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The best way to protect your wealth from big losses is to diversify your investments. In other words; don’t keep all your eggs in one basket.
Diversify to spread risk
You can do this by spreading your investments over a broad spectrum of assets such as cash, property, bonds and equity (i.e. shares or stocks). You can (and should) diversify these even further. For example, instead of owning one share only, it’s best to spread your investments across shares in multiple companies in various sectors such as, for instance, mining, finance, retail, high-tech, etc.
Property can be divided into residential or commercial.
Collective investment schemes (i.e. unit trusts) were originally introduced to help people spread their investments amongst and within various asset classes. It gave ordinary people access to the Johannesburg Stock Exchange by allowing them to pool funds to buy a range of stocks necessary to reduce risk.
The problem with property (and the unit trust solution)
The problem when it comes to investing in property is that very few people can afford to diversify a property portfolio over several different property investments.
In the same way as with equities, property unit trusts can offer investors a share in a range of buildings owned by a management company. Because of the resources available to large management companies; they can afford to buy shopping malls, factories, office blocks and so forth.
You do not need to own the home you live in to invest in property. You don’t need much money and you don’t need a home loan.
Property unit trusts have far lower barriers to entry than buying a residence as an investment while offering vast diversification benefits.
There are risks (as with any investment)
The convenience of investing in a property unit trust obviously comes at a price and in the next article I’ll compare costs, liquidity, risk and returns of buying-to-let vs. investing in property unit trusts. In a third article we’ll discuss the practicalities of investing in property unit trusts.
Claude Hannah is a financial planner for Venn-Sure Consulting. He completed a degree in Financial Risk Management from the University of Stellenbosch in 2006 as well as a post graduate diploma in Financial Planning. Claude helps to organise and simplify the often complicated and busy financial lives of his clients. He takes great pride in providing the highest level of service to help his clients build and protect their wealth.
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