Diversifying investments is an important topic for every investor to consider. The old principle of "not putting all your eggs in one basket" immediately comes to mind for most people when they think about investment diversification. However, how do you diversify your investments in such a way as to minimize your risk and maximize your returns? There are two principles that I believe will assist every investor in addressing this issue.
Only Diversify Amongst Investment Types That You Understand
Many new investors in real estate begin investing because they want to diversify outside of the stock market. Other investors, who are comfortable with real estate, diversify by putting money in the stock market because they feel they should. The truth is that money can be made in any type of investment (although some do of course have more inherent risk or rewards). The most important thing to consider when looking into a new investment type is do you understand it and do you know how to mitigate the risks in that investment. As an example, I understand real estate incredibly well and know how to achieve the results I want with it as an investment vehicle. I cannot however say I have the same level of acumen when it comes to investing in the stock market. Therefore, I would only choose to begin investing in the stock market if and when I understand it to a degree that I am confident in my investment choices and not simply investing in it to diversify. Truthfully, investing in any type of investment without understanding is a form of gambling and should be avoided if you want to minimize risk in your portfolio. Therefore, the first principle of diversification is to only invest in assets that you understand even if it's only one type.
Do Diversity Amongst Specific Investments/Properties
This is where I believe the "don't put all your eggs in one basket" principle should come into play. Even if you only have an understanding of one investment type you should diversify amongst specific investments. For example, I understand and focus on investing in real estate and mostly multifamily. However, I invest across a number of different properties in order to reduce risk in my portfolio of one property underperforming. At Apogee, we always recommend that our investors diversify between at least a few different projects. This helps to minimize their risk and is the second important principle of diversification.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."