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Is diversity the key to a successful investment portfolio?

If you’re fortunate enough to have a property portfolio, you may think you’ve it made. But even with a swag of properties, you could still find your portfolio underperforms or takes a hit if market conditions change. The most vulnerable portfolios are those filled with look-alike properties in the same area – and their owners often don’t appreciate the risk until it’s too late. Here are a few tips on how to improve your investment strategy so that you can get the maximum return. 

1. Invest in different areas

A phrase you will hear often when talking of investment is that if you buy in this or that area “you can’t go wrong”. Fifteen years ago, examples of what some called “can’t go wrong” areas include Sydney’s North Shore, Melbourne’s inner east and the western beaches in Perth. But just a few years later, the “can’t go wrong” areas seem to have changed to Sydney’s west, Melbourne’s north and Perth’s inner south. Over time, changing conditions tend to favour different locations, which is why it pays to spread your portfolio across a number of areas.

2. Get the mix right

Another phrase you will hear is that when it comes to investment, houses always beat apartments. That is true right now; growth in house prices is ahead of apartments in every major city, according to RP Data Rismark’s latest report.
Houses do tend to best over time, but apartments and townhouses regularly have periods when they outperform. Having a mix of property types ensures your portfolio keeps its momentum when the market is moving to a different tune.

3. Invest across price bands

Why do some areas suddenly take off while other locations begin to stagnate? A common driver is ‘relative affordability’, where buyers get priced out of an area and shift their buying power elsewhere. A great example of this played out in Sydney during two periods in the 2000s. High prices and rising interest rates hit home, shifting many buyers out west. A change in relative affordability can put spark into well-located but overlooked suburbs and end a run of big prices rises in others.

4. Target different buyer types

    In 2009, 29% of purchasers were first home buyers; this year it’s 12%. In the 1990s, upgraders were the biggest buyers, now it is investors. Changes in the market or society often result in one buyer type receding while another increases and because different buyers favour different property types, the market can sometimes move suddenly. That’s why it’s a good idea to ensure your portfolio caters for the demand of different types of buyers and renters.

    5. Look for changes in the city

    Until 2008, Melbourne’s’ outer east was largely avoided by investors, but a new motorway link meant families and investors flocked in, turning a couple of these suburbs into top performers. Big infrastructure, intense development or new employment opportunities can turn property turkeys into eagles – or end a location’s golden run.

    6. Invest in good management

    The point of having a portfolio is to diversify across those parts of the market most likely to do well while minimising your risk. When conditions change, demand for different property types, areas and prices points tend to change as well, so it makes sense to have a spread in your portfolio.

     

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