How many times have you heard financial advisors, bankers and other “financial gurus” say that “You should have a diversified portfolio”? Well, they are correct. Diversification is the key in any portfolio and should reflect multiple investments. By choosing multiple asset types you protect yourself from the risk of declining value in one particular asset type thereby having a negative impact on your cash flow and net worth.

Typically the word “diversification” makes you think about having the right mix of stocks, bonds, and mutual funds in your 401k or 403b. These assets are extremely important when creating a diversified portfolio; however, they do not tell the whole story of diversification. There are actually four major asset classes that everyone should invest in to truly have a diversified portfolio:

1. YOU
2. Paper Assets
3. Real Estate
4. Business Development / Entrepreneurship

From a financial context when you increase the presence of these four asset classes in your portfolio, you also increase the ability of those assets to generate income and create wealth for you.

Of the four asset classes, YOU are the greatest and most important asset in your portfolio. When you begin to invest in yourself, you not only increase your value but you are positioned to increase your income as well. You can increase your value by:

• Returning to school for another degree
• Reading a book a month
• Meeting someone new every month
• Learning another language
• Learning to play an instrument
• Joining the gym
• Learning a new trade

When an employer takes note that you are well educated, speak three languages, have a Rolodex filled with valuable contacts and have great ideas, you become an invaluable asset to that employer giving you more bargaining power and leverage when it comes time to negotiate your salary and bonus.

The second asset class is paper assets. We are most familiar with these assets, such as stocks, bonds and mutual funds. Most invest in these assets through publicly traded companies with the purpose of increasing their value and producing income through dividends. Ultimately your net worth is increased as the company increases in value. Your paper asset portfolio can be increased by investing in quality assets, such as certain ETF’s and mutual funds representing the entire stock market.

Real estate investments is the third asset class and can increase your income through rental income and your net worth through the appreciation of the property. You can further increase the value of your real estate portfolio by making improvements and/or renovations to your property to enhance its value.

The fourth asset class is business development. Owning and investing in your business is a major endeavor with the potential to yield great income levels and increase your net worth over time. Studying the wealthiest people in the world, 99% of them own businesses and/or invest in other people who have their own businesses. You may not have an interest in starting your own company; however, you can still have an equity stake in someone else who has a privately held business.

True diversification is all about investing in all the major asset classes in order to protect your income and net worth from being negatively affected. If we have learned anything from the global financial crisis over the last year, we have learned that we cannot rely upon any one asset class, but we must invest in all of them to protect us against unforeseen events that may happen.