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
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
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.