The importance of diversifying your investment portfolio

By Paulina Moskala | Bricksave

May 21, 2024

News > Blog Article > The importance of diversifying your investment …

Investing in real estate is a powerful way to build wealth, but focusing solely on high-yield properties can sometimes lead to unnecessary risks. As Bricksave looks to expand our investment opportunities into new geographic locations across the U.S., it's essential to understand the importance of diversifying your investment portfolio. By broadening your investment horizons, you can ensure a well-balanced, stable, and potentially more lucrative portfolio in the long run. 

Why Diversification Matters 

Diversification is the practice of spreading your investments across various assets to reduce and manage risk. In real estate, this means investing in properties in different locations, types, and classes. The primary goal is to minimise the impact on your overall portfolio. of any unforeseen and unavoidable issues that might occur with a single investment. Diversifying your portfolio is crucial: 

1. Risk mitigation: Investing solely in high-yield, lower-market properties can expose you to significant risks. Markets like Chicago and Detroit have been fruitful, but they also come with their own set of challenges, such as economic downturns and fluctuating property values. By diversifying into new locations and properties with different profiles such as San Antonio or certain cities within the American Midwest, you spread your risk. This means that if one market faces a downturn, your overall portfolio remains protected. 
2.  Consistent returns: High-yield investments often carry higher risks such as rental defaults or extended vacancies, which can lead to inconsistent returns. On the other hand, properties in more stable, less risky markets might offer slightly lower yields but provide more consistent and reliable returns. Investing in these properties should ensure a steady income stream - essential for long-term financial planning and stability. 
3. Capital appreciation: While lower-market properties may offer high rental yields, capital appreciation often depends on the extent to which the neighbourhood in which they are located develops. More desirable locations are likely to develop further in a more predictable manner and are likely to appreciate more in value. Cities like San Antonio are experiencing significant growth and economic development, which can lead to substantial property value appreciation over time. Diversifying your investments into such growing markets can boost your portfolio's overall value. 
4. Market Dynamics: Understanding market dynamics is crucial for any investor. Certain local markets may have an oversupply of properties, leading to lower prices and a prime opportunity for investment. Our article on shifting dynamics within the US property market highlights how this oversupply can create significant investment opportunities. By investing in these markets now, you position yourself to benefit from future appreciation as the demand catches up with the supply. 

Understanding property classes 

It’s essential to understand the different property classes and their implications on your investment strategy. Very briefly: 

• Class A: High-quality buildings in prime locations, offering lower risk and stable returns. 
• Class B: Slightly older properties in good locations, providing a balance between risk and return. 
• Class C: Older buildings in less desirable areas, higher risk but potentially higher returns. 
• Class D: Lowest quality properties, high risk, and often lower income stability. 

For a more detailed explanation, please refer to our property classes article. 

A strategic approach to diversification 

For our investors, the key to successful diversification lies in carefully selecting properties across different classes and locations. Here are a few strategies to consider: 

Mix property classes 

Allocate a portion of your investment to Class A and B properties in stable markets like Miami, San Antonio, and Philadelphia. Complement these with selective investments in Class C and D properties in emerging markets like Chicago and Detroit. 

Geographical diversification 

Spread your investments across different regions to avoid market-specific risks. This approach ensures that your portfolio isn't overly exposed to the economic conditions of a single area. There are several benefits to this strategy: 

1. Economic stability: Cities like San Antonio and other parts of the American Midwest have diverse and robust economies. This economic stability translates into a safer investment environment. 
2. Population growth: These areas are experiencing population growth, leading to increased demand for housing and, consequently, property value appreciation. 
3. Development and infrastructure: Investments in infrastructure and development projects in these regions enhance property values and rental incomes over time. 

By spreading your investments geographically, you can protect your portfolio from localised economic downturns and capitalise on growth opportunities in multiple areas. 

Regular portfolio review 

Regularly review and adjust your portfolio based on market conditions and performance. Rebalancing your investments can help maintain an optimal risk-return profile. 

Educating our investors 

We understand that many of our investors seek the highest possible rental yields, often without fully understanding the associated risks. However, a well-balanced portfolio is the surest way to grow wealth and hedge against market fluctuations. 

Our goal is to provide you with the best possible investment opportunities, backed by thorough research and market analysis. By considering slightly lower-yield investments in superior quality and less risky markets, you are taking a sensible step towards building as well as maintaining your wealth through real estate investment. 

Start diversifying your portfolio today with Bricksave. Maximise returns and mitigate risks all at once.

Create your account now

Conclusion 

Diversification is not just a buzzword; it's a fundamental principle of successful investing. By spreading your investments across various properties and locations, you can mitigate and manage risks, ensure consistent returns, and capitalise on market growth. As we launch new investment opportunities in cities like San Antonio and the American Midwest, we encourage you to embrace diversification for a more balanced and resilient portfolio. 

Remember, the highest yields aren't always the best choice if they come with high risks. A diversified portfolio, with a mix of high-yield and stable investments, is the key to long-term wealth and financial security.