INVESTMENT DIVERSIFICATION
Real estate funds usually perform differently from other assets. Their inclusion thus tends to reduce the volatility of the whole portfolio. At least a small part of each portfolio should be allocated to real estate.
What is diversification?
Some risks can be reduced by diversification. Investors may choose to distribute their money among a large number of businesses instead of one. Those who have limited means can also invest in an investment fund or a mutual fund, which itself has a well-diversified portfolio. Banks are another instrument that contributes to diversification. The financial system allows for portfolio diversification in many ways. Not all types of risk can be reduced through diversification, though. Corporate profits depend on the performance of the management as well as on the overall economic and legal conditions. The general level of economic activity varies with the business cycle. Corporate profits are interdependent to a certain extent, and diversification cannot mitigate this kind of risk. This can be partly helped by investing on foreign financial markets. However, there are also dependencies between the economic cycles of countries. Countries with a limited number of productive sectors can be strongly affected by the collapse of a particular commodity market. In an extreme case, the collapse of an important link of the financial chain could wreck the financial system of a country (this is called systemic risk), which, in turn, could have serious implications for economic activity and international trade.
Source: penize.cz
