As the COVID-19 pandemic spreads and everyone starts to feel the impact first-hand, we're reminded of why diversification is more important than ever. In these uncertain times, having well-diversified options isn't just about hedging against volatility — it's to position yourself for the new opportunities that will inevitably emerge as well.
With these recent happenings around COVID-19 and as we got stuck in Niseko, Japan just as the lockdowns were kicking off, we were reminded of the importance of diversification.
“Diversification” is a phrase we hear getting tossed around quite a bit, often within the context of investing and diversifying one’s portfolio, etc.
As we see within this new unpredictable environment that we're all navigating — it's critical to not only diversify your portfolio, but other dimensions of your life as well.
What is diversification all about?
As a general principle, diversification is about managing risk by spreading your bets across a range of options that would each react differently to the same event. In the event of an extreme shock in one area, this limits your downside and hopefully gives you other options elsewhere.
With the coronavirus, we see the increasing volatility and uncertainty making it incredibly difficult to plan future decisions. Therefore, it’s important to increase your odds for success by creating multiple paths across key areas of your life, work, and investments...
Here are some things to be thinking about diversifying…
- Your investment portfolio
- Your living situation
- Your work and team
- Your operations
Diversify your investments
As the saying goes, you don’t want all of your eggs in one basket! You wouldn’t put all of your money under your mattress, or into a single company, asset class, or even sector (tech, energy, etc), because you’d be overexposed to the extreme downside of some unforeseen shock.
Most people typically work with a financial advisor that lightly diversifies their holdings across some mix of stocks, bonds, index funds, short-term instruments (like money markets, CDs) — all designed around their risk profile and time horizon. And if you drill a level deeper, each of those assets are diversified themselves — e.g., stocks are spread across various sectors and types of companies (from small cap to large).
Yes, this is still a rather narrow and limited approach, which really isn’t all that diversified.
We saw entire markets dramatically plummet as the pandemic initially hit China and shut down supply chains. Many people's investments were not quite as diversified or uncorrelated as they thought they were.
International Real Estate
This is precisely why we are big fans of international real estate as a critical component to truly diversifying any investment portfolio. Real estate offers a distinct mix of benefits:
- Exposure beyond the more traditional asset classes (stocks, bonds)
- Is largely uncorrelated to the broader markets
- Hedge against inflation as it’s a tangible, income-producing asset
- Stable across economic cycles — and a historically strong performer in recessionary times
- A store of value resilient to adverse events (Pan Am, Enron or Lehman Brothers can go to zero, but your property generally retains utility and value regardless)
When you start to look globally, many of those benefits of real estate investing become amplified. It allows you to tap into the higher growth potential (and lower costs) of emerging economies, different asset types and geographies, unique tax advantages, and a more global lifestyle.
The reality is that the vast majority of investors have a strong ‘domestic bias'. But if all of your money is in US real estate, stocks, and bonds, then you’re at the absolute mercy of a single economy and currency.
Global real estate is a mechanism for true diversification to hedge against the unpredictability of these current times.
Diversify your living situation
We recently did a video on ‘3 Reasons Why You Need a Second Passport’, which breaks down the importance of securing future living options in the case that relocation makes sense for you at some point down the line.
First off, it allows you to design a lifestyle that suits you, if you want to spend different part of the year between Bangkok, Osaka, and Bogota. Or just want to escape the brutal winters of New York...
With a global outbreak of the nature and scale of COVID-19 — these are the times that you want and need maximal geographic flexibility. Depending on how and where the crisis is impacting, you want the option to seek safe havens.
Having a second passport will open up your options to travel or relocate wherever might make most sense for you as the situation unfolds.
Additionally, this is also where owning a second property can come in very handy. Again, we got locked down while traveling through Japan, then faced a 2 week quarantine upon return to Thailand.
Depending on how things progress, it'd be good to options for relocating to see things out from those less affected areas.
It's about creating optionality to choose the best location for any given time.
Diversify your work (going remote)
With no signs of stopping, countries around the world are trying to contain the fallout from the pandemic. Of course, a major piece to that is minimizing unnecessary in-person interactions.
Suddenly, remote work has become a global public health strategy!
Remote work isn’t a new thing, but up until last month it has existed somewhat on the fringe. Through a kind of forced adaptation, we’ve seen it become mainstream and transform the way companies operate right before our eyes.
This is a very important development because it’s realigning norms for the design of the workplace as well as catalyzing the infrastructure for enabling remote work.
Companies of all sizes and types are getting accustomed to the tools and practices. We've seen massive spikes in downloads in tools, services like WeChat struggled to handle the increased load, stocks like Zoom shot through the roof despite a broader market correction, etc.
This is a glimpse into the future — and it's apparent that being savvy and setup for a remote lifestyle will prove advantageous.
The value of a distributed team
Importantly, there’s also something to be said here for distributed teams. We’ve talked in past posts and videos about the many benefits of being able to tap into a global workforce, and bootstrap your startup with diverse talent pool.
In the context of the current crises, distributed teams allow companies to diversify against concentrated regional outbreaks by having a workforce that is spread out.
We are seeing some very large-scale, reputable companies splitting certain key teams in half and relocate them to completely different regions just in case any one single location gets hit hard.
Diversify your operations + supply chain
Given the outbreak started in China, probably the most immediate pressure to diversify was around supply chains.
China is the world’s factory and heart of the global supply chain, if you’re in manufacturing and physical goods, you are most definitely looking very very hard at diversifying your production operations beyond China going forward.
As interconnected as the entire global economy is, we’re seeing there was an over-reliance on China as the world’s workshop. What happens when the factories are closed or operating at extremely reduced capacity?
Last year there were whispers of diversification amid the US/China trade wards. Now, that’s kicked into full gear as folks have been forced to move into adjacent markets like Vietnam, Thailand, Cambodia, Indonesia, etc.
Diversify is now more important than ever before
We haven’t even begun to understand the full effects of this global economic crisis. We don’t know which areas might be hit hard next, and we don’t know how long it will last....
What we DO know — diversification is an absolute imperative
As we face a wildly unpredictable year ahead, you need to have balanced and diversified options across your work, life, and investments.
Remote Ventures is an international real estate investment company building software to help you scout foreign markets, find up-and-coming neighborhoods, identify and analyze properties, close deals, and turn them into cash-flowing investments.
Sign up for our free 12-week real estate course here — realestate.remoteventures.com
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