Diversifying Your Portfolio: Is It Worth It?
As a savvy property investor, minimising risk should be one of your top priorities. It’s not enough to create a profitable enterprise: you must also learn how to maintain your monetary wealth.
There are lots of different ways to do this, but diversification is one of the most popular. A risk management technique that involves the creation of a more varied investment portfolio, it can mean dipping your toes into unfamiliar territory, but it has the boon of actually working.
This doesn’t mean it’s the right approach for everyone. Diversification certainly carries risks of its own, and this means it may not be the most appropriate course of action for all individuals. Here’s how to assess whether or not it will work for you…
What is diversification?
In any article about diversification, it’s important to provide a thorough explanation of the concept, so that’s what we’re going to do. At its heart, diversification is a risk management strategy, one that works by spreading a portfolio’s investment assets across a wide range of areas. This means rather than sticking solely to one type of property, you will add a varied mix of property types, or perhaps even expand your portfolio to include different investment instruments entirely, like options trading, forex, or stocks and shares.
What’s the logic behind it?
Now, a natural question one might ask themselves is how diversification actually works. The logic behind it is simple and easy to explain, so here’s a condensed answer that should help illustrate our point. Essentially, diversification works by spreading your risk across a number of investment markets, so that should any single asset class collapse, your portfolio as a whole will be diverse enough to weather such upheaval. This means that if the bottom were to fall out of the property market tomorrow, your finances would not be ruined in one fell swoop. Diversification has the added advantage of not only protecting your investment, but of also delivering a higher average yield overall.
What sort of assets should I add to my portfolio?
The beauty of diversification is that there’s no right or wrong answer when it comes to building a profitable portfolio. In fact, there are numerous ways to approach such an aim, and these include either adding different types of property (preferable to some but less effective overall) or expanding into entirely new areas instead.
We’ll take a look at the first to start. Some property investors prefer sticking to what they know, and where this is the case, you’re a little more limited with regards to what you can add to your portfolio. That said, we recommend including as many different types as you can, from sprawling, antiquated houses to neat, new-build flats. Overseas investments are another good idea, as global markets are not always affected by external factors in the same ways.
Your other – and more effective – option is to add different investment instruments to your portfolio. These could include everything from options trading – a type of derivative which allows you to profit from any and all market movements – all the way through to forex, stocks and shares, and even government bonds. The choice of how much risk you want to run is entirely up to you, but whatever you choose to add, you’ll find yourself in a far stronger position should the bottom ever fall out of the property market.
With all of this in mind, wouldn’t it be worth adding a little more diversity to your investments?