At Property Moose, we strive to provide our investors with the tools they need to build well-balanced, diversified portfolios.
A brief history of diversification
The term “portfolio diversification” developed currency in 1952, when Harry Markowitz published a paper entitled Portfolio Selection. His theory detailed how investors can lower the risk of their portfolios by investing in a variety of asset classes and markets. [1]
By spreading your capital in this way, Markowitz proposed that investors would be more likely to mitigate market unpredictability and reduce portfolio loss. By investing in a variety of assets that do not correlate with one another, or more specifically, do not move in “lock-step together,” the risks rooted in a portfolio are lowered and “higher risk-adjusted returns can be achieved.” [2]
The investment strategy, although widely embraced as a consistent goal, is particularly significant during uncertain times, when markets are most unpredictable.
Recognizing the value
At Property Moose, we recognize the value of diversification. That’s why we provide opportunities which hold a variety of risk/reward ratios. As you may already know, we recently launched a Property Moose Mortgage. We believe this product has a significantly reduced risk profile and can provide market leading returns.
Putting the Property Moose Mortgage to the test
We decided to look at an assessment of actual and simulated returns during a 3-year investment, from peak market pre-recession 2007 to 2010. Below is a graph of our calculations.
Note: the graph shows indexes for each of the FTSE All Share and property investment (50% LTV Mortgage)
[Sources: 3, 4, 5]
Our findings:
- Between Dec 2007 – Dec 2010, there was a fall in house prices in the UK of 11.41% across the period. The peak fall was between Q4 2007 and Q4 2008, which was 14.75%. [3]
- This means that, at the markets peak before the recession (2007), the Property Moose Mortgage Loan could have been made at a maximum of 55% loan to value, giving a secure headroom of 33.41% remaining in 2010, even despite the property fall.
- According to Nationwide’s house price data [3], in Q3 2007, the average house price in the UK was £184,131 at its peak before the recession. This was balanced against an average rental value of £699 per month in 2008 [4] giving an average gross rental yield of 4.6%.
- Base Rate was 5.5% in December 2007, which gives an indicated 50% LTV mortgage rate of 6%. With the above averages, this would generate an average yield of 3.2%. [6]
- During 2007, the peak dividend yield achieved by the FTSE All Share was 3.32%. Between Dec 2007 and Dec 2010, the FTSE All Share fell 6.81%. [5]
The table below shows an example of a 3-year investment of £100,000 from 2007 to 2010. This does not include fees and costs of trading FTSE shares or acquiring property but does include a 10% + VAT management fee for rentals.
| Equity Property Investment (cash) | Property Investment (50% LTV Mortgage) | FTSE All Share | PM Mortgage Loan | |
| Income (3 years) | £12,144 | £10,630 | £9,600 | £15,000 |
| Capital Value (after 3 years) | £88,590 | £77,180 | £93,190 | £100,000 |
| Total Returns | £100,734 (profit of £734 (+0.73%)) | £87,810 (loss of £12,190 (-12.19%)) | £102,790 (profit of £2,790 (+ 2.79%)) | £115,000 (profit of £15,000 (+15%)) |
Although past performance is not a reliable indication of future performance, our findings, and our own expertise, lead us to believe in the value of the Property Moose Mortgage. In addition, please note that returns calculated from the Property Moose Mortgage Loan and property investment (50% LTV) are not actual past performances. As demonstrated by our calculations, the product could have offered a reward that was significantly higher than other investments during a period of economic downturn.
Sources
- http://www.investopedia.com/walkthrough/fund-guide/introduction/1/modern-portfolio-theory-mpt.aspx#ixzz4ZJryaxV5)
- http://www.frontierim.com/files/file/download/id/589
- http://www.nationwide.co.uk/about/house-price-index/download-data#xtab:regional-quarterly-series-all-properties-data-available-from-1973-onwards
- http://downloads2.belvoirlettings.com/marketing/Dec12-Report-FiveYearRentalIndex.pdf
- http://swanlowpark.co.uk/ftseannual.jsp
- http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
