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Concentrate and Diversify Our Portfolio

Concentrate and Diversify Our Portfolio

Find out how to diversify our portfolio (or not) by using this tutorial.

Master Investor
May 10, 2024

Summary:

Putting money into a project we are enthusiastic about is a good idea, but don't limit our possibilities only with our passions.
Understand when and how to turn a profit in investing.
Wealthy investors maintain really diverse portfolios among the asset classes exist.
To diversify our portfolio and make investments, we can choose from five different asset classes.

When was the last time we became so engrossed in a task that time passed us by? That is unquestionably evidence that we are totally in tune with our passions.

On the other hand, every minute we are compelled to spend on anything would feel like drudgery if we are not interested in it.

This idea is applicable to the process of choosing investments because there are multiple asset classes to pick from. Selecting the asset that best fits our personality, values, and way of life is essential if we want to be linked to it and enjoy spending time caring for it.

The Five Main Types of Assets

We'll talk about the five main asset classes today, although there are numerous assets we can invest in. They are as follows:

1- Business

If we are thinking about launching a business, you can finance it with money from our own resources, money raised from private investors, or a traditional loan. Regardless of where the funds originate from, the goal of investing is to yield a return on investment that benefits the business, we, the inside investors, and/or the lender.

Now, imagine a situation where a friend approaches us to ask for money for their business concept or to share a hot tip about an investment they are making in someone else's venture. After conducting our due diligence to make sure the opportunity is perfect for us, of course, we may decide to invest in this private business or company.

We may or may not be familiar with the company and its owners, therefore we will need to research:

The project (the company itself)
The partners
The financing
The management and business team of the investment.

2- Real Estate

Investing in real estate can be done for two main reasons: capital gains from property flipping and cash flow from rental income. Cash flow is a key component of our formula for financial independence, which is why we at masterinvestor recommend investing in rental real estate. We will determine which model best suits our objectives and circumstances.

Investing in real estate is not a one-size-fits-all endeavor.

Investing in this asset class offers a wide range of alternatives, including single-family, duplex, triplex, apartment complexes, office buildings, shopping centers, retail strip malls, and industrial assets like hotels, warehouses, and mobile home parks. Although it's advisable to start small at first, the possibilities are endless; who knows, maybe one day we will own a skyscraper!

The idea of leverage is one of the main advantages of real estate. The ability to buy the asset using OPM, or other people's money, is known as leverage. A highly leveraged property has more debt than equity, which is defined as equity being the current market worth less the loan.

A property with a 90% debt load meaning the owners and investors contributed 10% of the total is more highly leveraged than one with a 70% loan and 30% cash contribution. The cash flow on the property decreases as the debt level rises. The cash flow is higher when there is less debt. But as long as the debt is putting cash flow in our pocket then is good debt regardless of the positive amount it provides us with. We have other articles and we are realizing a book about investing with other people's money.

3- Paper Assets

Traditional paper assets, such as equities, bonds, mutual funds, and retirement accounts, are already well-known to most individuals. Foreign exchange, stock futures, and options on stocks are additional investment alternatives. Paper assets include funds that invest exclusively in real estate, known as REITs (real estate investment trusts). ETFs are another type of paper asset (exchange-traded funds).

Typically, capital gains investments make up this asset class (against cash flow). Dividends on stocks, however, are subject to cash flow tax. We can start investing as soon as we grasp the language of paper assets.

4- Commodities

Commodities are the next asset type; these include food items like cereals, corn, coffee, and sugar; raw materials like oil, gas, and cotton; and metals like gold, silver, and copper.

Commodity prices are primarily determined by supply and demand. Prices are low in a bumper crop year because there is an abundance of maize available. On the other hand, corn will cost more if there is a shortage brought on by a drought and adverse weather patterns.

Commodities like gold and silver can be purchased from our neighborhood precious-metals merchant. Alternatively, we can purchase what are known as future contracts via futures exchanges for any commodity. Typically, commodities are not a cash flow (passive income) scenario; rather, they are a capital-gains (or loss) asset.

5- Crypto

The last asset class is cryptocurrency, a decentralized digital money that is not backed by the government or any issuing organization and that we can purchase, sell, or exchange directly. These days, it seems like everyone is talking about cryptocurrencies like Bitcoin, Ethereum, Tron, and Litecoin (there are currently over 5,000 of them). Furthermore, why not? It's highly exciting and alluring material, with huge value swings and quick gains of up to 1000%.

To help diversify their portfolio, some people are using cryptocurrencies like bitcoin and others as alternative investments. Those that buy and hold for the long term and those who buy and sell following a price rally are the two primary categories of investors.

However, much like in the stock market, we will inevitably lose money if we are an ignorant investor.

It is true that there is a potentially hazardous aspect to the bitcoin game if we haven't done our research. In what way? This is a regrettable list of prospective cryptocurrency billionaires who were shut out of their own wealth due to password loss. This is the tale of a man who is locked out of his $321 million bitcoin holdings. Hurt. Similar to the stock market, there are sometimes erratic crashes.

And while we are at it, a word of caution: cryptocurrency does not put money in our pocket and is therefore not an asset. Because crypto is exploding in value, many people feel wealthy, but they are not unless the cryptocurrency is producing real gains that we can use. Just like with any other asset class, the asset must put money in our pocket in the form of passive income and capital gains income to be label a real asset.

Before crypto was only an asset when it puts money in our pocket, by making a capital gains through selling the cryptocurrency. However, today crypto is not only an asset and assets class but it is also a new currency. Yes crypto is the new money in town. We can pay each other and use it as money. We can take the gains of the crypto instantly by utilizing them as money. Before it became a currency only method to gain value with Bitcoin and other cryptocurrencies is to sell them as they are not useful for making purchases. They only turn into an asset if we are profitable after that. Because crypto is a new urgency it has added additional value into the asset class and the ability to turn it into a real asset by using crypto as a currency after we invest in it. Crypto just like any other asset class it goes up and down according to the market and events happening.

Focus and Diversify: Is It An Oxymoron?

The day-to-day effort of managing various asset classes won't be enjoyable for us if we believe bonds are boring or have little interest in the price of silver. Be diverse even though it's crucial to invest mainly in the things we are most enthusiastic about. However, what does that actually mean?

At some time, we have undoubtedly heard financial advisors rave about the value of having a "diversified portfolio," but what does diversity actually mean to them?

Successful investors of today, have holdings in all five asset classes. Different assets within each class may respond differently to the markets, as does each asset class as a whole. We have often seen that placing all of our money in one place might not provide us with the level of financial security we want. Therefore, it makes sense to get knowledgeable about all asset classes and develop into a well-rounded inside investor; in other words, truly diversify our portfolio among the asset classes that exist! Finally, we want our surplus of our businesses to buy other investments so that we create money for nothing and tap into infinite return on investment.