How Do Investors Build Diverse Investment Portfolios?
When it comes to building a strong investment portfolio, having a range of diverse investments is one of, if not the most, important factor to consider. Having multiple assets can mitigate risk and ensure several different streams of income. But how are investors diversifying? What are the most desirable investments and what are people actually investing in?
Why Do People Invest?
Before we consider what people are investing in, it’s useful to consider why people invest. Aside from the common goals of ‘making more money’ and ‘securing a financial future’, there are certain key catalysts that cause people to invest.
One of the major reasons that people invest is because of the poor returns that a basic savings account can offer. According to Finder, 43% of the respondents to their survey described low returns as a reason for diversifying into other investments.
While savings accounts are incredibly safe, they obviously have a much lower ceiling for returns when compared to other assets.
At the same time, the Finder survey also highlighted how much of an impact the advancement of technology has had on investing. 19% of investors in the survey said they invested because the technology available made it so easy. There’s no doubt that investment apps have made building a portfolio of diverse investments a much more streamlined process – especially with assets such as stocks or cryptocurrency – which has allowed many more people to dive into the world of investing.
That said, how many people are diversifying into their most desired assets? We’ve performed the research and found that there is a huge disconnect between what people want to invest in and what they actually end up utilising.
How Are People Investing?
In our ‘Time to Invest’ survey, we found that the most desirable investments are; property, land, gold, stocks, shares, ISA’s, antiques and cryptocurrency.
This is unsurprising considering the high returns that assets such as property, land and gold can offer when compared to investments considered more ‘low-risk’. It also demonstrates the allure that tangible, physical assets hold over other investment vehicles.
Unfortunately, our survey found that in reality, these aren’t the most common investment assets. While there’s an argument this could be associated with financial costs, the more shocking headline was that over 40% of our respondents have no investments whatsoever.
In order, the most common investments are; nothing at all, ISA’s, property, shares, jewellery, stocks, gold, antiques, cryptocurrency and land.
This highlights several key points. Firstly, land is the most desired but also seemingly the most unattainable investment – nearly 20% prioritised the asset but only 3% of investors have taken the plunge. Similarly, property is the most desirable asset by a large margin at 40% but only 20% have invested – a clear sign that property has an exceptional reputation with investors but is underutilised.
Our survey also demonstrates how the maturity of an asset can impact investor sentiment. Cryptocurrency has been making huge strides over the last five years and yet it still ranks relatively low in both of our metrics. It’s likely that crypto is seen as a more volatile asset and is yet to sway investors from more proven assets.
Finally, most worryingly, these results show that many people haven’t even considered an investment. With the value of pensions rapidly declining and the costs of living increasing, for many people a ‘comfortable’ retirement requires the additional income stream an investment can deliver.
How Do the Ultra-Rich Diversify?
The Knight Frank Global Report shows that, in terms of diversifying, property is the most commonly utilised asset. With nearly 36% of respondents citing a property investment, it’s a flexible asset that can work alongside different investment vehicles. Unsurprisingly, the less mature markets are relatively under-utilised.
While cryptocurrency continues to grow in popularity, this research suggests it’s still viewed as a relatively volatile asset overall. Similarly, collectables make up a small % of the average portfolio, although this is to be expected when a single item (such as art, whisky or handbags) can be worth an incredible amount over the long-term and are typically much rarer.
Diversifying with Property
So why is property such a popular investment asset, especially for diversification? For many investors, it’s the simplicity of the investing process combined with the quality returns that a property asset can deliver.
Property is different to something like stocks and shares in that it represents a much more tangible asset built for long-term returns. It’s an investment vehicle with a proven history of reliability – property prices have grown significantly over the last 50 years, despite facing challenges such as the global financial crisis.
At the same time, it’s also relatively easy to achieve further diversification across a property portfolio. One portfolio could include a number of locations and property types, reducing the risk of having all of your assets tied to one market.
Finally, property is flexible. With the option of achieving both rental yields and capital appreciation, it can be adapted to a number of different property strategies spanning any number of years. The Buy-to-Let market alone has several common property investment strategies – such as single-lets, HMO’s and off-plan property – that can offer multiple layers of diversity.
There’s also never been a better time to invest in property. With low interest rates, plenty of demand and growing mortgage availability, multiple locations across the UK are demonstrating the potential to offer lucrative returns for investors. As the property ‘mini-boom’ continues, forecasts suggest that regional cores could experience over 15% property growth by 2025. If you’re looking to round out a portfolio of diverse investment, property is ideal.