Benefits of Portfolio Diversification

March 2, 2021 10:00 am





Portfolio diversification in the property investment industry is very important - by ensuring you have a diverse portfolio you reduce the risk your investments will experience. There are multiple ways an investor can diversify their portfolio effectively.


Many investors typically have an investment strategy or location etc that they prefer, however, a good investor will understand the range of benefits they can experience by entering multiple strategies or investing in different locations.



Minimise Risk

Risk is an incredibly daunting factor within property investment as large sums of money are being committed to projects, therefore, investors regularly analyse the best ways to minimise the risk their investments will experience.


By devoting themselves to one investment type - Buy-to-Lets, Flips - investors risk utilising opportunities in other areas. While their strength may be in, for example, Flips, investing in this type only would not provide complete security.


Although an investor may do everything in their projects and investments correctly, there is always the risk of the unknown happening. This is why it is recommended that investors diversify their portfolio.



Investment Strategy

Think of the following scenario - you are an investor with a passion for flipping properties and selling them on, great. However, suddenly a global pandemic hits and suddenly the number of people looking to buy a house outright declines. Tragic, because now you have a number of finished projects waiting to be sold, however, this reduction in buyers is slowing your opportunity to receive a return for your investment.


With a diverse portfolio it doesn’t have to be this way. Now imagine this - you are an investor with a passion for flipping properties and selling them on to gain a high return of investment, exciting. You have been flipping and selling properties for years, however, at some point in your property investment career you dabbled in investing in Buy-to-Let properties and Serviced Accommodations - these proved to be an excellent decision as they are still earning you a monthly income, peaking your interest to seek more of these opportunities.


Suddenly, we are in a time where renting a property is beginning to become the preferred option of many, this increases your opportunity to find tenants for your most recent Buy-to-Let properties. You are now working on a flip project and ready-ing your latest Buy-to-Let for rental - and then a global pandemic hits. No need to panic though, because your tenants are still going to need a home, now more than ever if we are honest, so your monthly income is likely to be secure, ensuring you are still gaining a return of investment.


What about your flip property? Well, the pandemic has caused a reduction of those looking to buy a property, but a reduction doesn’t mean there is no one to buy. The beauty of this is that your portfolio is currently diverse enough to continue earning you money, reducing your need to panic. Ultimately, this means you can continue to focus on your larger investment that requires more attention.


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Strategy: Flip

Location: Shawlands

ROI: £14K profit

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Strategy: Buy-to-Let

Location: Shettleston

ROI: £170pm





Property Locations

There are pros and cons paired with every investment location, therefore, it is important to do your research before committing to an investment. Extensive research will help you determine the quality of an area, if it is part of a regeneration or whether it is declining.


Many locations experience spells of growth and decline, meaning it is essential to invest at the right time. This also means there is a chance of a change in opportunities. An area you hold investment in may have been thriving when you committed to your investment 10 years ago, however, now it may appear to be in decline - this brings great risk to your investment and portfolio.


While removing yourself from this investment may seem like the only logical move to reduce your risk, it is not. By having a portfolio filled with investments in different locations you lessen the dramatic impact this location decline will have. With investment properties in different areas you can experience the highs and lows of multiple areas.



Assets

Let’s be honest, 2020 was a great example of showing us we can’t predict the future but we can be sure it will have an effect on your life in some way and it's how we prepare and handle the situation that sees us through. With a diverse portfolio, you can begin your preparations and diversifying your assets is an effective way to do so if the past year is anything to go by.


The world goes through periods of highs and lows all the time which consequently has effects on people, whether they be positive or negative.


An investor who decides to invest in one asset type only is an investor more likely to fail. Investing in one type only because it is what makes you comfortable is only going to increase risks in your investment future.


Imagine, had you been an investor who had chosen to invest only in student flats, your portfolio would likely be dead by now considering universities have been closed for the best part of a year. However, as an investor with student flats as part of their portfolio alongside Buy-to-Lets and Flips your portfolio can continue to grow.



Conclusion

Everything experiences change at some point and there are either opportunities to take advantage of it or it will present itself as a risk to you. As a property investor it is vitally important that you take measures to ensure you limit risk you may experience.


A great way to do this in property investing is to diversify your portfolio. As we have discussed, there are a variety of ways an investor can diversify their portfolio, and quite obviously, diversifying in each of the aforementioned areas would be the best risk limitation.


It is often advised in property investing that investors should refrain from “placing all of their eggs in one basket” and it is completely true. Widen your horizons, step out of your comfort zone and reap in the benefits.


Disclaimer: This is information based on our knowledge gained throughout years of experience, education and learnings. This information is open to interpretation, therefore, you must carry out your own due diligence regarding the subject.

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