THE IMPORTANCE OF A DIVERSIFIED PORTFOLIO

THE IMPORTANCE OF A DIVERSIFIED PORTFOLIO

• Posted By Shiral Alexander

"Don’t put all your eggs in one basket."

In the Residential Property Market this simply means:

Don’t put all your eggs (properties) in one basket (area).

If an investor only invested in one location whilst building a property portfolio, this may leave them overexposed and hence increasing the possibility of losing everything at once. For instance, if we review the change in dwelling values over the past 5 years and compare the strongest performing capital city to the worst, the results are night and day. Over the past 5 years, Hobart dwelling values increased 44.9% and Darwin values decreased -29.5%. If an investor placed all their eggs in the Darwin basket 5 years ago, they would be unfortunately waiting a long time to recover the losses.

As you can see from the graph below, there have been many fluctuating property markets across Australia in the past 5 years and well-versed investors may have reaped the benefits of having a diversified portfolio [1]. Along with Hobart, Melbourne, Sydney, and Canberra also experienced solid growth and illustrates the value of diversification.

 

Risk Mitigation

As investors, we want to mitigate risk where possible, and the overall strategy of diversification could potentially play a vital role in a sustainable property portfolio. An investor can spread the risk across their property portfolio by adhering to elements such as market cycles, type of property, and potentially increase the possibility of returns and the overall long term success.

The Diversification Process

Market Cycles.

Take advantage of different market cycles – different states, different cities, different suburbs all performing all different rates. Conducting thorough due diligence and understanding at what point of the property cycle each state, city, and suburb is positioned can assist with selecting the next investment property.

Location, Location, Location.

Once the market cycle has been determined and you have chosen the exact suburb, conduct research on key amenities that attractive to both future home buyers and tenants.

This may assist in the potential resale value and securing a tenant promptly. Key amenities include (but are not limited to) schools, public transport, shopping centres, and connectivity to employment nodes.

Identifying the ideal location within a suburb can assist with the potential long term return on investment.

Type Of Property.

Conduct research into the market demographics to understand who is living in the suburb and what type of property is most suitable.

Who is living in the area? Is it young professionals and managers who work big hours and have no kids? Or is it larger families with 2-3 kids.

Understanding the main demographic of the market will help determine the most demanded type of property and assist in the asset selection

Diversification doesn’t guarantee success, but it does assist with spreading the risk and opportunity across one’s property portfolio and the potential return on investment.

If you would like to learn more about diversification in the Residential Property Market, We are more than happy to elaborate. Simply book a call with us.

References

[1] CoreLogic

Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.