Are you following the 20% Investment Rule when managing your Wealth Portfolio?
“The best investment on Earth is the Earth”
- Louis Glickman
Effective Wealth allocation is the key to any successful investment. Asset classes can include cash, stocks, debt, mutual funds, Real Estate, gold, commodities and more. High risk arises when an investor invests all of his/her money in one Asset/stock/industry. It is no secret that investment in the Real Estate industry is not only safe, but highly profitable as well. The advantages of investing in Real Estate are numerous and well-documented. The critical factor to determine for most investors is not whether or not to invest in Real Estate, but rather how much of their Wealth to allocate to Real Estate. A well-made, diversified portfolio, is one that has Wealth allocated in various Assets classes, with different investment strategies.
The “20% rule” is one of the leading strategies in investment. This rule was created by the Chief Investment Officer of the Yale Endowment, David Swensen. This strategy is designed to invest at least 20% in Real Estate, an Asset class which has little or no correlation with publicly traded Assets. Although Real Estate is one of the least liquid Assets, it is relatively stable and generally appreciates on a consistent basis. This strategy is fairly straightforward to follow. Monitor your Wealth portfolio constantly. When the value of your Real Estate holding sinks below the allocations you set, 20% in this instance, buy enough of a Real Estate holding to re-balance the portfolio and vice-versa.
Does this strategy work? David joined Yale in 1985 when the endowment was worth $1.3 Billion. Over the span of 3 decades, he has grown the portfolio from $1.3 billion to over $30 Billion at an incredible annual growth rate of 12%. The reason he was so successful is his obsession of diversification to mitigate market risks. He also understood that private Assets with limited to no active trading ability can offer a premium to patient investors, especially those that can afford to forego immediate liquidity. This is where Real Estate becomes an excellent option for investment as it meets all these criteria.
The major advantage of Real Estate being isolated from publicly traded markets is that it provides investors with stable returns for their portfolio at reduced risk. This is especially true in a high growth market like the India market. The Indian Real Estate market is constantly appreciating and in fact, property rates has grown 38% over the last 10 years across the country. Indian Real Estate market, if worked with the right advisors and those having in-depth local knowledge, can offer investors a great premium based on location and property type. Significant market inefficiencies and information asymmetry creates great arbitrage opportunities for investing in Indian Real Estate. However, it is important to work with local advisors and domain experts who can navigate the various complexities that investment in Indian Real Estate poses. There are many factors that play an important role in the type of Real Estate to invest in. One of the first decisions is to identify which property type to invest in, whether it is an existing or newly built house, apartment, land or plots in a gated community. Following this decision, it is important to identify the right city and locality for the particular property type, where investments are expected to appreciate. Following these important decisions, there are many other decisions to make when investing in Real Estate.
Each investor determines how to grow his wealth portfolio over time and which investment and diversification strategy meet their goals, short and long term. But, irrespective of how one chooses their portfolio, the age old barriers that used to restrict access to efficient diversification have fortunately been brought down, providing investors with the power to construct truly unique, risk-mitigated portfolios like never before. David Swensen’s golden “20% rule” is one that transcends market conditions and time period of investment. This diversification strategy provides a fool-proof way of consistently generating returns for investors.