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The importance of diversification

Diversification in property investment is a way of managing the future as well as managing your own risk. After all, nobody can predict the future, particularly with regards to the property market. But diversification is a way you can manage your investment by spreading the risk to mitigate any potential losses.

Spreading your investments reduces risk

Spreading your investment across different assets lessens the risk because you are not dependent on the success of one market or one asset, and likewise, if one investment bombs or a particular market is hit by something unforeseen, you won’t lose all your money in an instant.

Looking at it less dramatically, different markets perform in different ways, so you can invest some of your money in a market that performs very well, but is volatile and unpredictable. This will enable you to earn good money but you may need to move that money out of it at short notice, and hence it needs managing more closely.

At the same time, you can invest other portions of money in markets that may earn less, or take longer to earn money, but are more stable and predictable. Hence, you build up a balance of long and short term investments with different rates of expected income.

The objective is to build security and protect yourself from the financial ebbs and flows that naturally occur in the market, and so you are not dependable solely on one market and left exposed to one source of income. Therefore, if or when one market is underperforming, you still have money in another market that might be over-performing and another that is performing steadily and as expected, and accordingly you don’t feel any hit that occurs as severely.

Diversification and UOWN

In terms of UOWN investment, you could diversify by investing a proportion of your money in a property with a 5% rental yield and some of it in a property with an 8% rental yield. This is usually dependent on the type of property and/or the geographical location. Likewise, you can look longer term at the expected capital growth of properties and invest accordingly, or you could decide to invest in a property development and see how that performs.

It is all down to individual choice and your attitude to risk, but essentially ‘diversification’ is the property investor’s term for “don’t keep all your eggs in one basket”, and anyone who chooses to is playing a much riskier game.  

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