One of the most effective strategies for diversification is to use property in an investment portfolio. It offers unique benefits over stocks and bonds because its value will often be in contrast to the movements in these markets. That means when one is up the other will tend to go down and this reduces overall volatility. It also offers advantages when the economy is in a downturn because there will still be good returns from dividend income.
There are two distinct ways to make use of property. Publicly traded REITs or Real Estate Investment Trusts have different benefits to privately owned real estate or non-public trusts. Either could be used for different reasons but it has been shown that using both together has even greater benefits that either option on its own.
Working out how much of either should be purchased can be done using mean-variance analysis. For this to be done it is necessary to make use of a reliable index. This is easier to achieve with REITs as there is ongoing data being generated by regular trades. With privately owned real estate it is more difficult to get a clear idea of volatility as they are not bought and sold on a regular basis.
The NPI is used to track the value of hotels, apartments, retail, industrial and business properties. A value for each individual building would have to be submitted so the index is only compiled quarterly. If a sale had not taken place then the value would have to be based on an appraisal.
The purpose of diversification is to mitigate risk by not relying to heavily on any single option. Making the best of the advantages and disadvantages of different options can decrease the risks but it cannot completely overcome the overall economic situation. All stocks and especially real estate can be affected by fluctuations in the GDP for example. Property in an investment portfolio is still remains one of the best hedges against inflation however.
Apart from having specific benefits for diversification there are many other reasons to have property in an investment portfolio. It can show very good returns on its own and in a study by Mueller and Mueller it was found that REITs out performed the S&P 500 over a 25 year period. There might be higher costs associated with taxes, asset management fees and transaction fees but in accounts when there are tax advantages such as with 401K's or IRAs then the returns are even better than usual.
The total allocation of property in an investment portfolio could be as high as 44.5% according to a study by Feldman (2003). The majority should normally be made of private real estate because it has a more negative correlation to markets than REITs do. In his study the best combination was 2/3 real estate and 1/3 REITs.
There are two distinct ways to make use of property. Publicly traded REITs or Real Estate Investment Trusts have different benefits to privately owned real estate or non-public trusts. Either could be used for different reasons but it has been shown that using both together has even greater benefits that either option on its own.
Working out how much of either should be purchased can be done using mean-variance analysis. For this to be done it is necessary to make use of a reliable index. This is easier to achieve with REITs as there is ongoing data being generated by regular trades. With privately owned real estate it is more difficult to get a clear idea of volatility as they are not bought and sold on a regular basis.
The NPI is used to track the value of hotels, apartments, retail, industrial and business properties. A value for each individual building would have to be submitted so the index is only compiled quarterly. If a sale had not taken place then the value would have to be based on an appraisal.
The purpose of diversification is to mitigate risk by not relying to heavily on any single option. Making the best of the advantages and disadvantages of different options can decrease the risks but it cannot completely overcome the overall economic situation. All stocks and especially real estate can be affected by fluctuations in the GDP for example. Property in an investment portfolio is still remains one of the best hedges against inflation however.
Apart from having specific benefits for diversification there are many other reasons to have property in an investment portfolio. It can show very good returns on its own and in a study by Mueller and Mueller it was found that REITs out performed the S&P 500 over a 25 year period. There might be higher costs associated with taxes, asset management fees and transaction fees but in accounts when there are tax advantages such as with 401K's or IRAs then the returns are even better than usual.
The total allocation of property in an investment portfolio could be as high as 44.5% according to a study by Feldman (2003). The majority should normally be made of private real estate because it has a more negative correlation to markets than REITs do. In his study the best combination was 2/3 real estate and 1/3 REITs.
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Adding real estate in an investment plan has some definite benefits, including less likelihood of property depreciation. Obtaining the services of a quantity surveyor Gold Coast company helps to valuate your property.
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