Step Up Your Investing Game With Portfolio Diversification Strategy

Smart and disciplined investments, both regular and diversified, from an early age are essential for acquiring long-term wealth.

Share on facebook
Share on twitter
Share on linkedin
Portfolio Diversification Strategy

Markets are never promising and stagnant. There may be a sudden boom or there might be a sudden downfall. In such instances, it does not become an intelligent decision to invest all your money into one single asset class. Portfolio Diversification strategy in investment portfolios might come as a savior in such instances. The central thesis of this concept lies in the quote “never put all your eggs into the same basket.”

Investment Portfolio Diversification is the practice of spreading your investments in dissimilar markets i.e spreading your eggs in different baskets so that your exposure to any one specific type of asset is limited. This practice is designed to help decrease the volatility of your portfolio over time.

Benefits Of Diversifying Investment Portfolio

  • It is a risk management strategy i.e it reduces the risk of investment.
  • Holding a variety of non-correlated assets can closely eliminate unsystematic risk (specific risk).
  • Diversifying decreases the volatility of the portfolio because different assets rise and fall at different times, therefore, make a way for decent returns of the portfolio as a whole.
  • Diversification of non-correlated assets can decrease the losses in bear markets, preserving the capital amount for investment in bull markets.
  • The portfolios which are diversified in their investments are much more reliable by any financial institution to fund ( may be required for real estate investments) because of the fact that they are risk diversified.

Portfolio Diversification Strategy

Spread Your Wealth Across Various Markets

Firstly, you must find what your ideal asset class would be. You must consider all the factors like your financial status, age, risking capacity, the time period you can invest in i.e either long term or short term, the strategic changes you need opt according to changing markets, avoiding over-diversification, etc. Also, you must thoroughly research the market asset classes and decide what’s best for you to invest in. Here are some investment options.

  1. Exchange-Traded Funds (ETFs) and Mutual Funds (MFs)

    ETFs and MFs act as a basket of different stocks and give you instant diversification. They trade differently, so you have to research in detail before buying them. But they’re an excellent method to diversify without getting overly complicated.

  2. Index Funds 

    Index funds are another excellent option as they include stocks that mirror a particular index such as the S&P 500. Diversification here may be a little limited, but it’s still a good option to consider. It’s a portfolio of stocks or bonds.

  3. You can also invest in commodities, various types of real estate like commercial real estate, residential real estate and in various emerging real estate modules like REITs, fractional ownership, co-working, co-livingsenior-living, and many more.

Before proceeding with further tips, here is a quick bit for how to diversify your real estate portfolio.

The first step in building a diversified real estate portfolio is to understand the various real estate strategy buckets. Investors can spread and mitigate their risk by making allocations across these various categories.

Diversify within the asset class

Diversification within an asset class is just as important as diversifying across several classes. Below are some examples of diversifying within an asset class

  1. Cryptocurrency – Within crypto, if you are investing in Bitcoin, you can also buy some shares of Ethereum and Litecoin. 
  2. Industry – If you are investing in tech or biotech stocks, consider utility and retail stocks as well. 
  3. Funds – While the index funds track the overall market and rise and fall with it, for diversification, you can also explore some other high and low-risk investments from time to time. 
  4. Real estate – If you invest in real estate rental properties, you can also try real estate fractional ownership, REITs, and Crowdfunding to generate hassle-free returns. 

Geography

Location can be defined and evaluated by a neighborhood, city, state, region, or country. It also can be defined by the usual size of the market, such as primary or gateway markets, secondary markets, and smaller tertiary markets. You can mix all of these to get a diversified portfolio.

Asset Diversification

Major asset classes include office, retail, industrial, multifamily, hospitality, senior housing, and storage like a garage or a godown. Real estate markets have periodic ups and downs that have the potential to affect all asset classes or may affect few classes more and others less. One way to overcome this cyclical risk is to invest across asset classes and hence, diversify.

Income Generation

Some properties generate steady, and predictable cash flow, while other investment types target upside at an exit at the expense of little or even no yield until the property is actually sold. To create diversification, blend income-generating opportunities with equity multiple driven ones.

Business Model

Each deal usually has its own unique business strategy, such as a new development, a long-term holding period intended to clip a steady coupon or a value-added scenario with small cash flow but is predominantly back end loaded. So, when investing, blend your strategy.

Debt vs Equity vs both

Investors can invest at various points in the capital stack on a real estate deal. Debt and equity deals have quite different characteristics and each comes with different risks and return expectations. Some investors may favor one over the other, while a few others choose to keep capital in both debt and equity deals. By investing up and down the capital stack, you can diversify the risk accordingly.

Risk Diversification

The risk of a project usually falls into one of the four categories: starting with low-risk, stable core investments-known as “core” strategies and moving further out on the risk curve to core-plus, value-added and opportunistic at the far end which carries the highest risk.

When investing in real estate, be cautious. While you chase the highest returns, they may end you up with a portfolio of high-risk real estate assets that can depend on speculative business plans. Clever investors very well know that not all IRR’s are created equal.

Holding Period

Short-term holding periods not only offer better specificity from a real estate cycle perspective but also potentiate time risk since the business plan will unveil rapidly in order to hit targets. Also, it is much difficult to provide substantial equity multiples.

Mid-term holding periods reduce intensified time risk but might re-bounce at the end of a cycle. Long-term holding periods not only reduce these risks but also typically bring lower targeted annualized returns.

Amalgamating these different holding periods helps to ensure you eliminate the possibility of having all of your exits come at the same time and most probably the “wrong” time. Also, even in good times, exiting your holdings at the same time will present you-the reinvestment risk. So, it is always beneficial to keep a fusion of holding periods in your portfolio.

Sponsorship

Some investors build a long-term relationship with one sponsor while others may prefer to spread their holdings among different developers, operators, or capital/fund providers. Few others still prefer to invest with multiple sponsors for a certain period of time and then re-invest with a selected few after narrowing the field through experience. By diversifying across multiple sponsors you limit risks associated with the sponsorship aspect.

At last, keep in mind that a tenured sponsor has learned many lessons over the years and can use this information to protect investors. Sponsors with less experience may be more error-prone but they might be ones who offer better terms to investors to compensate for their lack of comparative experience. These aspects make for good reasons to opt for investing with different sponsors.

So, considering all these aspects or rather categories, you can make a fused real estate portfolio which is far more beneficial than a non-diversified portfolio.

Benefits of Diversified Real Estate Portfolio

Creating a diverse real estate portfolio, made up of various assets posing different levels of risk, allows you to balance the dependable, low-maintenance, low-risk possessing properties that offer lower returns with high risk possessing, high-demanding properties that promise lucrative returns.

Continue Building Your Portfolio

Continue adding to your investment portfolio on a regular basis for your Portfolio Diversification. In this way, you can smooth out the ups and downs created by market volatility. The idea behind this is to cut down on your investment risk by investing the same amount of money over various assets over a certain period of time.

Know When To Exit

Stay alert with your investments and be vigilant of any changes in overall market conditions. You should know what is happening to the companies you invest in. By doing so, you’ll also be able to predict when it’s the time for you to cut your losses, sell or move on to your next investment.

Having said all that, it’s high time that investment enthusiasts understand the potential of portfolio diversification and hence consider this smart investment strategy to diversify their risk and benefit despite the worst times in the market.

The best-diversified portfolio includes stocks, bonds, MFs, ETFs, and of course the champ of all time which provides high profits, stable rentals, high capital appreciation, and is a lower risk investment option – the real estate.

Portfolio diversification of an investment is just as essential as the investment itself. One can diversify their portfolio on their own, or also take the help of portfolio managers if need be. As Assetmonk pushes investors to diversify their portfolios, you can also take advice from our expert asset and property advisors. Assetmonk offers residential real estate and also commercial real estate modules like co-living, a senior living which is highly valuable and curated projects. Investing in them would count for a smart decision and make you a smart investor.

Portfolio Diversification FAQs:

Investment portfolio diversification is the practice that allows you to spread your investments in dissimilar markets so that your exposure doesn’t remain limited to one asset class and therefore, reduces the risk of investment.

The purposes of diversifying a portfolio:

  • To reduce the risk.
  • Decreases the volatility of the portfolio because different assets rise and fall at different times,
    therefore, make a way for good returns of the portfolio as a whole.
  • Decreases the losses in bear markets and preserves the capital money for investment in bull markets.

Here are a few investment options that will help you diversify your portfolio:

  • ETFs
  • MFs
  • Real estate
  • Commodities

Index funds – portfolio includes stocks and bonds

You may consider the following categories:

  • Geography
  • Asset class
  • Income generation
  • Risk diversification
  • Holding periods
  • Debt or Equity or both
  • Sponsorship
  • Business plan/strategy

If you create a diversified real estate portfolio which consists of various assets and those which possess different levels of risk, diversification allows you to balance the dependable, lower risk, low-maintenance properties that offer lower returns with high risk, high-demanding properties that promise higher returns.

Related Articles

istockphoto 155700839 612x612 1

Rental housing demand will increase in crucial micro markets

The real estate market has exploded in the post-pandemic era. The corporate market is increasing, increasing demand for commercial space and rental residences. According to industry statistics, in the second quarter of this year, Indian rental home searches climbed 84.4% year on year and 29.4% sequentially. Furthermore, total combined rental housing listings rose 3% quarter on quarter and 28.1% year on year throughout the 13 Indian cities covered. Do not miss The 18% GST on rent gets anticipated to harm the rental housing industry. But, what are the variables that will lead to the rental housing demand boom? Accessibility and cost-effectiveness: When it comes to renting a property, people primarily examine three factors: infrastructure, connection, and price. The property’s location, with ready infrastructure and decent connection, takes precedence over the size and price of the unit. Customers want a home in a prominent location that allows them to maintain a good work-life balance, with less commuting time, easier access to…

Read more
istockphoto 1393356971 612x612 1

REITs, New Age Instrument: Investing in Properties Without Actually Investing in One

Real estate investing always meant purchasing, owning, and managing an actual property. But, did you know that it can still be done without actually owning the property? Thanks to REITs, investors need only put their money into corporations that possess substantial portfolios of self-appreciating real estate assets in some of the world’s most desired locales. Welcome to the world of REITs where you can buy real estate without the inconvenience of owning the property altogether. Easy peasy lemon squeezy right? Real estate investment trusts are popular among investors who wish to buy real estate without the inconvenience of owning the property altogether. These investments, known as REITs, allow investors to deposit money into income-producing real estate. A REIT is best described as a simple way to own real estate without actually purchasing any property. Investors can acquire individual shares of a real estate investment trust, similar to stocks, which gives them little chunks of several properties. This protects them from…

Read more
istockphoto 1394977436 612x612 1

Commercial Real Estate Leases: Different Types and Which Is the Best?

Leasing commercial space is a significant financial commitment and requires commercial real estate leases. These leases can be intimidating, especially because they are a huge commitment that can be costly. However, they are not as difficult as many people believe. A commercial real estate lease, like most other legal transactions, should not be taken lightly. As a result, when renting commercial space for the first time, it is critical not only to thoroughly study the industry but also to have a good understanding of the many forms of commercial leases accessible in India. Also, read Commercial Real Estate Is Booming In 2022: Explore How You Can Also Profit Via This Alternative Investment. Here’s an explanation of the many forms of commercial real estate leases and what they imply for renters and landlords: Firstly, what are commercial real estate leases? Commercial leases, as opposed to residential leases, are an arrangement between a renter (company) and landlord that specifies the property only…

Read more
istockphoto 817688664 612x612 1

The Indian real estate market would be worth $1 billion by 2030: RBSA Advisors

According to RBSA Advisors, the real estate business gets expected to grow by 15% by 2030, reaching $1,000 billion. According to RBSA Advisors, the Indian real estate sector would grow at a 15% CAGR from $60 billion in 2010 to $1,000 billion by 2030, contributing 13% of the country’s GDP by 2025. The organized retail real estate industry get expected to rise by 28% to 82 million square feet by 2023. Per “The Outlook of the Real Estate Sector in India,” the Indian real estate sector is showing strong indications of recovery as the economy recovers from the pandemic. Also, read JLL reports Indian real estate garnered $943 million in investments worth in Q1 2022. Despite a little increase in prices and a slight increase in home loan interest rates, the real estate industry has thrived on good buyer enthusiasm. According to the poll, there is substantial demand for property in Delhi-NCR across all price levels. The entire increase in…

Read more
istockphoto 1394786542 612x612 1

Aspire to be A Top Commercial Real Estate Agent? Here are Some Critical Steps To Becoming One

Do you want to be a successful commercial real estate agent? The Indian real estate market is diversified but vibrant and competitive, particularly for commercial real estate agents. To build a successful niche, they must comprehend the shifting promotional circumstances of developers as well as customer preferences. Staying current and afloat in the market requires innovation and openness to new marketing concepts. Follow the steps below to be a top agent. Do you want to be a successful commercial real estate agent? If this is the case, the first question you must answer is whether you want to work in commercial or residential real estate. To be sure, because individuals are more likely to buy or lease a place to live rather than a location to operate a company, it is simpler to get into residential real estate – where there will always be more prospective clients and transactions. Commercial real estate, on the other hand, may attract a large…

Read more
istockphoto 1263914795 612x612 1

Real Estate Investments: The Hottest Alternative Investments You Do Not Want To Miss Out

One of the best ways to grow your money in the modern era is by making investments. Whether small or large, every investment has got the potential to be a profitable one. It wasn’t long ago that people only knew about the stock market as a primary investment method. But, this has changed pretty much with the arrival of better technologies for making investments and making profits out of them. The hottest topic in the domain of investments is the growing popularity of alternative investments such as real estate. The real estate industry has been in existence for a long time, but it has changed a lot from its original form. Better alternative investments are emerging in real estate, mostly due to innovations introduced by technical firms. There’s still much to learn about this, so don’t worry. We have explained everything about this trending topic in this blog post. Do not miss Aspire financial freedom. Find Out How Real Estate Investment…

Read more