I am a big believer in investing in risky assets. You must take significant risk to earn significant returns. For example, I invest in crypto currencies and platforms and a well timed $30K investment into crypto will pay for my kids' education. I have also invested in over 100+ small tech startups, knowing that only one or two will make it but that is sufficient to generate an outsized return.
However, the one lesson that I learnt and retained well happened during the second day of my finance class at Wharton and it was about the power of diversification. We had to model how to spilt our investments across multiple asset classes that had different risk and return profiles. It was interesting to see how my natural tendency to push all my chips into the riskiest asset classes was going to be counterproductive. In most downturns a lot of these paper returns could be wiped away quickly. Applying Montecarlo simulations to investments in order to generate a range of returns instead of just one was a skill that I acquired and apply to each deal we do today.
Now, I am a huge fan of diversification when holding a lot of risky assets. Getting into crypto and startups is easier when I know I have real estate, large cap stock and bonds and index funds in my portfolio.
However, I am surprised that a lot of our investors, when we first talk to them, think they are diversified but have all of their investments in the stock market and are hand picking a few stocks every quarter that do really well. When a rising tide lifts all ships the going is great and this bull market we have going on shows no signs of abating. However, look back at historical data on any asset class and you will see they are cyclical.
When crypto went crazy in 2017 and then blew up it was mostly a blip in my portfolio . The same was true in the second quarter of this year when crypto had a big pullback. I like to have a mix of assets, ideally uncorrelated, in my portfolio.
An asset class that I really like as a hedge against early stage tech sector risk and the stock market in general is multi family real estate. Through Valorem Ventures I own a lot of income producing real estate and it feels very uncorrelated to early stage tech or the stock market. People still need a place to live and call home no matter what the stock market is doing.
Within asset classes you need to think about diversification too. That is why we invest in Class A, B and C multi family properties in Austin and Phoenix since the value add opportunity and return profile for each varies and a down cycle impacts each one differently too.
If you don’t want to think about your individual investments, something I cannot bring myself to do, then a stock index fund or a REIT can get you the diversification you need. But the level of risk taking in that strategy is a lot lower and therefore you should expect a lower return too.
Regardless of how you get there, it is very important that you not have all of your eggs in one basket. That basket can drop and then you will have a mess.
Please diversify. You will sleep better for it.
If you have not considered multi family real estate as an asset class please reach out to us and we can help.
Comments