation of your financial future not on bedrock but a reservoir of liquidity. Since life is full of emergencies, tomorrow’s needs can be swamped by today’s emergency.

You are at risk of a sudden cash drought unless you have enough of your total wealth in highly liquid assets to cover a year’s worth of living expenses if you had no other cash coming in. Your portfolio cannot be solid unless it is also liquid.

The biggest holding in your portfolio is you: Income that your career will generate over your life. When following the advice, do not put all your eggs in one basket, remember that you are one of the eggs. Ensure your human and financial capital do not get cracked at the same time.

Cash is money that you can convert on-demand without loss, cost, or delay – into goods and services. Short-term bond funds often sold as being “safe as cash” are no such thing. You can have low risk, or you can have high yield, but you cannot have both in the same investment.

Cash is the most basic building block of a portfolio. It is the cornerstone that holds everything else upright. If you keep the cash portion of your portfolio secure, it can hold up the rest of your wealth through the worst of times.

The basic principle of managing your cash sensibly is that: You should match the horizon of your assets (the cash) with that of your liabilities (whatever you plan to spend it).

Why buy bonds? Historically, bonds have tended to zig when stocks have zagged. This provides a cushion for the crunching roller coaster of the stock market

Above all, focus not on stock price but business value. You must maintain a margin of safety – you must understand Mr. Market (the nickname Graham gave to the collective mood swings of investors).

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If you would love to dive deeper into the basics of sound investing, I would recommend reading “The Little Book of Safe Money” by Jason Zweig.