Apartment investing diversification
Diversification and the goal of having a diversified portfolio in general is an overly abused concept. It is an ideal made popular through a strong push by the equity investment, investment publishing, and journalism communities.
Diversification isn’t inherently bad either. It’s just the wrong focus.
What we advise our clients to do is to consider diversification as they look to invest capital, but never make it the end goal.
Warren Buffett, probably the greatest investor in the world, states unequivocally that,
“Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
It was never Buffett’s end goal to diversify. He simply looked for business cycles, industries and companies that made sense, and diversification occurred naturally over time.
Concentration of capital
The wealthiest people believe in concentration of capital. Sure they diversify, but they don’t do it by having hundreds of smaller investments. They can hold as few as five to ten investments and have all the diversification they need.
Imagine trying to invest in 30 – 50 apartment investment properties or any other asset and manage them after you’ve invested. It would be overwhelming, and most likely you would not gain the same advantage as you would by selecting a few great investments. So think about concentrating your capital into a manageable number of investments you know, understand, and can follow.
There is also a cost to every deal. Perform your due diligence and select your investments wisely. Ensure that your deal is meaningful enough to merit the time, focus and expense you will put into it.
And when you do focus on diversification, think about the following tests.
1. Is your next investment uncorrelated to your current investments?
Most of the stock market is highly correlated because the primary driver of performance is overall inflows and outflows of money into stocks as an asset class. Sure, you can get incremental diversification by investing in REIT(Real Estate Investment Trust) stocks. Realize however, REITs are 81% correlated to the general market and more volatile. To get true uncorrelated performance you need to focus on assets that have little to no correlation. Passive large-apartment investments are truly uncorrelated to stocks, bonds, currencies, and more.
2. Must be as safe or safer than your current investments
Diversification provides no value if it doesn’t support or improve your risk profile. We have seen investors opt to increase their risk profile in the name of creating a “complete investment mix” when it would have been better to either keep their capital in cash or wait for a better project.
3. Must have both a historical and future expectation of positive returns
When diversification becomes the goal itself, realistic and required return and safety expectations go out the window. And, this happens more often than one would hope. Your investment must show that is has been providing positive returns, and hold the promise that it will continue to do so into the future. Diversify don’t dilute.
Focus on investments the increase Permanent Wealth. Diversification will come in time.
Schedule a brief 15-minute introductory call with one our advisors to learn more.