real estate

“Don’t put all your eggs into one basket”; a often heard sayings goes.

And good advise is certainly is, because by putting parts of your money into different baskets you gain security, as it becomes less likely that all of your investments fail you at the same time, and further more you are also able to reduce your risk (volatility) of your overall portfolio.

Modern portfolio theory states that by adding asset classes with low correlation to ones portfolio you can actually reduce risk without reducing returns.

In plain language this means that it is advisable to combine asset classes that move out of sync as much as possible. (simplified: when stocks take a dive, bonds tend to hike up, thus offsetting the overall movement of the portfolio)

As it is unfortunately not possible to predict which asset allocation will best match any given risk/return expectation it makes sense to spread as far as possible, never forgetting cost. (it does not make sense to add an asset class that brings little diversification, but cost dearly to own)

For further reading on modern portfolio theory and efficient frontiers see gummy, read the Intelligent Asset Allocator from William Bernstein, or search alltheweb...