STRATEGY
ACQUIRING ASSETS
Breaking Down the Myth of Diversification MAKE SURE YOUR DIVERSIFICATION DOES NOT BECOME DI-WORSE-IFICATION
by Tom Olson
seems like all the “great” financial minds of the 20th
This is a great solution for invest- ment advisors who want to avoid perceived loss of client money at all costs and who are dealing in the high- ly volatile and insanely unpredictable world of the stock market, but it is not the best advice for real estate in- vestors. When it comes to real estate, diversification will ultimately lead to “di- worse -ification” if you spread your capital too thin across too many sectors or markets about which you know little or nothing.
rentals, and take that strategy into new markets. For example, they own 10 cash-flowing, single-family rentals in the Gary, Indiana, market, which is ideally suited for the acquisition of single-family homes and the updating and conversion of those properties into long-term, performing rentals, then they decide to move their strategy to another location. Just because they are sticking to the same strategy, does not mean moving to another market will create a safety net through diversification. This is where peril can emerge for their capital. If an investor decides to diversify by investing in another market and researches properties in California, for example, they might discover property values are amazing, so they invest. Then they buy one in Colora- do. They purchase one in Pittsburgh. They’re now diversified, but only one of those markets is arguably even close in nature to the Gary market
It
and 21st centuries love the idea of diversification. But not everything is what it seems. Warren Buffett has said on nu- merous occasions, “Diversification… makes very little sense if you know what you are doing,” and that while diversification may “preserve wealth, concentration builds wealth.” Take it from Sir John Templeton, founder of the Templeton Growth Fund and, according to Money Mag- azine , “arguably the greatest global stock picker of the century” who said, “There is safety in numbers,” explain- ing, “Statistics showed that when I advised a client to buy one stock to replace another, about one-third of the time the client would have done better to ignore my advice.” Tem- pleton believed the solution was for the client to not replace but instead simply add to their existing portfolio.
KEEPYOUR EYES ONTHE PRIZE
Real estate investors most likely un- derstand that too much diversification leads to di-worse-ification, but many still fall prey to the allure of “safety in numbers.” Generally, this takes the form of an investor deciding to stick with a strategy that has been success- ful for them, such as single-family
74 | think realty magazine :: october 2020
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