If you are just starting to invest, this is the right place for you. This is the second part of a series on how to start investing. This part covers everything you need to know about building a portfolio. If you haven’t read the first part, you can do so here.
Investors, not speculators or traders, should use this guide. We don’t think it’s a good idea to invest in stocks for a short period of time, have a lot of different stocks in one portfolio, or trade cryptocurrencies or different currencies.
In his 2013 letter to Berkshire Hathaway shareholders, Buffett stated that his will instructed the trustee to invest 90% of his estate in a low-cost equity index fund, with the remaining 10% to be invested in short-term government bonds.
Buffett was asked if it would be better to invest in Berkshire or a low-cost equity index fund for the long term, to which he replied that the financial results would be “very close to the same.”
This isDespite what some in the industry would have you believe, when the most successful active manager in recent history says that active management is a difficult task, you should take their word for it.
The best way to build your portfolio is by investing in funds. If you diversify your funds by investing in different stocks and bonds, you won’t have to buy each share or bond individually.
There are two type of fund managers, those that are employed by the company running the fund, and those that are not. Fund managers are either ‘Active’ or ‘Passive’.
Passive vs Active Managers
Fund managers who passively invest, or index fund managers, invest in stocks or other securities that track a particular market index. Index funds act like a basket of shares. They invest in all the companies that are listed in the index that the fund tracks.
For example, the Kernel NZ 20 fund invests in the 20 companies that are in the S&P/NZX 20 index. This fund has low fees and eliminates stock picking decisions and the associated costs of trading.
Active managers are stock pickers and traders. They try to find a select group of stocks that they think will perform better than the overall market. They regularly change their portfolio, which is a collection of investments like stocks, bonds, and cash.
At first glance, that sounds great. Why would you not want an “expert” to do your analysis for you, and why shouldn’t you aim to get better than average market results? Some people are willing to spend a lot of money on this, assuming that it must be better than other options because it is more expensive.
Look At The Data
There have been many academic studies and records of past performance that show that most people who pick stocks and actively manage funds do not make as much money as the market does.
This is because, over the past decade, active managers have, on average, underperformed the market. Almost 90% of actively managed funds failed to beat the market, with the winners not being consistent.
In other words, investors in these actively managed funds have ended up paying higher fees for poorer performance, with the only winner being the active manager who’s collected these higher fees.
To be a successful investor, you need to own the market and get the market returns while minimizing the costs of ownership.
And by the way, this underperformance by active managers isn’t a new phenomenon or confined to the 2010’s. The success of index funds has been demonstrated across time, with the first index fund being launched in 1972.
You Have Two Choices
When building a portfolio, you’ve got two options. You can try to predict which one of the very few funds will beat the market. You can take yourself out of the game by owning your share of the market return through an index fund.
This investment strategy is straightforward, can be started with $100, and has been supported by years of research. It can be difficult to stick to your investment strategy when the market is doing well and you are seeing profits. However, it is important to remember your long-term goals and not get caught up in the excitement of the moment. As The Economist puts it:
” According to the text, active fund managers have not provided good value for the majority of the time. They have a history of doing well compared to others, but this is usually followed by a period where they don’t do as well.
Over long periods of time, most fund managers have not outperformed the market averages.
While charging their clients large fees, fund managers rarely outperform the market. Indexed funds that promise a market return but with significantly lower fees are a better investment.
It is more important to invest in a portfolio of low-cost index funds than to try to outperform the market.
Watch Out For High Fees
Fees are a payment that goes to someone else, rather than being kept by the person who paid it. There will always be fees when you invest money. To get the most value for your money, be aware of high fees and make sure you’re getting a good deal. If you want to build a portfolio for your future, you shouldn’t have to pay high fees.
The fees charged by actively managed funds can have a significant impact over time, even though they may not sound like much when you first see them. You will be charged 2% on your entire investment balance.
If you earned 6% in returns and 2% went to the fee, then the fee is 33% of your total returns. Actual rates of return may vary. This is an example of a return that does not take into account taxes and other expenses.
The last thing you want to do is to pay more than you need to in fees. The fees charged are so important that you should make sure you are getting value for the service provided.
There is a small “but” to the above. Don’t be fooled by the company that offers the lowest fee. The strategy that the fund uses to invest its money needs to make sense to you.
Additionally, the index fund manager needs to be able to show that they can provide the return of the index, which is more difficult than one might think.
While index funds are often marketed as a low-cost way to invest, many of them underperform their index due to inefficiencies, incorrect operations, or a number of different drag factors, including cash held, dividend treatment, tax handling, or hidden costs.
Build A Team
If you’re finding that the workload associated with your real estate portfolio is becoming too much to handle on your own, it may be time to consider hiring someone to help manage it. This is a great opportunity to start building a team of reliable real estate agents.
Many investors feel uneasy about onboarding new employees, but it can help them out in the long term. It’s important to find people who share your vision and goals, and to start slowly when it comes to giving them responsibilities.
Many investors choose to hire a virtual assistant to help with their investment tasks. This can free up time to focus on other important aspects of their business. This is a great opportunity to hire someone to do small tasks that take up time, like website management or tracking the results of a marketing campaign.
Hiring an accountant is another opportunity to build your team. As your business grows, they will be able to manage your taxes and finances. If you want to be organized and have an easy time during tax season, keep good records throughout the year.
When thinking about building a real estate team, start with the tasks you struggle with the most in your real estate investing business.
Growing Real Estate Portfolio
1. Leverage Your Real Estate Portfolio
It is important to learn how to use your portfolio to go after new opportunities. An asset or resource can be used to your advantage.
For example, if you have a strong portfolio, it can help you to convince people to invest in you or give you more funding.
2. Reduce Risk By Diversifying Your Portfolio
If you do not want to risk losing all of your investments at once, you should invest in a variety of different types of assets. This way, if any external factors negatively impact one particular investment, you will still have others to fall back on. Here are a few alternative investments to help bolster your real estate portfolio:
Commercial Real Estate
Many investors perceive commercial properties as the logical progression following the completion of a few residential deals. This is due to the fact that commercial properties not only have the potential to generate higher profits, but also provide opportunities for diversification.
Commercial properties can be used for a variety of purposes, such as office buildings, retail space, and even industrial buildings.
Multifamily properties are a great way to increase the size of your real estate portfolio. Investors can protect themselves from market factors that may affect the profitability of single-family homes by exploring different markets and larger residential spaces.
Real Estate Investment Trusts (REITs)
REITs allow investors to get the benefits of real estate investing without having to actually buy any property. Companies that purchase income-generating real estate and pay dividends to investors in the company are referred to as trusts.
This is a good opportunity for investors who want to increase their influence while still investing in real estate.
Real estate investors are increasingly looking to undeveloped land as a viable investment option. Investors who purchase raw land can make money in several ways, such as dividing the plot for resale, leasing it to renters, or developing new construction. Another option is to simply hold on to the land and wait for it to appreciate in value.
If you’re looking to diversify your investments, raw land can be a good option because it provides a chance to invest in a new market or pursue a different exit strategy.
3. Costly Mistakes To Avoid
It is important to know what mistakes to avoid when you are looking to grow your real estate portfolio effectively. Making certain mistakes can be very costly and can damage your portfolio significantly.
Some common mistakes people make when investing are not diversifying their portfolio, not doing their research, underestimating costs, or not knowing when to seek professional help. Get the full discussion here.
4. Compile Your Assets Using A Real Estate Portfolio
An entrepreneur’s success in the real estate business often depends on their ability to create efficient systems that achieve economies of scale.
When growing a real estate portfolio, you should launch and cultivate it in a way that it starts working for you. Additionally, learning how to create a real estate portfolio template can help you showcase your work, which can attract new opportunities.
Investing in several different types of real estate can help to diversify your portfolio. The market is known to ebb and flow, which can pose a risk if you invest heavily in just one category of real estate.
If you have a portfolio of investments in different types of real estate, you can rely on more than one of your properties to generate income if the market for one type of property declines. You can choose to invest your money in different locations, different types of assets, or in REITs.
5. Utilize Real Estate Analytics
Real estate analytics is the process of analyzing different investment opportunities in the real estate market. This analysis can include things like looking at trends in the market, evaluating potential ROI, and more.
Analytics are important in real estate because they help managers understand how various investments are performing. By monitoring analytics, managers can make changes to their portfolios as needed to try and maximize returns.
There are a few different types of analytics that investors use to assess a property, which include the capitalization rate, cash flow, rate of return, after repair value, and loan repayment schedule. Many investors use a real estate calculator to determine key numbers associated with an investment property quickly.
It is essential to take these calculations and record them with your real estate portfolio.
Measuring The Success Of A Real Estate Portfolio
Many investors will choose to manage their own portfolios instead of having someone else do it for them. This approach relies on adding the appropriate performance metrics and tracking how those numbers change over time.
Make sure to keep your calculations updated so you’re always aware of what’s working and what’s not. Here are a few key indicators to help you get started:
Net Cash Flow
Net cash flow is a metric that is important for real estate investors to know. The bottom line for a property is the annual income after the annual operating expenses have been paid.
To calculate your return on investment, divide your net cash flow by your initial investment. This results will give you an indication of your cash-on-cash returns, allowing you to compare your investment options.
Economic Vacancy Rate
The economic vacancy rate is equal to the number of vacant units multiplied by 100, divided by the number of total units. This can help you compare your vacancy rate to similar properties in the area, which can help you decide when to raise the rent.
It is important to monitor the amount your investment is worth and how quickly it is increasing in value. Purchasing a property is a long-term investment that will reap benefits in the future.
It is important to understand the importance of a real estate portfolio in order to not only manage and grow your wealth long-term, but also to obtain financing for future projects.
What it boils down to is that an investor’s ultimate goal will determine the kind of assets they get, which in turn dictates how they achieve their goal.
While you’re unlikely to find any mention of long-term investing on reality television, that doesn’t mean it can’t be a great way to generate wealth. Imagine yourself 10 years from now and reflect on where you would like to be financially. Investing in real estate may help you achieve your financial goals. A rental property portfolio is a great way to start building equity.
Real estate analytics can help you understand the market, make better investment decisions, and determine the best time to buy or sell. Prospective lenders will request these numbers from time to time and they can also be used to quickly evaluate whether a new property is worth pursuing.
You should create a spreadsheet to help you review and write down the numbers associated with different properties. You can also include specific metrics for investments you didn’t land, which might help when analyzing similar properties.
The most important thing is to find a system that you can easily use. Keeping an eye on real estate analytics is a foolproof way to keep your portfolio in check and improve it over time.