It’s a principle of risk management where you spread your risk, so you are protected if one of your ‘baskets’ fails – this is diversification in a nutshell.
No doubt you’ve heard of the old term ‘don’t put all your eggs in one basket’ – this is diversification in a nutshell. It’s a principle of risk management where you spread your risk, so you are protected if one of your ‘baskets’ fails.
Looking at it specifically in investment terms, diversification is when you build a portfolio across different markets and products. This way, your capital is not concentrated in a particular market or product and therefore you don’t risk your entire capital if that particular market or product has a downturn.
Diversification in property can be difficult, particularly for investors and homeowners that do not know how to use OPM (Other People’s Money) and leverage.
How to diversify in property
As property takes a significant investment of capital, it’s not as easily diversifiable as shares and other asset types that are divisible.
However, astute investors and homeowners can build a diversified portfolio over time by using OPM and equity within their portfolios. These people can invest across a diverse range of product types (houses, townhouses and apartments) and interstate markets to build a diversification buffer, ensuring particular shocks don’t overly influence their overall portfolio.
Where people go wrong
A common mistake investors make is to invest in an area they know, usually close to where they live. If you already own a home in the area that you’re investing in, then you are breaking the fundamental rule of diversification.
While it’s tempting to be close to your investment so you can drive past and check the property from time to time, this is again breaking another rule by letting emotional bias guide your decision making. Australia has roughly 4,800 postcodes – but if you ask many investors the best location to invest, it’s almost invariably the same suburb they live in!
Investing in new property markets
Australia is fortunate to be a young and rapidly growing country built on immigration, entrepreneurship and new markets. As such, there are a number of new markets available for investment that are underpinned by strong population growth, job creation and infrastructure creation that are relatively affordable.
The difficult part for investors is the ability to monitor all these locations and identify the new property markets that will have the strongest fundamentals for capital growth and rental yield. I’ll go through this process later on so you’ll be well equipped to invest in new markets.
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SUMMARY
No doubt you’ve heard of the old saying ‘don’t put all your eggs in one basket’ – this is diversification in a nutshell. Whilst diversification in property can be difficult, with the right strategies, you can achieve a diversified property portfolio.
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