Diversify your portfolio with these types of investments.
The U.S. economy's post-COVID-19 pandemic recovery has not followed a textbook pattern. Instead, Americans are coping with problems they haven't encountered in decades: inflation, a labor shortage, supply chain problems, and sky-high gas prices. Despite these troubles, the stock market has been recovering nicely since the middle of 2020.
As 2022 approaches, though, there are credible concerns that stock market values may decline sharply if inflation continues to rise. This possibility can make the staunchest stock investor think about developing a more diversified portfolio as a hedge against uncertain market conditions.
Fortunately, there are plenty of different types of investments beyond stocks and mutual funds that can help you reduce portfolio risk.
Why Diversify Your Portfolio with Various Types of Investments?
The most successful personal finance plans include a balanced portfolio. Having a balanced portfolio reduces possible volatility from short-term price fluctuations. You can create a balanced portfolio by grouping investments that take different paths to appreciation. In other words, these investments have a low correlation. For example, suppose you have only two types of assets in your portfolio: 50% tech stocks and 50% travel-related stocks.
If the airline workers went on strike, 50% of your portfolio would likely go down because the travel industry relies on the airline industry. But, on the other hand, your tech holdings would either stay the same or appreciate. So, having a balanced portfolio helps you reduce the likelihood of your portfolio being 75% to 100% down.
What Are Some Investment Options That Don't Involve Stocks?
If you want to add diversification to your portfolio, many types of investments have a low correlation to stocks and mutual funds. Here are four excellent investments that offer a potential healthy return and balance to your portfolio.
You have access to several types of real estate investing opportunities. Your choice depends on how much money you want to commit and if you wish to be an active or passive investor. Also, you have the option of selecting a combination of real estate investment types.
Buying rental property is the traditional and straightforward way of investing in real estate. After securing a loan from a bank, you can acquire an apartment complex, multi-family home, or a house with a down payment as the initial investment. Your return on investment (ROI) comes from property appreciation and rental income.
In some cases, you can receive passive income from the rental income minus mortgage payment, taxes, insurance, and maintenance. Unless you hire a management company, you will have to do almost all of the property managerial work yourself, including:
- Recruiting and dealing with tenants
- Collecting rents and handling evictions
- Overseeing maintenance and repairs of the properties
- Managing the payment arrangements for the mortgage, taxes, insurance, and other bills
- Bookkeeping and other administrative tasks
The heavy responsibilities of conventional real estate investing motivate many investors to invest in property through a real estate investment trust (REIT). REITs invest in real estate projects like warehouses, hotels, commercial buildings, and homes. This type of liquid real estate investment allows you to include real estate in your portfolio without committing a lot of money and large blocks of time researching and managing properties.
Immune to adverse market swings, bonds act as a hedge investment in your portfolio because they offer a steady rate of return over a specified period. Plus, with U.S. Treasury bonds, you can count on Uncle Sam paying you the interest payment according to the term conditions of the bond.
These government-issued bonds come in two classes: Series E.E. and Series I. The Series E.E. bond comes with a fixed interest rate, and the Series I bond's interest rate contains an inflation rate-based component. Like most low-risk investments, U.S. Treasury bonds have a low return, and the Series 1 bond could underperform in zero inflation periods.
Gold is the ultimate anchor investment in a portfolio with multiple assets. This coveted asset is a tangible hedge against inflation that holds value over the long term, and it competes well against stocks. In addition, because of its low correlation to other investments, gold serves as a potent diversifier, and it's as liquid as money.
You can buy gold in various ways, such as:
- Gold accounts
- Gold stocks, futures, and options
- Gold ETFs & Mutual Funds
- Gold Mining companies
In case of a complete financial market bust, the best way is to buy gold in the form of bars, coins, chains, and other actual gold items. For balancing purposes, prudent investors fill about 5% to 10% of their portfolios with gold.
Peer to Peer Lending
Peer to Peer lending offers you an investment opportunity once reserved for very wealthy individuals and commercial lending institutions. Through online peer-to-peer platforms like Lending Club and Upstart, you can join a group of other investors to lend money to prequalified borrowers. In return, you will receive a fixed monthly repayment plus the interest owed.
The average return from peer-to-peer lending is between 4% to 9%. Lending to risky borrowers has the highest return potential (but may feel icky in the process). If the borrower defaults, you lose the money invested in that loan. However, since you can invest as little as $25 per loan, you can minimize your risk exposure by spreading your funds over as many notes as you like.
Investment Options for Stability and Portfolio Health
Diversifying your investment portfolio is a wise move because having the bulk of your money in one asset class can leave you too vulnerable to turbulent market conditions. In addition, technological advances and entrepreneurial innovation have provided investors with more viable investment alternatives to stocks and mutual funds.
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