Why You Need To Diversify Your Investment Portfolio
Don’t have all your investment eggs in one nest
You will no doubt have heard the old saying: “Don’t put all your eggs in one basket”. While it may make sense to carry eggs from barn to house in one go, all it takes is one slip of your grip and a dropped basket and all your eggs are gone.
While most farmers these days ignore the advice for practical reasons, the saying applies to investments more than ever. If you put all your money into one investment, you are exposed to the most risk. If that goes belly up, so do you.
Imagine if you put everything you had into Kodak cameras 15 years ago. It would seem like a smart, conservative choice, right? The brand dominated the space and had the best cameras. But then along came smart phones with quality cameras embedded and what happened? The general public no longer needed Kodak cameras.
The point is that unexpected things happen. Assets that seem safe can be undone in a flash by a GFC, or a pandemic, as we are discovering right now. So you need to spread your risk exposure.
Financial advisers worth their salt will recommend you put your hard earned money into a diverse range of investments. So, how do you go about it?
If you wanted to diversify in general, you could take your property investments and add Australian and international shares, cash or currency, fixed interest options like bonds or annuities, cryptocurrencies, managed funds, or even precious metals.
But if you want to stick to your favourite asset class, you can also diversify within that space.
We know that at Binvested, property is our preferred asset class, so how do you diversify in property?
Safe as houses?
Property seems pretty safe. It has a physical, bricks and mortar presence that can’t disappear overnight like some other investments. However, it’s only worth something if there is a market of potential buyers out there to prop up its value.
Just ask the investors who enjoyed thousands of dollars a week in rental returns and massive capital growth from investing in mining towns.
When the mines closed down, suddenly, they owed millions of dollars on subdivided properties in the middle of nowhere whose values had plummeted to next to nothing.
No mine in operation meant no need for people to live and pay rent there, which meant no economy and no value.
A diverse portfolio could include a mixture of properties from different capital city and regional areas.
It’s important to mix up the geographic areas that you tip your money into as there is no one “Australian property market”, but rather thousands of micro markets.
While Sydney properties peaked a couple of years back, for example, Perth was closer to the bottom of the market and there was value available.
Meanwhile, properties in south east Queensland offered affordability and decent rental return, but not necessarily short term value growth.
At the same time, bigger regional towns have been on the grow as more people leave cities for tree or sea changes and even commute remotely.
So a property holding in a market like inner Sydney or Melbourne is expensive but safe when it comes to retaining and growing its value. This could be offset by a subdivision in a regional centre with a solid economy and growing population.
The returns will be smaller, but so will the risk.
With your location sorted, you can then diversify the types of property you invest in; whether it’s a three-bedroom brick house targeting family renters in an affordable suburb; an inner city furnished unit for professionals on short term work contracts, a property near a hospital or university, or others.
That way, a business closure or a financial shock for a particular industry won’t wipe out your entire tenant market or value position.
If you want to know what your options are when it comes to diversifying your investment portfolio, please feel free to contact us for a free Discovery Session.