Diversifying your investment portfolio will make you sleep easier at night and could help you prosper in the long run. Let’s check out the benefits of diversification.
Diversification remains one of the biggest focuses for investors these days. One major advantage is of course reduced risk. After all, the greater diversity of investments you hold, the greater chance you’ll likely have of at least one investment thriving.
But beyond reduced investment risk, there are plenty of advantages of diversifying your investment portfolio:
1. Less impacted by declining markets
2. More protected against policy changes and economic headwinds
3. Cash flow combined with capital gains
4. Spread your investment timeframes
5. Spread your emotional investment
It won’t take you long to realise the sheer power of diversification for your investment portfolio after reading this post. Let’s jump into it.
The advantages of a diversified investment portfolio
Less impacted by declining markets
We’re just days away from 2023. Here are some of today’s headlines:
3 reasons there could be a stock market crash in 2023 (Motley Fool)
Capital city house prices in 2023 to rise 3 to 7 per cent (ABC)
Why Australian commercial property is the best in the world in 2023 (The Property Tribune)
Don’t give up on bonds. Next year should be better. (Barron’s Magazine)
Between these four headlines and their relevant major investment classes, it’s easy to see the mixture of optimism and pessimism. If the bulk of your savings were dumped into just one of these investment types, you’d be clinging to the belief that things will be better next year – or ridding the thought of them becoming worse.
The alternative? Accepting that every investment has risk, that every market fluctuates, and that every diversified portfolio can offset a declining market with a rising one.
Protection against policy changes and economic headwinds
No investment is bulletproof, or completely immune to risk. But it doesn’t mean you can’t reduce that risk. One way is by lowering the chances you’ll be impacted by external influences, like government policies and economic challenges.
In 2019, thousands of self-funded retirees in Australia were petrified they’d lose a third of their income. How? Labor, the frontrunner in the 2019 Federal Election, had planned to scrap franking credits if elected.
Imagine losing a third of your income. You wouldn’t be able to afford so many of the things you currently can. Your financial stability would be shaken. My chest tightens a little at the thought.
Franking credits stop the double taxation of share dividends (because the company is taxed on its profits, followed by the individual who receives the dividends – which originate from said profits). Labor’s intention was to give wealthy shareholders a wakeup call. But the thing is, thousands of Australian retirees rely on them to afford a comfortable lifestyle.
Thankfully for them, Labor wasn’t voted in and franking credits were never banned. But it’s a reminder for us all that even the best intended policy changes can rip the rug from beneath our feet.
The way to avoid this is diversification. Changes to taxation laws on dividends, for example, have zero impact on the residential or commercial real estate markets.
The worrying factor is Labor’s franking credits ban is back on the table in 2022/23. One can only hope those retirees, and the many Australians who’ve retired since 2019, have diversified their precious retirement income.
Cash flow combined with capital gains
Another benefit of a diversified investment portfolio is it allows a combination of cash flow-focused investments and capital growth-focused investments.
Some, like commercial real estate, blue chip shares, and bonds, focus on providing regular and robust yields to investors. Others, like residential real estate and speculative stocks, promote capital appreciation (i.e. the increase in your investment’s overall value).
Depending on your financial goals and advice from your financial adviser, it might be a good idea to hold multiple investments to benefit from both return types, ticking both boxes of cash flow and capital growth.
For more information on what is a good return for commercial real estate, read our blog post here.
Different investment timeframes
Diversification doesn’t just concern risk and returns. It also relates to time.
That’s why another benefit of diversifying your portfolio, which short-sighted investors rarely consider, is that the finish lines of investments are different.
A property syndicate – managed by seasoned professionals who know when to buy, how to manage and when to divest a real estate asset – will of course have an end date. This divestment date (the date of the property sale) might be pre-determined. Meaning you’ll either want another investment option to place your sale proceeds into when that date comes, or you’ll hopefully already have another investment earning you a return (or growing in value) in the meantime.
A well-diversified investment portfolio might have a mixture of investments which are maturing or being divested soon and investments which have years and years to run.
Diversify your emotional investment
We all take sides, and when it comes to financial wellbeing and the financial health of you and your family, there’s no side more staunchly taken than the investment you’ve put a tonne of hard-earned capital into.
An investor who tells you no investment is better than, say, residential property probably has some emotional tie to that asset class. They might own a few shares or have savings in a term deposit, but residential property is potentially their cash cow. Which means they’ve not only put the bulk of their capital into residential assets – but most of their emotional capital into it too.
It’s not necessarily bad they’re biased of they have sound reasons to be. And who knows – they could be right. But diversification helps spread this emotional investment across a number of different investment classes.
Diversification won’t just reduce risk, but it’ll reduce bias as well.
Want to diversify your investment portfolio?
You now know the benefits of a well-diversified investment portfolio. So – if it suits your financial position and aligns with your financial goals – you might consider adding commercial real estate to your mix of investments.
Commercial property sometimes carries the stigma of being heavily expensive or available only to elite investors with millions of dollars to burn. But thanks to commercial property syndicates, also known as unlisted property trusts, that’s no longer the case.
A commercial property syndicate is smart, securely managed by professionals, and a set-and-forget investment that can help diversify your portfolio. And the best part? You can own a portion of a high-quality commercial asset – like an office building, industrial asset or large format retail premises – for the same cost as a house deposit.
Keen to invest in an unlisted property trust? Get in touch with us today to find out how one of our exclusive investments can diversify your investment portfolio.
Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.