Diversification is one of the best ways to optimize your portfolio’s risks and returns. Investments come with risks from a variety of factors. So many events can cause an investment to underperform and it is crucial that investors protect themselves. For example, if you primarily invest in technology stocks and antitrust legislation is made, it would increase risk and cause those assets to decrease in value. Your portfolio will likely have worse performance than an investor who had a portfolio composed of multiple industries.
Strictly speaking, diversification is a risk-management strategy. It allows investors to limit exposure to any single risk or asset class.
Choosing a portfolio that is mixed with equities, bonds, and real estate, can be the first step towards properly diversifying your investments. Real estate crowdfunding allows retail investors the opportunity to diversify their portfolio with real estate assets for small amounts of capital, sometimes as low as €100 per investment!
For example, an investor with a portfolio of €10,000 could be diversified by allocating their capital in the following way:
€5,000 in stocks
€2,000 in bonds
€3,000 in real estate crowdfunding
By doing so, this investor has reduced the risk of their portfolio substantially. If housing prices were to crash, it would likely only affect a fraction of their total investment. The same can be said about a stock or bond market crash. Diversification can protect investors from negative events!
With real estate crowdfunding, investors of all types are finally able to access the diversification benefits of having a portfolio with real estate.
What are the different types of investors? Read more here!
The basics
Diversification is meant to reduce or even eliminate unsystematic risk in a portfolio. This means that the positive performance of some investment types helps compensate for the negative performance of others. Additionally, it is crucial that these investment types are not correlated, as in, the performance of one is tied or connected to another.
Diversifying your investments by choosing to create a portfolio with a wide range of assets in a multitude of industries is the best way to make your risks and returns uncorrelated from each other. This means that the reasons one asset might underperform are not connected or related to the reasons another asset might underperform.
Diversification and real estate crowdfunding
Real estate crowdfunding gives retail investors the opportunity to expand their investment portfolios. For most of history, real estate investment has been out of reach for most investors. Traditional real estate investing requires large amounts of capital, large amounts of time, and a lot of work in order to access. With real estate crowdfunding, all of those barriers have been eliminated or substantially reduced.
Real estate crowdfunding also allows investors to easily diversify their portfolio with real estate, and it is recommended to do so to decrease risk. Currently, there are over 160+ active real estate crowdfunding platforms in Europe alone, each with a variety of property types, investment methods, and returns. By not putting all your real estate eggs into one basket, investors can take advantage of this wide market by investing through several different platforms. This also reduces the investor’s risk should one platform have financial or other issues that impact the returns of the investments.
Additionally, real estate crowdfunding has advantages over traditional real estate investing. The biggest advantage is the ability to invest cross border and internationally. With real estate crowdfunding, investors are able to invest in real estate in many countries depending on what is offered by the respective platform. Some platforms focus on one country, others offer international investments. This is just one more way for investors to practice diversification.
At BrikkApp, we make it even easier for investors to diversify. As a real estate investment marketplace, we offer projects from a variety of real estate crowdfunding platforms, with properties in a multitude of countries - all across Europe! In one easy-to-use dashboard, you can diversify your real estate investments quickly and efficiently.
The bottom line
Diversification is one, if not the, most important risk management strategy an investor can have in their toolkit. By investing in a variety of asset classes and types, investors can protect themselves from risk.
In real estate crowdfunding, this can be practiced by investing in real estate through a variety of platforms, in a variety of property types, and in a variety of methods, such as having a combination of safer investment types such as senior debt, and riskier investment types such as common equity.
Debt vs Equity Investments - learn about the types of investment here.
By practicing diversification, investors can protect themselves and their money from unnecessary risks. Add real estate to your portfolio and start your real estate crowdfunding investment journey today! Browse, compare, and invest in real estate projects from multiple platforms located across multiple countries on BrikkApp.