In investing, there are a few golden rules and idioms that the experts and analysts live by. One of those is that no one investment should ever take up more than 5 per cent of your entire investment portfolio. But how practical is this advice? And is it something that investors should follow at all costs?
For most types of investments, such as the stock market, this is sound advice and can also be told as “don’t put all your eggs in the same basket.” Because one certain stock can plunge, and you can lose everything, yes you want to diversify your funds and make sure you’ve protected yourself. However, there are certain investments that just don’t make it possible to live and die by this rule. Investing in private mortgages is one such type of investment; but that doesn’t mean there’s any more danger to the investor.
This is because unlike stocks, investing in private mortgages is, in its simplest terms, loaning someone money to buy a home. Once they have, the property is theirs and you just sit back and collect your principle, as well as high returns on the investment. You can put all your eggs in this basket, because there’s virtually no risk. Your investment isn’t tied to the property, so there’s no risk of decreasing values. And these investment vehicles aren’t nearly as volatile as other markets, such as the stock market, are and so, it’s more acceptable to put all your eggs in this basket.
Because you’re investing in a mortgage, which is typically going to be anywhere from $100,000 to millions of dollars, it’s often simply not possible for investors to diversify their portfolio, spreading out funds here and there. It’s one mortgage, and often a fairly costly one. Some investors may choose to invest in a number of mortgages, but it’s most likely not going to be anywhere near the number of stocks an investor may have.
Typically, diversifying your portfolio and spreading around the funds is a great idea and a good investment strategy. However, remember that just like every other “rule” in investing, you have to be flexible when working with this one; and know when it’s sound advice, and that when it’s not, it doesn’t necessarily reflect poorly on the investment or the investor.