JUNE 2013
Buy direct or via a fund?
somewhere between 10% and 20% of your assets was the right number. (Swensen Unconventional Success in 2005 and Ibbotson Associates 2006). What about today? Darrow Fitzpatrick, the respected American commentator – who must be a good guy because, as well as being a successful investor, he is an engineer by training and a rock climber by inclination – backs up the 10-20% range and says that he invests about 15% in real estate. John Redwood, chairman of the investment committee of Evercore Pan-Asset and former UK government minister, is another great believer in the importance of choosing the right allocation of assets. He currently has 21% of its PFS PanDYNAMIC balanced fund in real estate as well as 8% of its defensive fund.
So, for the purposes of this article, let us assume 15% is conventional wisdom. Now, I am sure that most of us know investors
who have a much larger percentage of their investments in property. Some have 50-80%. This doesn’t, necessarily, make it a good idea! This 15% allocation means that if you are worth $1 million you should – ignoring your house – have about $150,000 in real estate investments
Don’t have all of your eggs in one basket
and if you are worth $2 million you should be investing $300,000. Now, there’s not much real estate that you can buy for $150,000 or $300,000 so this could be one reason why potential investors look at funds rather than individual properties. But there is more to it than that.
Almost everybody agrees that it is not a good idea to have all
of your eggs in one basket. This includes, ideally, not having all of your real estate eggs in one real estate basket. An ideal real estate investment portfolio might include several different properties of several types in several countries. Yet that is hard to achieve with $150,000-300,000 – even allowing for the ability to borrow, a factor that will be the subject of a separate article.
Investing through funds can give you a diverse holding of real estate in a particular country or even all over the world. It can also do so cheaply–- you might invest only, say, $10,000 in a particular fund. Better still, it can be given in a way that allows you to get out, by selling your “shares”, whenever you want and without having to go through tiresome months finding a buyer and closing the sale.
As all this sounds so good, why doesn’t everyone hold property in this way?
There are other factors at play. 51
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