By Kevin Mitchell – Direct Real Estate Investors
Everyone has their pet peeves and today I am going to write about one of mine. And it all centers around the word diversification.
My brother and I have been full time real estate investors for the past 7+ years now and over this time period we have witnessed our real estate investments flourish…and at the same time we experienced the stock market crash of 2008 and the subsequent recovery over the last 6 years.
And the biggest lesson people should have taken (but many didn’t) from the crash of 2008 was the immense importance of diversification within your investment portfolio.
So what exactly is diversification? Well, this is what Google had to say, “In finance, diversification means reducing non-systematic risk by investing in a variety of assets.”
Ok so reducing risk by investing in a variety of assets. Sounds simple enough and it makes a LOT of sense to me.
And this is why it is such a pet peeve of mine. How can such a simple concept get so twisted by the financial industry?
If all of your investments are in the stock market, and more specifically mutual funds, how in the world can the financial industry tell you that they are diversifying your portfolio?
When the market crashed, those that had all their money “diversified” in the market lost, and they lost big.
While those individuals that had true diversification made out much better.
So what is true diversification? Well it’s having your money invested in more than one asset. A mutual fund, by design follows the ups and downs of the stock market. You can invest in one mutual fund or ten of them but at the end of the day you are still investing in the exact same asset.
With real estate, it is a completely different asset and its value has very little to do with the volatility of the stock market. Deciding on how to find and invest in a real estate investment is another story all together but the point is by having some of your money in real estate and some in the market, you provide yourself with true diversification and the ability to limit the risk of your investment portfolio.
Let me give you a real life example of how this works:
Person A – $200,000 Investment Portfolio
– Invests $100,000 in Mutual Fund A
– Invests $100,000 in Mutual Fund F
Person B – $200,000 Investment Portfolio
– Invests $100,000 in Mutual Fund A
– Invests $100,000 in Fortress Syndicate Mortgage
When all is going well with the market this diversification isn’t as big of a deal because all the assets are making money. But say this example was before the crash of 2008 (or before the next stock market crash). What would the results look like.
People lost between 20%-40% of their investments through the 2008 market crash so lets use a 20% loss for this example. While the Fortress sydicate mortgage is making a fixed 8%.
Person A
– $80,000 in Mutual Fund A
– $80,000 in Mutual Fund B
– =$160,000 Portfolio Value
Person B
– $80,000 in Mutual Fund B
– $108,000 in Fortress
– = $188,000 Portfolio Value
As you can see Person B has an additional $28,000 because of the fact that they diversified their investment portfolio.
I know this is a simple example and there are a TON of variables at play but I just wanted to show you why it drives me crazy when the financial industry advertises and talks about diversifying your investment portfolio by investing in different mutual funds.
So do yourself a HUGE favour and come on out next Thursday, August 21st at 7pm to learn all about Syndicate Mortgages.
Fortress is coming down from Toronto to fully explain these fantastic investments and to answer any questions you have.
This article is sponsored content and is a part of our Keep It Local Business Spotlight feature. Contact Dana Haggith for more information – 519-784-4610 or dana@sydenhamcurrent.ca.
