Why It's Important to Diversify into Real Estate Investing

Why is diversification important?

You probably have heard the adage, “Don’t put all your eggs in one basket.”

While this can be applied to different facets of life, investing experts often use it when explaining the importance of diversifying your investment portfolio.

No matter what your investing goal is, diversification is a key to success.

Real estate, in particular, is one of the assets you should be looking at if you want to diversify. Why?

Real estate investing reduces risk.

Unlike other asset classes, real estate can help you hedge against inflation.

And since real estate is backed by a physical asset, it’s less likely to be affected by market uncertainties that cause stock prices to fluctuate.

Why it's important to diversify your portfolio

Diversifying your portfolio is critical as it reduces the volatility and risk of loss in an investment portfolio in the long run.

By diversifying, you’re spreading out your risks so that the performance of one investment doesn’t correlate to the performance of your entire portfolio.

Here’s why you should never put all your eggs in one basket.

Suppose that basket is one stock.

Putting all your money in one company can be extremely risky when investing. If the company goes bankrupt or hits a performance bottleneck, your investment will suffer too.

But, you can reduce your risk by spreading your investment across many different companies or even other asset classes.

Why diversify your portfolio with real estate?

Adding real estate to your investment portfolio is among the best ways to reduce risk while still maintaining a healthy return on your investment.

Investing in real estate is a viable, low-risk alternative that can significantly reduce the potential for loss in the event of a downturn in the stock market.

Because of its low correlation to the stock market, real estate is not as susceptible to the inherent risks associated with stocks and bonds.

Other reasons to invest in real estate include:

• Historically strong returns – Averaging an annual return of 10% for over twenty years, real estate has traditionally performed well
• Cash flow and current income – Rental properties can be a great source of passive income. They can provide a stable monthly income without you having to participate in any daily work—providing you protection and diversification during financial market volatility.
• A hedge against inflation – Real estate income is one of the best ways to hedge against inflation because property prices tend to stay on an upward curve over time. Most homes that hit rock bottom during the 2008 housing bubble were back to their pre-crash prices in less than five years.
• Tax benefits - Real estate can offer tremendous tax benefits like depreciation

Plus, there is the pride of owning a hard asset, like a home, that you can’t get with stocks.

An overview of the major asset classes for investing

In modern financial markets, most people can choose which asset class they want to invest in.

An asset class is a group of financial instruments that exhibit similar characteristics and are subject to the similar laws and regulations.

You’ll want to achieve an optimal asset allocation by allocating a certain percentage of your investment funds into each asset class.

This can help to reduce risk because each asset class will perform differently in any given market environment.

Typically, the three major asset classes for diversification are:

• Cash
• Equity
• Bonds

Expanding on these three major asset classes yields five different asset types that make up the bulk of many investment portfolios.

These asset types are:

• Stocks
• Bonds
• Real estate
• Commodity
• Cash

We’ll touch on the pros and cons of investing in stocks, bonds, real estate, and digital assets like cryptocurrencies.

Stocks

Investing in stocks means you own a piece of the company whose stocks you’re buying.

As the company grows, you can expect a good return on your investment.

Historically, the stock market has yielded high returns to investors who hold stocks for a considerable amount of time.

That said, the stock market can also go down, presenting investors with risks and potential losses on their investments.

Here are the pros and cons of investing in stocks.

Pros

• Easy to buy
• Potential to build massive wealth over time
• Grow with the company you invest in
• Little cash required to get started
• Income from price appreciation and dividends
• A lot of choices

Cons

• Risk losing it all
• Emotional ups and downs
• Taxes on profitable stocks sales
• Returns not guaranteed

Bonds

When it comes to investing, most people think of stocks first. But if you’re looking to diversify and manage single-asset risk, you may want to add bonds into the mix.

Bonds are made of debt securities that companies or governments issue to investors to raise capital.

While stocks provide partial ownership of equity in a company, bonds are a loan from you to a company or government. Hence, unlike stocks, bonds pay fixed interest over time.

Here are the pros and cons of investing in bonds.

Pros

• Tend to be less risky and less volatile than stocks
• Give investors fixed returns
• A multitude of corporate issuers and bonds to choose from
• Liquid market

Cons

• Bonds yield lower returns than stocks
• Larger investment sum is needed than stocks
• Expose investors to both credit and interest risk
• Many corporate bonds must be purchased OTC

Real Estate

Including real estate as an asset class in your portfolio adds diversity to help spread out your overall investment risk.

There are many real estate investing strategies you can adopt to maximize your returns. Some options, like real estate investment trusts (REITs), are passive.

Others like buy and hold strategies provide a way to preserve wealth while earning rental income along the way.

But, as with any other type of investment, investing in real estate has its pros and cons.

Pros

• Real estate generates cash flow
• Appreciates over time
• Provides a hedge against inflation
• Builds equity
• Property acts as leverage
• Provides a depreciation tax shield

Cons

• Real estate is capital-intensive
• There can be hidden problems associated with property
• Bad tenants
• Lack of liquidity

Cryptocurrency

A cryptocurrency or crypto is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography.

Cryptocurrencies have the potential to change the financial world as we know it and have attracted many investors, mainly due to the Bitcoin craze.

Bitcoin soared from a meager $50 per Bitcoin to a whopping $68,000 in 10 years.

So, what are the benefits and drawbacks of cryptocurrencies?

Pros

• Anti-inflation characteristics
• Self-managed and regulated
• Instant and secure transfer
• Personal information privacy

Cons

• High loss risk
• Avenue for facilitating illegal activities
• Highly volatile market

Why real estate is a safer investment than stocks and crypto

If you have $20,000 to invest right now, three of the hottest options in today’s world are real estate, stocks, and cryptocurrency.

But which is the best option for you?

To answer this question, we’ll look at the three investment options in terms of risks, returns, and liquidity. Spoiler alert; if you’re looking for the best place to invest $20,000 today, real estate is the option that will give you the best of all worlds.

Crypto has been one of the hottest investments over the past five years and isn’t showing any signs of slowing down. Yet, the crypto market is highly volatile.

The stock market can also be a lucrative investment venture.

But if you’re planning to invest your $20,000 for a few years, experts recommend you avoid the stock market. Why?

Like Bitcoin, stock prices are highly volatile, and you could lose everything overnight. Yes, a stock can lose its entire value. Plus, stock prices change every day due to market forces, so you’ll always be in an uncertain state.

However, unlike Bitcoin, you can make money in two ways with stocks; value appreciation as stock price increases and dividends. But these earnings are not guaranteed, and the return on investment (ROI) is often lower than expected.

Investing in real estate is the best of both worlds.

When you invest in real estate, you acquire physical land or property.

You make money by collecting rent and through appreciation as the property price appreciates in value.

Also, since property can be leveraged, it’s possible to expand your holdings even if you don’t have ready cash.

And as we mentioned earlier, real estate is less risky than other asset classes. The key downside to investing in real estate has typically been that it’s not easily liquidated. Lofty AI changes this by providing 100% liquidity.

Why real estate is hedged against market volatility

When it comes to hedging against equity markets, real estate is the best option to add to your investment portfolio, particularly in light of current market conditions.

Adding real estate to your investment portfolio provides a hedge against stock market volatility.

Rental properties give investors an added boost: an extra yet guaranteed income stream with the attractive potential for long-term growth.

Real estate is also considered a smart approach to hedge against inflation, given that the asset class usually has little correlation with stocks and bonds.

As an investor, diversifying your portfolio isn’t something you should ignore. If you’re looking to diversify your portfolio, incorporating property into your investment portfolio is the best way to reduce risks and preserve long-term wealth.

Additionally, real estate provides a hedge against market volatility while giving you control over a physical asset.