Investement eggsAre all your investment eggs in one basket?

Historically property has been a sound investment. However, investors may be missing out on securing their financial future by not diversifying their portfolios. A financial planner can help you feather your nest by providing tailored investment advice.

It’s probably fair to say that if you are reading this, you are not new to the idea of property investment. For many years, investing in a rental property has been the go-to strategy for many Australians – from mums and dads looking to secure a good retirement, and rentvestors setting out to own a property they can afford while renting a home to suit their lifestyle, to entrepreneurs creating impressive property portfolios as a career, and those with self-managed super funds using tax breaks to move into property.

You can invest in property directly (for example, when you buy a house or commercial premises such as a shop or office) or indirectly (for example, by purchasing units in a property trust that is listed on a stock exchange). Some of the advantages of investing in property include an income in the form of rental payments, some tax concessions on income, and capital growth if the value of the property holdings increases.

“Historically, property investment has yielded good results. Over the last 20 years, Australian property has produced annualised returns of 7.40 per cent.[1] However, over the course of those two decades, returns fluctuated dramatically – according to Morningstar data, in December 2006, the return reached a peak of 34.06 per cent, but in contrast hit a low of negative 53.99 per cent two years later,” explained EBM Financial Planning Managing Director Jay Manley.

“Property[2] – whether it’s residential, commercial, retail, hotel or industrial – is a medium- term investment option, by which we mean three to five years, so those entering the market need to be able to stay the course and weather the inevitable fluctuations as the value of investment and income varies,” Jay cautioned.

The old saying “safe as houses” has held true over the centuries. But the adage “don’t put all your eggs in one basket” has proved to be prophetic too.

Amid the scaremongering headlines (“housing bubble!”, “property bust!”, “recession!”), uncertainty about how property investment will be regarded by whichever political party is in power (Labor plans to limit negative gearing and capital gains tax deductions, the Liberals may ‘tweak’ their policies), diminishing tax incentives and mounting restrictions on lending for investment purposes, many investors are carefully considering the ‘risks’ in property.

Jay says that investment diversification is the key to spreading risk and achieving consistent long-term returns.

“The first lesson in investing is that ‘risk equals reward’ – the higher the risk, the higher the potential reward, but also the higher the risk of not making money. But the simple fact is that all types of investment involves an element of risk,” he said.

These risks include:

  • Market risk – the possibility that market movements could cause the value of your investment to fall in value
  • Investment risk – the risk that the investment(s) you have selected do not deliver the expected returns
  • Regulatory risk – the risk that changes in rules, legislation or government policy could have an impact on your financial strategy
  • Liquidity risk – the risk that you are unable to readily access your funds because they are invested in illiquid assets (those which are difficult to sell quickly)
  • Inflation risk – the possibility that your investment delivers returns below the inflation rate
  • Interest rate risk – the risk that an increase or decrease in interest rates could adversely affect your investments
  • Timing risk – the risk that the time you choose to enter or exit the market may not deliver the best results for your investment goals
  • Concentration risk – the risk that if you have placed all your investment capital into one asset class (e.g. Australian property), a fall in that market will adversely affect all your capital

“In order to successfully invest for your financial future, you need to understand the risks that are associated with the various types of investment asset class and also look at ways of mitigating those risks,” Jay explained.

Jay noted that diversifying across asset classes, industries and funds would help minimise the impact of unexpected market shocks. For example you can invest:

  • across different investment types or asset classes (cash, fixed interest, property, shares, alternatives)
  • in more than one investment within each type (e.g. in several different types of property such as residential, retail, commercial or industrial)
  • in more than one type of fund, and with more than one fund manager, when investing in managed funds
  • inside and outside of super.

By investing in several asset classes, you spread your risk and can offset underperformance in one asset class with positive performance in another.

“Ultimately, investing is about getting the mix right. Getting a mix that is best for you in terms of your financial and lifestyle goals, your timeframe and your risk tolerance,” Jay said.

“This is where a financial planner can help, as we take a holistic view of your finances, not just recommend investment products. We look at the individual and provide strategies to help you achieve financial security.

Armed with a good understanding of where you are financially today and where you want to be in the future, can help you make informed investment decisions. Talk to an EBM Financial Planner about the best options tailored specifically for you.

This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a financial adviser and read the relevant Product Disclosure Statement (PDS) before making a financial decision. This document has been prepared by EBM Financial Planning Pty Ltd who are authorised representatives of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.

Information in this document is based on current regulatory requirements and laws, as at 10 December 2018, which may be subject to change. This document has been approved by Financial Wisdom. While care has been taken in the preparation and approval of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. Any views and opinions provided in this article may not reflect the views and opinions of Financial Wisdom Limited.

[1]Compared to the 20-year annualised return of 7.40% for Australian property, Australian cash returned 4.50%, Australian shares 8.70%, global shares 5.00%, Australian fixed interest 5.90%, global fixed interest 7.20% and multi-sector balanced 6.90%. Source: Morningstar, data to 31 December 2017. Please note: past performance is no indication of future performance.

[2]Property (like shares) is usually classified as a growth investment. As well as income, growth investments aim to increase the value of the capital invested. While investment returns are expected to fluctuate over the short term with market movements and economic changes, growth investments have the potential to produce higher returns than defensive investments (such as cash and fixed interest products) over the long term.