Investment Diversification Techniques

Family offices are telling us something—loud and clear. According to UBS, 42% of the average family office portfolio is now allocated to alternatives. That’s more than cash, fixed income, and emerging market equities combined. What does that signal? → Yield is no longer found—it’s engineered. → Diversification now means private markets, not just 60/40. → Patience is a luxury retail investors can’t always afford—but family offices can. Breakdown within alternatives: • 22% Private equity • 11% Direct investments • 10% Real estate • 5% Hedge funds Traditional allocations still matter, but this chart makes one thing clear: institutions are betting long on illiquidity, complexity, and control. The average investor is told to keep it simple. The ultra-wealthy? They’re doubling down on bespoke and off-market.

Which Sectors in Real Estate Are Family Offices Likely to Invest in Now? As family offices consider where to allocate their capital, real estate remains a primary focus. Its tangible nature, potential for steady income, and ability to hedge against inflation make it an attractive asset class. However, the specific sectors within real estate that capture family office interest are shifting based on evolving market dynamics, long-term goals, and generational priorities. Family offices are increasingly focused on specific real estate sectors that align with their long-term goals and investment strategies: 1. Multifamily Housing: A preferred sector due to stable cash flows and growing demand in both urban and suburban areas. There's also rising interest in affordable housing, driven by both impact investing and market needs. 2. Industrial and Logistics: The e-commerce boom continues to drive demand for warehouses and distribution centers. Family offices are particularly interested in last-mile delivery properties. 3. Medical and Life Sciences: Healthcare-related properties offer stability and long-term leases, making them attractive. The aging population also drives demand for senior living facilities. 4. Hospitality: With the rebound in travel, there’s renewed interest in hotels, resorts, and unique experiential properties. 5. Office Space: Investments focus on flexible office solutions and properties with strong sustainability credentials, adapting to hybrid work trends. 6. Student Housing: Consistent demand, resilience during economic fluctuations, and long-term leases make student housing appealing. It also offers opportunities for global diversification. Investment Strategies - Family offices leverage their significant capital and long-term perspective through: 1. Direct Investments and Partnerships: Direct control and flexibility in niche markets are key benefits, often complemented by strategic partnerships. 2. Value-Add and Opportunistic Strategies: Higher returns are sought through investments in properties needing redevelopment, with a focus on market timing. 3. Long-Term Holdings and Legacy Projects: Real estate is used to preserve wealth across generations, with a focus on long-term capital appreciation and legacy-building. 4. Geographic Diversification: Family offices are increasingly investing globally, partnering with local experts to mitigate risks and tap into emerging markets. Family offices remain committed to real estate, leveraging their unique advantages to navigate and capitalize on market opportunities. #familyoffice #familyoffices

Just because stocks have a higher return than an unlevered bond index doesn't mean that an all stock portfolio is better. Arguing for a 100% stock portfolio is at best imprudent & self defeating and at worst significantly increases the risk savers have unacceptable outcomes. There is no reason to have to have an all stock portfolio to generate equity like returns. These academics just assume bond returns are lower than stocks. But that's not inherent to bonds, its because the bond index is a whole lot less volatile than stocks and because of that bonds structurally have lower excess returns. There are lots of ways that investors can *achieve the same returns as stocks* but have much better diversification. For instance, by using futures contracts or holding long-duration bonds to create bond exposure with similar volatility as stocks, then bonds investors can get returns that are of similar expected return vs. cash. Even a few simple steps can significantly improve diversification while keeping equity like returns (like the link below): https://lnkd.in/ep2hs8q4 There are even many easy ways to do this today that don't involve having to put the portfolio together yourself. Damien Bisserier's $RPAR and $UPAR offers investors *balanced* beta exposure at different levels of expected return. Corey Hoffstein's return stacking structures allow investors to get more cash efficient exposures. WisdomTree Asset Management's $GDE is an efficient way to access to gold and stocks. These are just many of the pieces investors can use to build high-returning, cash efficient portfolios. The reason why this diversification is so important is because *the path matters.* A lot. Savers don't just chuck money in their 401k or brokerage accounts and say bon voyage till retirement (as is assumed in the paper). Things change and changes draw on savings. People go to school, get married, they buy a car, house, have a baby, their kids go to school, etc. Savings is there for all those steps and since the timing isn't precisely known, the path matters. Imagine being a saver in 03 or 09 when stocks were down hugely and the savings you thought you had evaporated. The paper says wait it out, but that is often not realistic. Further there is a behavioral aspect. The paper just assumes that investors will 'ride out' any losses. Not care, not panic, not sell. But any advisor knows that's totally unrealistic. Its been well proven investors sell at bad times and buy at bad times too. An all stock portfolio fails to recognize these realities of human behavior. I'm all in favor of challenging the status quo but this is a step backward, not forward. The last thing we need is for investors to load up on stocks when they are at the highest levels relative to balance assets in decades. https://lnkd.in/e5YqjHcg

How are family offices looking at real estate in this shifting market? Real estate still plays a critical role in wealth preservation for Family Offices, yet headlines are filled with uncertainty: higher interest rates, tighter credit, and major institutional retrenchment. But that’s not the whole picture. Beneath the surface, real opportunities are opening up for those that know where to look. This month, Blackstone walked away from another multifamily deal due to pressure on cap rates. At the same time, large institutional players like CalPERS and Harvard’s endowment are pulling back on new real estate commitments. The reason is that the old strategy of relying on cheap debt and compressed cap rates to drive returns is no longer working. For Family Offices holding patient capital, this shift presents a strategic opening rather than a setback. As institutions retreat, we’re seeing Family Offices move toward more direct investments and niche sectors. Self-storage, workforce housing, and medical office are seeing increased attention. These are not trendy plays. They are durable, income-producing assets tied to essential needs. Recent data from the Family Office Real Estate Institute confirms a steady reallocation toward these areas. Cap rates remain favorable, and with less institutional competition, Family Offices are stepping in. Another clear shift is the growing preference for long-term holds. More than half of Family Offices now aim for investment horizons of 10 to 15 years. At the same time, value-add remains one of the most popular strategies. This might seem contradictory, but it reflects a more nuanced approach: entering value-add deals with a plan to stabilize, refinance, and hold. That requires alignment with sponsors willing to think beyond the typical three-to-five-year timeline. Family Offices are especially well positioned at this moment. They are not tied to quarterly earnings. They can weather illiquidity. Most importantly, they understand that protecting capital over time is more valuable than chasing short-term gains. So, here’s the takeaway. Real estate remains a powerful tool for wealth preservation and generational growth. But success today requires a shift in mindset. The best opportunities are direct deals, longer holds, and asset types that serve basic economic needs. It is not just about what to buy. Family offices need to understand how to structure ownership in a way that supports their family's goals for decades to come. I’m curious to know what type of real estate you think Family Offices should be looking at in the current climate? As one patriarch once said to me, “We’re not in a hurry. We’re in a legacy.”

Full-sample (i.e. average) correlations are misleading. Prudent investors should not use them in risk models, at least not without adding other tools, such as downside risk measures and scenario analyses. To enhance risk management beyond naive diversification, investors should reoptimize portfolios with a focus on downside risk, consider dynamic strategies, and depending on aversion to losses, evaluate the value of downside protection as an alternative to asset class diversification. (From the book Beyond Diversification.)

The Hidden Risk Lurking in Every Sector You Own. Complacency can cost you, sometimes more than a market crash. If you think your portfolio is “diversified” because you own stocks in different sectors, you might be wrong. A few weeks ago, Jamie Dimon warned that markets were shrugging off the looming U.S.-EU tariff negotiations. Why does that matter to you? Because tariffs, interest rate hikes, and global trade tensions can hit all public market sectors at once. That “diversification” your advisor promised? It can vanish overnight. I’ve seen it before in tech, finance, and real estate. When professionals assume “it’ll all work out,” they miss the window to prepare. Here’s what sophisticated investors do instead: ✅ Balance public market exposure with private, cash-flowing assets. ✅ Focus on investments not directly tied to global trade swings. ✅ Build relationships with trusted operators before uncertainty spikes demand. True diversification isn’t just owning different tech stocks, it’s insulating your wealth from shocks that don’t care what your portfolio spreadsheet says. Private Main Street assets often move on a different timeline than Wall Street. If tariffs or rate hikes hit harder than expected, will your portfolio take the blow or sidestep it? I guide senior tech leaders in building resilient, income-producing portfolios that can weather these shifts. If you’ve been relying solely on Wall Street “diversification,” maybe it’s time to challenge that belief. DM me for a private conversation. #YourLegacyOnMainStreet #PowerOfPassiveInvesting

Part 3 in a series that steps through the allocation process for young allocators… First, decide the goals of the portfolio (don’t lose money, accept vol to make more money, strategy vs deals). Next, decide your investment beliefs and how you’ll construct the book (active v passive, alts - yes/no, liquidity and opp cost). Finally, you get down to strategy and interaction/correlation. 1. Now for the tricky part. You need to stay true to the goals for the portfolio, but everything can’t be leaning the same way. For example, it’s straightforward to construct a book that doesn’t lose money in a down market. But if the market is up, like 2010-2020, you’ll be relieved of duty before your portfolio outperforms. Similarly, the Regents may say they can accept market volatility, but if the book is down so much in a 2008 environment that the school has to dramatically cut its mission, you may not be around to see the rebound. So balance matters. 2. Diversification is important, but you don’t want to diversify away your alpha. Again, it’s tricky, and relates to your own risk tolerance as well as the risk tolerance of your IC. A good place to start is “how much can I lose (in actual $ or %) and either overcome it with another part of the book OR be able to sleep at night?” 3. To the extent that you DO take on more calculated risk in a certain part of the book, can you mitigate that in another part of the portfolio? Or are you just going to keep it small enough that the rest of the book can overcome it? If you’re right, does it increase the book’s return by 100 bps; if you’re wrong and it negatively impacts the portfolio by 50 bps, will you still be outperforming? If so, by how much? Is that sustainable? 4. Do you have sufficient liquidity to take advantage of opportunities? If all of your marketable strategies are 4-yr rolling locks, then no. So the terms you accept have to be consistent with the way you are trying to generate outperformance. We are active allocators on the marketable side, for example, so long locks don’t work for us, period. 5. Consistency of approach/tilt within a market matters. Because we are active (recognizing it’s not for everyone), multi-manager/multi-strat and most quant strategies don’t work for us. If we’re going to allocate to/from managers, we have to be able to determine when to do that. If the portfolio is meaningfully different from one week to another, we don’t know when to allocate. Thus, particular strategies fit differently into a book depending on how you are attempting to outperform. 6. It REALLY helps to evaluate the risk/return potential for a particular investment against ALL available investments, not just against those in a particular category or part of the portfolio. (That’s what TPA is trying to address.) 7. It’s ok to get things wrong. Either on the interaction w the rest of the portfolio or strategy or manager. Try again until you get it “right”! Cheers and good luck!

𝗪𝗵𝗮𝘁 𝗱𝗼 𝘆𝗼𝘂 𝗱𝗼 𝘄𝗵𝗲𝗻 𝗮 𝗰𝗹𝗶𝗲𝗻𝘁 𝗵𝗮𝘀 $𝟮𝟬,𝟬𝟬𝟬,𝟬𝟬𝟬 𝗶𝗻 𝘂𝗻𝗿𝗲𝗮𝗹𝗶𝘇𝗲𝗱 𝗴𝗮𝗶𝗻𝘀... 𝗶𝗻 𝗮 𝘀𝗶𝗻𝗴𝗹𝗲 𝘀𝘁𝗼𝗰𝗸? That was the situation in front of us recently. The stock had been a career-maker — literally. They’d worked at the company for decades, and the equity stake ballooned over time. But now they were sitting on a mountain of paper wealth, with two looming threats:  1. 𝗔 𝗺𝗮𝘀𝘀𝗶𝘃𝗲 𝘁𝗮𝘅 𝗯𝗶𝗹𝗹 𝗶𝗳 𝘁𝗵𝗲𝘆 𝘀𝗲𝗹𝗹.  2. 𝗔 𝗺𝗮𝘀𝘀𝗶𝘃𝗲 𝗿𝗶𝘀𝗸 𝗶𝗳 𝘁𝗵𝗲𝘆 𝗱𝗼𝗻’𝘁. We weren’t just solving for performance — we were solving for concentration risk, tax efficiency, and legacy all at once. Here are some of the ideas we walked through: ✅ Donor-Advised Funds — gift some shares, get a deduction, and fund future giving. ✅ Charitable Remainder Trusts — defer taxes and turn stock into income. ✅ Exchange Funds — diversify tax-deferred by pooling with other investors. ✅ Option-based collars — protect the downside and unlock liquidity. ✅ Deferred Sales Trusts — sell to a trust, defer the gain, and reinvest more. This is where tax, investment, and estate planning all converge — and where having the right team matters. We’re still finalizing the path forward, but the conversation has shifted from “Should I sell?” to “How do I turn this into a legacy?”

Diversification is a very specific thing that you can measure. It is the extent to which your portfolio's volatility (risk) is LESS than the sum of each position's volatility. It tells you how much "free-lunch" you're getting, which translates to not only lower risk, but into improved returns. You want the Diversification Ratio to be as high as possible. Because without diversification, the only other way of creating value is by stock picking or market timing. And good luck with that. To maximize the Diversification Ratio, you will want to diversify both types of risk: - Company Specific Risk - Market (Systematic) Risk Company specific risk is easy to diversify with index funds. For example, the std. deviation of the S&P500 is around 16%, while the weighted average sum of the std. deviations of the stocks in the index is around 32%. So depending on your measurement period, you're getting about a 50% reduction in risk without any reduction in return! But don't stop there. You still have the risk of the stock market itself to diversify. You could use AGG bonds like everybody else, but you might as well be holding cash. AGG bonds barely improve the Diversification Ratio at all. But if you used liquid alts to diversify the systematic risk of equities instead, you can improve the Diversification Ratio by another 40-50%. Take a look at your portfolio. I bet if you measured your Diversification Ratio, you would be diversified against company specific risk but have near zero diversification against market/systematic risk. This is why you're not protecting your client's to the downside, and why your portfolio has zero alpha vs the S&P500. Diversifying the systematic risk of equities is the biggest opportunity for adding value (alpha) that you are leaving on the table. It is so simple and intuitive. Yet advisors are still focused on trying to add value through stock picking and/or timing their stock exposure.

Achieved 50% less risk in my portfolio in just one year. Here’s how I did it: Most investors think they're diversified. They're not. I see the same mistake everywhere I look. The real estate agent with 3 rental properties. All in the same neighborhood. All bought the same year. The tech worker with their entire 401k in company stock. The entrepreneur who only invests locally. Here's what real diversification actually looks like. **The Single-Basket Problem** Picture this scenario: You own 3 rental properties worth $600,000. Same street. Same market. Same risk. The local factory closes. Unemployment spikes. All three properties lose 30% of their value overnight. Your entire real estate portfolio just got crushed. This isn't diversification. It's concentration disguised as diversification. **Why Most People Get This Wrong** We invest in what we know. We buy where we live. We stick with what's comfortable. But comfort is the enemy of true wealth building. Real diversification means spreading risk across: Different geographic markets Multiple asset classes Various time periods Different management teams Multiple economic drivers **The Syndication Advantage** When you invest in a multifamily syndication, you get instant diversification. One $50,000 investment gives you exposure to: 200+ different tenants Multiple income streams Professional management Diversified local economy Compare that to buying one rental property. Same investment amount. Exponentially less risk. **Real Numbers, Real Difference** Investor A: $200,000 in one rental property 1 property 1 tenant at a time 1 local market 100% concentration risk Investor B: $200,000 across 4 syndications 776 total units 4 different markets Multiple management teams Diversified risk profile Which investor sleeps better at night? **Your Portfolio Reality Check** Ask yourself these questions: What percentage of your wealth is tied to your local market? If your industry had a downturn, would both your job AND investments suffer? Are you comfortable betting your financial future on one geographic area? **The Texas Diversification Strategy** Smart investors spread across multiple Texas markets: Austin: Tech-driven growth Dallas: Corporate headquarters hub San Antonio: Military and healthcare stable Houston: Energy and port commerce Different economic drivers. Different risk profiles. Better sleep at night. **Your Next Move** Look at your current portfolio concentration. Identify your biggest risks. Start building true diversification. Success isn't about finding the perfect investment. It's about building a portfolio that survives any storm. **What's your biggest concentration risk right now?** **PS:** What's holding you back from diversifying beyond your local market? I'd love to hear your biggest challenge in the comments.