Diversification is a powerful tool. It can help protect portfolio value by ensuring that all of your holdings are not influenced by the same market forces. But — as many of us now know all too well — if your portfolio is invested entirely (or even predominantly) in stocks, a global correction can quickly erase a huge proportion of its value, even if your investments are spread across securities from a variety of industries and geographies.
In our view, a portfolio invested almost exclusively in public securities can’t be considered truly diversified, even if it includes the widest possible variety of securities. A truly diversified portfolio must include some investments that are independent of the public markets. The trust deed investments we offer at Sterling Pacific Financial, for example, offer diversification that is more meaningful for many portfolios because the investments are secured, pay monthly income, and are not subject to the swings of public trading.
Consider an investment in an S&P 500 index fund. Some would argue that this investment achieves sufficient diversification for most investors, since it includes a wide variety of stocks. However, investors who invested in an S&P 500 index fund five years ago and held it until today have lost over 15% of their investment due to the market downturn — and, those who invested more during the peaks of 2006 and 2007 suffered much more severely.
Diverting just 25% of the initial investment into one of our mortgage pools would have completely protected that portfolio’s value. In fact, total portfolio value today would be up about 4% had 25% been invested in the Foundation Fund — and, even a 10% diversification into the Fund would have helped cut the impact of the S&P’s losses by 50%, as shown in the chart below:
We know that contemplating investments outside the public markets can be intimidating if you’ve never done it before. Our mortgage pools are designed for simplicity and relatively low initial investment levels; they can be a good first step towards broader portfolio diversification. A single investment in our pool allows you to participate in dozens of profitable private loan investments, and earn a regular income each month — and, you’ll be pleasantly surprised by how easy it is to get started.