How To Help Create Wealth With A Diverse Portfolio
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’re over-exposed to certain sectors or investment types.
It’s common to think that diversification begins and ends with owning stocks and other market-based investments. The reality is quite different, however. There are other factors, such asset class and market exposure, that play a major role in growing your portfolio. If your holdings aren’t timed to maximize upside potential, and spread across a wide range of asset classes, you may be missing out on diversification options that could otherwise create value.
One of the easiest ways to diversify your portfolio is by finding other opportunities outside the market, primarily by way of alternative investments. Alternatives can provide you with a hedge against downturns, exposure to more industries and asset classes, and even provide you with passive income at the same time.
Determine what kind of diversity your portfolio needs
A diverse portfolio can help investors take advantage of growth opportunities and mitigate losses. 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.
It’s important to pick the right kind of diversification when it comes to each of these asset classes. If, for example, you’re investing half your portfolio in stocks, conventional thought suggests that you cap the number of stocks you have somewhere between 25 to 30. This number decreases if you allocate a smaller percentage of your portfolio strategy to stock holdings.
You’ll also need to factor in other core considerations for how you want to grow your money: if you’re looking for short-term gains, then a stock-heavy portfolio might actually be a preferable option to one that’s more conservative and fund-heavy. If you’re investing for the long-term, having stocks play a large role may still be a good idea if you’re willing to be aggressive. This can be an advisable path forward for people who are early into their retirement savings, for example. If you’re near retirement or simply risk-averse, diminishing your stock holdings might be the best way to go.
No matter your investing goals, picking an off-the-shelf diversification strategy may not be enough. The common wisdom for diversification is, in many ways, outmoded. Staying within the realm of stocks and funds doesn’t offer meaningful diversification, given how much overlap there is between these two investment types. If the stock market suffers from slow growth, no growth, or a loss in value, it becomes awfully difficult to seek shelter through these holdings alone. Bonds can help store cash safely, but they won’t yield more than the stated interest rate you got when you bought them. Plus, they won’t make you rich either.
Investors with more skin in the game, or those who want market-beating returns, are going to have to think a bit harder. 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. Diversification doesn’t have to merely be a way to protect what you’ve gained; rather, the right diversification opportunities and methods can actually help you build your assets.
Where to find options for diversifying your portfolio
Options to diversify one’s portfolio are multitudinous. There are options to be found through conventional investment products, such as stocks, mutual funds, and index funds that take the guesswork out of spreading one’s allocations across a wide range of industries and economic sectors. Each requires a certain strategy and set of holdings. Pursuing the wrong approach with diversification through conventional investing only can actually set you back in some cases.
Thankfully there are several alternative investments that savvy investors can also include in their portfolio and diversification strategy. Some, such as gold, are a go-to for many—but there are other, more value-driven options out there as well.
Here’s what you need to know about your diversification options, and how the right approach may even create wealth with your diverse portfolio assets.
Diversification with stocks
Owning a diverse range of stocks across the market can help you diversify your stock market investments. Investing across several sectors can help you offset losses in those that might be sluggish by availing you to gains in sectors that are on the rise. Make sure you’re selecting well-performing stocks from across a range of sectors, and that your overall stock portfolio is balanced in terms of exposure.
In this case, exposure means being too heavily invested in a stock, especially if you have other investments in the same sector. Say, for example, that you’re bullish on the technology sector. If the total financial amount you’ve invested in shares of companies in that realm outweighs any other portion of your stock portfolio, you’ve got more exposure to losses there than elsewhere.
Experts suggest that no single stock should equal 5 percent or more of your total investments in the stock market. Even the most stable stock can experience a loss in value; overloading on one stock can leave you exposed to a potential decline in value. This may wreak havoc on your portfolio if it’s given an outsized share of your investing dollars. As tempting as it might be to put an outsized investment sum on one company, you will be left without a place to hide if its price comes crashing down.
Stocks are a must for investors who want a shot at creating significant returns. That said, they can be much riskier than other assets. Stock values fluctuate constantly. Today’s surge might get wiped out by the closing bell tomorrow. Yet most stock investments tend to appreciate over time, which makes them a better prospect for portfolios with a long view. But even then, there’s no guarantee that you’ve picked the right stocks, or that every stock asset grows with time. That’s why it’s crucial to include more conservative financial holdings as well.
Diversification with investment funds
Mutual funds offer investors with a quick, simple, and affordable way to diversify their portfolio. There are an extensive number of options: some seek to cover the best investment opportunities in a specific sector, economic region, or for a certain period of time. No matter what kind of diversification you’re looking for, you’re bound to find a mutual fund that can provide it.
Funds do come with their own drawbacks, however. First, they don’t provide much customization for investors. You can choose between a variety of options, but you can’t customize the assets within your fund. Fund managers and algorithms control what each fund consists of, making you choose between convenience and customization.
Diversifying with funds isn’t a surefire strategy, either. Investors often end up buying into several overlapping funds that invest in one or several of the same companies. This means you may end up paying management fees twice (or more) for the same underlying stock holding. Worse yet, you’ll end up with less diversification than you thought. Bear in mind that many of the larger funds include shares in 100 or more companies, which can lead to underperformance due to over-diversification.
Bonds have long played a role in diversification, given that they’re designed to provide a guaranteed return. There are a ton of options in this class that can offer long-term diversification. 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.
Bonds tend to offer a steady rate of return without much room for outsized 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.
At present, municipal bond interest rates are near zero. This leaves investors with little incentive to include the usual bond allocations experts suggest. Plus, with inflation likely on the horizon, bond holders may even end up losing money on their investment in terms of purchasing power by the end of the bond’s length.
Diversification through annuities
If you’re a long-term investor and want to build an even sturdier foundation for your retirement, annuities can be a great addition to your holdings. With an annuity, you make recurring payments over a period of time. When you’re ready to retire, your annuity plan begins paying out.
There are three kinds of annuities—at least as far as portfolio diversification is concerned. Each offers a different approach to when and how much you’re paid out when the time comes. Fixed annuities, variable annuities, and equity-indexed annuities. When and how you’re paid out differs between all three, which means you can find the right terms for you.
Fixed annuities offer fixed payments as well as a fixed return on the investment dollars you've put in. Variable annuities give you the option to select investments and then pay you a portion of the earnings depending on how well the underlie investments perform. Index annexed annuities function similarly to variable annuities, except they’re pegged to a stock market index (such as the S&P 500). When the index increases in value, your payout does as well.
How alternative investments build diversification
So far we’ve only covered market-based portfolio diversification. Stocks, bonds, and funds are some of the most commonly used assets for diversification, but, as we’ve discussed, they may still leave investors overexposed to the whims and volatility of the market. A sluggish economy can affect the stock market at large. If stocks dip, funds may also experience setbacks. The bond market makes it challenging for investors to find good reason to load up on bonds right now.
Smart diversification strategies need to include alternative asset classes, which can outperform common market offerings. Plus, many alternatives are more stable than stocks. This depends on the kind of alternative investment you’re pursuing, given the sheer breadth of options available.
Alternative investments are, as the name suggests, an alternative to the kinds of assets you can own through stock markets and exchanges. Since alternatives don’t trade on conventional markets, often they can avoid market shake-ups as well. Alternative investments can be a wonderful complement to a market-heavy investment portfolio, building in diversification that doesn’t rely on major stock indices to create value.
The world of alternative investments is broad. They can take the form of anything 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. That’s not true across the board, however. Some are less volatile than others—and may even be less unpredictable than stock market holdings. Better still, they can even outpace bond and fund performance with the same or less volatility.
Alternatives have grown steadily in popularity among individual investors. One investment management firm found that roughly 87 percent of their clients were either keeping their alternative investments level or increasing them through mid-2021. The Fed’s rate cuts throughout the pandemic have sent bond interest rates plummeting, making it more apparent that better returns are often possible through alternatives.
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 fluctuations. 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.
Farmland: The go-to for diversification
Farmland investing may not capture as many headlines as gold, silver, or cryptocurrency, but it is among one of the most stable revenue-generating alternatives around. The average price for an acre of farmland has increased consistently for more than 15 years, and demand for agricultural goods is set to rise throughout the next 20 years.
With inflation fears on the rise, savvy investors should consider farmland as a place for their money to weather the storm. Farmland has been consistently inflation-proof, and can even increase in value as the cost of goods increases. Bonds can’t offer the same interest that farmland does, particularly with rates slashed to fractions of a percent. That makes farmland investing an appealing option for safeguarding assets.
Better still, farmland investing gives you more bang for your buck than other common alternatives. For example, an ounce of gold fluctuates around $1,700. A minimum investment with FarmTogether begins at $10,000. You can hold just under six ounces of gold, or you can choose from a range of farmland investing opportunities across the country.
Diversify and grow your portfolio with FarmTogether
Investing in farmland used to be a challenge for your average investor. Finding and selecting the right options was tedious, and vetting your potential investment required significant hands-on research. FarmTogether has changed all of this: now, accredited investors can choose from a range of expertly chosen investment opportunities in farms across the United States. Better still, they can do so through our intuitive online platform. This provides an at-a-glance view of your farmland investments, making it easier to track performance and the duration of what you own.
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 is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.