Diversify Your Wealth - Build Resilience

Senior Investment Adviser, Clint Williamson discusses the importance of diversification and building resilience within your investment portfolio.

‘Invest in bricks and mortar’, who hasn’t heard this before? There is something about investing in an asset that is tangible, something you can see, it gives a sense of security. What’s more, everyone has heard stories about friends and acquaintances making considerable capital gains, and/or receiving a healthy rental income from buy-to-let. Given the current returns from investing in the Gibraltar property market, it would not be an exaggeration to say that if you are not first on the list to view a property, you will probably be unsuccessful in making the purchase.

Despite many challenges, Gibraltar has proven to be a strong and stable economy with progressive policies. Limited land availability and years of historically low interest rates has provided the perfect environment for property speculation and ever rising property prices and rental yields.

However, it is important to be realistic and ask the following questions: Will this trend last for ever? Could the Gibraltar property market collapse? This may never happen of course and if it was to happen it may take a long time before doing so.

Having said this, Gibraltar is not completely immune to property slumps. Property markets internationally have been subject to prolonged downturns. Investments in property can at times lack liquidity, and the high transaction costs only make it suitable as a long-term investment.

For this reason, it is worth considering alternative investments to diversify your wealth and build resilience for any unforeseen circumstances.

I believe real estate should form part of everyone’s wealth, particularly through your main residence. Relative to other asset classes, real estate can offer high potential returns in the long-term.

However, if real estate represents a large proportion of your wealth, it would be wise to question if you are increasing your risk if the market collapses. Just because it has never happened before, does not mean it cannot happen in the future.

Diversification is a widely used term in the world of investing and wealth planning. Anyone wanting to protect their wealth, should diversify across other asset classes and geographical regions.  By doing this you reduce the inherent risk you face if one asset, or in this case your property portfolio, drops in value or suffers a lengthy downtrend.

By adding assets which are weakly correlated, you reduce overall risk and protect your wealth in different market conditions. For example, stocks and property do not typically move in the same direction. However, it is worth noting that correlations do not remain constant, they are quite dynamic.

An investors’ asset allocation is the direct result of their unique financial goals, time horizon, attitude to risk and affordability. There is no one-size-fits-all answer but considering these from multiple perspectives can help bring potential solutions to create a truly resilient portfolio. One which would be ideally diverse, consistent, risk aware and flexible, with the ability to effectively navigate short-term shocks while capitalising on long-term trends.