Diversification is simply: not placing all your eggs into one basket, and instead spreading your investments across various asset classes. Whilst there is no guarantee that it is fail-safe, the simple benefit is that by mixing assets that are reasonably dissimilar, you will reduce risk and the probability of an extreme value alteration . Investing in property could prove to be beneficial financially, but it also carries risk. However, there are various types of property that you can diversify across.
PRS (Private Rental Sector) homes are residential properties with one paying tenant, who may or may not be representative of a group of people, like a family. Residential properties in the UK have had a strong reputation over the past few decades but with the uncertainty of a looming Brexit, there has been a slowdown in the rate of growth. However, house prices have continued to increase since the referendum, and with housebuilding being the top priority for Philip Hammond it could be an opportune moment to take hold.
Mixed-use pertains to both residential and commercial use e.g. a block of flats with shops on the ground floor, or a pub with a self-contained living section. Yields tend to perform better but capital growth can be hard to measure . Success of the commercial section depends on the business that purchases it.
Most investors already know that having a well-rounded investment portfolio is key, but there are often misunderstandings, leaving investors with unnecessary risk, or in some cases not enough to generate a decent enough return. The concept is mixing variables, so their movements are not directly correlated but instead move in different directions, returning a healthy average in the long run. If your investments don't move together in the same direction constantly, it is considered diversified.
Of course, no investment portfolio is fail-safe, no matter how well diversified it is. There will always be the possibility of a negative return. It can also be quite stressful when one asset soars and the others drag the overall return down. The main lesson is no one can predict the trajectory of any investment. Diversification can better protect you than any amount of wealth and confidence.
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