Gold Diversification – Diversifying Your Portfolio with Tangible Assets
One of the most important aspects of investing is the control of risk in your portfolio, relative to the expected return. Tangible assets are an extremely useful tool for investors in that regard.
In building an investment portfolio, investors should avoid unnecessary risk through wise diversification. Diversification is the allocation of investable funds to a variety of investments. By diversifying, investors can reduce the risk that they would otherwise bear. Also, the risk reduction benefits of diversification can be achieved without reducing the overall return on yourportfolio.
The key to diversification is finding investments that are not closely correlated with one another. Other things being equal, the less the correlation between two investments, the better suited they are for effective diversification.
This gives rise to a problem for most investors because most stocks are relatively closely correlated with one another and most bonds are relatively closely correlated with each other. In addition, there is also a close correlation between stocks and bonds. Investors need to find investments that are not closely correlated to stocks and bonds and include them as additional elements in their portfolios.
- The different tangible asset sectors provide investors with an opportunity to make dramatic positive changes in the value of their investment portfolios.
- Tangible assets can be very useful in reducing the overall volatility of an investment portfolio because, on average, they tend to move in the opposite direction of paper investment vehicles.
Many investors combine tangible assets with their stock and bond portfolios to reduce risk. This is due to the fact that tangible assets have historically had a very low, even negative, correlation with stocks and bonds. This means that they are useful to hold in conjunction with paper investments in order to reduce total risk. Not only is the risk reduced due to negative correlation between tangible and paper assets, but tangible assets have produced exceptional investment returns on their own.
Every sign today points to increasing importance for diversification; that also means increasing importance for tangible assets.
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