The goal of diversification is to ensure access to a lot of upside without being exposed to an unacceptable downside. But are you as diversified as you think you are? Long-time community member, Frank Vasquez says there are three roles bonds have in your portfolio, income, stability, and diversification. The Holy Grail Principle focuses on what the concept of diversification really means. It doesn’t mean different, it means uncorrelated. Investors can use online websites to calculate the correlation of two assets that results in a number ranging from 1 to -1. The closer the number is to 1, the more highly correlated they are. A number close to 0 indicates the assets are uncorrelated and move randomly with respect to each other. A negative result means the assets are negatively correlated and typically go in opposite directions. Why would an investor want assets that are negatively correlated if that means while one is doing well, the other is not? In the accumulation phase when an investor is trying to build wealth, they probably would want negatively correlated assets. Upon reaching FI, they may be helpful when attempting to ensure the highest safe withdrawal rate. Safe withdrawal rates for each portfolio will vary slightly and range from 3-5.5%. There are websites online to help calculate the rate for different portfolios. Frank has three adult children who he advises to max out their retirement accounts in basic index funds. The next bucket to fill is an emergency fund, followed by a taxable brokerage fund to used toward a down payment on a house. His son’s brokerage account used a risk parity-style portfolio, which is good for intermediate-term savings. When first starting out, money invested is a big pile of future cash. You invest a little each year and should get it into risky, growth-oriented, and reliable investments, which are stock index funds. Until you have $100,000 in your account, being invested in one fund is perfectly fine. It’s about earning and saving at that point. After the first $100,000, earnings begin to mean a little more and you can embrace a little more complexity. In the four phases of investing for retirement, the first two are earning and saving and are the most important to get automated saving going. Phase three is investing and the fourth is managing the investments to ensure they don’t blow up or go away. Long-term accumulation comes first in a portfolio, and Frank’s son is extremely frugal, making the risk parity portfolio possible. But what considerations are there if you are looking to transition index funds into a risk parity portfolio? The first step is to figure out where you are going and where the goal is. Next, look at what you have and what needs to be transitioned. Start the process when you hit your FI number or about five years out from when you think you are going to need it. You don’t want to be 100% equities and have the stock market crash two years before you retire. A risk parity portfolio does not stop earning money. The return is approximately between 6-8% after inflation, but the tradeoff is you are also only getting half the volatility of the stock market. You can’t optimize the performance of your portfolio in the future, but you can control your expenses, modify them, and take less in one year if you need to. Treat all of your assets as one big portfolio. You don’t want to incur unnecessary capital gains in your taxable accounts, so moving funds in retirement accounts is appropriate. The least movement possible is best and anything taxed as ordinary income should be put into retirement accounts. Risky parity is a style of investing that has become more accessible to everyone with no-fee trading. It is finding uncorrelated or negatively correlated assets and combining them to reduce the risk of the overall portfolio. The main driver of the portfolio is going to be stocks at 4-60%. The most diverse thing from stocks are Treasury bonds, like long-term Treasury bonds, at 20