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I've had plenty of underwater positions over my career ? some of which ultimately turned into huge winners and others that ended up as realized losses.

Hey, it happens to everyone!

But today I want to tell you why I'm able to sleep just fine even when an individual holding is down 20%, 30%, or even 60% from my original entry point.

The reason: Diversification.

In other words, I make sure that no single position represents a massive portion of overall investment capital ? whether you're talking about a real-money portfolio of a list of recommendations that I'm making to readers.

After all, it would be almost impossible to relax if your entire net worth were cut by 20% at any point in time!

In contrast, it's no big deal to lose 20% on a stock that represents 5% of your equity portfolio, which in turn only represents 40% of your overall net worth.

I actually recommend having three different levels of diversification.

The first level is a healthy cash position for emergencies.

Before you invest a single dollar, I always recommend accumulating a good portion of money for emergency expenses, a potential loss of income, or some other unforeseen circumstance.

How much?

At least three months of your current expenses, and preferably far more. A full year would be great!

This money is not meant to generate a return; it's meant to generate peace of mind.

Once you have your emergency fund in place, you maintain it in perpetuity ? increasing it if your overall life expenses also escalate.

And please note that this keep-safe money is not the same thing as having some cash in a brokerage account earmarked for investment opportunities.

Cash meant for investments ought to be completely separate.

But once you have that additional cash for investing, you should also make sure that you're allocating it among the major asset classes ? like stocks, bonds, real estate, and precious metals.

This is your second layer of diversification ? spreading your wealth among various asset classes.

Generally speaking, one major asset class will rise when another is falling… or at the very least, each will respond to various macro events differently.

So once you determine your target asset allocation ? i.e. the percentage of your investment capital you want to put in each ? you can simply rebalance your holdings whenever things get out of whack.

Here's an example:

Joe wants to have 60% of his investable assets in stocks, 35% in bonds, and 5% in gold.

But after the big stock market run, his stock holdings have surged in value to the point where they're worth 75% of his total portfolio.

Therefore, Joe should now consider selling some of his stock holdings and invest the proceeds back into bonds and gold so that his overall target allocation is maintained.

Of course, it also makes sense to hold more than one particular stock or one single bond!

This is the third layer of diversification ? owning different investments within the same asset class.

If you use exchange-traded funds or mutual funds, then it's likely that you're getting some degree of instant diversification in a particular asset class.

Still, I would make sure you're investing in a number of different funds so you can participate in various market moves.

If you're buying individual stocks and bonds, then I think it's absolutely critical that you spread your money across at least 10 or 20 different positions.

In the case of stocks, you should do your best to get exposure to a wide range of different sectors and industries.

With bonds, you will want to hold not only different types but also different maturities.

That way, even if some particular investment is going down in value, you'll have others that could be rising.

Also remember to factor in your home or any other physical real estate you own when looking at your overall asset allocation plan? especially since they often represent a large part of your total net worth.

At the end of the day, when you have all these different levels of diversification, you'll be able to rest easier knowing that no single event is likely to ever impact your overall financial picture in a catastrophic way.

To a richer life,

Nilus Mattive
Editor, Rich Life Roadmap

The post Aggressive Investments: How to Be Fearless, Smart and Profitable appeared first on Daily Reckoning.