You have likely heard people talk about diversifying your portfolio. Learning how alternative investments can help with portfolio diversity. And why diversification is key to maintaining and growing your wealth.
What does it mean to diversify your portfolio? Diversification is an essential part of investing because it spreads your investments over high, medium, and low-risk investments to help avoid significant losses during economic downturns.
Why is Diversity Important to Have in Investments?
Most investors have purchased a variety of stocks believing that the market will cooperate and they will see large gains. However, equity is more fickle than other investments. Funneling all your assets into it could result in negative returns on your investment. Pouring funds into more stable alternative ventures can protect your money and deliver gains when the stock market is in flux.
When considering the best ways to invest, securities are the most common option chosen. These are fungible financial instruments that are of monetary value. They represent ownership interests and can be traded for financial gains. There are several equity options outside of purchasing stock:
With low risk and low-interest rates, bonds are the safest alternative investments. These are securities that investors buy upfront. Over the life of the bond, the purchaser receives interest payments, and when the bond reaches maturity, the investor is paid out the value of the bond. With bonds, you invest in a company in exchange for interest. Although returns are low, bonds negatively correlate with the stock market and can offset declines.
2. Mutual Funds
As the second most recognized financial instrument with relatively low risk, mutual funds are a good investment option for those looking for a conservative portfolio. Investors purchase mutual funds. The fund then buys shares in various stocks and bonds. If those stocks and bonds perform well, the investor receives a return based on the equity held in each.
The downside of investing in mutual funds is overlap. Because each fund comprises many individual investments, it is possible to invest in the same stocks and bonds under different mutual funds. You may pay fees on returns more than once, reducing the anticipated gains.
These are unique because they combine securities such as stocks, bonds, and other financial instruments into one investment. If you want to diversify your portfolio, EFTs are a simple option. Rather than investing in a few specific stocks, they include varied holdings.
This diversity mitigates risk while providing competitive returns and is subject to lower transactional costs.
Like securities, assets hold monetary value and can be sold for financial gains, and can yield significant revenue. Assets are tangible items that you have full ownership of or a stake in. You should do your homework before investing in any of the tangible assets listed below:
1. Real Estate
Sellers realize sizeable gains on their real estate investments in the current market. These earnings far exceed the returns you would expect to see on Wall Street in some cases. The most common form of real estate investing is homeownership. As the home value increases and the debt decreases, equity accumulates.
In 2021, the average homeowner had $185,000 in available equity that they could access, a 35% increase from the prior year and a new record. In addition to traditional homeownership, buying investment properties to rent out or Airbnb is an alternate way to generate substantial income. Like the stock market, real estate is at higher risk due to fluctuations in interest rates, maintenance, and changes in the market.
To minimize the risk, you can participate in a real estate investment trust where you own a portion of a property and forego managing or developing the land. These can be complicated, so before you dive in, do your research.
In 2020, the agriculture industry added $1.055 trillion to the United States GDP. Agricultural commodities are a considerable portion of the economy and make for an attractive investment.
There is always a demand for food, and as long as there is enough supply, prices stay steady. Changes in customer demand and variations in supply can impact your returns, but these swings have little to no correlation with the stock market’s performance.
Like agriculture, farmland is an important section of the US economy and is vital to the health and nutrition of consumers. The purchase of farmland combines the record-breaking increases in equity and value of the farm’s land with the constant, ever-increasing need for food.
With over 2.02 million farms in the United States, investing in operational farms allows you to add a new industry to your portfolio without the heavy lifting. Farmland investing generates multiple streams of income and tends to maintain value.
4. Precious Metals
Silver and gold are popular alternatives to stocks. Their value has no relation to the ebbs and flows of the market, and they maintain their worth. Precious metals have been shown to outperform traditional investments during uncertain times.
Getting your hands on these valuable assets is expensive due to their stability and demand. One ounce of gold will currently cost you $1854.90. The escalating price will require you to pay a large amount of money if you want the gamble to be worthwhile.
Diversifying your portfolio can guard against some financial losses, but equity alone may not be enough to protect you when the market is volatile. You need to understand the options available to you and perform due diligence to ensure your investments meet your financial goals.
How to diversify your portfolio is up to you. Your choice will depend on your risk appetite, how long you intend to hold each investment, and your liquidity. However, a well-planned strategy with balanced risk and maximum returns can mean the difference between losing everything during tough times and weathering a storm.
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