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Diversification: Why It’s Crucial for Your Portfolio

10/23/2014
fundrise blog, crowdfunding blog, cre blog, cre investing trends, dan miller

One of the most effective ways to build a profitable portfolio is through investment diversification. Simply put, diversification is the process of investing in different types of assets, minimizing a portfolio’s overall risk by lessening the impact you’d see from a single asset loss. This is especially true when investing in real estate, where deals may outperform and underperform based off of original projections.

John Templeton, who made billions through diversified mutual funds famously said, “Diversification should be the cornerstone of your investment program.” The following graph shows how diversification can allow for high return and moderate risk:

Most investors look for both high returns and low risk on their investments; diversification helps to produce this golden combination. As an example, consider a 10-year period. Baylor University Professor William Reichenstein describes: “$1,000 invested in stocks grew to $1,900, while $1,000 in Treasury bills grew to a more modest $1,732. But if you owned a mix of 75% stocks and 25% Treasury bills and rebalanced back to these targets at the end of each year, your portfolio would have ballooned to $1,925—more than if you owned just stocks.”

Over the past decade, hundreds of large institutional organizations—pension funds, endowments and foundations—have embraced diversification to find higher returns at lower risk levels. More and more, diversification into the real estate market is seen as an important strategy for institutional players to provide current yield and inflation protection. The New York State and Local Retirement System exemplifies this trend. The third-largest pension fund in the U.S. has 6.9% of their assets, over $12 billion, directly invested in real estate.

Studies indicate that the risk-return tradeoff of portfolios that include real estate improves versus portfolios that only include standard financial assets. Between 2007 and 2011, pension portfolios including real estate, saw higher returns of more than 1.4 percentage points compared to traditional stock-bond mixes.

It’s historically been extremely difficult for the average investor to access private real estate opportunities in the same manner as large institutions.

However, crowdfunding and new innovations in technology has made investment in real estate assets open to a much broader portion of the population. Just as institutions have been steadily increasing the allocation of real estate in their portfolios, so too will individual investors through real estate crowdfunding platforms like Fundrise

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By: Dan Miller

Co-Founder | Fundrise

Follow Dan on Twitter: @dan_miller

Visit Fundrise's Website: www.fundrise.com

Email: contact@fundrise.com

Visit the Fundrise blog: blog.fundrise.com

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