Real Estate an Asset Class in my Investment Portfolio ... ??
Have you ever thought of your property as part of your investment portfolio? The good news is that it is one of the best asset classes to include in your estate as part of your assets.
When compared to the inflation rate, property growth has over time outperformed inflation, leading to positive real return figures. This makes property a necessary and an attractive asset class when making investments and building an estate.
Property has the advantage...
...that returns can firstly be made up of capital growth or the increase of the value of the property. Secondly the rental income of the property can serve to provide an annuity income, outperforming inflation.
The upside of investment in real estate is that it has over time outperformed most asset classes.
What Asset Classes form part of an Investment Portfolio?
There is a number of different types of assets that can form part of one’s estate. The four main asset classes widely recognised as crucially important in your investment portfolio, are Cash, Bonds, Property and Equity – more about these asset classes ....
This is the most liquid asset class with a conservative risk, giving short term yields. Bank and savings accounts and money market investments are the typical cash type investments. The risk with this investment type is that it might not beat inflation over time.
Bonds are fixed interest securities that offers a series of fixed interest payments over the time of the investment. It is normally issued by the government, public corporations or companies and can also form part of your investment as underlying asset class in an investment fund in an investment product like collective investments, retirement annuities and other investment products
Real estate like mentioned before, is an essential part of your investment portfolio, normally outperforming inflation on capital growth and also on rental income if applicable. The downside of investment in real estate, is the liquidity risk, meaning that in cannot necessarily be immediately changed to cash.
There is a variety ways to get direct investment exposure to property, like full title, sectional title, time-share, retirement villages, share blocks schemes, ets.
Exposure to property investment can also be by means of property based investment funds, like, the two best known of which are, Property Collective Investment Schemes (PUTs) and Real Estate Investment Trusts (REITs).
Exposure to the stock market in a variety of share classes, either on the JSE, or in foreign investment, should also form part of one’s investment spread. Fortunately for those of us who cannot invest directly in the stock market, we can invest in Collective Investments or other investment vehicles, which provide us with stock market exposure, by pooling our contributions with those of other investors.
Why should my Investment Portfolio include different Asset Classes?
When you put all your eggs into one basket, you run the risk that if something happens to that basket, you can potentially lose everything. By investing in different asset classes, you can spread the risk that if something happens to one asset class, you stand chance of losing a portion of your investment, but not all.
When constructing an investment portfolio, it is also important to be invested in the right asset class in the right country. In an attempt to get above average returns on the investment, one can be invested for above average returns in a poor asset class or the wrong country for the specific time, not getting the required result.
Depending on your risk tolerance, your spread of asset classes must suit your needs and must therefor specially be compiled for you. Of course you have the last say in how you want to construct your portfolio.
How do I know how much to invest in an asset class?
There is a number of factors that play a role when one makes the decision.
Factors that play a role, are:
Age: The rule of thumb is that the younger you are, the more risk you can take with investment, because you have more time to recover from losses
Liquidity: It is important that you have cash on hand in case of an emergency. In the event of an emergency, fixed assets like eg real estate cannot immediately be transferred into cash and the market conditions can also have an effect on how quickly you can sell a property
The Implication of Tax: It is important to understand that different investment vehicles can be affected by different types of possible tax, like Income Tax, Dividend Tax, Value Added Tax, Transfer Duty and Capital Gains Tax. Make sure that you understand the effect that tax will have on the end result of your investment
The Risk: that you are prepared to take, compared to what Returns you would expect: The important question is how much risk can you stomach – how will you feel if the value of your investment dropped to 25% below what you have invested?
People are mainly divided into 3 risk categories, namely conservative investors, moderate investors and aggressive investors. Your risk category plays a vital role in the construction of your investment portfolio.
More about your investment spread ...
From the above it is clear that one can invest in different asset classes, spread over different investment products or vehicles in different geographical areas.
It is important to get proper advice, before either getting lost in the detail, or making a costly mistake.
For a tailor-made Investment Plan, please contact your Property Practitioner or Investment Specialist without delay.
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Author: Erna Rossouw
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