The housing market remains competitive despite the ups and downs that have affected the global economy in the past year. As with any good investment plan, much like the one featured by Jaxx Preston, an important step is diversification. This ensures that you have some added security against losses, and that you aren’t fixating on a single asset that may stagnate. There are various ways to diversify your portfolio, within and outside real estate. This article breaks down the different avenues below so you can maximise performance.
• Invest in properties in different locations
Arguably one of the simplest ways to diversify your real estate portfolio is geographically. Diversify the physical location of your properties so you can have a stake in various local economies. This also protects you from having all your money in just one concentrated area, which increases your risk of loss if the local financial space gets affected. This year, some of the top areas to invest in the UK property market are Birmingham, Manchester, Sheffield, and Glasgow. Large cities like Newcastle might also be worth looking at for their rapid growth in startups, which can attract young professional renters.
• Change up your asset types
Expanding on those mentioned above, you’ll want to invest in different asset types. You don’t need to limit yourself to residential housing. Consider industrial, commercial, storage, and even land when picking out investments for real estate. Even within those umbrellas, you can find different specifics to dip your toes in such as multifamily housing or office spaces. This helps you levy on the growth of various sectors in the market as you have a presence in each category. The 2021 UK Real Estate Market Outlook reports that there will be a steady recovery this year for the real estate market. Tax structures, land use planning, the potential Scottish independence, and even Joe Biden’s first months as the president will have an impact on the recovery of real estate in retail, logistics, office, residential, and hospitality.
• Diversify by risk and class
Although it’s best to steer clear of high-risk assets now during such a tumultuous time, it’s still good practice to have diverse options when it comes to risk profile and class. This is where you have to really think about what demographics will come into play from either end of the spectrum. For instance, stable assets will likely be an easy pick for new investors and should be a safe enough bet. In the real estate sector, residential is almost always that safe bet. However, this can also be counter-balanced by going for an asset class that can maximise returns despite their higher risk, which, right now, are commercial properties. Again, it’s all about having some stake in different types of properties so that you don’t get stuck with one box. Not only does this put you up for possible stagnation but it actually increases risk because you are not giving yourself alternative streams of profit.
• Dip into other markets
Though you might consider yourself a real estate investor, a good diversification strategy involves other markets than the property market. If you find that this puts you out of your comfort zone, it’s always good to look up markets that are seeing a lot of movement. Though you shouldn’t base your investment choice on trends alone, this can give you a good idea of where you can dip your toe in. Consider the trading platforms supported by FXCM, which give you access to the forex market, futures, and CFD shares, among other securities. Figure out which markets appeal to your sensibilities, risk tolerance, and goals. In line with the above, Britain continues to be the world capital of the forex market and the pound has been strong against the dollar, while CFDs can be more profitable than share trading itself. Futures, which are dependent on macroeconomic factors, are volatile at this time, yet this volatility could play in your favour as an active trader. Using the features on the platform, you can check real-time performance and volatility, which should assist your choice on whether you want to opt for high-yield and high-risk or relatively safer options.
• Mix active and passive investment
Even new investors should know about the merits in having both active and passive investments under your tool belt. While Investopedia notes that many wealth managers prefer to pick one over the other, there is some benefit to considering both. Passive investments can be a good way to support your active investment because it’s less hands-on and can be more cost-effective in the long run. That said, it also has its own set of disadvantages like small returns and more limitations, hence mixing the two can give you that solid balance of reliability and flexibility.
When you’re a real estate investor, diversification can mean several things — from mixing up the type of properties in your portfolio to investing in securities. It’s best to find a balance between these strategies to protect yourself from the risk of one market crashing while also giving you access to other well-performing markets.
