As far as financial freedom is concerned, investing is probably the most powerful tool at your disposal.
And yet, in an ever-evolving financial landscape, the significance of prudent investment strategies cannot be overstated. One of the cornerstones of successful investing has long been portfolio diversification.
Traditional diversification methods often focus on spreading investments across various asset classes, industries, and regions. However, an often-overlooked approach to diversification is local investing, which can provide a unique opportunity to not only balance one’s financial risks but also support the growth and sustainability of the community.
That’s the topic of today’s article. Let’s dive in.
What Is Portfolio Diversification?
Portfolio diversification is a rather simple investment concept: spread your investing efforts across different asset classes to mitigate risk.
For instance, you may have invested in stocks for a tech startup you believed in. They did well, you earned some returns—until suddenly, one small mistake sank the company, and with it, your investment.
Or, let’s imagine you’ve invested in several tech startups. You are somewhat diversified, however, come a tech crisis, all your investments will take a hit at the same time.
The rationale behind diversification is that a well-balanced portfolio can better withstand market fluctuations, as the performance of different investments is unlikely to be correlated. This reduces the overall risk and helps to protect an investor’s capital in case of adverse market conditions or underperformance of a specific asset.
Why Diversification Matters
Risk management is the prime benefit of portfolio diversification, but that’s not all this strategy offers.
You probably have more than one financial goal lying ahead of you—from upgrading your car to buying a home to planning for your retirement.
A well-diversified portfolio enables you to allocate investments according to the various financial goals you have set and their respective timelines. This is crucial because distinct investment types are associated with different time horizons and risk-return profiles, making it essential to align them with the corresponding objectives.
Short-term goals, such as saving for a vacation or an emergency fund, may require lower-risk, highly liquid investments like cash, money market funds, or short-term bonds. Medium-term goals, like buying a house or starting a business, necessitate a balanced approach to risk and returns, often achieved through a combination of stocks, bonds, and real estate.
Long-term goals, such as retirement planning or funding a child’s education, demand higher returns to account for inflation and increasing costs over time. These goals can accommodate higher-risk assets with longer time horizons, such as alternative investments like real estate or private equity.
In a way, risk management means preparing for the worst. But you can also see it as a financial growth opportunity to better plan, manage, and protect your financial future.
The Problem With Traditional Diversification
Up to this point, we’ve focused exclusively on the traditional approach to diversification, one which encourages you to distribute investments across a range of traditional assets like stocks, bonds, and mutual funds.
However, this approach is not without its flaws.
First, these asset classes are complex. It can be difficult for the average investor to fully understand what is happening with their stocks, bonds, and mutual funds at any given moment. Sure, you’ve invested in a startup or the S&P 500, but what control do you really have over the performance of these investments?
Second, it’s still a rather time-consuming process to get these investments started, especially if you are performing proper due diligence. For the non-professional investor balancing work, family, and social life, this essential exercise can be especially difficult.
Finally, traditional diversification can make a big dent in your wallet, particularly when it comes to fees. From broker fees to trading fees to expense ratios, the costs of traditional asset classes can add up quickly if you don’t read the fine print.
Local Investments as a Diversification Strategy
In summary, traditional diversification is complex, time-consuming, and costly… what’s an investor to do?
Two words: invest local.
By shifting our focus from the global stage to the untapped potential within our own communities, we can streamline the process of portfolio diversification. Local investing, particularly in mid-market real estate through regulation crowdfunding (Reg CF), can help investors unlock a myriad of opportunities that not only have the potential for competitive returns but also foster economic growth and sustainability where it matters most—their backyard.
Briefly, here are some of the benefits of taking a local approach to portfolio diversification.
1. Focused Growth Potential
By investing in local projects, you concentrate on a specific area with potential for growth. This potentially can lead to higher gains, as you may have a deeper understanding of the local market dynamics and be better positioned to identify promising opportunities.
2. Simplified Management
Local investments through Reg CF may be easier to manage because they often involve a smaller number of assets or businesses to track. This can save time and effort, making it less overwhelming for investors, especially those who are new to the process.
3. Economically Accessible
Investing locally doesn’t require you to be a millionaire or an accredited investor. By allocating a portion of your savings or existing investment funds to local mid-market real estate, you can take advantage of low minimum investments.
4. Personal Connection and Familiarity
Local investments allow investors to leverage their knowledge of the community and local businesses. This can help inexperienced investors be more confident and comfortable with their investment choices, as they might have a better understanding of the real estate and businesses they are investing in.
Diversify Your Portfolio With Vicinity
Investing in local mid-market real estate not only helps diversify your portfolio, it allows you to play an integral role in your community’s economic growth.
The more people invest around where they live, the stronger local economies get. And don’t forget that you are part of that local economy, so there’s a quality-of-life and financial benefit.
As such, it’s worth considering allocating a portion of your investments to local real estate.