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Portfolio diversification in equity and bonds-Why is it important?

Portfolio diversification in equity and bonds-Why is it important?

What is the benefit of diversification in a portfolio of stocks and bonds?

With the recent spike in interest rates on mortgages, many investors should seek to diversify their portfolios from standard buy-to-let or property acquisitional investments to a range of different types of investments. Property bonds are an investment that is a catalyst for developers to raise capital from investors in the form of a loan. The intention of property bonds is to fund a development project during its early stages. The bond is usually a binding agreement between the investor and the property developer. The investors’ funds are offered as a loan to the property development company and the contract between them explains how the investment will be utilised, the payable interest for the investment and how the capital will be secured along with when the investment is repaid to the investor.

Investing in equity is a high-risk, high-reward investment. In the scenario of investing in equity, the investor is a shareholder in a specific property. Their stake is proportionate to the amount they have invested. Returns are realised in the form of a share of the rental income the property generates. Service fees are paid to the crowdfunding platform. Investors may also be paid out a share of any appreciation value if the property is sold. Equity investments should be considered for the expectation of rising in value and strengthening an investors portfolio diversification. According to Statista, the value of private equity deals in the UK reached £159.2bn in 2021. This represents a 60% growth in value of the previous year of 2020 which private equity deals amounted to £99.5bn.

Advantages of Bonds

Bonds offer a great number of advantages to investors. Opposed to deposits, bonds offer a three-year fixed annual interest rate of 4.75% according to Nationwide. The two-year interest rate of a £2,000+ deposit on via HSBC is 2.50%, we can assume a three-year interest rate is 2.75% based on a one-year rate being 2.25%. During the tenure of holding the bond, the coupon is usually delivered regularly. Holders of bonds can also sell their bonds to others. If these bonds are sold higher than the initial purchase price, the difference is rewarded to the investor as capital gain. There are two types of bonds:

Government BondsThese are more specifically debt securities issued by the government. The security of bonds issued by the government are guaranteed by law making it a very secure investment. Government bonds can also be used as collateral when applying for bank loans, making them a very useful and versatile asset to have.

Corporate BondsThis is a type of debt security that is issued by a firm and sold to investors. The highest quality of corporate bonds are usually referred to as “Triple-A” bonds. Corporate bonds that are Triple A are considered a relatively safe investment as interest rates are higher on the highest quality corporate bonds opposed to government bonds. Bonds and the firms that issue them are classified according to their credit rating. This determines whether the bond is investment grade or non-investment grade. Investment grade bonds are considered much safer due to their security and certainty. Non-investment grade bonds offer higher interest rates but for a greater risk.

Advantages of Equity Investment

Equity investing have numerous advantages. The most important to consider are investment classes with significant liquidity. This means that shares can be quickly transferred to a new owner, making the procedure much faster than traditional transfers.

Capital GainThe two major sources of income from an equity investment are income and dividends. When the company's share price rises or it generates a profit, you will receive a return on investment.

Higher YieldVariable income assets often have larger yields than fixed income assets, and while they are riskier, the reward they provide is substantially greater. Following the pandemic, the equities market has continued to climb, resulting in ever-increasing yields.

Limited LiabilityAs a shareholder or investor in an equity venture, your only liability is the amount you have placed in the company.

Combat InflationInflation is one of the most significant barriers to wealth accumulation. The rate of return on equity investments is high, allowing you to outperform inflation rates by a significant margin.

OwnershipInvesting in a company's or product's shares entitles you to the position of shareholder, which means you can exercise control over the amount of shares you earn and gain voting rights in the company.

Property Bond Projects

Bonds are usually used to fund residential or commercial property developments, or a combination of the two, depending on the bond. Residential property bonds often assist small and medium-sized homebuilders in providing needed housing developments in the most needed and highest-demand locations. Residential property housebuilders, as opposed to national housebuilders, use brownfield land, which benefits the UK's countryside areas while also helping to regenerate communities by repurposing unused lands into high-quality housing. Small and medium-sized residential housebuilders' flexibility allows them to deliver mixed tenure developments more easily, which could include properties to buy and rent, adding diversity for investors looking to purchase in that location.

Why is it important to diversify your portfolio?

One of the primary motivators for equity investing is versatility. Investors can choose from a variety of residential and commercial property investments. Office spaces, industrial properties, retail properties, shopping centres, residences, student housing, self storage facilities, medical offices, undeveloped land, and manufacturing spaces are examples. Diversification of assets increases the potential of an investor's portfolio by providing them with a variety of possibilities to pick from.

 

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