Property Hub - Investment Insights & Inspiration - Realty Talk Vault: When diversification does not make sense

Episode Date: December 7, 2022

We bring you another classic Realty Talk episode from the vault, which was originally published on July 1, 2021, but is still just as relevant today. It’s a generally accepted investment principal that diversification can reduce your risk and improve your investment returns.  But are there times when property investors shouldn’t diversify?  Stuart Wemyss tells Bushy it could be called ‘diversification’ RealtyTalk is part of the Property Hub podcast channel, your home for property investment insights, inspiration, and stories from Australia’s top property experts, investors, leaders, and analysts. Subscribe now to get every RealtyTalk episode delivered to you each week for free, and also get full access to Get Invested, the leading podcast for Australians who want to unlock their full ‘self, health, and wealth’ potential and get inspired by the stories of investors, founders, and entrepreneurs. Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media.  Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

Welcome. Do you spread your investment eggs across multiple baskets? Well, it's a general investment principle that diversification can reduce your risk and improve your returns. But there may be times when investors shouldn't diversify. So to discuss this, we're joined by a leading industry veteran, Stuart Weems from ProSolutions. Welcome back to the show, Stuart. Hey Bushy, great to be with you. Thanks for the invitation. Yeah, now really interesting subject Stuart. Very interested in your thoughts on why you do believe that there are occasions when property investors shouldn't diversify. Well I guess it does buck conventional wisdom but I think quality trumps diversification every day of the week. So I would rather own one

quality asset one quality property and that's all i ever own as long as it's the best let's just assume it is the best property in australia well i'm always going to do well out of that asset over over long periods of time um and that the reason for that is just stands to really basic logic bushy is that you can't expect above average returns from an average or below average quality property or asset or investment or methodology. You can apply it across the broad, across broad asset classes, really. But when we're talking about property, it's really about the quality of that asset. And really, it comes down to the imbalance between supply and demand. So if I had the opportunity, if someone said to me, Stuart, would you like three average

properties or would you like one above average property? I know in the long run that the above average property, as long as we're comparing the same dollar amounts, is going to produce better outcomes for me in the long run, and also reduce my investment risk. Because if I'm investing in a sure thing, if you like, a really high quality blue chip asset, then I would say my risks are relatively low in terms of the capital growth that asset will generate. Yeah, it's a really good point. And we had a client recently that's really relevant to this discussion that was tossing up he had nine hundred thousand dollars he could put towards a property and he was wondering does he buy two at 450 or one at 900 well we demonstrated to him that it was worth spending

the 900 on a property much closer to the uh the city in a very tightly held location uh with a very strong demand graphics and a demographic of strong and growing incomes well that's a much better proposition than than two much lower properties much further out so it certainly makes a lot of sense now you've recently said that in retirement we pay for our living expenses in dollars not percentages what do you mean by that well look when comparing investment returns between different asset classes and actually investments within that asset class of course percentage returns of in that comparison perspective are incredibly important But when we invest in property to hopefully fund our retirement, we must realise that it's the dollar value of growth, not really the percentage is the most important thing.

So if we look back 30 years ago in 1991, the median house price between Melbourne and Sydney was appreciating by about $10,000. Now, adjusting for inflation, that's worth about $20,000 in today's dollars. now if I'm retired and I'm spending a hundred thousand dollars then that's one-fifth of my spending whereas if we look at the median house price today and we're assuming long-term sort of average growth of around six percent which is historically it's been higher than that but let's just be conservative well then my median house price is increasing by sixty thousand dollars well that's now sixty percent of my annual living expenses so whilst we look at percentages and they're important what we must understand is because the compounding growth in property

that it will start to deliver in in growth wise a greater proportion of our living expenses and that's important in an overall investment strategy to ascertain how we're going to fund retirement and and how long that money is going to last for. Yeah that's perfectly said and I guess a great segue into the future because reading some of your projections they sort of indicate that the appreciation in property over the next 10 plus years may be over $100,000 a year. What's that going to mean to investors? Well, I think it supports the investment case that perhaps one fantastic quality property, just like your client contemplated, is better than two average quality properties. Sometimes we have this sort of goal or idea in our head,

I would love a property portfolio you know several properties and it would make me feel like I'm a successful investor etc etc but it's really not necessary I would much rather again put all my eggs in one basket and that be a fantastic basket because it chances are over the next two or three decades that that property's growth rate every year will be more in dollar terms than what I'm spending in retirement and as long as that's the case of course I need other liquid assets to fund retirement but at least i know if i've got say half a million dollars of super and i'm spending a hundred thousand dollars a year but i've got this asset that's appreciating by two hundred thousand dollars a year i'm going to sleep very well at night knowing that hey i might have to

sell this asset one day but at least i know it's working in the background it's it's working while i sleep to build my personal wealth yeah well said so the million dollar question then is how do i put all my eggs into one property basket safely while avoiding the obvious risks so i think um it's really two things i would counsel people to really test their own comfort levels in respect to what an investment property budget looks like and we have to realize or acknowledge that a lot of our preconceived notions around this are really um as a result of our upbringing our own personal experiences as well, which may serve us well, but also may not necessarily serve us well. So I'm not inviting people to go and borrow way too much money than they ever should borrow

and go and buy a $3 million property or anything like that. What I'm saying is that in your mind, if an investment property is worth half a million dollars, well, particularly in capital cities, you're going to need to make some compromises. But if you can get your head around and if it's appropriate for you to, say, spend a million dollars well you've got better options available to you to maximize the quality of that asset so that's the first thing the second thing is get some advice you know particularly if you're not an experienced investor but even if you are an experienced investor i think it makes really good sense to get some professional advice from a good quality buyers agent that is a local area

expert that has been operating in the market that you're looking to invest in and has been operating in that market for many years so really knows the street suburbs knows the agents has been been through a lot of the property that you know that's available for sale and so forth and we've got to remind ourselves that just a one percent growth differential on a million dollar property in 20 years is equal to half a million dollars today right so if by using a buyer's agent i can make a better decision and that better decision is going to get me one percent more capital growth and that's going to cost me 20 grand most people go look 20 grand or buyer's agent that's a lot of money but if it's going to make me another half a million dollars

in today's dollars over the next 20 years it's a no-brainer right you'd pay 20 grand wouldn't you bushy to make half a million bucks so every day of the week yeah every day of the week so they're the two things push the budget as much as you can but still obviously within your safe limits and get some advice yeah really good advice as always mate really appreciate your insights into getting us to think differently around some of the assumptions we make around property. I'd really appreciate you coming on the show again today. Pleasure's all mine. Thanks a lot, Bushy. Thanks, mate. So the message is very clear there that we need to focus on quality. And if you want to get above average returns, you need to focus on above average properties.

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