The Value In Diversification
Updated: Mar 29
One of the metrics for gauging portfolio strength is diversification. Most investment counselors include this detail when assessing portfolios. General investing wisdom holds that spreading your portfolio out is a far superior strategy.
In terms of earning strength, wealth preservation and growth, it is generally preferred among investors as opposed to investing in a single instrument or entity. They usually point to the obvious weakness inherent with investing in a single entity. An entire life savings is just too precious to risk in a single investment.
That old adage about not putting all your eggs in one basket is certainly pertinent wisdom for every investor. Then the issue arises of just how to spread your portfolio out to maximize yield and shield loss.
At Precision Global, we have some first-hand insights and experience that can benefit investors seeking to correctly and successfully diversify. We have posted some of that helpful information for your perusal below.
Strategy of Diversifying
Smart diversification is a practice of seeking out investments across a variety of markets or even different kinds of investments within the same market.
Since some sectors of the market are so broad they are already well diversified, it is possible to have a well-diversified portfolio within a given single market. Here again the strategy remains the same: multiple investments into a range of related companies within the same sector.
Simply put, multiple investments made at a lower money level for each gives a portfolio flexibility. The investor simply spreads his funds over multiple investments. Smart Investing always includes a degree of flexibility. Diversity is the source of this much-needed flexibility.
Think of flexibility as tensile strength. The idea behind diversification is that if a single sector of the market is adversely affected, it cannot negatively affect the total spectrum of all investments. This gives the investor portfolio strength and sustainability through flexibility.
The critical key for implementing investment diversification is the selection of the sectors and companies within those sectors. While diversification is a smart and recommended strategy, the benefit of this strategy can be nullified by making poor investment choices.
It makes no difference if you're diversified among worthless or poor performing investments. Your losses are simply multiplied. Diversity alone is not the key; research and due diligence is.
In order for diversification to work properly, investors must make smart choices and build a portfolio that compliments and balances out their risk. Invariably, some of these selections will disappoint. While this is unavoidable, it is highly unlikely that every selection will disappoint simultaneously. Therein lies the secret of the strength of diversity. Investment accounts can withstand losses better while the rest of the group is making even minimal gains.
Diversification success then is governed by the quality of the investments that make up that portfolio. The logical next question to arise then is what are some of these smart investments? One of the smartest and best-performing investment sectors is that broad spectrum a real estate. Investing in real estate is a wise start.
Real Estate Investing
Real estate investing encompasses a wider range of opportunities than practically any other sector how the economy. This type of investing ranges from purchasing and selling open land and residences to commercial and industrial real estate.
Generally speaking, every one of these sectors has tremendous investment upside potential. The industry is rife with horror stories of residential investments gone awry. For this reason, investing in real estate has an unfair negative view for some.
These ordeals are generally experienced by novices who know little about how to invest in residential real estate. They violate one of the basic tenets of investing: know your investment.
Due diligence is an all-important first step for considering any investment. Investors fail to do the research at their own peril. There is a smart way to invest in real estate just as there is a smart way to invest in every other sector of the economy.
Commercial Real Estate Investing
Commercial real estate investing has long been one of the best kept secrets in real estate. Consider it a level above traditional residential real estate investment. Generally, the return on investment, ROI, is much higher than residential real estate.
Banks and lending institutions view commercial real estate loans more favorably. They more quickly approve commercial real estate loans based on the potential income derived from tenant rentals.
Commercial real estate also gains and retains higher value more quickly, and this increases appreciation or property value more readily. This increased appreciation builds equity into your investment.
Rent from leases also provides ready and regular cash to the investor. These monthly rental payments are significantly higher than any stock investments can pay. They represent a steady source of income that is not dependent upon whether a stock drops or rises in value.
A wisely selected group of commercial real estate investments can yield impressive cash gains. Believe it or not, there is an even better way to lower financial exposure and secure safer gains with commercial real estate.
Investing Partnership: A Better Way
Logically, just as diversifying your portfolio is advantageous to your investing bottom line, so is partner investing. This is a smart way to add yet another layer of security to your overall investment picture. We share some more obvious advantages below.
Reduced Personal Risk -- Investing with partners spreads personal risk among those partners. This has the cumulative effect of reducing total, personal risk of each participant. For risk-adverse investors, partnership is the ideal solution for one of their greatest fears.
Increased Investment Opportunity -- Partners also mean additional financial resources. Additional financial resources combined with reduced personal risk presents the opportunity for expanded commercial property investments. This expansion opportunity also restores a portion of revenues the single investor loses when he takes on partners.
Added Perspective -- Each new partner brings to the partnership his own experience and ideas about commercial real estate investment. These kinds of contributions can be even more valuable to the overall partnership than the financial strength each individual contributes. This increased perspective from multiple viewpoints exponentially increases the partnership's earning potential.
Increased Industry Knowledge and Awareness – Each investor who makes up the partnership also brings his personal connections to the commercial real estate industry to bear. Every partner has knowledge, contacts and connections that can be pooled to create an even greater access and earning potential.
Self Storage: A Hidden Gem
Perhaps at the top of the heap among smart investors are those who are wise enough to consider the very quiet growth industry that is self storage. Human beings are generally by nature savers who store what they save.
According to US News Reports, this is a 30 billion dollar a year industry segment of commercial real estate. Yet, this accounts for less than 10% of the total US population in terms of the percent of this market that has been tapped so far.
Investors in self storage get the advantages of commercial real estate ownership without having to be the landlord. That steady monthly flow of cash still arrives without any of the headaches or aggravation associated with landlord headaches.
Whatever your investment goals are, they can be more quickly achieved through diversification coupled with partnership. These two components of your total investment strategy are intrinsically important if you are serious about meeting your investment earning potential.