A good investor knows that generating sustainable returns is a long-term commitment that can only be achieved with a well-diversified portfolio. What It all boils down to is recognizing that risk is inevitable and that it’s a key component in the investment process. Not all properties meet or perform above expectations, that’s for sure, and this is where the very simple concept of diversification comes into play.
Don’t put all your eggs in one basket
Real estate, in practice, preaches that location is everything — precisely summarized in the infamous quote: “location, location, location”. While this element does carry significance in guiding investors in deciding where best to allocate their capital, the term “diversification” is another magic word we can multiply by three. “Diversification, diversification, diversification” — it does have a ring to it, don’t you think?
Essentially, when you pool your money in only one asset, you position yourself in a tight and risky spot with the potential to lose out on returns you could have otherwise realized had your investments been spread out. Case in point, with diversification, comes the potential for unlocking real value and assuming less risk.
That’s why expert investors with years of experience under their belt look to diversify their portfolios through financing a wide range of investments. The logic behind this is as follows: if you invest in a number of asset types, it is much less likely that all of them would lose value simultaneously than it would be if you were holding only one asset in isolation. The losses experienced with some investments are subsidized by gains in others, and ideally, you end up with a total portfolio that has grown in value, especially in a volatile market environment.
So… how can one actually diversify?
Diversifying your portfolio may seem like a daunting task from the get-go, but it really is simple. All you have to do is purchase different types of unrelated assets whereby the performance of one doesn’t impact the entire portfolio or another asset. By taking your overall investable funds and splitting them between the major investment classes such as stocks, bonds, property, fixed income, and the like, you are diversifying!
What may be more appealing to some is that you can also choose to diversify within each asset class itself (assuming you have a preference, be it real estate or otherwise) by purchasing a range of different instruments of that type, which achieves the same effect but at a slightly more granular level of abstraction.
Stake’s Tip – It’s worth keeping track of the asset split or distribution over time to calculate your “asset allocation” as this is the best way to monitor your risk management. As you continue to invest, aim to maintain a stable asset allocation as the values of investments change. In doing so, you are effectively rebalancing your portfolio over the medium to long term.
How can Stake help YOU?
We provide our clients with an easy and efficient way to diversify their investment portfolios through a real estate equity crowd-investing business model. From only AED 500 (USD 136), you can invest in prime rental properties, no matter where you are in the world! Normally, investing in real estate requires large amounts of capital and may even call for mortgages and down payments in most cases.
What’s even better is that once you invest, our team will take care of everything, from maintaining the property to making sure there’s always a tenant in place. Our offering is just one example of an alternative asset class that provides diversification at a very low cost and serves as a significant contributor to sustaining a well-balanced portfolio.
TL;DR | Diversification helps you achieve a balance between risk and reward in your investment portfolio across several different types of high-performing asset classes. Essentially, the more diversified your portfolio is, the lower your overall risk because it does not rely on one specific investment. If you get this concept right, then half the battle is won, and you set yourself up for a long and successful investment journey!
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