Portfolio diversification: how to build a 25/25/25/25 strategy

Diversification is one of the few investment concepts that nearly every expert agrees is essential. The issue is that, in practice, many people do not know how to turn this generic advice into a concrete allocation for their own portfolio.

An intuitive way to start is the 25/25/25/25 strategy: dividing your capital into four equally weighted buckets, each serving a different role within your portfolio. It is neither a magic formula nor a one-size-fits-all solution, but it provides a solid starting point for anyone looking to balance safety, liquidity, and growth potential.

Why diversify instead of concentrating everything in a single asset class

Each asset class reacts differently to economic cycles. When the Selic (Brazil's benchmark interest rate) rises, fixed income becomes more attractive and the stock market often suffers, as the opportunity cost of investing in equities increases. When the Selic falls, the opposite tends to happen: variable income gains momentum and fixed income loses relative appeal.

Anyone who concentrates 100% of their net worth in a single asset class becomes hostage to these cycles. If your entire portfolio is in stocks and a crisis hits, your wealth can drop 30% or 40% all at once. If it is entirely in fixed-rate (prefixado) bonds and inflation spikes, the purchasing power of your money silently erodes.

Diversification does not eliminate risk, but it spreads it out. When one asset class underperforms, another can compensate, smoothing out overall portfolio volatility over time. This is especially important for those who do not have the stomach to watch their portfolio drop 20% in just a few months.

Moreover, diversifying across different asset classes—rather than merely buying multiple similar assets—is what truly reduces risk. Holding ten different bank stocks is not genuine diversification, because they all react similarly to the same economic factors.

The first bucket: post-fixed fixed income and an emergency cushion

The first quarter of the portfolio in this strategy is allocated to low-risk, post-fixed fixed income: Tesouro Selic (government bonds pegged to the policy rate), daily liquidity CDBs (Certificados de Depósito Bancário, or bank certificates of deposit) pegged to the CDI (interbank deposit rate), and DI funds. This slice acts as the portfolio's bedrock—money that cannot disappear when you need it.

This bucket features low volatility and high liquidity, making it ideal for complementing an emergency fund as well. In high-Selic environments, such as those observed in Brazil in recent years, this portion alone delivers double-digit annual returns, making the portfolio less reliant on risk to generate performance.

It is important not to confuse this bucket with all the fixed income in your portfolio: here, we are specifically discussing the short-term, post-fixed component that serves as a cushion of stability.

The second bucket: inflation-linked fixed income

The second quarter goes into bonds indexed to the IPCA (Brazil's official consumer price index), such as Tesouro IPCA+. These securities pay a fixed interest rate plus the inflation variation, safeguarding the investor's purchasing power over the long term—something post-fixed fixed income cannot guarantee in the same way when the Selic rate drops quickly.

This allocation is especially relevant for long-term goals, such as retirement or buying a property 10 or 15 years down the road, because it shields wealth from the inflationary erosion that has historically caught the country off guard during multiple periods.

An important characteristic: if redeemed prior to maturity, Tesouro IPCA+ can be subject to mark-to-market adjustments, meaning its price fluctuates with future interest rate expectations. Therefore, this portion works best when tenors and maturities match the investor's financial goals, avoiding forced early redemptions.

The third bucket: domestic variable income

The third quarter enters the Brazilian stock exchange, whether via individual shares, ETFs like BOVA11, or equity mutual funds. This is where the portfolio's most substantial growth potential lies, but also its highest volatility.

Within this slice, it is wise to diversify across different sectors—banking, consumer goods, energy, commodities—to avoid being dependent on a single segment of the economy. Real estate investment funds (FIIs, or fundos de investimento imobiliário) can also make up this bucket, generating monthly income that is exempt from personal income tax under certain conditions.

The time horizon for this bucket should be at least five years, ideally longer. Stocks and FIIs fluctuate considerably in the short term, and anyone who needs the money within a few months risks selling at a low and locking in a loss.

The fourth bucket: international exposure

The final quarter of the portfolio is dedicated to international assets, whether through BDRs (Brazilian Depositary Receipts), ETFs tracking US markets (such as IVVB11, which tracks the S&P 500 in reais), or foreign exchange funds. This allocation hedges wealth against the depreciation of the real and provides access to companies and sectors that simply do not exist on the Brazilian exchange, such as global big tech.

International exposure also acts as a natural hedge: in times of domestic crisis, marked by capital flight and currency depreciation, dollar-denominated assets tend to appreciate in reais, offsetting part of the local losses.

For beginners, ETFs listed on the B3 (the Brazilian stock exchange) that track international indices are a straightforward way to gain this exposure without having to open an offshore brokerage account, although that also remains an option for more advanced investors seeking even broader diversification.

Conclusion

The 25/25/25/25 strategy is a starting point, not a rigid rule. Ideally, you should tailor the percentages to your risk profile, age, goals, and volatility tolerance. A more conservative investor might prefer 40% in post-fixed instruments and scale back variable income, whereas a more aggressive, younger investor might invert that proportion.

The important thing is to move away from the extreme of having everything in a single basket—whether 100% in a poupança (traditional passbook savings) or 100% in the stock market—and build a portfolio that makes sense for your life goals, with periodic rebalancing to maintain the desired targets over time.

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