Earning your money was the hard part, but now you are staring down the barrel of the second step in wealth management – where to invest your hard-earned cash? Investing can seem like a gamble, and no one has a crystal ball that will predict the health of your investments over the years. There are, however, a few investment tips that have stood the test of time.
To create a balanced investment portfolio, savvy investors spread their money across three classes of assets:
- Stocks: Rise and fall in value rapidly, offer high returns coupled with high risk.
- Bonds: U.S. Treasury bonds, notes and bills are low-risk and low-yield, while corporate bonds and private debt funds offer higher yields at higher risk levels.
- Real estate: Low-risk, high-return investment when held long-term. Real estate hedges against inflation but has a high entry cost and can’t be sold quickly.
- Each of those assets plays a different part in balancing an investment portfolio.
As with any roll of the dice, investments that generate the highest returns, such as stocks, also carry the highest risk. While you may be soaring high one day, we have all seen the stock market crash and leave investors penniless. Conversely, investments that carry the lowest risk, like government bonds, also have the lowest rate of returns.
A team of economists from the University of California, the University of Bonn and the German Central Bank recently set out to shine a brighter light on the often confusing world of investing. Taking an extremely broad approach, the multi-disciplinary team released a research paper that covers 16 advanced economies over the last 145 years. Aptly titled The Rate of Return on Everything, 1870-2015 researchers compared returns on equities, residential real estate, short-term treasury bills and long-term treasury bonds.
Their findings revealed a winner in the returns race – residential real estate. Residential real estate had average returns of 7 per cent per year, with rental income driving roughly half of those returns. With almost 49 per cent of the world’s wealthy currently tied up in real estate, the conclusion of the study is powerful.
Residential real estate also came out on top in the study in terms of risk. Investments are rated with what is called in the industry a Sharpe ratio. Simply put, this ratio is the return divided by risk, with a higher ratio indicating a better investment – a greater return relative to risk.
Over the 145-year study, real estate clocked in with a healthy Sharpe ratio of 0.7, much higher than equities at 0.27 or even treasury bonds at 0.2. What is more, the Sharpe ratio for real estate has grown stronger over time, averaging 0.8 per cent since 1950.
Investing in real estate allows you to generate a secondary source of passive income and allows you to participate in capital appreciation. This means you can reinvest your rental income while benefiting from appreciation. What is more, investing in real estate releases your finances somewhat from a fluctuating economy. Over time, returns on both equities and real estate tend to average growth around double the speed of the country’s economy as a whole.
While real estate investments are the clear winner for returns overtime, they do come with their challenges. Property is expensive, giving real estate investing a high-cost barrier to entry. Because of the high cost of real estate, it is difficult to diversify a property portfolio, and you can’t buy and sell on a whim.
Crowdfunding real estate platforms like Smart Crowd are coming in with a solution to these investment challenges. Crowdfunding your investment allows you to invest in real estate with whatever capital you have, rather than waiting years to save up for a downpayment. Smart Crowd gives potential investors exposure to residential real estate that can start generating passive income almost immediately. Crowdfunding platforms such as Smart Crowd not only give you access to real estate in your investment portfolio but rather allows you to tbuild a diversified real estate portfolio without a high upfront cost thus allowing you toshoulder much less risk.