Even the most successful investment portfolios are bound to lose money at some point. One can reduce losses by diversifying portfolio allocation, which can boost the total return potential of the portfolio. However, not all diversification methods are made equal, and selecting the best investment performance is critical.
Most investors recognize the dangers of investing in a single stock, asset class, or industry. However, what about the dangers of investing in only one market? Many investors diversify their holdings across and within asset classes, sectors, industries, and other categories, usually just within the stock market, a public market. Publicly traded equities are getting connected as the public market shrinks and control companies. As a result, significant diversification in the public market is becoming increasingly impossible.
Individual investors now have more options outside of the stock market thanks to increased access to private market assets. Private market investments, genuine estate, are now significantly more accessible than they have ever been to most investors. Real estate may be an excellent diversification investment option for the portfolio because of its features, including limited performance correlation with the stock market, a history of long-term gain, and the potential for regular income. Find out here about the taj residential stocks.
What makes a portfolio of investments diversified?
By minimizing the risk of loss, diversification is utilized to improve an investment portfolio’s stability and return potential. The volatility of a portfolio is lowered when risk is managed by diversification. The less volatile an investment portfolio is, the more diversified it is likely to be. Its earning potential will almost certainly grow more steady and predictable as well. Diversified investors can generally follow a quieter and more consistent investment path thanks to their portfolios, rather than riding the waves of public stock exchanges or sectors of them.
So, how does a well-diversified portfolio appear?
Diversification techniques vary, but the best ones aim to optimize a portfolio’s risk-adjusted returns. In other words, they advise choosing investments that provide the maximum potential return for the risk level someone is willing to take. An investment portfolio’s risk tolerance is most likely tied to goals and investment horizons. When establishing risk tolerance, consider the following considerations.
Once risk tolerance is determined, one can start planning portfolio allocation. One can eliminate unnecessary risk in the portfolio by investing in assets with little or no correlation. When two or more investments are linked, they share part or all of the same risks. As a result, if one investment loses money, associated investment is also at risk of losing money. On the other hand, if portfolio holdings are diversified across uncorrelated assets, the performance of one or more of them may be able to offset losses in the portfolio if another asset underperforms. It is because uncorrelated assets are mathematically considerably less likely than linked investments to lose value in lockstep.
The two-thirds rule
David Swensen, the Yale Endowment’s Chief Investment Officer, devised the 20 percent rule as a leading diversification approach. By allocating at least 20% of an investment portfolio to alternative investments — an asset class with little or no correlation to traditional, publicly listed assets – the 20 percent rule aims to reduce portfolio risk and, as a result, maximize return potential. Because alternative assets are typically transacted on the private market, they fall outside of the purview of traditional investments. Private market investments, which follow the 20 percent rule, are becoming increasingly critical to financial success. Individual investors do not have the same level of diversification in alternative investments as more prominent accredited and institutional investors. Alternative investments have a longer track record among institutional investors, with pension funds and endowments allocating 30 percent and 52 percent of their portfolios to them, respectively.
How can real estate help diversify the portfolio?
The private market has substantially different purchasing and selling characteristics than the public market, which reduces an asset’s volatility potential – and thus diversification potential. Let us look at the characteristics of private market real estate and why this asset class might be a valuable complement to a standard investing portfolio.
Markets that are distinct and have a low correlation
They are exchanged in various markets is the most significant distinction between private market real estate and traditional public assets. Stocks, bonds, and commodities, among other traditional investments, are traded on a public exchange such as the New York Stock Exchange. On the other hand, private market real estate is traded in, as one can expect, the private market.
Although each public market investment has its advantages and disadvantages, there is a correlation in performance at the market level because all assets are exchanged inside the same public market. Overall, they have the same strengths and limitations in the market. They might also have a stronger connection at a closer level.
On the other hand, private market investments are not exposed to the same dangers as public market investments since they are traded in a different market with their own set of driving factors and structural peculiarities. As a result, private market real estate has a minimal correlation with traditional publicly traded equities at the market level.
Platforms for real estate investment on the internet
Online real estate platforms provide a new method to invest in single properties or a diversified real estate portfolio. Some platforms specialize in debt investments or rental properties, while others specialize in certain geographic areas. Limiting real estate investments by area or asset class concentrates investments along those lines, limiting their diversification potential. Platforms that diversify real estate investing by investment type (debt, equity), property type (residential and commercial), and area seek to provide investors with greater diversity.
Investor access varies per platform as well. Some platforms are only available to accredited investors, while others open to everyone have high investment minimums. It is not valid for all real estate investment platforms, however.
For example, it provides access to real estate portfolios diversified over hundreds of debt and equity assets, commercial and residential real estate, and location. That not only gives investors access to private market real estate but also diversifies the asset class. Unlike other real estate investments restricted to accredited and non-accredited investors, Fundrise has a low investment requirement of just $10.
Considering available options
Each investor must decide which asset classes and diversification techniques are suitable for them. However, regardless of how one can diversify, the old obstacles that historically limited access to functional diversity have thankfully been removed, allowing investors to build genuinely diverse, risk-mitigated portfolios like never before.
Fundrise is the first investment platform that makes it simple for anybody to participate in diversified private real estate portfolios of institutional grade. Many investors will benefit from this exposure since it introduces them to a new asset class with historically consistent income potential and diversification potential.
Muhammad Junaid is a senior Analyst and Search Engine Expert. Extensive experience being a lead writer in Estate Land |Blue World City. Work for years with local and international enterprises. Also, represent well-known brands in the UAE.