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Investment Diversification 101: Beyond Stocks and Bonds

Oct 17, 2023
5 min read
Written by Diamond Standard

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Diversification - a term well-versed among the investing community - is the process of spreading investments across various asset classes to minimize risk. This principle serves as a safeguard against extreme market movements, ensuring portfolio stability during tough market conditions. Usually, investors consider a blend of traditional assets like stocks and bonds to achieve diversified portfolios. But what about thinking beyond these conventional classes? What about considering non-traditional assets for better risk adjustment and portfolio health?

Discovering Non-Traditional Assets

Recently, there's a growing interest in non-traditional assets as part of the broader diversification strategy. These alternative investments can range from private equity, real estate, commodities, to collectibles - and yes, even diamonds.

While many might see diamonds as just a dazzling gem to adorn in pieces of jewelry, diamonds' potential to add robustness to an investor's portfolio goes unnoticed. But why diamonds? What positions this precious stone as an alternative yet worthwhile asset class for diversification?

Unlocking the Potential of Diamonds as an Investment

Diamonds offer a compelling investment opportunity as they have continually displayed relatively stable performance during periods of recession, uncertainty, and economic crisis. The asset class not only provides potential for portfolio diversification, but it also serves as a shield against inflation while promising substantial potential returns.

But how can diamonds provide portfolio diversity? Look at it this way - investment in diamonds is far less saturated compared to other precious metals like gold or silver. Currently, investors control around only 2% of the estimated $1.2 trillion diamond market. If diamond allocations reach the same investor allocations as gold (around 30%), there's an approximately $336 billion market opportunity sitting on the sidelines. This underscores the potential for diamonds as a largely untapped asset class for diversification.

Diamonds and their Low Correlation

From an investment perspective, diamonds shine bright due to their low to near-zero correlation with other asset classes such as gold, silver, equities, and bonds. In simpler terms, the performance of diamond investments tends not to mimic these traditional assets. This unique characteristic provides an avenue for diversifying portfolio risk as fluctuations in stock or bond markets are less likely to impact the assets' values.

Diamonds - A Fading Treasure

As mentioned in the previous section, one of the most intriguing factors that pegs diamonds as a unique investment option is their dwindling supply. As natural resources, diamonds do not occur ubiquitously. Their production has seen a steady decline over the years, leading to an anticipated near endpoint within the next 60 years. Notably, the world has not witnessed the discovery of a new diamond mine in over two decades.

So, how exactly does this fading supply impact diamond investments and, in turn, portfolio diversification?

The fundamental principle of supply and demand governs the dynamics of any market, diamonds being no exception. As supply constricts while demand remains constant or even increases, prices naturally rise. This increases the potential for diamond investments to appreciate in value over time. In other words, due to a fall in supply, diamond prices could potentially appreciate, leading to capital gains for investors.

Additionally, in a broader macroeconomic context, the 'scarcity factor' of diamonds could magnify their appeal as an alternative investment route. Considering diamonds' resilience to economic downturns and their low correlation with traditional asset classes (ETFs, equities, or bonds), their scarcity could transform into an investor's boon. This, in turn, could further cement their status as a robust portfolio diversifier.

Even though market dynamics are unpredictable, and nothing is ever guaranteed in the world of investments, diamond's diminishing supply holds the promise of value enhancement in the longer run. When compared to surplus assets whose value often gets impacted due to oversaturation in the market, diamonds' inherent scarcity can be an advantageous proposition for investors seeking to diversify their portfolios while also pursuing growth.

This "Fading Treasure" factor of diamonds could serve as a beneficial diversification option for investors to enhance potential returns on their portfolio while significantly mitigating risk. However, as always, potential investors should conduct their own due diligence and consider their risk tolerance before venturing into alternatives like diamonds.

Diamonds in the ETF Universe

You might be wondering - how exactly can an investor add diamonds to their portfolio? Even though diamonds can't be directly added as an asset class, there's an innovative workaround that lets investors gain diamond-like returns - The Diamond ETF.

The Dow Jones Diamonds Index allows investors to have mirrored returns of the underlying Dow Jones Industrial Average through diamonds. This opens an interesting diversification avenue in an investor's portfolio without the compulsion to directly own individual stocks.

The Takeaway - Diversification Beyond the Norm

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In a nutshell, diversifying beyond traditional assets and considering non-traditional or alternative assets can provide myriad advantages for investors. Especially in the case of diamonds, their growing potential as an investment, low correlation with other asset classes, predictable rising value due to decreased supply, and accessibility through specialized ETFs can make them a sparkly addition to an investor's diversified portfolio.

As Lawrence Wintermeyer aptly puts it, "The Diamond Standard Coin inherits the best features of gold and bitcoin. A naturally scarce, market-traded commodity, and a trustless digital asset that can be transacted instantly and globally." Diamonds, in their own unique way, are steadily claiming their place as an attractive investment alternative.

Investment diversification is undeniably a cornerstone in the art of investing. By including diamonds, a non-traditional yet promising asset class into an investment portfolio, investors can actualize sound diversification principles, enhance potential returns, and significantly reduce risk - a win-win across the board.

In the world of investing, exploring and experimenting beyond the traditional norms can sometimes lead to sparkling returns.

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