Diversifying + Finding Your Niche to Create a Well-Balanced Portfolio

Whether experienced as an investor or just starting out, we all have a very important goal in common: we want our investments to be successful. Of course, we may have different ideas in mind for what “success” looks like. We also have different preferences, such as level of risk tolerance and time commitment (i.e. active vs. passive).

Personally, I always thought of investing as a method for building a steady stream of passive income, and I prefer to take on investments that I know and understand. Others may prefer to be more active and take on rehab deals that they fix up themselves.

But regardless of the differences, there are two main strategies investors use when developing their portfolios: diversification and investing within your niche.

Finding Your Niche + Pursuing Diversification

I believe that it is always best to invest in what you know, but sometimes gaining the necessary education and finding your niche takes longer than you’d like. Let’s face it, when you come into this world you can basically do any work you want, however not everything you want. You are limited by time. Some kids know exactly what they want to be in 3rd grade, and others still don’t know even after graduating college. At some point, by design, by accident, or by circumstances, you go down a certain road to make a living.

Some people experience life-changing events that force them out of one niche into another. For example, I have a good friend that was a great dentist with a terrific practice that was turned upside down in days with the onset of a medical condition that killed his capability to be a dentist. He had to reinvent himself. He looked at his capabilities, resources, talents, and network, before becoming a financial leader.

I have several friends who got older and then realized that they didn’t have enough money to retire, so they looked at passive income streams to supplement and eventually replace their income. I've seen clients come to our classes, who had been laid off. They meet others and discuss new ideas, ongoing businesses, niches, etc. and learn about things that were not on their radar for years.

If you’re still finding your niche or you’re trying something new, dip your toes before jumping in. Maybe invest a smaller amount of money in a particular investment at first, while you are still learning. Over time, you will start to see what you’re good at. Plus, you will have more to go off when determining what yields the highest returns. There are many opportunities, so look for the ones that best suit you.

As an example, some people love to fix and flip properties, while others simply want to buy and hold rental properties, or even be realtors and help people buy, sell, and find investment properties. For example, a mailman in my neighborhood knows when homes or businesses are in foreclosure, abandoned, or vacant, and he also knows investors looking for properties not yet on the market, so he gets a “bird dog” fee for finding these gems. Assess your network, resources, time, wants, needs, and capabilities. Once you do that, your choices should be narrowed down to a few good candidates. Investigate and discuss these options, educate yourself, and experiment until one or two emerge as clear winners.

The other main investing strategy is diversification. Many folks (including me) believe that it is best to spread out risk and avoid putting “all your eggs in one basket,” or in other words, all your money in one investment. If fully diversified, when the unexpected happens, your entire portfolio doesn’t suffer.

One way to do this is to look at asset classes that are not correlated to each other, and assess the risks that can potentially cause economic hardship, such as hurricanes in Florida that can damage your properties.

In my case, I have commercial and residential investment properties in different geographical areas in case of natural disasters, economic trends, terrorism concerns, etc. Turnover in residential is higher than in commercial, but it is faster to find a new tenant for those properties. Property prices in Florida and Las Vegas dropped 60% in the 2008/9 recession, while properties in the northeast dropped considerably less. In addition, I have land that can be developed in recessions when labor and materials are at bargain prices.

Private mortgages are a way to minimize the hands-on work of owning real estate while maintaining the security of an asset-backed investment. With this investment type, the main risk would be borrower default and foreclosure, but even in that case, I would simply acquire the property at a discount.

Another tip would be to look at insurance and understand timeframes for recovery, because sometimes the unexpected will happen. The pandemic of 2020 was not on my radar but between the different properties I took about a 30% hit for a little while. Some businesses thrived while others were significantly impaired. The lesson I learned was to look at “essential” businesses and professions. Dentists were stopped in their tracks. Liquor stores were selling more than ever. Guns and groceries and construction material suppliers were open but facing a supply problem. All these considerations will be factored in for the future and will most likely influence changes in the portfolio.

Preparing for the risks I mentioned above will certainly help diversify your portfolio. But it is also possible to diversify within your “niche” investment type. For example, there are many ways to invest in real estate, including rental properties, rehab deals, single-family, apartment complexes, commercial, land, garages, and more. Plus, you can further diversify by lending money on real estate or buying tax liens.

Creating My Portfolio

Personally, I’ve utilized both these strategies to build my investment portfolio, and each deal, whether within my niche or not, was a learning experience.

I’ve tried many things in my lifetime (stocks, bonds, mutual funds, options, commodities, and even blackjack). I purchased training programs on how to maneuver in the equities market to no avail. I drifted away from the stocks and bonds for many reasons, including lack of understanding and lack of success. It simply wasn’t my niche.

My family has been in real estate for generations, so I was naturally drawn in that direction. This included land and single-family homes to start, branched out to commercial office space, multi-family, industrial warehousing, creating diversification in the real estate sector. In addition, I focused on geographic diversification by owning properties in 8 states. I further diversified with raw land and owning actual oil wells in Wyoming.

Building on the tangible assets that I knew and understood, I looked to simplify and enhance the diversification through private lending and tax liens tied to real estate. It was a natural evolution. Most investments went well, but some were not as good as others. Time working the assets, return on investment, risks, etc. have been evaluated over time and my strategies have been adjusted for lifestyle changes, family changes, and economic changes. It isn’t static, and I don’t believe there is a “set it and forget it” system that works forever.

Further diversification was incorporated by using different tax advantaged plans, as well as legal entities to provide asset protection. After some research, I also got into precious metals because I met wealthy individuals on a cruise and they said, “throughout history the wealthy have invested in real estate, gold, and artwork.” As an example, physical gold is valued in 158 countries and cannot be easily manipulated. Investing in precious metals is a way to store wealth.

Overall, I focused on my niche (i.e. real estate investing), while also diversifying within that asset class and by venturing into other alternative investments. This is what worked for me.

Regardless of where you are in your wealth-building journey, these strategies still apply. Have you determined your “niche” investments? If so, how are you diversifying your portfolio while focusing on them?