Real estate investor Grant Cardone has never been afraid of prioritizing a single asset class. He’s always been skeptical of stocks and recently warmed up to Bitcoin, but real estate has remained his primary asset outside of growing businesses.
He recently threw cold water on a popular piece of investing advice that has served people well over the years.
“People should not diversify their investments,” he stated while criticizing ETFs and mutual funds.
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Cardone’s thoughts on portfolio diversification contract the mainstream advice of diversifying your portfolio and not putting all of your eggs in one basket. However, there is merit behind Cardone’s suggestion that can be valuable for investors.
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Diversify In What You Know
Cardone does not diversify his portfolio across a wide range of sectors. For instance, he doesn’t pour his money into oil stocks, bank stocks, consumer staples stocks, or any other stocks. He has made almost all of his money with real estate, but he has a well-diversified portfolio if you narrow it down to real estate.
He isn’t betting all of his wealth on a single apartment complex. Instead, he has thousands of apartment units spread across several states that make up a multi-billion dollar portfolio.
You don’t have to buy real estate to apply this knowledge. For instance, the S&P 500 gives you broad, diversified exposure to 500 of the largest and most profitable publicly traded corporations. However, if you know a lot about artificial intelligence and believe it can outperform the broad market, it may be more beneficial to buy an ETF that only contains AI stocks.
Thematic ETFs can push you away from broad market ETFs. It’s possible to limit your stock investments to two sectors that you know very well and outperform the stock market.
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Look Deeper Into ETFs
If you ask Cardone, he will tell you to buy real estate for the significant tax advantages. However, if you are a stock investor and want to apply the same concept of not diversifying, you can look deeper into ETFs and see their holdings.
Every ETF displays its holdings and how the funds are allocated. You can see which stocks make up the lion’s share of an ETF’s portfolio and which picks aren’t doing much to move the fund.
An investor can review this information to gauge which stocks outperform the ETF, and every ETF is guaranteed to contain stocks that outperform its benchmark returns. For instance, if you look at an ETF that holds AI stocks, you can dig deeper and discern which AI stocks are delivering most of the returns.
Many broad market benchmarks like the S&P 500 and Nasdaq Composite lean heavily on the Magnificent Seven stocks. There’s also a recurring trend of tech ETFs outperforming the S&P 500. For instance, the iShares Semiconductor ETF SOXX has rallied by roughly 170% over the past five years, while the S&P 500 has barely doubled during the same stretch. The gap between their gains only expands as you look further in the past.
Continue To Research Investment Opportunities
Occasionally researching new investment opportunities can help you discover promising stock picks before others notice. You can also use this approach with Cardone’s preferred asset, real estate, and look at deals in your area.
Some real estate investors may have to look for deals outside of their zip code to get the highest returns. Cardone hasn’t isolated himself to a single city or state and opts to buy multifamily properties in different states. It’s good to avoid rushing into an asset, especially one that requires as much time and capital as real estate.
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