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Building a portfolio. What part should property play in a successful portfolio?

Posted on February 16, 2016 · Posted in Chris Mansfield - Blog

I’ve been in investment markets now for 30 years and I’m happy to tell you that this experience leads me to the conclusion that ultimately only two aspects of your investing will determine whether your investments grow or decline over the medium to long term. The first is: investing at the right time, and the second is: designing a robust investment portfolio.

In addition, I can honestly say that picking the right time to invest is, more often than not, more about luck than judgment, regardless of how much advice you get. So accepting that you have a 50/50 chance of getting the timing right, that leaves the major determinate of your success as being the designing of a robust portfolio.

Simply put, building a robust portfolio is all about asset allocation. This is the process whereby you divide your investments between different asset classes, which could include: bonds; cash; equities (that’s shares in companies); and property. This careful diversification will help you to spread the risk exposure of your capital, mainly because each asset will behave differently from the other.

The important factor to understand with differing asset classes, is that each asset type has a relationship with the others. And whilst some have very little or no relation to each other (this is known as a ‘low correlation’), others can be inversely connected, which means they can move in completely opposite directions to each other (this is known as ‘negative correlation’).

 

The benefits of balance

You’ll see immediately that by investing in assets that aren’t related to each other, your portfolio benefits from the fact that whilst one part of it might be falling in value, the other parts aren’t doing the same. And some assets will actually go up in value when others decrease. Ultimately, diversification helps lessen what’s known as ‘unsystematic risk’, for example: decreasing values of certain regions, investment sectors or asset types in general.

However, there are some risks and events that diversification can’t help you with, and these are known as ‘systemic risks’, and include factors such as inflation, interest rates, recessions, and even wars. It is rare that all asset classes go down simultaneously, although the evidence that this can happen is the credit crisis of 2008.

Unfortunately for some investors, there would appear to be early evidence that the lessons from that crisis haven’t been learnt and if fact they might actually be about to repeat themselves. The current crisis in world stock markets is the visible evidence of the uncertainties that investors have in the underlying strength of the global economy, and in the ability of Governments and Bankers, including Central Bankers, to influence matters to secure a positive outcome.

But back to your portfolio – if you apply asset allocation to your capital, not only can you successfully spread the risk, in some cases you might even lower the level of risk, and achieve increased returns.

So for example, if your portfolio was made up of 100% bonds, it would certainly carry less risk, but it would also probably deliver lower returns than equities. So what might happen to your 100% bond portfolio if you added some equities? The addition of a reasonable percentage (say around 10%) of equities would increase the risk, but would also increase your potential returns. This is because the two assets have a ‘negative correlation’, meaning one asset is usually moving up whilst the other is moving down. If you then added in some property (which of course is an asset class unrelated to equities and bonds), you could boost your returns, whilst probably keeping your risk at the same level as before.

 

What constitutes a robust portfolio?

If you really want to create a diversified portfolio, then there’s no better place to start than with the four main asset classes, which are: bonds; cash; equities and property. When spreading your capital in that way, it’s also important to diversify not only between each asset class, but also within each asset class. For example, you might invest in equities in different regions and different industries, or in a range of differing property investments and Government bonds. Further diversification could be achieved by adding other assets with little relationship to your existing group, these new assets could include commodities such as gold, gas, oil, or other alternatives such as hedge funds.

You might then wonder when would be the right time to change your asset allocation. There are a number of different reasons that investors do this, including changes in their personal circumstances such as changes to timing, tolerance of risk, alterations in their income (either up or down), changes in family relationships and needs, or their financial goals. Another instance could be that most investors seeking to prepare their portfolio for retirement generally hold fewer equities and more cash and bonds as they approach their retirement.

 

Why I consider property investment to be an essential part of any balanced portfolio.

I should make clear straight away that when I refer to “property investment”, I am not referring to your primary residence. The house that you live in should NOT be considered as an investment. Why not? Simple: the key features of any investment are: it can be sold relatively quickly; its sale won’t affect its price, and it generates a regular return. The house you live in fails on all three counts. In fact, it could even be claimed that, when you consider the associated borrowing costs, repairs, improvements, utility bills and insurance – your home is actually the biggest cost you’ll ever have.

So when considering property for an investment portfolio, you should consider three main categories: funds that invest in a portfolio of listed property companies; unit trusts that invest in the underlying properties themselves; or shares in listed property companies. If you make the right choice from what’s currently available in any of the above three categories, there’s a very reasonable chance that you’ll end up diversifying your portfolio with a high yielding property investment.

I have a variety of clients with a range of diversified portfolios, and I’m happy to say that I’m currently able to help them with a range of property opportunities, from investments in well-structured development schemes, through to high return Bonds that offer consistently strong returns over fixed periods with a good terminal bonus.

These solid assets help my clients to mitigate against the uncertainties of global stock markets, and to compensate for some of the low return bonds and gilts in their diversified portfolio.

Please note: none of the above constitutes financial advice, it is intended to act as a helpful starting point for a conversation with a Regulated Financial Adviser. You probably already have such a trusted advisor, but if you should want a second opinion, then I’d be happy to introduce you to a Regulated Independent Financial adviser who can help specifically with a diversified portfolio that includes strong return property investments.

If you’d like to know more about how to either create or improve a balanced Investment Portfolio, just get in touch with us at Davenport, by either emailing us at info@davenport-wealth.com, or calling us direct on 01273 763 900.