The key to any successful investment portfolio is to diversify as well as focus upon your particular strengths. In theory, giving yourself a backbone of diversified property assets and then using your particular strengths to increase your returns is the perfect long-term investment strategy. However, can you over diversify your property portfolio?
The simple answer to this question is yes.
Exposure to different markets
When we talk about diversifying your property portfolio we are talking about diversifying by country, location such as towns, cities, etc as well as by property type. Before you even consider diversifying your property portfolio be aware that it is impossible to get the perfect mix of diversification. You need to look at a mixture of mature markets, developing markets and in demand markets and review these different classes of exposure on a regular basis.
Ways to diversify
The more simple way to diversify your property portfolio is to acquire individual properties in different countries, different markets and different types of property. Simple? Well, a lot will depend upon the amount of investment funds you have to hand as to whether you go down the route of individual properties or some form of pooled investment.
It probably makes sense to buy individual properties in your local markets where you have experience, you know how the markets work and you can monitor them extremely closely. When looking away from your local markets pooled investments will be very useful.
Pooled investments are simply funds which are used to acquire a diversified portfolio of property assets. There are some pooled services which will also take in other pooled investment funds (a fund of funds) which have particular focus on specific markets although in general they tend to invest in actual properties themselves. The idea is that if for example you have £50,000 to invest and you require exposure to the US retail property market then you simply buy shares in a fund which is managed by a third party and invested in US retail property. The fund may be worth £50 million for example and will give you exposure which would be impossible if you invested your £50,000 in individual properties.
Many people use pooled investments to gain exposure to specific country property markets although when going down this route you will need to research the underlying managers, their past performance and prospects for the future.
Keeping costs low
If you look to diversify your portfolio there will come a point when the benefits of diversification gradually reduce. For example if you look at two pooled investment funds covering the US market then you have two management costs and will need to split your time when monitoring their returns. In this instance it may be better to go for a general US property fund which might only follow the trend of the underlying market but offers a long-term opportunity for capital appreciation.
While the management charges associated with managed investments will vary, in reality you get what you pay for. If you are looking for rock bottom management charges then this will reduce the amount of funds available for research. However, if you are paying higher than average management charges you want access to managers offering higher than average returns. The balance is somewhere in between.
So, if you are looking at a diversified property portfolio it may make sense to invest in specific properties in areas where you have particularly knowledgeable while looking at pooled investments in areas where your knowledge and experience is lacking somewhat.