Managing and growing wealth now requires following the new rules of money, one of which is exploring digital opportunities. Traditionally, the portfolios of high-net-worth individuals contain real estate, rare collectibles, gold, and hard currencies. However, with technological advancements, investors now have access to digital derivatives of several investment assets, offering a way to diversify portfolios by exploring redefined and new markets. This ensures investors can build a balanced and future-proof portfolio that can thrive in global markets.
Digital Diversification
Digital diversification is using an online medium to distribute investments across different asset classes and industries to reduce the overall risk of an investment portfolio. The key reason why diversification is important is due to the ability to offset any poor performance of one asset class with the better performance of other assets in the portfolio. Diversification allows investors to have a better chance of having a positive overall return.
Engaging in digital diversification involves using digital investing platforms like forex trading firms, wealth management platforms, and others. Most high-net-worth individuals maintain a luxury portfolio of big brands and timeless assets. While this approach to portfolio building is good, a better way to diversify is to ensure that assets are not highly correlated with one another.
When a portfolio has assets that are highly correlated with each other, they’re more likely to follow the same price movement. A portfolio with just gold, silver, copper, and other precious metals will very likely return a net loss if gold loses value due to investors losing confidence in the assets, if scenarios like higher interest rates or central banks liquidating their gold reserves were to occur.
Diversification does not necessarily guarantee against loss, but it can help minimize risks. While traditional diversification includes spreading assets across physical assets like lands, properties, wines and spirits, and arts and antiques, digital diversification covers investing in forex, cryptocurrency, and other alternative investment instruments.
3 Means of Luxury Digital Diversification
1. Forex
Forex trading platforms offer investors access to various financial instruments, including foreign currencies, stocks, bonds, indices, options, and exchange-traded funds. While many luxury portfolios hold hard currencies and direct investment in private equities, forex trading platforms allow investors to invest in high-end goods and services brands. For example, the stock market features shares of luxury brands like L.V.M.H., the company behind Louis Vuitton, Hennessy, and Dior; supercar companies like Ferrari; and tech stocks, which have yielded the highest returns on investments for the past decade.
Aside from the opportunity to invest in high-end stocks, forex brokers provide access to luxury-curated ETFs that give a diversified exposure across luxury brands without investors having to buy individual stocks. One of the popular examples of luxury ETFs is the Amundi S&P Global Luxury UCITS ETF (GLUX), which has holdings in LVMH, Kering, Ferrari, and Estée Lauder. Investing in foreign currencies, high-end stocks, and ETFs allows investors to diversify across geographies, sectors, and industries more efficiently than traditional investment allows.
2. Cryptocurrencies and Non-fungible Tokens (NFTs)
Cryptocurrencies and non-fungible tokens (NFTs) provide a new digital luxury asset class. Fine arts, vintage watches, and unique collectibles traditionally exude rarity, class, and value. These same characteristics are inherent in some cryptocurrencies and NFTs. Take Bitcoin, for example. As the first cryptocurrency created with an immense following from several high-net-worth individuals, it acts as the gold of virtual currencies. One bitcoin is worth over 100,000 dollars, as the digital asset’s value has grown over time. Many Bitcoin maximalists, die-hard followers, believe the token is the future of money. Although subject to price volatility, several wealth managers suggest it as a worthy high-risk asset to consider during digital portfolio diversification.
NFTs share qualities with cryptocurrencies but represent digital collectibles, preserving value and taste like physical luxury goods. The high-end NFT Crypto Punk, with a floor price of $200,000, is a prime example of a digital luxury asset for portfolio diversification. NFTs also enable virtual investment in real estate, rare collectibles, and novel technologies. Luxury brands exploring NFTs include Dolce & Gabbana’s Collezione Genesi ($6 million at auction), Gucci’s Aria digital film ($25,000), and Louis Vuitton’s “Via” series (€39,000). While hype has cooled since 2021, many brands remain invested, making NFTs a viable long-term diversification option with future potential.
3. Tokenized Real World Assets (RWAs)
Real-world assets like gold, company shares, and commodities are now being tokenized on blockchains for easier accessibility to cryptocurrency users. After tokenization, investors can buy the cryptocurrency version of the assets at the same value they hold in the real world. All tokenized RWAs can be redeemed at the ratio of 1:1 in the real world. Using gold as an example. It has several RWAs, including PAX Gold (PAXG). Each PAXG token equals one fine troy ounce of London Good Delivery gold, held in Brink’s vaults in London. Investors can rest assured that they will get the actual value of the underlying assets, as crypto exchanges back the RWAs with the physical assets.
Investing in RWAs is also a smart way to perform digital diversification, as most luxury RWAs have low correlation to stock market swings, making them a valuable hedge during periods of volatility. Additionally, investors looking to invest in elite assets without breaking their bank can do so by owning fractions of RWAs in their portfolio.
Diversifying Beyond Traditional Assets
Luxury portfolios used to comprise physical assets and commercial and residential properties, but with advancements in technology, modern investors can diversify their portfolios with digital assets like foreign currencies, tech stocks, cryptocurrencies, NFTs, and RWAs. These alternative investments enable investors to future-proof their portfolio and hedge against market volatility and inflation.
