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Why This “D Word” Should Be a MAJOR Part Of Your Investment Vocabulary

by Ken Corsini on April 25, 2014 · 6 comments

  
Post image for Why This “D Word” Should Be a MAJOR Part Of Your Investment Vocabulary

John Templeton was identified as “The 20th Century’s Greatest Stock Picker” by Money Magazine. Born in 1912 in the small town of Winchester, Tennessee, Templeton went on to become a billionaire investor, forging new inroads into globally diversified mutual funds. Although his prowess for investing was in the stock market, many of his philosophies on investing hold true for real estate investors today.

Over his 95 years, he was quoted many times regarding his views on diversification:

“Diversification should be the corner stone of your investment program.”john-templeton-screen-bargain-hunting-across-the-globe

“The only investors who shouldn’t diversify are those who are right 100% of the time.”

“To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify.”

How true is this today?

Do any of us know what the future holds? Stock markets crash, housing markets tumble, commodities climb and then drop again. As real estate investors, what does diversification look like?

Why Diversification Matters

Just this last year I told a couple I couldn’t sell them another property in good conscience. They had already purchased 3 properties from me and wanted to take the remainder of their retirement account to buy a fourth house. As much as I would have liked to sell another house to them, I thought putting all of their retirement into 4 single family homes in one market just wasn’t a wise choice for them.

While I personally believe that buying and holding single family properties is one of the most proven wealth building strategies, I would never advise someone to put all of their savings into only single family homes. The prudent real estate investor utilizes multiple investment strategies to profit from real estate, but also minimizes the risk of over concentrating ones wealth in a particular area.

What Does Diversification Look Like?

I think diversification can look different depending on the individual.

For some, diversification may mean owning 2 investment properties in 2 different areas of town. For others, it may simply mean having a balanced portfolio of stocks, bonds, and real estate holdings. For many of us who eat, sleep and breathe real estate … it probably means buying different types of real estate (ie. residential, commercial, land) across multiple cities and states. Perhaps it means branching out into other real estate investment strategies such as private lending and other types of real estate notes.

Related: 5 Compelling Reasons Why I like Private Lending

Whatever your level of involvement in real estate, the principle holds true – diversifying your investment portfolio is not only wise, but imperative to your long-term success. As the late John Templeton reminds us, Don’t put all of your eggs (real estate investments) in one basket … lower your risk by diversifying!

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{ 6 comments… read them below or add one }

Joe H April 25, 2014 at 12:53 pm

“You should only diversify if you have no idea what you are doing.” – Warren Buffett

Reply

Giovanni April 25, 2014 at 1:44 pm

+1 on that Joe. The problem with diversification is that the better you do it the closer to overall market returns you get. If that is all your looking for buy the index (or a REIT for real estate) and save all the brain damage and transaction costs of building a portfolio.

Traditionally in the US most millionaires were people who owned a business AND the property the business was located on and that works pretty well for having a diversification of zero (granted, most millionaires today probably come from some combination of nickel and diming your bank account, frontrunning your stock and bond trades and/or defrauding your mortgage).

I go with Warren and Andrew Carnegie: “Don’t put all your eggs in one basket,” is all wrong. I tell you “put all your eggs in one basket, and then watch the basket.”

Reply

Dennis Lanni April 27, 2014 at 12:53 am

You don’t know what you don’t know. Some diversification is healthy.

Reply

Paul Salmela April 25, 2014 at 1:20 pm

Throughout most of the 2000s I actively looked for a rental property. In 2003 I purchased my first 3-plex. At the time it seemed like a decent deal. For the next 5 years I looked and looked and couldn’t find any deal that made sense to me. Then in December 2008 I found a really good deal so I jumped on it. Between 2009 and 2013 I purchased over 20 rental properties. I sold nearly all my assets and put everything I had into rental properties. My accountant (and many others) told me that they was worried that I wasn’t diversified enough and that I could be in trouble. At the time I knew that there was risk involved but when my cap rates for single family homes were 15%+ I had a hard time understanding how it could get much worse. I’m now at a point where I can quit my full time job (unrelated to RE) and live off the rents. If I were to listen to everyone that told me that I should be more diversified I wouldn’t be where I’m at today.

That said I do believe that there comes a time where one should diversify and that time for me may be soon!

Reply

Chuck H April 25, 2014 at 2:42 pm

I do it all. SFR. MFR. Land. REITs. Mutual Funds. Dividend paying stocks. Variable Universal Life. Im looking to getting into notes. I never even of heard of that investment vehicle until I joined Bigger Pockets. Makes complete sense to me.

Reply

Jeff S April 28, 2014 at 7:54 pm

To be honest I wish I had not diversified and had more RE and less other assets early on.

Having cash is like an insurance premium though because the yield you lose is like a payment guaranteeing less risk.

Reply

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