The purpose of investing is to maximize your returns. However, the more you make when you sell investments for a profit, the greater your capital gains tax. Thankfully, capital gains receive more favourable tax treatment than ordinary income and there are legal strategies to minimize your capital gains tax even further.
Mark Twain once said “Buy land. They don’t make it anymore.”
Real estate has long been considered its own asset class within a well-diversified portfolio. The combination of income, tax efficiencies, and capital appreciation, along with the benefits of diversification, should make real estate a consideration for your investment portfolio.
However, there could also be risks to think about, such as a real estate market downturn, and dependent on the investment approach you take, managing and maintaining real estate can be labour intensive and sometimes costly. Your decision to invest in real estate will be dependent on your own risk tolerance, time horizon, and investment goals.
Passive investing is often seen as a low-cost, minimal-effort way to invest. While this is somewhat true, it is not the whole story. There are still risks and costs to address when considering investing in a passive fund.
A passive fund attempts to mirror the performance of its benchmark index by holding the securities of that index in the same weightings as the index. No active investment decisions are made.
One of the greatest risks is the inherent potential for passive funds to underperform their benchmark indices.
As the saying goes, you can have too much of a good thing. This principle applies to most things in life including portfolio diversification.
When applied efficiently, portfolio diversification is a proven method for reducing overall portfolio risk exposure. However, it is possible to over-diversify investment portfolios.
In his book, One Up on Wall Street, Peter Lynch coined the term “diworsification”, which has evolved as a label for over-diversifying portfolios where too much diversification actually worsens portfolio performance.
The recent COVID-19 pandemic, geopolitical turmoil, and high inflation have brought about unsettling investment market volatility. When a market is volatile, it is even more important to have a diversified investment portfolio. Diversification helps your portfolio withstand volatility and smooth returns over time.
So, what is diversification, and why is it so important?