Deeper dives on diversification, wealth-building, and making the most of every investment
February 27, 2018
Your parents may have even told you about the importance of diversifying investments, they’re right about that, too.
But they likely associate diversification with investing across various equity stocks, mutual funds, and bonds. And while those are certainly beneficial there are other ways to elevate your portfolio beyond the old-school strategies. Consider alternative assets for example.
“Alternative asset” is a broad term that simply refers to an investment other than stocks, bonds or cash. Futures, commodities, precious metals and real estate all fall under the alternative category. Alternative assets can help diversify any investment portfolio. This is because they tend to have a low correlation to the stock market. Meaning large swings in the stock market won’t necessarily coincide with large swings in the prices of alternative assets.
Take real estate for example. Real estate offers a buffer against volatility. Property values do not respond to the same forces that move the prices of stocks and bonds. Thus, the value of real estate investments does not typically follow wild swings in the stock market. Any number of items – from location, number of bathrooms in a home, the reputation of the local school district – can move the price of real estate.
So if real estate is important, why didn’t mom and dad invest in it? For one, the traditional ways of real estate investing are expensive and require days of labor to fix and flip a single property. Even more, the best real estate deals tend to be exclusive to only the wealthy and well-connected. But the investment world is ever-changing and the introduction of technology has opened up a range of investment options never available to your parents.
Now through the power of crowdfunding and online technology, the next generation of investors can gain the diversification and capital appreciation that mom and dad never had. You don’t need millions of dollars and Wall Street connections to add real estate to your portfolio anymore. You don’t need to spend hours fixing up that old property you can’t wait to be rid of.
Dramatic sell-offs on Wall Street have likely damaged your parents’ portfolios in the past, but you don’t have to go down the same path. Instead, you can allocate a portion of your invested cash into real estate and see the rewards of a truly diversified portfolio.
After all, father doesn’t always know best.