Why it’s important to have a sound, diversified investment portfolio
Most investors want to maximise returns while minimising risk. A good way to achieve this is to create a portfolio that includes a variety of asset classes including local, and offshore equities, bonds, property, cash and alternative investment vehicles. Your asset allocation is a function of many variables such as your age, your appetite for risk, and your growth expectations.
By incorporating assets from each class, that address your specific needs, you’re able to balance your investment portfolio. This is important because should one asset class experience difficulties, the others could still perform well enough to help you weather the storm.
It’s one of the ways to mitigate risk, and it can help you to stay on course in terms of your long-term investment strategy.
While some investors have a greater appetite for risk than others, most will take the risk/reward ratio into account when building up the assets in their portfolio. This means dividing the amount you stand to lose if the price of an asset moves in an unexpected direction (the risk) by the profit you expect to make when the position is closed (the reward).
You need to find your own comfort level with risk, taking into account that a low risk portfolio will return lower rewards, while a portfolio with a high degree of risk might produce impressive returns but can equally return significant losses.
A moderate amount of risk, in a diversified portfolio, can increase the potential that you will achieve your financial goals.
There are five basic asset classes that every investor should consider adding to his or her portfolio. Each asset class has its strengths and weaknesses however, so it is good to have an understanding of each, when building your investment portfolio. Your aim should be to create an investment portfolio that is resilient enough for you to stay the course, weathering the storms to achieve your long-term strategy. There will be times when, for various reasons, you might consider selling off some of your assets sooner than you had planned. Always bear in mind when making such decisions that the result could be a deviation from your long-term strategy.
An overview of the traditional asset classes
Equities (stocks and shares) typically produce better returns over the long-term than any other asset class, if the investor remains strong during short-term market downturns. They have an inherent potential for capital appreciation, and the ability to deliver a growing income over the long-term. Your investment is not limited to local equities, so by investing in multinational companies, you can gain global exposure and benefit from a growing global economy. Regular income can be realised if you invest in dividend-paying stocks. Equities can be affected by many factors, and economic downturns can have a significant impact on share prices. Ideally, you need to take a long-term view when investing in equities, so if you need to access your money in the short-term, be sure to have a diversified investment portfolio, where one of the other asset classes will allow you to access your capital more quickly, without negatively affecting the return on your investment.
Bonds are effectively a type of loan. Bonds are issued by companies or governments so they can borrow money from a lender that receives fixed, regular interest payments in return, as well as the original loan amount when the bond matures. Bonds are lower risk than equities as the borrower is contractually obligated to pay the interest on the bond. If a borrower runs into financial difficulties, bond holders will be repaid ahead of equity holders. As bonds are generally a less risky investment, they typically offer lower returns than equities. It is important to note that if the company that issued the bond goes bankrupt, you risk losing all the money that you lent to that company. Bonds are also affected by changes in interest rates.
Investing in property has become popular worldwide because there is a high return potential, and it can provide a regular income stream for investors.
Buy-to-let investments are often favoured, while others prefer “flipping”, buying a property, fixing it up and selling it on with the goal of making a profit on the sale. The challenge for property investors comes when you sit with a property that proves difficult to sell, which could result in your capital being tied up for a long period, and taking a loss should it be sold for less than the price that was initially paid for it. Investors also have the option to invest in the listed property sector. The property market is also affected by interest rates and macro-economic issues such as a recession.
By keeping a portion of your investment in cash, in a savings or money market account, investors are able to access the funds relatively quickly (depending on the type of account chosen). This means that you are able to cover unexpected expenses, or move quickly to acquire an investment that might present itself. The downside is that the returns on cash in a savings environment are quite low, and over time, the level of inflation can erode the real value of your cash savings.
Investing in an alternative asset class such as hedge funds, private equity, venture capital, and infrastructure, among others, is another way to minimise risk across your portfolio. In South Africa, the alternative investment market is still finding its feet. Investors in this space usually include those ultra-high-net-worth individuals, foundations or family offices that have the capacity to invest a sizeable portion of disposable income to achieve the potentially higher long-term returns offered by the asset class. These groups were early adopters of QIHFs (qualified investor hedge funds with a minimum investment R1m), private equity (minimum R100m) and Section 12J investments in Sars-registered venture capital companies (minimum R100 000), which offer tax rebates – provided the investment is held for a minimum of five years.
Today, for the most part, investment in retail investment hedge funds (RIHFS) is the only available alternative asset available to most South Africans. The minimum investment of R25 000 however, is still a good deal higher than unit trusts, so they’re still inaccessible to many investors. Alternative investments can be very complex, so investors need to perform a strong due diligence, and have a good understanding of what is driving the value of the investment, particularly in private, unlisted investments that fall outside the scope of the country’s regulators.
Using Private Mortgage Lending to diversify your investment portfolio
Private Mortgage Lending can be a successful alternative investment option within the property asset class, enabling you to further diversify your portfolio through a low risk investment.
It is a form of asset-based loan that has the potential to offer investors a consistent, sustainable income stream. Suitable as a passive cash-flow generating business, private mortgage lending can generate above-average returns with low investment risk, if the correct due diligence is performed. While entire investment portfolios based solely on stocks and bonds can be lost, with private mortgage investing, the investor will consistently retain some value because the loan is secured by a tangible asset.
There are a number of advantages to investing in Private Mortgage Lending. You have the ability to generate consistent, sustainable income, just like a salary. You can generate above-average returns with lower investment risk than a market-exposed portfolio. Like investing in traditional asset classes, it is a passive investment strategy that makes your money work for you, but it is more stable than a market-exposed portfolio. While macro-economic factors may cause major fluctuations in the stock market, resulting in a loss for the investor, Private Mortgage Lending ensures that your investment is secured by tangible real estate properties. As the Private Mortgage Lending is done in the United States, the return on investment is in US Dollars, which can be helpful during negative currency fluctuations.
Contact YDL today to learn more about Private Mortgage Lending and how it can help to diversify your portfolio and help you to achieve your long-term investment goals.
Some Past Deals
- Private Lending-Wholesale (USA)
- Private Lending-Rehab (USA)
- Flipping (USA)
- Buy-to-Let (USA)
- Speculative (SA)
- Buy-to-Let (SA)