The importance of Diversification
diversified portfolio
A core aspect of building your property investment portfolio is diversification. By investing in various property assets across different classes, Investors can reduce their risk exposure. The total portfolio return is safeguarded in the event that an investment may underperform.
Risk and Return
The riskier an investment is perceived to be, the higher the returns expected. There are 2 main types of risk:
-Systematic Risk
: Also known as market risk, it refers to the volatility of economic fluctuations. Some investments have greater exposure to the market, which can be measured and compared.
-Specific Risk
: Company or industry specific risk that is unique to every investment. The risk can be mitigated through diversification as the risks are usually not correlated with other investments.
The volatility of a portfolio can be reduced by increasing the number of assets held, particularly if the assets are negatively correlated. That is, when investment A decreases in value, investment B increases.
Real Estate Investments
When assessing risk exposure, it is important to look at the portfolio as a whole. A portfolio with adequate diversification will have a lower risk profile than that of the investments on their own, without sacrificing returns. Categories of risk associated with real estate investment include:
-Location
: Geographically speaking, investors can invest in properties in different States. Investors can also diversify across the size of the market by holding properties in primary, secondary and even smaller tertiary markets.
-Asset Class
:Investors should ideally hold properties in many of the major asset classes. These include retail, office, utilities, apartment complexes, and homes. Different property types are affected differently by economic events; diversification will reduce the risk of a particular investment.
-Investment Strategy
: Real estate investment can be split into value-adding projects or long-term developments. Holding properties with different strategies can act as a buffer if one business plan underperforms.
Diversification in Real Estate Crowdfunding
Real estate has characteristically been a difficult asset class to achieve diversification; however technology has allowed innovation to change this. Investing in real estate via crowdfunding, such as via the CrowdfundUP platform, gives the Investors the opportunity to diversify across multiple real estate investments. The small minimum investment required to invest via crowdfunding lets investors spread their capital across various property classes including residential and commercial and across different locations.
Diversification is important and is the cornerstone of all esteemed investment portfolios because it reduces risk while maintaining high returns.
"Any advice provided on this blog is general in nature. Readers are urged to seek their own professional advice before making decisions."
Jan 12. 2017 CrowdfundUP