Why Is Portfolio Diversification Important For Investors?
No matter what your long-term financial goals are, making smart investments along the way can be a major factor in your success. Portfolio diversification is a highly recommended investment strategy that you should consider if you’re serious about investing.
Without it you can lose large chunks of your portfolio with a downside move by one asset. If all you own is Tesla stock, you’ve seen it go up fast and also down very fast! Great for rollercoasters but not your wealth.
What Is Portfolio Diversification?
Portfolio diversification is essentially the act of choosing different types of investments that don’t have the same historical performance. To do this, people typically invest in different types of assets, such as:
- Stocks, bonds, and mutual funds
- Real estate
- Private notes (trust deeds
- Hard assets, such as precious metals, art, and watches
Strategic asset allocation allows you to build a portfolio that is more resilient than one made up of just one asset class. Even when one asset is in decline, a balanced portfolio has a better chance of generating overall returns.
It’s also important to think about the liquidity of your investments. For example, private loans, notes and trust deeds are a safe, relatively liquid, and stable investments. In addition, they provide good yields, whereas the liquidity and value of hard assets depend on their value at any given moment.
What Happens When You Don’t Diversify?
Markets of all types fluctuate but not always in the same way. Having a mix of assets and assete types helps protect you when one market swings. When you don’t diversify, you have all of your proverbial eggs in one basket. Although many markets go through cycles, and you may be able to wait out a down period, the possibility of losing your investment is always a reality, especially if all of your investments are in the same asset class.
What Are The Benefits of Diversification for Your Investment Portfolio?
By diversifying your portfolio to include a mix of assets such as private notes, stocks, and real estate, you get the potential benefits of managing risk and stabilizing returns. Study after study has proven that for long-term wealth generating investments a sensible mix of income real estate investments (such as Coastal Capital), equities sprinkled with a few alternative investments (art, angel investing, crypto) almost always generates above average returns with less inherent risk
Portfolio diversification allows you to choose a variety of investments that match your risk tolerance. When you have investments in multiple types of assets, you maintain the possibility of generating returns, even when one or more markets are in decline. Having a combination of high-risk assets, such as cryptocurrency, balanced with assets such as private loans, which typically deliver more stabilized returns, allows you to balance risk.
Putting all of your investments into high-risk assets such as cryptocurrency or trading options can provide you the largest gains; however, there are no guarantees. A diverse portfolio may have the potential to perform better than if you were investing in just one asset class, especially in the long term. You can also choose assets that tend to have more predictable returns. For example, because private loans generate income from the interest on the loans, the returns tend to be more stable.
How Do You Successfully Diversify Your Portfolio?
When strategizing, it’s important to keep a few things in mind. Investing is a dynamic activity, and you can’t just set your diversification strategy and forget it. Follow these tips when diversifying your portfolio.
Choose the right asset mix for your risk tolerance.
Different types of asset classes come with different levels of risk. Understand the nuances of each type of asset you’re considering and how much of your portfolio they should account for.
Do an annual checkup.
Investing preferences change over time. You might be more or less risk-tolerant than you were when you made your initial investments. Your financial situation might also change with a new salary or a windfall. Take a look at your portfolio at least once a year to determine if your asset mix stills feel right for your goals. Make adjustments as needed and repeat the process on a regular basis.
Stay diversified within each asset type.
If you invest in the stock market, diversify with a mix of stocks and bonds with different market capitalizations. With your real estate investments, maintain a mix of residential and commercial properties. You can also diversify geographically to protect yourself against local fluctuations. The more diversity you have, the more safety you have built to protect your financial future
Here at Coastal Capital fund we partner with investors to generate above average returns (13% annually on average since inception) safely secured by real estate by pooling all our partners capital to be diversified in over 100 private notes (aka trust deeds.). Many of our partners choose to allocate 20 to 40% of their portfolio to the fund and it serves as a great baseline. If you need assistance in diversifying your portfolio please visit us at https://www.coastalcapital.com/investors/ for more info or give us a call.