Diversifying your portfolio is a brilliant way to mitigate risk. It’s a sentence you’ll hear from most in the investment industry in some way, shape or form. The reason behind this is on the most basic of levels, it’s simply about not having all of your eggs in one basket.
Rather than having all of your capital at risk in one kind of investment, you can spread your money - and therefore the risk - across multiple opportunities.
If you have the former, should something happen unexpectedly in the sector for instance, your investment could suffer. If you take the latter approach and diversify your investments, whilst nothing is guaranteed, you will generally be better placed to weather bad times in the market.
We’ve talked about this extensively, but property has long been one of the favourite forms of asset for investors (it’s in fact the most popular in the UK). There are various reasons why this is the case, but the one I’m touching on today is its ability to diversify your portfolio - and there are four key reasons property is so fantastic for diversification.
1. There are options to invest for capital growth or monthly dividends
Whether you want to invest for income or for growth is entirely a personal decision; one built around your financial requirements and expectations.
As a result, the assets you invest into will generally be determined by your portfolio requirements.
But with property, whilst there are arguably more opportunities for capital growth, there are numerous for income. What’s more, there are some opportunities that allow you to achieve both income and growth with a single investment.
In more recent times this has been the more popular choice of investment for many property investors in the form of buy-to-let. However, due to recent changes in legislation, buy-to-let as an investment choice is nowhere near as attractive as it once was for many, as such leaving investors exploring the other options.
And with everything from residential property development projects targeting relatively quick capital growth through to some of the newer property bonds looking to deliver regular dividends, there are investment opportunities for most.
Therefore if your portfolio is already more growth based, investing in property for income could provide a much needed balance and therefore provide you with a regular income from your investments. But likewise, if you have a portfolio focussed on income then many could recommend a source of recurring capital by investing into property for growth.
2. You can be as involved - or as hands off - as you want to be
Some investors want to be fully involved in their investments. They want to monitor the performance of their funds daily or they want to take an active role in the high growth SMEs they’ve purchased shares in.
Others want to do the complete opposite. They have no interest in taking any form of active role and simply want to invest money into opportunities that are tailored to their portfolio
With property, you have the ability to do either.
Investing into property passively is rather straightforward. For example, you could invest in the likes of British Land, a company listed on the London Stock Exchange. This would mean your capital would be managed and used by them to develop property projects as per their activities. You can invest, sit back and ideally see a return on your investment without playing an active role.
Another perfect example of passive property investments are residential property development projects. Our recent opportunity at Chilton provided investors with the ability to invest £400,000, and is targeting a 1.5x return over a development period of 18 to 22 months.
With this opportunity, investors supply the capital and there is no additional involvement needed (or, in many ways, possible).
On the other hand, active investing requires much more involvement from the investor and by its nature requires more of a hands on approach over the duration of the investment.
Buy-to-let landlords are a great example of such types of investors. Purchasing houses or apartments with the purpose of renting them out to tenants who will pay a monthly rent, these are classed as active because unless you hire a property management company, you’ll be responsible for all the necessary work - think everything from collecting the rent through to maintaining the property.
3. Opportunities are available regardless of your risk profile
Whilst all forms of investing generally carry a degree of risk, many of those under the banner of property are classed as low risk. This is often because property is a physical asset that is built on land and due to the fact there is only a limited amount of land available, property will naturally increase in value given a sufficient period of time.
But as with the other points mentioned, property investing can be both high risk and low risk, giving you the ability to add both riskier and more conservative investments to your portfolio.
For instance, property bonds are very similar in their overarching concept to a traditional bond. You invest money and after what will generally be two or three years, you’ll see a return. This return will be lower than other property investments, but that’s because the likelihood of realising a return on your capital is greatly increased.
At the other end of the scale, you have the ability to purchase property that falls under the ‘opportunistic’ header. Generally speaking, such an investment will be into a property - or properties - where the return could be considerable, but it relies very much on a specific event to happen within the market.
Think along the lines of a purchase of a retail unit in an out-of-town location, but where there’s potential of an entire residential estate to be built nearby over the coming years. Should the estate be built, the retail unit could rocket in both general value and the rental potential. Should the estate not be built, however, the property may only see marginal increases in value - at best.
4. All investors can be property investors
Investing in property is considerably easier and much more accessible for investors today than it ever was. Due in part to technology, as well as an increased level of education around the potential, variety and benefits, investors no longer need to invest via a specific individual or company. The availability of the technology and information makes it accessible to almost everyone.
This has opened up the whole property investment market and made it possible for investors to not only invest in property online, but to invest with smaller amounts. Where you would once have needed large sums of capital to be involved in a property development project or purchase a house to let out, now it’s possible to invest in property with minimal amounts of capital, effectively opening up investment to all.
Diversifying your investment portfolio
Balancing out your portfolio is a great way to mitigate risk. Able to happen partly or even entirely with property as an asset class, there are multiple opportunities available with property that almost regardless of your requirements.
Importantly, all investments bring with them a level of risk, and property isn't any different, but by considering an investment into property, you can develop a balanced portfolio, something most agree is a particularly critical trait for a successful investor.