Portfolio diversification is something that even the most inexperienced investor has heard of. The idea is that by blending a variety of assets an investor can minimize the exposure they have to risk. This is not as simple as spreading out your stocks amongst different industries. That type of activity will still leave you exposed to market risk, or a general market downturn, and will not protect investors from something as widespread as a stock market crash. A well-diversified investment portfolio is a crucial component in ensuring the long-term success of your investments. (investopedia.com)
How Diversification Works
Diversification works by spreading out your investments through many different assets, such as stocks, bonds, cash and real estate. This lowers an investor’s exposure to risk because of the low correlation between each asset. For example: a huge drop in the stock price of a company like Google, or Facebook, would not likely mean a drop in the housing market.
Therefore, if all of your investment funds were tied up in these two companies you would likely stand to take a huge hit. However, if you had also invested in an apartment complex or condominium building, your equity in those assets would likely be unaffected. For this reason, having a diversified portfolio can improve the overall performance of your investments.
Diversifying Through Real Estate Investment
One of the most practical options for diversification is the investment in real estate property. Using real estate as option to diversify a portfolio is a viable and uncomplicated alternative that can greatly reduce the potential for loss in the event of a downturn in the stock market. With that being said, it is amazing how many people overlook this extremely secure form of investment. Because of the real estate market’s extremely low correlation to the stock market, it is not susceptible to the inherent risk that is taken when investing in stocks.
Should I Diversify?
If it is at all possible to diversify then it is most definitely recommended. Of course there are limits to the degree in which this can be achieved, depending on the financial situation of each investor, and the overall strength of their portfolios. With that being said, if you have a sizeable net worth and substantial funds for investment, then it should not be a difficult choice. Investing in even one property can greatly reduce your chance of losing big during times of recession or economic uncertainty. (ipinglobal.com)