Building wealth with portfolio diversification

Looking to get started with building wealth? In this article, we'll explore how portfolio diversification can help you reach your financial goals.

Who would have thought that 17th-century Spanish literature could have such a dramatic effect on the global investment community? Who would have thought a classical book Don Quixote, could inspire an idea that is so entrenched in the investment vernacular as to drive the way we shape and view our investment portfolios? The author of the book Miguel de Cervantes, is widely recognized as the first to write,

 “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

Having all your eggs in one basket implies a high-risk strategy. If the basket falls, the eggs will break. This metaphor is one of the top clichés for investors. If all your investments are in one asset class or one investment this could have drastic consequences on your portfolio.

In this article, we examine why diversification is a favored investor strategy, the different types of diversification, and a contrary opinion from one of the world’s greatest investors that will surprise you.

Why is Diversification a favored strategy?

When you decide to create an investment portfolio, you soon realize you are in the risk business. Your underlying portfolio objective is to carefully maximize returns against the risks you feel comfortable taking.

We all have different levels of risk tolerance

Your risk tolerance depends on so many factors, including.

  • your knowledge and experience of an asset,
  • your preferred timescale
  • your age.

If you are a 25-year old digital native, you are more likely to feel comfortable with riskier technology assets in your portfolio. You understand technology and if it goes wrong you can make up ground later.

As a retiree investor, you are more likely to need stability and income-generating assets to provide you with ongoing income, such as real estate assets.

Risks and returns vary

Global investors salivate at the average annual real return (adjusted for inflation) of 7.3% for the equity markets over the past 30 years. It becomes the benchmark by which we judge other investments. There are, however, certain assets that come along that are outliers with performances that almost defy gravity.

Bitcoin has been one of the strongest-performing asset classes since its launch in 2009. From a standing start, Bitcoin generated an average annualized return of 1,576% over the years 2010 – 2021. To put this into context Good Financial Cents compared Bitcoin’s returns over the period 2010 to 2021 to more established investment assets that themselves provided very strong returns.

 

 

Of course, it’s easy to be an armchair investor with 20-20 hindsight, but as investors we have to crystal ball the future, to make sense of where future returns are likely to come from, and the forces that might undermine those returns.

Riskier assets tend to be highly volatile

Bitcoin’s journey has been bipolar. Like any asset, when we look at Bitcoin in the interim years there are challenges. In 2021, Bitcoin peaked at $67k falling to $18k in 2022 –  a jaw-dropping 73% decline. Bitcoiners flippantly recognize this as “just part of its cycle” – with returns falling by 58% in 2014 and 73% in 2018 respectively. Volatility brings much greater risk.

Imagine you had placed your life savings into Bitcoin at it peak price of $67k when even Financial Institutions were suffering from FOMO (fear of missing out) to see its value plummet to $18k. That’s a lot of broken nest eggs.

Balancing your Portfolio

Many investors use diversification strategies to balance a portfolio against volatility and risk. The core idea is that different assets do well at different times and that by balancing your portfolio you reduce the overall risks of your portfolio. A very popular balancing structure is the 60/40 strategy.

Under this strategy, 60% of your portfolio is placed into stocks and 40% into bonds. In this way, you get the best of two worlds: the potential for high growth from riskier stocks and some protection from the more conservative bonds. Many investors further diversify their stocks, ensuring they are in different industries to minimize the risks of adverse forces undermining any one industry.

This balancing strategy is usually adjusted according to your individual risk tolerance and the asset classes you feel comfortable with, and income-earning assets like real estate. This Forbes article highlights a number of portfolio ideas to consider, with one example that blends the average of Harvard, Stanford, and Yale’s investment allocations:

 

 

How does Warren Buffet view Diversification?

Warren Buffett has a very different take on diversification. In many interviews, he has said

“Diversification is protection against ignorance.”

He argues that diversification can actually damage returns because you can only hold a few strong investment ideas at any given time. Broadly, his thesis is that if you:

  • fully understand the company you want to part own,
  • appraise all the necessary risks and believe with conviction in the investment,

you can generate higher returns. While his views are contrary to traditional risk management, his track record, of course, speaks volumes.

It is noteworthy, however, that he is not a fan of technology, once alluding to Bitcoin as Rat Poison, and his investment firm, Berkshire Hathaway does have 53 stocks in its portfolio – so this probably reflects his personal investment views and should be viewed cautiously when assessing your own portfolio management.

Perhaps Mark Twain should have the final word on diversification, when in his book Puddin’head Wilson (1894) he wrote:

‘Scatter your money and your attention; but the wise man saith, ‘Put all your eggs in the one basket and—WATCH THAT BASKET.’

While recognized as a humorist and a writer, perhaps Mark Twain was the inspiration for Warren Buffet’s investment strategy all along.

Funny stuff this investing…

Necessary Disclosures
Informational Purposes for Discussion Only

This general analysis is for general informational purposes only and does not constitute a prospectus, an offer document, an offer of securities, a solicitation for investment, or any offer to sell any product, item, or asset (whether digital or otherwise). The information set out in this general analysis is for community discussion only and is not legally binding.

No Responsibility or Obligation Regarding the Provision or Maintenance of Information

USP and its affiliated persons and their respective shareholders, members, officers, directors, managers, employees, counsel, advisors, consultants, and agents (“Representatives”) reserve the right, in their sole and absolute discretion with or without notice, to alter any and all of the information of this general analysis.

You acknowledge that: (1) the information contained in this general analysis is subject to change without notice, and no one shall assume from the lack of any updates to this general analysis that the contents of this general analysis have not changed since the date of this general analysis; (2) this general analysis could become outdated due to changing circumstances; and (3) USP or any of its Representatives does not hereby obligate itself in any manner to periodically or otherwise to update the information in this general analysis or to maintain the availability of any information in this general analysis.

No Advice

Nothing in this general analysis constitutes business, finance, legal, or tax advice. You agree to consult professional advisers before engaging in any activity related to the information provided in this general analysis.

Not an Offer for Any Securities or Investment

This general analysis does not constitute an offer of securities, a prospectus, an offer document, or solicitation for an investment of any kind. Information contained in this general analysis is not an offer to sell securities or the solicitation of an offer to buy securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.

You acknowledge that: (1) this general analysis and the information shown herein is not an offering of any securities nor a solicitation of an offer to buy any securities and (2) this general analysis and the information herein shall not be construed as any description of the business of USP or any of its Representatives in conjunction with any offering of securities.

Nothing Legally Binding

This general analysis does not constitute or imply a contract or an offer to enter into a contract. This general analysis is provided solely for informational purposes only and does not constitute any binding commitment by USP or any of its Representatives. No person is bound to enter into any contract or binding legal commitment in relation to anything in this general analysis.

No Liability, No Representation and Warranty Regarding Information

Neither USP or nor any of its Representatives shall be held liable for any use of or reliance on the information described and/or contained on this general analysis. USP and its Representatives do not and do not purport to make, and hereby disclaims, all representations, warranties or undertaking to any entity or person (including without limitation warranties as to the accuracy, completeness, timeliness, or reliability of the contents of this general analysis, or any other materials published by USP or its Representatives). To the maximum extent permitted by law, USP and its Representatives shall not be liable for any indirect, indirect, special, exemplary, incidental, consequential, or other damages or losses of any kind, however caused and on any theory of liability, whether in contract, strict liability, or tort (including, without limitation, any liability arising from default or gross negligence on the part of any of them, or any loss of revenue, income or profits, and loss of use or data) arising in any way from the reading of this general analysis, including but not limited to the reliance upon or the use of the general analysis (including, without limitation, inaccurate information, errors, omissions, outdated data, etc.) or otherwise arising in connection with the same.

No person has been authorized by USP or any of its Representatives to give any information or make any representation or warranty regarding the subject matter hereof, either express or implied, and, if given or made in this general analysis, in other materials or verbally, such information, representation or warranty cannot and should not be relied upon nor is any representation or warranty made as to the accuracy, content, suitability or completeness of the information, analysis or conclusions or any information furnished in connection herewith contained in this general analysis and it is not to be relied upon as a substitute for independent review of the underlying documents, available due diligence information and such other information as you may deem appropriate or prudent to review. USP and its Representatives expressly disclaim any and all liability for express or implied representations or warranties that may be contained in, or for omissions from or inaccuracies in, this general analysis or any other oral or written communication transmitted or made available to you.

Any historical information or information based on past performance included herein is for informational purposes only and has inherent limitations and is not intended to be a representation, warranty, or guarantee of future performance. Projected performance data shown constitutes “forward-looking information” which is based on numerous assumptions and is speculative in nature. Actual results may vary significantly from the values and rates of return projected herein.

Your Responsibility to Verify Information

You will have the sole responsibility for verifying the accuracy of all information furnished in this general analysis. There shall be no recourse against USP and its Representatives in the event of any errors or omissions in the information furnished, the methodology used, the calculations of values or conclusions.

No Affiliation

USP or its Representatives does not imply any affiliation with, or endorsement by, any third party. Such references in this general analysis are for illustrative purposes only.

Regulatory Approval

No regulatory authority has examined or approved, whether formally or informally, of any of the information set out in this general analysis. No such action or assurance has been or will be taken under the laws, regulatory requirements, or rules of any jurisdiction.

Legal Compliance

You will and shall at your own expense ensure compliance with all laws, regulatory requirements and restrictions applicable to you.

Did you enjoy that article?

Spread the word! Help us reach more people on social media by sharing our posts with your friends and followers.

Join The USP Newsletter!

Want to receive updates whenever we share a new article about real estate tokenization, investing, or company updates? Join our newsletter!

We are committed to transparency with our community, and our USP Token Buyback Guarantee is designed to help you have faith in your investment.

Your trust is paramount to us. We stand ready as your safety net, committed to buying back any USP Tokens issued by us at the original price the tokens were issued at. For more information, reference page 26 of our whitepaper.

The old USPC™ security token has been renamed USP™.

The old USPC™ security token has undergone a simple yet crucial change: it has been renamed to USP™. This strategic shift only involves the token’s name, with no alterations made to the smart contract, funds, or any other aspect of the token.

The renaming of USPC™ to USP reflects our strategic pivot and aligns with the introduction of the USP stablecoin. This shift simplifies our project’s structure and allows for a more distinct separation between the security token (USP) and the stablecoin (USPC™), providing a more comprehensive and accessible offering for our users.

No, your USP holdings remain unchanged and secure. You can still access them at invest.uspc.io. The only change made was the token’s name, ensuring continuity in your investments while adapting to our strategic shift and the introduction of the USPC™ stablecoin.

The USPC™ stablecoin is a next-generation ERC20 token pegged to the US dollar. It offers enhanced stability and security through a unique 2:1 reserve ratio, with reserves held in both cash and real estate assets. This innovative approach to backing stablecoins makes USPC™ an attractive choice for those seeking stability in the crypto market.

Stay tuned for the official launch announcement of the USPC™ stablecoin. Once launched, we’ll provide all necessary details regarding how and where to purchase USPC™, making it as simple and straightforward as possible for our users to become part of this groundbreaking stablecoin project.

USPC™’s exceptional 2:1 reserve ratio, backed by both cash and real estate assets, sets it apart from other stablecoins. This robust backing ensures greater stability and security, while offering transparency through proof of buyback reserves. Tied to United States Property Inc., USPC™ stands out as an innovative, reliable, and secure stablecoin option.

USP Now Live On DigiFinex!

We’re excited to announce that USP is now live on the DigiFinex exchange. This is an important milestone for USP as it marks our first listing on any crypto exchange. This also represents a major victory for tokenized real estate, as it demonstrates the potential for decentralized real estate investing!

Contact Sales Rep

Corporate entity interested in buying USPC stablecoins? Contact a USP sales representative to talk details about your purchase.

By submitting this form, you agree to our Privacy Policy.

Play Video