Creating a diversified stock portfolio will produce higher returns, because holding similar stocks tends to lead to similar returns for better or worse; whereas coupling alternative investments on top of your stock holdings can theoretically lower your portfolio’s risk, and even lead to better returns over time.
Generally, the stock market has a higher chance of encountering loss versus a real estate investment. While stocks change on a daily basis, the waves of progress are easier to pinpoint with real estate – and relatively steadier. “Diversification is very important to reduce portfolio risk, and reduce the risk that you might not be able to meet your future goals,” says Mike Cornacchioli, Senior Strategy Analyst, Citizens Bank Private Wealth Management. Cornacchioli says when investors pair assets that have negative correlations, having diversity tends to be beneficial and lowers the risk for significant losses which may impact an investor’s progress and future. While diversification doesn’t guarantee profit or a rebound from loss, it’s a great way to be prepared and smarter with your portfolio.
When it comes to real estate investing, there are two main avenues investors can take: investing in property directly (either to develop, flip or rent) or investing in hard money real estate loans. In the latter case, an investor puts capital into funding short-term loans with a private lender for an expected return.
Let’s assess the moving pieces and how they all come together to create the big picture.
- Think of Your Portfolio as Players on a Team: No one wants the same player to play different positions.For most investors, the goal is to either create a nest egg or passive income. Having an array of investments will provide a checks and balance method that will be financially beneficial.
Having a diversified portfolio is like incorporating key players on your team and recruiting others for the bench as backup for the future. One of the biggest issues in the investment realm are potential segmented dips. Diversification provides value because it is a safety net for those periods of loss and will offer a financial cushion for loss, or may even allow an opportunity for an investor to take a bigger risk with a potentially greater return.
- Don’t Fall into the Get Rich Quick Scams: There’s no doubt that you’ve watched a new product rise to the top overnight – think Snuggies, fidget spinners, or As Seen on TV infomercials. Just because something is trendy today, doesn’t necessarily mean it will be trendy tomorrow. One of the biggest struggles for investors is identifying when an investment is good and bad, or potentially when to sell.
Based on the millionaires and billionaires out there, it’s evident that taking risks is part of making money. Therefore, having a real estate investment within your portfolio can make a huge difference because the chance of an unexpected significant dip within the investment is substantially less.
- Understanding Diversity Takes Time: It’s important to recognize that achieving a successful diverse portfolio takes time. One of the biggest misconceptions of diversitywithin investment portfolios, is the reality of today’s market. Mutual funds, ETFs and other stocks typically share an overlap when you look at them individually. According to USA Today, the number of publicly traded stocks in the US is shrunk by 50% since 1997 and the options for public investors has continued to decrease.
The real estate market entails a lot of research and potential management experience; however, investing in real estate loans is a less time-intensive way to get real estate into your portfolio, while letting your money do all the work for you.
- Real Estate is a “Must Have”: Having a real estate component within your portfolio is a wise decision – and not just during a crisis. Incorporating real estate helps investors access potential market inefficiency. It is no secret that asset market prices do not always reflect their true value, but having diversity will provide security and produce higher returns as the years go by. It is incredibly difficult to beat the market merely with stocks and public market assets. However, a strong foundation built with a variety that includes real estate can support the funding of more aggressive loans for borrowers.
- There Will Always Be a Risk: Investors must always remember, there is no “safe” investment. Think of your investment portfolio like a board game – any move you make could potentially make you lose; however, not taking a risk could also mean that you lose. Ultimately, you have to lose some to win some.
Diversifying a portfolio can help an investor produce higher returns; however, one of the biggest elements of a great portfolio will be the strong foundation that supports the higher risk investments. Moreover, that more predictable and sustainable foundation could be built upon real estate investments.
As always, the best investors cultivate a portfolio that helps them grow beyond their current investment situation. If you're looking for a simple way to get involved in real estate investing, click below to learn more.