Stock market volatility can put a lot of investors on edge. Learn why diversification can help you hedge against the inherent exposure to risk you get with traditional investing.
Diversification is the safest hedge against increasing volatility in the stock market. Even when the stock market is performing strong, diversifying your portfolio across various types of investments lowers your exposure to risk and can help you build a more profitable portfolio.
What does it mean to Diversify?
Diversifying means choosing a range of investments that have little to no relation to each other. It keeps you from concentrating your investments to one asset class which can expose you to too much risk and volatility shared by a single asset class.
Why is Diversification important?
Investors’ risk tolerance is as varied as their reasons for investing. Diversification particularly appeals to investors who want a more stable portfolio, including those whose primary investment goal is retirements savings. By diversifying an individual retirement account (IRA), you can improve the earning potential for your portfolio, while also taking advantage of the tax incentives those accounts provide.
There are two key reasons why investment diversification is important:
Lower Risk: Investing carries inherent risk, and the types of risk vary. Some individuals with more wealth, or with a longer investment holding period, might be open to making riskier investments where the potential return is much higher. However, if you don’t have as much cash on hand to overcome a risky investment that goes south, or if you are nearing retirement age and want a stable portfolio with less likelihood of suffering losses from market volatility, then you should diversify.
Additionally, diversification reduces your risk exposure. Exposure happens if you have all of your eggs in one asset class basket. If that asset class doesn’t perform, you could take a heavier loss.
Increase Earning Potential: Because diversification reduces your investment portfolio’s potential to experience volatility, your portfolio becomes more stable. When you have a stable portfolio, your potential for earning increases because a downturn in one asset class won’t necessarily affect the remaining asset classes where you’ve invested.
What is the best way to diversify my investment portfolio?
What investment strategies are right for you when you are looking to diversify across asset classes?
The key asset classes in which to diversify include:
- Real estate
- Exchange-traded funds (ETFs)
- Foreign securities
- Mutual Funds
As an individual, it can be hard to determine the percentage of investment breakdown for each asset class. Talk with your investment advisor to determine the right type of allocation for you. It is all dependent on your risk tolerance and investment goals.
Diversifying with Alternative Investments
Alternative asset classes are investments that have low or no correlation to traditional investments like stocks, bonds and cash. They include real estate, private equity, hedge funds, commodities, and art and antiques.
Alternative investments are usually held in the private market, meaning they are insulated from the volatility of the stock market. A private Real Estate Investment Trust (REIT), like Upside Avenue, is a type of alternative investment that produces regular, predictable cash flow with returns from investment income and appreciation, regardless of stock market volatility.
With Upside Avenue, the price of shares doesn’t change from day-to-day depending on market performance. Your $2,000 investment will buy 200 shares at $10 per share whether the stock market is up or down. The per share price only changes after yearly auditing of the portfolio, so it is not subject to investor behavior.
This is not the case with publicly-traded REITs. The number of shares you can buy, and the equity you earn, can vary from day-to-day based on all of the same factors that apply to traditional investment classes.
Investing solely in the public market means you could be missing out on the downside-proofing benefits of private market investing. Plus, with private REITs like Upside Avenue, you have the same benefits and access that come from being part of a professional real estate investment firm without the high fees and high minimums of traditional real estate investing.
Ready to diversify your portfolio against stock market swings and earn passive real estate income?