When it comes to investing, one thing most would agree on is the importance of diversification. But does it really matter? The short answer is yes, it matters. Diversification is one of the best ways to make sure you see financial success. Here’s what you need to know about diversification, asset classes, and why different investments within those classes matter.
Diversification is the act of making sure all your investment dollars aren’t in one place. The more diversified you are – provided you choose good quality investments – the more likely it is that your monetary future will have security. That’s because an investment can go bad, and even the best investors can make a mistake. If all your money is tied up in one investment and that investment fails, it could be a huge problem. By choosing a mix of common and alternative investment options, you’re much more likely to weather any financial storm.
Double diversification happens when you not only choose different asset classes to invest in but also spread your money among different investments within each class. You may invest in the stock market, real estate, bonds, and other assets to create a diverse portfolio. That’s a wise strategy and one that’s generally better equipped to handle market fluctuations. But the well-advised investor will make sure all their stocks aren’t in the same company, their real estate is in different types of properties and locations, and their bonds are tied to more than one business.
As you can consider your options for diversification, keep in mind the asset classes you have to choose from. Some should be stock market correlated, and others should be non-correlated. That’s only the start of your mix of assets, but it’s an important one. Correlating everything to the stock market means you could fare poorly if there’s a big drop in that market. But you also want to be sure you have correlated assets, so you can see the benefits when the market performs well. Then you have the best of both worlds, theoretically, and that gives you a stronger financial base for future growth and earnings.
Many investors feel they’re diversified if they have their investment dollars in a number of different stocks. Unfortunately, that’s not really proper diversification. Instead, these investors only have their funds in multiple sectors of a particular class of assets. While they may feel secure, they would quickly find that was not the case if the market shifted significantly. Having investment money truly represented in more than one class is the only way to successfully and safely diversify at the proper level.
By spreading your investment dollars out among different investments in a class, you add to the level of diversification in your portfolio. This double diversification adds to the safety and security investors experience as they grow their portfolios. For example, someone who invests in stocks may also invest in real estate. But to spread investments out correctly inside those classes, they would need to be invested in a number of different types of stocks from a range of companies. That same investor would also need to focus on not just multiple properties, but several kinds of properties, as well.
It isn’t always easy to spread out investment inside a class, especially for new investors or those unfamiliar with alternatives. Multifamily real estate, for example, is a good choice for a non-correlated investment. People who want to put their investment dollars into commercial real estate often use a REIT to invest in a number of properties, in different locations. That’s one of the ways they can spread their investment out within the real estate asset class more successfully.
Every investor needs a good foundation on which to build. Diverse investments are an excellent way to build that foundation and keep it strong. With proper diversification, an investor will still be successful even in they have an investment that fails. Wise investors will see the value in a portfolio diversified across multiple asset classes and within those classes, as well.
DiversyFund offers investors diversification through our Growth REIT fund. The fund owns multifamily real estate assets across the country. Multifamily real estate is an alternative investment and is generally non-correlated to the stock market.
With the Growth REIT, you’re not only diversified with real estate, but you also have real estate from different locations across the country in your portfolio.