Finding Investments that Provide Diversification

Written by: Samuel Gregoth
07/15/2019

stocks-portfolio

Many people seek out diversification in their investments by investing in different classes of investments and different investments in varying industries. They often believe that they have true diversification and can weather stock downdrifts as well as fully experience market increases. However, when a true black swan event occurs they often find themselves experiencing significant heartache when they realize that many of their investments are more closely correlated than they may have thought.

The 2007 – 2009 stock market recession was a prime example of this. Stocks, bonds, real estate, and preferred stock positions all decreased in value simultaneously. Although the banking sector was the hardest hit of all of the stock market industries, almost every industry experienced some level of decline in the market and many took a long time to recover. True diversification is difficult to achieve although some steps can significantly reduce the risk that your portfolio may have.

Keep an Level of Cash on Hand

It is a good idea to keep some cash on hand that you can use to invest in positions that drop significantly in value at a moments notice. This liquidity may seem like a waste when assets increase in value as cash holdings don’t appreciate much in value, but cash can provide you with financial flexibility in recessionary times that you can use to load up on assets that are under valued and provide you security on investments that have declined. 

Individuals who get hurt most during stock market classes are those who have leveraged Their investments by borrowing more money and attempting to increase their returns with these positions by borrowing. Safer investors maintain some security and safety with additional liquidity and have a better opportunity that allows them to take advantage of these opportunities having cash allows you to achieve. Cash retains value in many down markets and provides real diversification from your investments and you should maintain a certain level cash on hand at all times.

Betting on Alternative Assets

It is important to consider alternative investments if you have an established portfolio of stocks that you are looking for protection from. Alternative investments are those that are generally not regular treated and can be from a variety of sources. As an example, an alternative asset may be a piece of artwork that you hold in your home that can appreciate in value over the long run. Alternatively, you can have rare wine or other collectibles and antiques that you look to have increase in value over time.

Other assets you can hold can be a side business that leases tools or properties or even atm machines. There is no end to the alternative assets that can be invested in and the more creative you are the better the potential return can be. Best of all, these alternative assets are unlikely to be correlated with the stock market and can provide you with true diversification.

Holding On to Some Precious Metals

Precious metals such as gold and silver provide true diversification for an investment portfolio. Many people flock to the safety of gold and silver when the stock market and other investment classes drop in value and these precious metals have proven to be a good hedge on other investments that you may have. While gold and silver do not produce economic gains, they do provide a hedge against inflation as there is a finite supply of these precious metals and will go up when inflation occurs. 

The finite supply becomes more pronounced when these metals are used in industrial processes and increase in value as a result. Silver, in particular, has some Industrial uses as well such as its use in photography, and it can be an asset that increases in value over time as it becomes depleted. You should invest a portion of your portfolio in this precious metals to add true diversification and security to your assets.

Continuing to Dollar Cost Average Into Varying Assets

Sometimes it is not just the investments that you choose to make or in the diversity of investments that you have, but how you invest in these assets that makes a difference in your overall portfolio.

In many situations, as an example, you are often better off dollar cost averaging into positions than purchasing all of your investment in one fell swoop. By dollar cost averaging you are continuing to put money into your investments regardless of the current price. When you do so, some of your investments will be when the assets are at a higher value While others will be when the assets are undervalued. While many people believe that they can time the market, research has shown that few are good at timing an investment.By dollar cost averaging you can not only enter into Stocks but also into alternative investments that can provide some security and balance in your portfolio and which provides true diversification.

Rebalancing Your Portfolio

It is important to rebalance your portfolio in order to keep it from becoming too heavily weighted in any specific industry or position. For example, if you believe that real estate holdings of yours provides diversification from the stock market, and the stock market has increased significantly in value, you may want to sell some of your stocks and purchase additional real estate. The key is keeping an overall understanding of your portfolio and making sure that you do not become too dependent on the success of any specific as a class for two significant of a portion of your wealth.

Finding Unusual Investments within the Stock Market that Add Diversification to Your overall Portfolio

There are some investments and listings within the stock market that do add diversification to your portfolio. These investments can be in equities that give you exposure to the assets noted above such as gold or silver etfs or real estate investment trusts. Alternatively they can be in stocks that mine metals or oil and give you some broad diversification. There are a lot of ways to buy stocks that are separate from the typical stocks but keep in mind they may not offer true diversification the way alternative investments do. 


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Finding Investments that Provide Diversification

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