According to sources like Fundrise and Investopedia, since April 2020, stock markets around the world have not been at their best, for that reason, investors are constantly searching for ways to reduce the fluctuations in their portfolios and find ways to make their portfolios more resilient. Below, we explore some of the ways you can do that through diversification into real estate.
What is Diversification?
Simply put, the process of a business/individual enlarging or varying its range of products or field of operation. The saying, “don’t put all of your eggs in one basket” is essentially an appeal for diversification. We can also define diversification in the financial world, as the process of mixing a variety of investments within a portfolio. The goal behind diversification is maximizing returns for a given level of risk.
How Can Investing in Real Estate Help You Diversify Your Portfolio?
Real estate historically has strong returns, making it a valuable addition in the quest for diversification. This is true irrespective of how much you plan to invest in real estate. Like some real estate experts say; you can never get it wrong with real estate investment, yes, it might take some time to yield a mouth-watering return but the time and return are nothing compared to what you would get from bonds or stocks. The boom in the real estate sector in Nigeria in the last decade is a proof of the success investors who have diversified into it have enjoyed.
How to Use a Mix of Real Estate Assets to Diversify Your Portfolio
There are several ways to invest in real estate including doing-it-yourself, private equity funds, publicly-traded REITs (real estate investment trusts), and online real estate platforms. With a good real estate guide/advisory you may be able to use any of these investments to effectively diversify your portfolio. Most real estate companies that accommodate investments have a greater potential to generate market-beating returns. In addition, real estate does not limit investors to a single geographical region, property type or property sector. Not all diversified portfolios are in fact well diversified, this is why we consider this article so important. For example, if you bought twenty different tech stocks, you could argue that you are diversified. But the assets/returns are likely to be highly similar, increasing your risk in the event of a downturn in tech stocks. But by diversifying across uncorrelated asset classes, one or more of your investments are likely to outperform during tough times, keeping your portfolio afloat.
The bottom line is that the public markets (stocks) have historically been a volatile asset class and this current period is no different. By diversifying into real estate now, you can increase your chances that you will only experience mild fluctuations in your portfolio instead of extreme volatility.