Diversification, Diversification, Diversification

The most important consideration in real estate is location, location, location. When it comes to investing, diversification is the critical consideration. Most investors, however, don't truly understand how to diversify. That's why I-Pension offers this handy guide to diversification do's-and-don'ts.

 

False Diversification

Many people fool themselves into thinking they're diversified. They buy a few mutual funds and call it a day. More often than not, however, they invest in funds that have similar strategies and overlapping holdings. Like the graphic above, the funds may have different names and personalities but, in the end, they're all dogs.

Traditional Diversification

Most target-date funds and asset allocation models utilize a traditional approach to diversification. They diversify among U.S. stocks, U.S. bonds, and international equities. The drawback, however, is that they're all part of the same animal kingdom.

True Diversification

When you look beyond the traditional allocation to stocks, bonds, and cash, you begin to experience the full benefits of diversification. Asset classes like real estate, commodities, timber, and currency - as well as more specialized securities like foreign bonds and emerging market bonds and equities - bring a whole new level of diversification and non-correlation to your portfolio.

 

Diversification does not guarantee superior returns, but it does reflect the strategy employed by the largest institutional investors - and it is the centerpiece of how I-Pension LLC manages money for our clients.