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How To Get Real Diversification In Your Portfolio
The 6 Alternative Investments You must Know About
Hi. This is Michael Gross, co-author of “McGraw-Hill’s The Complete Guide to Option Selling” and also director of research here at OptionSellers.com. I'm here with your bi-monthly video lesson. The topic of this month's lesson is “Real Diversification” and we're going to go off the grid a little bit here this week and talk about something that's on the minds of just about anybody that has accumulated or preserved a certain degree of wealth.
High-net-worth investors are always talking about diversification but when it comes down to really doing it, sometimes a lot of them probably aren't as diversified as they think.
CNBC.com recently ran an article entitled “The Five Biggest Mistakes Made by High Net-worth Investors.” Do you know what the number one mistake was? Lack of diversification.
We're so programmed to put our funds into traditional investments like stocks, bonds, and real estate that we forget that even with a mix of those asset classes, certain events could affect all three and cause a real drawdown in our portfolios. One of the goals of diversification is to help smooth that equity curve out and help give us a more steadily growing portfolio that's not as vulnerable to the sharp whims of the market - whether that be stocks, real estate, bonds or all three, like we saw in 2008.
Before we get started, if you're interested in selling options an option premium, we do recommend “The Complete Guide to Option Selling”. It's now out and its third edition and you can get it on our web site www.optionsellers.com/book.
As a high net-worth investor, when we think about diversifying our portfolios we're often thinking about, “Well, what else can I put my money in? What else can I put it in it's likely to appreciate?” And one thing I think a lot of investors of our class overlook is, it's not just diversification of asset class, its diversification of strategy. And that second part is one thing a lot of high-net-worth investors overlook.
So one of the key concepts of this video is, if we want to get truly diversified where we're both growing and preserving our wealth through a number of different things and ways, we want to be diversified in asset class and we also want to be diversified in strategy. And what you'll find is most alternative investments offer one or the other but very few offer both.
So we're going to look at some of the most popular asset classes today what they might be able to do for you and talk about some of their drawbacks as well. This is the key concept that we want to look at. Do they offer this? Do they offer this or do they offer both?
When high net-worth investors think of alternative investments. What are some of the first things they think of? Well, we have tangible hard items like - we can buy art, coins, and, everybody's favorite, we can buy real estate.
Now these can be great investments. They can be great alternative investments. They can be great ways to grow wealth, especially if you know what you're doing in doing them. But they have one drawback. And that is, you're buying these hoping that their value will appreciate and if they do great you do very well. I know many people build wealth through real estate and there are some of these other things. There's nothing wrong with that, but the drawback to it is if we enter into some type of deflationary period, these could actually decrease in value like we saw in the real estate crash in 2009. The same goes for arts, coins or any type of hard asset.
When you're buying for asset appreciation, you need the value of that thing to go up to make money. So while you’re in a diversified asset class here, you're not really diversified in strategy because you're relying on the same thing you are in the stock market. You buy stock, you want it to increase in value. So you are diversified asset class not diversified and strategy.
Let's look at another alternative. And, again, I'm not saying these are bad investments. We’re simply looking at the differences between alternatives and what they offer and what their drawbacks are.
What's the second way investors tend to try and diversify their holdings? Number two is a Hedge Fund. “Well, I’ll just buy hedge fund and that'll be it. I'll be diversified.” Well, first of all, there are many different types of hedge funds and many different types of strategies that they use.
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