No matter where you are investing in, there is always a chance that you might accrue a loss. You can reduce the number of losses by diversifying your portfolio. By diversifying your portfolio, you divide your total capital investment into small segments, and each small investment is invested in different kinds of assets.
Hence, even if one of the investment plans fails to provide you with the profit, you will be able to balance the loss with the profits made by the other assets. However, you must know that not all the diversifying strategies are created equally. It all depends on what kind of assets you are investing in.
What Is Diversification?
Diversification is an important aspect of managing all your profit and loss. It is a management strategy that blends in different investments into a single portfolio. The idea behind doing so is to boost the return of investment and reduce the loss accrued.
Why Can Real Estate Improve Portfolio Diversification?
The private market is very different compared to the Public Market. The volatility of the buying and selling dynamics is significantly lower. Let’s look at the aspects of the real estate businesses and the possibilities to add them to portfolio diversifications.
Individual Market with low correlation
The biggest advantage of investing in the real estate market is that private real estate and traditional public investment are different. That means, if one market does not perform well, it will not affect the other market’s performance.
Public market investments have their advantages and disadvantages. However, all the assets are traded within the public Market; they hold a correlation. Whereas the public Market has its market for the trades. Both markets have different natures, and they do not share the same set of risks in the investment market.
Investment structure by market
Along with the market level, both the public and private markets share a low correlation at the asset level. If we talk about real estate, it is traded in REITs and mutual funds. On the other hand, private market real estate businesses can be structured in many ways.
With the different structures, different sets of risks are involved. The fee structure and return structure also depend on the structure of private real estate businesses.
Access to Liquidity
One of the greatest benefits you get with wholesaling real estate is the easy access to the liquidity. Assets like stocks and bonds can easily be sold. However, it is important to know what price you are paying for easy liquidity. The liquidity premium is what the investors pay at the time of buying an investment.
If you are a long term investor who thinks of buying and selling policy, then this expensive feature might not suit your taste. However, if you are among the people who are investing in real estate for the sake of diversifying your portfolio, the Liquidity premium might be the game-changer.
Market Instability offer opportunities
The public market is efficient with their prices. They have a strict code of conduct that evaluates the prices of the public market’s assets if information related to the public Market is disseminated, which makes it impossible for the intermediaries to gain more access than the others.
However, compared to the Public Market, the private market is inefficient. Buying and selling of the private market real estate generally come with high transaction costs. This difference in the dynamics offers the possibility to make a profit. This is why private real estate can be considered one of the options for the diversification of your portfolio.
Real Estate Retain Their Value
The price of the very asset we invest in goes through ups and downs, but the real estate businesses have seen only the upper part of the graph. Seeing how the population is rising, real estate businesses are going through its golden era. Other assets might lose their value down the line in the future. However, real estate properties will retain their value over time, and if all the conditions merge completely, you can even come out of the investment with a fortune.
If you are into the real estate investment to make money, then you might have taken the wrong approach. Investing should be fun. As long as you can educate yourself and enjoy the process, real estate investment will accrue profit. By diversifying your portfolio, you may find that investing in real estate is more rewarding than any other asset.