For investors seeking additional safe havens for their investments, diamonds may be an interesting alternative. Diamonds could offer benefits that are simply overlooked by the average investor. Diversifying your investment portfolio by adding these asset classes can help to protect your portfolio against the downturns we saw in 2008, hedge your investments against global uncertainty and inflation, provide returns, as well as provide a certainty that no “paper” investment can possibly give you. While these types of investments used to be available only to the super-rich, today average investors have access to them.
There are three key reasons to diversify your portfolio by including assets such as diamonds and gold:
If these benefits resonate with you, consider adding diamonds to your portfolio. Of course, you should always consult your legal, tax, and investment advisors before making any significant decisions, but let's look at each of these three reasons.
For decades, investors have split their portfolios into stocks and bonds. That's diversification. Traditionally, when the stock market went down, the bond market stayed relatively stable, in part because it provided yields in the form of bond interest, thereby moderating any recession's effect on the portfolio. As much as we'd all like to forget 2008, it still serves as an important lesson. As investors began to expect more from their fixed-income portfolio, they wanted their bonds to provide more than just a couple of percent of interest. Then came the mortgage-backed securities, which were investment grade, and ultimately came the “sub-prime” mortgage-backed securities. (Think of the book, and now movie, “The Big Short.”) When those collapsed, countless millions of dollars of assets, which investors thought were solid, evaporated into thin air. One solution to protect against that risk is to invest in assets that cannot evaporate—investments that you can hold in your hand if you want to be reassured that they are still there. Perhaps the most basic way is to invest in an asset that you can hold in your hand—raw diamonds.
Far from being only used by fine jewelers, and sold mostly around Valentine's Day, industrial diamonds have many uses and demand continues year round. They are used in cutting and drilling tools, from your local stone mason and patio installer, who uses diamond-tipped blades to cut the masonry, to industrial mining and drilling operations. The ever-expanding high-tech industries use diamonds in applications such as in lasers and for semiconductor manufacturing. More than 80% of diamonds are used in industrial applications, so even if the economy prevents some people from buying that big engagement ring, computer chips will still be manufactured. Thus, diamonds are a great way to diversify the portfolio.
In 2010, rough-cut diamonds provided a return of 20% while the S&P 500 lagged behind with just over 12% total return. And demand for diamonds continues to grow. In addition to the high-quality jewelry-grade diamonds, even low-quality diamonds have widespread demand in the global economy. A demand that is widely expected to grow unabated. It's simple supply and demand, a steady or increasing demand means that, all other factors being equal, prices will increase. Because the diamond market benefits from both industrial and luxury purchases, it tends to thrive across several fronts.
A big question that investors ask their advisors, especially after the sub-prime mortgage fiasco, is “Where exactly is my money?” Investors are tired of investments that are paper, held by someone else, who holds another piece of paper that's held by yet someone else. They want something that they can see. They want to be able to see and feel the solidity of their investments.
Imagine this. You are watching the evening news. After the story of yet another financial fiasco or ponzi scheme and the countless investors devastated by the news, there is another segment on the stock market's depressing reaction. Of course you will call your investment advisor in the morning, because you know for a fact that he won't return your call right now. After making a note in your calendar, you open your wall safe and pick up a dark velvet pouch. Feel how heavy it is, how good it feels in your hands. Open it and pour a few diamonds into your palm. They are real. They didn't evaporate or disappear with no credible explanation. You know that they will be there as long as you want them to be. As you go back to the news, the next segments discuss a new semiconductor plant and the increasing job market in the mining industry. You smile because you know that diamonds will always be in demand.
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