There are countless choices for every investor to make, from deciding what makes for a compelling investment opportunity to determining what makes a successful rate of return. Diversification reduces risk to keep your investment portfolio in balance, avoiding catastrophic loss when market conditions shift.
One of the most valuable choices you can make is deciding how you will diversify your investments. Let’s unpack what that should look like and why diversification is important to build a successful portfolio.
The Value of Diversified Investments
Why is diversification important? If all of your capital is invested exclusively in one business, one sector, or one asset class, you can lose everything at once due to the concentration of risk exposure.
Diversification is fundamental to an investment strategy to spread risk across a variety of assets and hedge against market volatility. When you diversify your investments, no single asset can cause devastating loss and catch you by surprise.
When you expand into more sectors and asset classes, the different yields, rates of return, and liquidity allow you to assess your portfolio growth over time. If an asset begins to under- or overperform, you can decide how it impacts your goals. When volatility risk increases—and significant swings in value threaten losses—a diversified portfolio positions you to rebalance as needed.
How to Develop a Diversified Portfolio
When building a diversified portfolio, you’re seeking a balance between your goals, your investment time frame, and your risk appetite versus risk tolerance. In other words, you’re accounting for:
- What you want to achieve with your investments
- How quickly you want to do so
- How much risk your portfolio can withstand
- How much risk you’re willing to take in pursuit of returns
This will define which opportunities are best for your investment strategy and inform your asset allocation.
Any diversified portfolio should include diversification across types of assets and within asset classes for distinct risk and return characteristics. Non-correlated investments won’t be influenced by the same risk forces and can help you maximize risk-adjusted returns.
While inherent systemic risk cannot be eliminated, idiosyncratic risk associated with different sectors, industries, and geographies will provide diverse opportunities to generate income and mitigate potential losses.
Real estate investment strategies are a great example of comprehensive diversification. Property is a tangible asset with a low correlation to stocks and bonds to reduce volatility risk, generate income, and take the form of equity or debt investments.
Private hard money loans and mortgage real estate investment trusts offer reliable passive income secured by real estate with different asset classes, sectors, and geographies.
Best Practices for a Diversification Strategy
A diversification strategy is not only a way to reduce risk but also to increase growth potential. These are some best practices to get you started:
- Seek professional guidance to ensure you can make well-informed decisions. A financial advisor’s expertise can fill gaps in your knowledge as a new investor—especially when you expand into new asset classes.
- Review historical performance for insights but not a guarantee of investment returns.
- Monitor and rebalance your asset allocation to adapt to market conditions and your investment goals.
- Consider investment vehicles for both short- and long-term growth to support your time horizon with corresponding levels of risk and return to meet your objectives.
Secure Diversified Investments with Herzer Financial
As you evaluate investment opportunities, diversification will be a practical way to enhance your portfolio for resilience and risk-adjusted returns. Private money loans secured with real estate are a great vehicle for fixed income.
Herzer Financial has been in the California lending business since the 1950s, longer than many banks, and we have funded more than $1 billion in real estate projects. Our investors trust us to operate with success in mind from start to finish, making it easy to achieve financial goals. Apply to invest and secure diversified investments today.
