September 21, 2022
Weathering Volatility with a Well-Diversified Portfolio
Investors desiring to maximize wealth will often utilize investment strategies that seek to mitigate investment risk or losses. One of the most fundamental of these strategies is to diversify your investments. This article sets out to discuss various investment opportunities and how diversifying your investments can provide positive risk-adjusted returns.
The most widely known investment opportunity is the stock market. Most individuals have some investment in the stock market, be it in your 401(k) or a more active investment. Whether you are an active investor or not, you’re likely barraged by stock market news about the volatility of the market due to various issues including political agendas and international influences. Some individuals are attracted to the upside this volatility provides. Others prefer to invest in the stock market because of its liquidity—it’s easy to access your capital when you need it.
Conversely, investments in bonds are generally perceived as low-risk and low-reward. Depending on the company or municipality issuing the bonds, an investor is less likely to suffer losses, but one’s upside or potential return will generally be smaller, compared to investing in stocks.
Money Markets and Certificate of Deposits
One investment often overlooked is maintaining a cash position. Individuals looking for a short-term place to preserve their capital will opt for a money market account or certificate of deposit with a large financial institution. These investments offer virtually no return but are considered the most low-risk and most liquid opportunity. One’s cash position needs to be taken into account when considering their investment portfolio.
Beyond investment in stocks, bonds and cash, individuals have a number of opportunities that are generally known as “alternative investments.” Alternative investments include investment in real estate, private equities, commodities, and others, including cryptocurrencies and collectibles. Alternative investments are generally privately held investments where one invests directly in industries or assets. With exceptions such as cryptocurrency, these investments provide a more stable value with less volatility given the nature of the asset. These assets are often also less likely to be impacted by economic fluctuations with potential for a higher return on investment over the long term. A downside is that while stocks and bonds are publicly traded and thus readily available, alternative investments can be less liquid since most are not readily available for sale in a public market.
Balance Risk and Upside Through Diversification
When we say diversification, we mean allocating investments across these various investment instruments to minimize the overall risk profile of the portfolio. Maintaining a diverse portfolio allows one to balance risk across these various investment opportunities based on one’s risk tolerance. A well-diversified portfolio will be able to weather the volatility of any one investment market but should benefit from investing across many investment types overall.
At Investors Associated, our focus is providing risk-adjusted returns through a diverse portfolio, not only in its real estate asset type (i.e., multi-family, office, industrial, and retail buildings), but also in the location of its investments. If you’d like to talk more about our portfolio diversification, contact Jamie Stefan at [email protected] or (414) 797-3947.