A diversified portfolio lets you spread your investments across different asset classes so that your risk is not concentrated within a single asset class. The logic of diversifying your portfolio is that the risk of failure is lower when funds are held in different assets. The probability that all the investments in a diversified portfolio will fail at once is very low.
A well-diversified portfolio means the performance of one asset class does not affect the performance of another asset. Downturns in investment performance are limited to that particular asset alone rather than the entire portfolio. This strategy lets you grow your wealth sustainably.
How should you diversify your portfolio?
There are two ways to diversify your investment portfolio.
- Diversify within asset classes. You do this when you buy many investments within a single asset class. For instance, if you decide to focus on company stocks, you can diversify by buying stocks from many companies of varying sizes and sectors.
- Diversify across asset classes. When you do this, you put your funds into completely dissimilar investments. For instance, your portfolio may include a selection of stocks, bonds, short-term investments, commodity-focused funds, and real estate.
In this post, Upkeep Media marketing agency explains reasons to diversify across asset classes by allocating funds to real estate. Real estate as an asset class has witnessed tremendous growth in the last few decades. There is an increase in the number of ways you can invest in real estate, and this asset class also offers the kind of returns and stability that is less common with other assets.
Putting your money in real estate lets you diversify into an asset with strong returns. Real estate is the asset class that investors ask the most about because it offers above-average returns consistently. Many high net worth investors allocate up to 25% of their portfolios to real estate.
How to add real estate to your portfolio
The traditional, most trusted way to invest in real estate is to buy a rental property. However, this method requires time and commitment, and many investors do not have that. Furthermore, real estate investing demands a level of expertise. But thankfully, this is not the only way to invest in real estate.
In addition to buying rental properties directly and becoming a landlord, there are real estate investment strategies with a less hands-on approach. When looking to diversify your portfolio by allocating funds to real estate, here are the three ways you can do it:
1. Real Estate Investment Trusts (REITS)
A REIT is a company that owns and operates income-generating real estate. The REITs pool investors’ funds and use the money as capital to purchase or finance various real estate investments. REITs invest in many property types, including apartment complexes, hotels, medical facilities, retail centers, office buildings, warehouses, data centers, timberland, pipelines, self-storage facilities, and even cell towers.
Most REITs are publicly traded; therefore, the asset is highly liquid, unlike traditional real estate, which is not liquid. REITs distribute 90% of their annual income to shareholders as dividends. But REITs are similar to stocks in that they are exposed to the same kind of volatility as stocks. Macroeconomic factors heavily influence the value of REITs.
2. Real estate mutual funds
Real estate mutual funds offer an indirect way to invest in REITs and real estate operating companies. You build a more diversified portfolio of real estate assets with relatively small capital by investing through a mutual fund. An advantage of investing in real mutual funds versus allocating funds to REITs is that you can easily move funds around.
Additionally, you gain access to the research done by the mutual fund on the acquired assets, giving you more in-depth information on the performance of the assets than you would get if you invested directly in the REITs. Real estate mutual funds are excellent for speculators who want the ability to make quick buy or sell decisions when investing in real estate.
3. Direct ownership of real estate
Direct ownership of real estate typically means becoming a landlord. This strategy offers the most diverse options when investing in real estate. You can either invest in residential or commercial properties as a property investor. Within these two broad categories, there is a long list of property types and a range of real estate investment strategies you can employ.
There are two main obstacles to direct ownership of real estate. These are a large amount of capital required to start, and the fact that direct real estate investments require active management. But these hurdles are not insurmountable. By borrowing money to buy real estate, you can solve the problem of capital. Hiring a property manager for your property will transform it into a passive source of income.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.