The goal of every investor is to make as much money as possible from their investments while avoiding the risk of losing any money they put into the asset. If an asset does not offer some guarantee of the safety of an investor’s capital, no amount of profit it promises is worth the risk. This is one of the first rules of investing any investor must learn.
Every investor wants that perfect scenario where the risk in an investment is zero while the possible return from the asset is 100%. Sadly, those kinds of investments don’t exist. The most you can hope for, as an investor, is an asset that presents a mixture of risks versus returns. It is your job to figure out how much risk you can tolerate in exchange for the expected return.
Evaluating how much risk you can tolerate is something you’ll want to do not only at the point of buying the asset but throughout owning it. This reassessment is important because no investment exists in a vacuum. Instead, it is a small part of an economic system composed of many moving parts. Therefore, your initial parameters for that asset – the reasons you bought it – are constantly subject to change.
In other words, an investment that once had an acceptable level of risk may suddenly become too risky. As a result, that asset will lose its attraction and require you to take action to protect your capital and stay on course with your investment goals. This typically means selling off the asset and buying other investments with a more favorable risk/return profile.
This process of reassessing your investment portfolio to ensure that your assets can still deliver the level of returns you want is known as rebalancing. This article explains the basics of how to adjust your portfolio to renew it. It will show you how to rebalance your portfolio to make rental real estate a significant part of your holdings.
Investment real estate offers a way to earn substantial passive income on a long-term basis. You will see why real estate should constitute a major part of your portfolio at the end of this post. You will also see why your real estate investment strategy should include hiring a property management company to oversee the operation of your properties. To make sure you hire the right one, be sure to review multiple property managers’ websites.
How to adjust and renew your portfolio
Firstly, why do you need to rebalance your portfolio?
You want a mix of assets with the right level of risk versus returns to help you cushion the effect of economic shocks while staying on course with your investment goals. By constantly adjusting your holdings to make sure you are not overweighted in any specific assets, you ensure the best risk-adjusted returns over time.
For instance, during the 2008 financial crisis, savvy investors rebalanced out of bonds into stocks, even though stock prices had taken a nose-dive. The bull market which followed showed that these investors had taken the right steps. Today, those same investors are still rebalancing to avoid being overweighted in stocks if another crash comes along.
How often should you adjust your portfolio?
You should adjust your portfolio if you notice a deviation from your target asset allocation. For instance, if your target asset allocation is 55% stocks versus 45% bonds, but it has strayed to 70% stocks versus 30% bonds, it is to rebalance your portfolio. You could also set specific timeframes for adjusting your portfolio, such as age milestones (at ages 25, 45, and 65)
Why you should rebalance into real estate
So far, most of the discussion has been about rebalancing out of stock into bonds or vice versa. This is because stocks and bonds, being digital assets, are easily traded. Due to this convenience, many investors tend to buy many of these kinds of assets. But not considering real estate investing as an option when rebalancing your portfolio is a big mistake.
That is because real estate offers better protection than stocks and bonds against the risks you seek to protect yourself from when you adjust your portfolio.
Real estate as an asset class:
- Is tangible, unlike stocks and bonds.
- Will never completely lose its value. All assets may lose value, but real estate will never lose 100% of its value like stocks or bonds.
- Has utility value. Real estate value is tied to the human need for land and shelter. As a result, an investment in real estate will always have value.
- Offers a reliable source of income. The rental income from real estate is one of the main reasons it trumps stocks and bonds. This income is not only regular, but it is also substantial.
- Can be completely passive. You can own investment properties without the hassle of fixing broken toilets or dealing with tenants. This is possible when you hire a property manager for the asset.
The principal reason for adjusting your portfolio is to minimize risks by diversifying your assets. Including more rental properties in your portfolio will help you achieve this goal with ease. Real estate offers a level of stability that reduces the amount of rebalancing you have to do in the future. This is because, as an asset class, real estate is not so susceptible to economic downturns.
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