Every investment portfolio looks different. After all, if you want to make sure you’re staying true to your own specific goals, how you allocate your money should follow suit. Making sure your financial strategy incorporates different kinds of investments can help prevent you from losing big if you’ve placed the majority of your money into industry-specific investments, direct stock purchases, or other categories of investments.
It’s common to think that diversification begins and ends with owning different stocks and products that are tied to the stock market. The reality is quite different, however. Keeping a majority of one’s investments within the stock market still creates a fair amount of risk, since a general downturn on Wall Street is likely to affect holdings across the board.
Real diversification means finding other opportunities outside the market, helping to give your portfolio the maximum amount of exposure to upside as possible. There are plenty of options out there if you’re looking beyond stock markets to further diversify your portfolio.
A diverse portfolio can help investors take advantage of growth opportunities in specific sectors of the economy, and forestall losses across one’s entire set of investments in the event that an industry or sector sees a massive drop in value. In other words, diversification should encourage growth when times are good, and soften the blow when markets drop.
Diversification can take several forms for an investment portfolio. The easiest form of diversification can be as simple as spreading one’s capital across differing mutual funds, certificates of deposit, exchange-traded funds, and stocks with steady performance. These simple steps can help forestall one’s entire portfolio from dipping in the event of a major disruption to a sector, country’s economy, or other episodic events.
This may be sufficient for simple portfolios. But investors with more skin in the game, or those who want market-beating returns, are going to have to think a bit harder. Merely covering one’s bases across sectors with a mix of stocks, bonds, and funds may be insufficient. A market-wide downturn, such as the one we’ve seen in fits and starts since the outbreak of COVID-19, can drag down the entire value of a portfolio that is stock, bond, and fund-heavy.
Options to diversify one’s portfolio are multitudinous. There are options to be found through conventional investment products, such as mutual funds and index funds, that take the guesswork out of spreading one’s allocations across a wide range of industries and economic sectors. These funds, however, don’t provide much customization for shareholders. Mutual fund asset allocations are at the discretion of the fund manager, and index fund allocations are set by algorithms and specific instructions from the business offering them.
Holding onto a well-structured stock portfolio may also offer a decent amount of diversification, as exposure to one specific stock or industry is lessened by the overall resiliency where money is invested. This strategy usually succeeds only when it is complemented by a mix of less volatile holdings, typically in the form of funds, bonds, or even cash holdings.
Speaking of bonds, there are a ton of options in this class that can offer long-term diversification as well. When investors buy bonds, they are essentially purchasing debt from either a business, governmental institution, or bank. In exchange, the bond-holder gets interest on the money lent. This tends to be a somewhat steady rate of return without much room for outsized or unexpected gains. Bonds are typically thought of as a “safer” investment: secure bonds tend to offer steady growth over time, and serve as a common financial product for most investors when looking to park their assets into something less fluctuation-prone than stocks.
So far, we’ve covered market-based portfolio diversification only. These options are some of the most commonly used, but still may leave investors overexposed to the whims and volatility of the market. A major marketwise drop won’t be forestalled by most of these investments.
Some of these losses may seem unavoidable, unless an investor begins to explore alternative investments. Alternative investments offer an opportunity to take a stake in an opportunity that’s independent of the stock market. This class of investment can be a wonderful complement to a market-heavy investment portfolio by building in diversification that doesn’t rely at all on major stock indices to create value.
The world of alternative investments is broad, and can take the form of everything from real estate investing to rare stamp collections. The most common kinds of alternative investments include private equity, hedge funds, venture capital, real assets, collectibles, and farmland, the newest of the bunch, to name a few.
Private equity, hedge funds, and venture capital all offer investors an opportunity to build value by way of a managed investment in a broad portfolio of holdings. Participation in these investment types often comes at a steep price, ranging from $250,000 to $25 million depending on the firm. Returns from these investments typically beat the market by a considerable amount, but can be prohibitively expensive for many investors.
Real assets, such as real estate holdings and investments in natural resources and utilities, don’t necessarily come with the high cost of entry, and can offer outsized returns depending on the nature of the investment. This is true for collectibles as well: anything from valuable artwork to vintage coin collections can add diversification to a portfolio, but depend almost exclusively on the appraisal value of what’s held.
Farmland investing is unique among these other asset types. Instead of coming with steep investment minimums or the challenges that come getting valuations for real assets and collectibles, farmland investments empower investors to diversify their portfolio through holdings that are independent of the market, easier to manage, and with less costly fees than hedge funds and private equity investments.
It’s easy to get lost in a sea of options unless you know what you specifically want for your portfolio. Each of these investments can help build wealth independently of the market, however, and may be resilient even when markets are volatile—or firmly in the midst of bearish conditions.
Why picking the right alternative investment is so important
Many alternative investment types come with risk that either rivals stock market investing, or is significantly greater than more common investment types in stocks, bonds, and funds. Some, however are less volatile than others—be it due to the kind of investment they offer, or the strength of the team offering them.
There is also a greater opportunity for upside depending on the asset class you choose within the realm of alternative investments. Adding investments to your portfolio that don’t correlate directly to the ebbs and flows of the market can offer a bulwark against a general decline in your portfolio.
But even within these asset classes, there is a difference in terms of exposure to the second-hand consequences of a shaky market. For example, holdings in precious metals are still tied up in commodities market fluctuation. Involvement in a REIT still has exposure to aftershocks to consumer spending and confidence when the market takes a tumble. Farmland investing, on the other hand, doesn’t correlate as closely to the fickle stock exchange disruptions, which can make for inflation-proof investment opportunities.
FarmTogether is the leader in the agriculture investing space. The company pairs accredited investors with institutional-grade farmland opportunities across different states and crops. When you invest with FarmTogether, you get unparalleled access to a broad swath of investment opportunities that have all been vetted by a team of experts, taking the guesswork out of finding the right opportunity. Plus, you’ll be able to build even more diversification into your portfolio that goes beyond the whims of Wall Street.
Disclaimer: FarmTogether does not intend to provide tax, legal or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.