Why Diversifying Your Portfolio Matters

diverse portfolio

You have probably read and heard that diversification is an important element of any investment portfolio.  And, in return, there is a good chance you have posed the question, “Why do I need to diversify my investment portfolio?”  The answer may not be what you think.  

Billionaire Warren Buffet, arguably one of the world’s most successful investors, once famously remarked, “Diversification is protection against ignorance.  It makes little sense if you know what you are doing.” The problem with this statement is that what worked for Warren Buffet, a consummate risk-taker from the age of 11, will not always work for the average investor who may not always be 100% sure they know what they are doing. 

Managing Risk 

Full-time investors like Mr. Buffet operate with one goal in mind – building wealth on a massive scale.  What if your goal is a bit more modest? What if you are more comfortable with the idea of incorporating passive income into your life and ensuring a comfortable future, while remaining a responsible, contributing citizen of the world.  Diversification may not provide the most direct route toward maximized returns and billionaire status, but it does offer the best tool available for managing risk.  

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It is simply unrealistic to assume that as a novice investor you will be equipped to predict trends, stay ahead of turns in markets and make the right choices quickly enough to avoid failure.  Even doing your homework is not enough. Stocks, bonds and properties chosen on past performance alone rarely deliver the desired yield. It takes a highly knowledgeable, seasoned investor with enough reserves to withstand the sting of inevitable losses to ignore the built-in safety net that diversification provides.  

Split Your Eggs Across Different Baskets

The idea behind a diversification strategy is simple – you don’t want to place all your eggs in one basket.  A healthy blend of stocks, bonds, cash and real estate holdings is a good beginning. Some risk will be necessary in order to achieve your goals and you will need to assemble a mix of high and low-risklow risk investments that match your goals and risk tolerance level.  You can then go on to further diversify holdings within each asset class. Energy stocks may be down one year while green companies are on the rise. In the age of Amazon, the retail sector of the commercial real estate market may be taking a hit while warehouse-distribution space is booming.  You can even diversify your bond holdings by purchasing a mix of varying credit qualities, duration and maturities.  

Mutual funds, particularly “Index Funds” which are well-rounded funds geared to investors of targeted age groups, offer some degree of built-in diversification.  Until recently, REITs (Real Estate Investment Trusts) were the only way to invest in real estate without assuming high risk or becoming a landlord. Mutual funds, however, come with pretty steep fees and REITs are often available only to qualified investors.   Today, micro-investmentmicro investment platforms such as IMBY have revolutionized real estate investment by democratizing the process and allowing everyone a seat at the table. With as little as $1, you can invest in real estate through IMBY and incorporate real estate into your investment portfolio.

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Over time, real estate has been a proven winner in the investment world, and it is unwise to have an investment portfolio that does not include real estate.  All investors need to understand that there will be periods of time when real estate, just like stocks and bonds, will lose value. The important thing to remember is that over time, real estate has been able to outpace inflation while also providing passive income through cash flow, tax benefits and the added perk of being able to leverage property to acquire additional property.  

Opening Doors to Diversification 

Incorporating real estate into a diversified investment portfolio is a no-brainer.  Thanks to IMBY, the barriers that once blocked the path to owning property in inflated markets such as Vancouver no longer exist.  If you have not already added real estate ownership to your diversified investment strategy, run – don’t walk to do so right away. And while doing so – think about this bit of trivia.  In Alice Schroeder’s 2008 Buffet biography entitled “The Snowball: Warren Buffet and the Business of Life”, his biographer notes that at the tender age of 14, young Warren invested $1200 of his newspaper delivery income into a 40-acre farm.    While barely in his teens, he had the good sense to purchase land. Buffet’s investment company, Berkshire Hathaway, owns farmland, mobile home parks and shares in REITs as well as real estate brokerage firms in the U.S. and abroad. In addition, his companies are heavily invested in companies that list large real estate holdings among their assets.  And let’s not forget that a multinational company such as Berkshire Hathaway is already diversified based on its structure as a holding company and its gargantuan size (the fifth largest company in the S&P 500 as of February 2019). 

So, while Mr. Buffet may appear dismissive of the need for diversification, a closer look at his own holdings tell another story.  Right now, IMBY is the best crowd sharing platform for anyone looking to diversify their portfolio on a small budget. In fact, IMBY is the kind of game-changing, common sense-based investment vehicle that would have attracted a young innovator like Warren Buffet.

 

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