Portfolio diversification is something even the most inexperienced investor knows of. Essentially, the basic idea is to not put all your eggs in the same basket. By blending a variety of assets, an investor can minimize the exposure they have to risk.
It’s not nearly as simple as it sounds though. As an investor, you can’t just spread 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.
How Diversification Works
Diversification works by spreading out your investments through many different investment vehicles, such as stocks, bonds, cash, savings, and real estate investment. 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 and vice versa.
Therefore, if all of your investment funds were tied up in these two companies, you would likely stand to take a huge hit and loose quite a chunk of change. 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 an option to diversify a portfolio is a viable, low risk, and low maintenance alternative that can greatly reduce the potential for loss in the event of a downturn in the stock market. With that being said, it’s 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’s not susceptible to the inherent risk that is taken when investing in stocks.
Their Pain Is Your Gain
One can argue the best time to invest in real estate and diversify your portfolio is when we’re experiencing an economic slump. Yes, there may be a bit of uncertainty, but with cash to invest, you can’t afford not to swoop in and pick up an investment property. Here’s a few good reasons why a down turned economy would cause you to open up your investor purse strings.
- Selection: A down turn can make everyone scared, especially first time Investors who’ve yet to experience one. In a panic, many try and sell their property. Individuals who now can’t afford their mortgages also put their houses on the market, trying to downsize. Whatever their reason is, they’re creating the perfect buyer’s market. With so many properties up for grabs, you can have your pick of the crop. Are you looking for something in particular? Maybe a house that has the potential to be split into two income suites? There’s a better chance you’ll find one now when so many houses are available.
- Less Competition: Why do investors tend to buy when the market has little choice and prices are rising? Because everyone else is. This situation causes a pack mentality that sucks investors in, but isn’t the best for them. In this scenario, there’s too many investors and not enough inventory, which creates competition for prime investment properties. However, when people are losing their jobs left, right, and center, no one’s even thinking of buying anything let alone a rental property. With this in mind, there’s a good chance you’ll be able to get a steal of a deal because the owner just needs to get rid of it.
As an investor, portfolio diversification isn’t something you should ignore. You need to practice it to ensure you don’t lose money if economic tragedy strikes. A safe way to diversify your investments would be to purchase a property because it’s a secure form of investment. In a down turn, you’ll have a wide variety of housing choices and low competition from other buyers. So next time you see a for sale sign, don’t just drive by it.