Financial strategy can be a tricky skill to master. It can leave many of us feeling anxious, particularly if we are new to things like investing—be it in stocks and bonds or in real estate and business ventures.
One of the biggest and most important concepts to master no matter what your financial goals are, however, is portfolio diversification. This is the idea of putting your money to work across multiple disciplines, markets, and types of investments.
For most investors, they tend to think of portfolio diversification in fairly narrow terms. For example, their diversification may be limited to investing in several different types of stocks to mitigate their risk. This is a smart move because it prevents loss in the event of an unexpected stock drop.
Diversification as a hedge of protection works, but it has limited effectiveness if you only use it within a single method of investment.
What do we mean?
Solving the Limitations of Portfolio Diversification
As a financial strategy, portfolio diversification is limited in its effectiveness when you only utilize one investment strategy.
While the stock market has been performing well in the past decade, for example, experts are closely watching as the stock market’s outlook turns more volatile and unpredictable. This has been caused largely due to uncertainty surrounding U.S. trade policy, tariffs, and international relations. We’ve seen fluctuations in some of the titans of the stock market including the S&P 500 and Nasdaq.
Some reports suggest we haven’t seen this level of market volatility since the financial crisis of 2009. Considering 2017 was one of the most stable stock market years since the 1960’s, that’s quite the pendulum swing.
Market volatility isn’t necessarily a bad thing. After all, stocks are a long-term investment and provided investors don’t panic and contribute to a crash by jumping ship, volatility can be weathered and opportunities can be found in a volatile market.
That said, it’s valuable and important to recognize the limitations of investing in a single market or arena. Many investors who have long put their faith in the stock market alone are recognizing its limitations to secure their financial future. While they are not leaving their stocks behind, they are choosing to take diversification to the next level—not simply in diversifying their stocks, but in diversifying their investments as a whole.
In short, they’re turning to real estate investment.
How to Find Financial Security Through Strategic Investing
Some of the best investing advice we’ve seen comes from Motley Fool. They gave some words of wisdom to stock investors regarding the volatile market of 2018, and among their top reminders were to breathe and remember that this is normal.
Investments fluctuate. Risk is inherent. Every investment must be approached with sound, critical thinking, not knee-jerk emotions or fear. Some of their advice, regardless of the market conditions, is timeless and can be applied to any investor, anywhere, but it is especially true of the time we live in. If you want to succeed in the long-term, you have to think strategically.
Evaluate Your Investment Holdings
A successful portfolio is always under scrutiny. You need portfolio advisors to sit down with you to evaluate your current investment holdings under a few different criteria. Firstly, do these holdings fit with your current financial goals and are they serving those goals well? With the shifting sands of uncertainty found in some investment arenas, you may find that some investments may not hold up anymore. The reasons you bought them in the beginning may not hold true anymore. They may not serve current financial goals. The shifting landscape may have created new demands or vacuums that need to be addressed.
Being a buy and hold investor with the long-term in mind does not mean you do not re-evaluate and course-correct over time.
Diversify Your Portfolio
One of the most valuable things you can do in a volatile market is to diversify. We’re already seeing that, in the wake of an uncertain stock market, investors are not pulling out of the game, but rather expanding how they invest.
Those who have traditionally stuck to stock investments are taking their money and putting it towards real estate investments, where they reap the benefits of a long-term investment, a physical asset, and passive income generation. This step is where portfolio diversification is at it’s best and most effective.
When you diversify the types of investments you hold, you truly hedge against the risks that a market can bring. If an industry or market as a whole suffers, you are protected through the diversification of your portfolio. It’s good to diversify on one level, but best to diversify on many.
Zero in on Specific Long-Term Goals
Lastly, when times are uncertain, you have to plant your feet and focus on what you really want for your future. This is the time to refocus on your goals. While part of that is done in evaluating your portfolio, it can also be done independently. As time goes by, our goals shift and change. We have to recognize that the investments we start out with may not always satisfy our goals as our vision grows.
This is why constant re-assessment is so valuable. It allows you to keep on track and keep pace with what you really want out of your life and out of your finances.
You have to always remember to be specific. Specificity when dealing with financial goals is valuable in that it forces you to act. Rather than saying “I want to have around a million dollars in five years or so,” or “I should have a lot of money when I retire,” you should define your terms. How much money do you want exactly in exactly how many years? When will you retire and how much money do you want to have in the bank and coming in as passive income?
Set these goals. Visualize them. Make it specific. Too many times we refuse to make them specific for fear of failure. Making goals specific is not a declaration that it will happen, simply that you are setting that specific target and that that specific work will begin. It gives you something to work for rather than an aimless and vague monetary goal.
Having specific long and short-term goals also allows you to better know when your investments fail to measure up against those goals. The broader your targets, the harder it is to know when your investments are missing the bullseye.
Our Licensed Real Estate Portfolio Advisors are experts in helping investors create diversified portfolios. Contact them today so they can help you reach your investing goals!