Diversifying an investment portfolio can be achieved through various methods. One way is to invest in a range of assets within a particular asset class, such as purchasing the market index to ensure that an assortment of low- and high-risk stocks across various industries are evenly distributed. Another approach is to invest in international markets, which can reduce the impact of relying solely on the domestic market to perform well and mitigate risks associated with it.
One diversification technique that has seen shifts in recent years is investment across different asset classes. Traditionally, investors have allocated 60 percent of their portfolio to public entities and the remaining 40 percent to bonds, with the goal of achieving stable long-term returns while reducing volatility. However, in recent years, high inflation, increasing interest rates, and economic uncertainty have disrupted this strategy. As a result, many investors are transitioning away from this model and exploring alternative asset classes such as private equity to diversify their portfolio.
Private equity investor and fund manager Mark Hauser said that private equity assets share many similarities with publicly-listed equities, and yet in spite of this some investors are hesitant to add private equity to their portfolio. Hauser, who has over 35 years of experience in investing and operating companies, encourages investors to consider this alternative investment type as a means of diversifying their portfolio.
About private equity
Private equity typically involves owning or holding a stake in a non-publicly traded entity. Private equity firms, as partnerships, acquire and oversee private businesses with the goal of eventually selling them for a profit. These firms pool funds from investors and invest the funds in businesses on their behalf. Mark Hauser points out that in most cases, the private equity firm will either take a controlling interest in the business or acquire the entire company.
Private equity funds consist of a group of companies, referred to as portfolio companies, which are actively managed and developed by the private equity firm’s partners. The private equity firm works closely with the portfolio companies’ executives to enhance the business and drive growth. As per Hauser, private equity firms differ from other investment types in that they take an active interest in ensuring their investment is profitable. At the same time, portfolio companies can experience accelerated growth with the assistance of private equity firms, which they may not have achieved independently.
In conclusion, diversifying an investment portfolio is crucial to minimizing risk and maximizing returns. While there are several strategies that can be employed, diversifying across asset classes, including investing in alternative asset classes like private equity, has become increasingly popular. Although Hauser cautions that like all investments doing so requires thoughtful planning and due diligence, private equity can offer a valuable addition to any investment portfolio. As such, investors should consider exploring private equity investments as part of their portfolio diversification efforts.