I am interested in hearing people’s strategies on diversification. Most if not all investment literature stresses the importance of portfolio diversification. As the people on this discussion board are likely proponents primarily of real estate as their investment vehicle, I am interested in strategies employed in real estate.
Do you diversify only within real estate? To do this, do you diversify across neighborhoods and housing types, or do you diversify across a broader geographic scale (i.e. in other counties, states, countries)?
Alternatively, how many of you use real estate as only one of many investment strategies, mixing it in with the other standard vehicles such as stocks, funds, bonds, et cetera? What percentage of your portfolio do you dedicate to real estate?
thanks,
belizeanbus
My wife and I are fairly diversified. Roth IRA,Stocks, Muni bonds, High yeild- savings acocounts.
The greater majority of our investments lies in RE however. It is what I and she are most comfortable and knowledgeable about so we emphasize our RE portfoilio. We do invest in different neighborhoods and locations for RE diversification.
It seldom hurts to diversify across different markets and mediums for accumulating weatlh.
belizeanbus got it… Diversification doesn’t mean buy mutual funds but by different ones. Nor does it mean buy real estate, but buy different types of real estate. Diversivacation means buy different types of assets… Real Estate, stocks, Bonds, ect. Here is the logic, in 2000 it was good to be in Real Estate as it was appreciating well, but the stock market, well you know what happened. But look at the last year or so, what has been stronger? This doesn’t mean jump the boat by any means, but if you own Real Estate and other assets, it nice to know that while one market might be slumping, the others could be doing well.
Diversification is the snake oil sold to the masses. I look at money like a basketball game. You have offense and defense. Offense is how you make money defense is how you keep from losing it. Diversification is a defensive strategy. You can adopt a total offensive strategy and run and gun and outscore your opponent without playing any defense at all and win the game. But if you bear down and play really hard defense, the best you can do is a zero to zero tie. You have to score at least a little bit to win using that defense strategy. Playing a no defense strategy can win but playing a no offence strategy can’t win. You have to score to get rich also. The only money that I have that is diversified is the money that I have taken off the table because I just can’t spend all my money on real estate. You don’t know anybody that became rich by diversifying.
We were all told by people not qualified to give us economic advice that we should be diversified. Nobody who told you to diversify was rich. We were all told to not put all of our eggs in one basket. If you read Think and Grow Rich by Napoleon Hill, he states that Andrew Carnage (a billionaire back when a billion dollars was a billion dollars) Andrew Carnegie said that you should put all your eggs in one basket and spend all your day making sure that nobody knocks over your basket. Each dollar can make you four dollars if and only if that dollar is playing offense. Diversification is like drafting Michael Jordan and making him play defense. He can do it and do it well, but it is gross misuse of his powers. You should be active in making your money work for you. In order to do that you have to understand what you are doing intimately. You can’t understand all these forms of investment well enough to make sure that every deal you do makes you money. That is why I invest in real estate and my diversified money is on hold until I can get it into a real estate deal.
Watch that basket carefully yes. But most people especially starting out can not focus 100% on landlording. Simply because they need additional income to support their main goal. Along with that, are opportunitys like 401k’s that definately should not be ignored. Most of your efforts should be focus on the main investment, or method of investing. But i really don’t think you should ignore everything else.
“You can’t understand all these forms of investment well enough to make sure that every deal you do makes you money. That is why I invest in real estate and my diversified money is on hold until I can get it into a real estate deal.”
You rely on the knowledge and experiance of others. Just the same if you ever get into any legal trouble you don’t handle that on your own. You still take the risk by owning property that something will go wrong, but I highly doubt you would handle the case on your own. You would hire a competent lawyer to represent you.The same is true with medicine and many other fields of work. Financial advisors and professional money managers are the same way.
Having your eggs all in one basket is a very dangerous move in our modern economy. What if all your money was invested in tech stocks in 2000, or what about your pension if you were a enron employee?
I hear stories frequently of people counting solely on their 401k. Companies go out of business, things happen.
Protecting your money(defense) and acquiring moeny(offense) don’t have to be different. In fact there are many institutions and options to make them one in the same.
Not taking those options is a personal choice, but with it come inherit risk
I am sorry bubbarobertson but you could not be more wrong. You said:
You rely on the knowledge and experiance of others.
This is the path that is taught to us everyday. The census of 1970, 1980, 1990 and 2000 found that 9 out of 10 people in the United States retires at or below the poverty level. Why would a nation of 260 million people follow this path? They are not bad or dumb, they are just following the advise that we all think of as common sense.
Just the same if you ever get into any legal trouble you don't handle that on your own. You still take the risk by owning property that something will go wrong, but I highly doubt you would handle the case on your own.
I go into my investments with tools to handle the things that can go wrong. I have insurance, I do criminal, credit and rental history back ground checks of my tenants, I take deposits, and I start eviction as soon as problems arise. I make sure nobody kicks over my basket. I can’t do that with any other investment. I am at the mercy of the management of the companies of the stock that I own. I can’t control their accounting practices, or the marketing paths they may take. I can’t control what happens to that egg, it is completely undefended.
You would hire a competent lawyer to represent you.The same is true with medicine and many other fields of work. Financial advisors and professional money managers are the same way.
The problem with a financial advisor or money manager is illustrated in a conversation I had with a money manager a while ago. He asked to manage some of my money. I asked him “How many people have you made rich” He thought I was joking and made some comments about what he wanted to do for me. None of which was going to make me rich. He said he can’t make me rich I can only get rich through consistent saving and diversification. What all money managers do is run a risk tolerance on you to see how to diversify your money. In other words all they do is set you up so if the market crashes you don’t lose all your money. I couldn’t even get him to guarantee that I would not lose money. They DO NOT make you rich. Everything a competent money manager of financial advisor can do for me I can do for myself with free stuff on the internet.
Having your eggs all in one basket is a very dangerous move in our modern economy. What if all your money was invested in tech stocks in 2000, or what about your pension if you were a enron employee?
I hear stories frequently of people counting solely on their 401k. Companies go out of business, things happen.
The main problem with all these investments is that you can’t control them. You can’t stop anybody from stepping on your egg. You can’t sit in the meeting with Andrew Fastow of Enron and see him out of control because his insider deal is not paying him the commission he wants. You are invested in companies yet you don’t get invited to the meetings to determine the future direction of the companies nor do you get to decide on the mix of companies your 401k invests in. When you do find out that your company is doing something boneheaded everybody else is stampeding to sell their stock also and you get trampled.
Protecting your money(defense) and acquiring moeny(offense) don't have to be different. In fact there are many institutions and options to make them one in the same.
Not taking those options is a personal choice, but with it come inherit risk
This is like driving with your foot on the accelerator and the brake at the same time. When I am on offense (my real estate) I set up to win on every turn. I have safeguards in place so that even if I lose, I win. When housing is on the rise, my property values go up and I can refinance and get cash out, I can raise rents, I can sell and get cash. When housing is falling I can get houses cheaper and more people are having hard times and become my tenants, etc. If my place catches fire, my insurance will give me more money than I need to fix the place up like brand new. Real estate allows me to watch my basket.
But when housing is falling you have the opprotunity for negitive equity in houses. How do you protect against this. Acquiring more is not the answer either. Buying right is not a answer either to buy right is relative aginst the depreciation of the market. This also works with the rental market how do you control your local rental market?
What if someone looking to rent your property is injured walking thru the property. They sue you. Does your umbrella policy cover that? Including the litigation fees?
What do you do with your overhead capital, your emergency fund?
Just keep it in a bank savings account? What type of return do you get with that? What if you could have 6xs the return on that money and still enure the same amount of liquidity?
I buy my properties such that if I end up with negative equity in my properties, the only currency will be a shotgun and a stockpile of water. My umbrella policy should cover most of what I should encounter after that my trust is next and then my LLC. But you see those are defensive measures that I have taken. I use money market and mutual funds and I have a 401k. They are all like ratchets on a wench. They limit my fall they don’t move me higher.
Don’t get me wrong, I do have other forms of investments and I use money managers, but I understand where they are in my plan to maximize my income and wealth. I use their advice on the defensive side and not the offensive side. Remember the movie Wall Street when Gordon Gekko had traders that made sure he didn’t have any losses. I would do that but they don’t teach money manager guys how to do that. Even the rich ones can only tell you how to get rich selling securities. They can’t tell the guy on the other end of the phone (me) how to get rich.
My problem with diversification is the very premise of it. That premise is that if I put $1 in a stock and it goes down I have another $1 in another stock that will go up. I see that is as the one that went down took both dollars with it. The one that went down and the one that had to rescue it.
If you have a 6X investment give me a PM and I will be interested.