In the financial world the term portfolio generally refers to an aggregation of assets (and liabilities) an investor holds across different asset classes. If your bank sends you your Portfolio Statement, it might contain information on your savings accounts, term deposits, share, bond, mutual funds, and structured products investments. Those are financial assets in your bank portfolio. All your properties will form your property portfolio and unless you have a company managing all of them for you, you will need to keep track of your property portfolio yourself.

The addition of your financial portfolio in the bank and your property portfolio gives your overall investment portfolio. Many investment advisors recommend that your portfolio should be diversified across different asset classes. Others advocate that you ought to invest only in things you understand and focus on only a few investments that bring you the best returns. The decision is entirely yours; whatever you think is right for you is right for you. For investments in financial assets you should seek the advice of a professional financial advisor.

Property should definitely be a part of your portfolio as it has so many advantages as you see in these pages here – and remember how 80% of wealthy people obtained their wealth? Why would you give your money to the bank, which pays you maybe 1 to 3% interest, when you can get 6, 8, 10, or even more per cent per annum, from your property?

How Can I Guard Against Inflation?

The interest rate you can get on many financial investments, including term deposits, is often below the rate of inflation in your country. What does this mean to you? It means you are losing money! Let’s say you get 2% interest on your $10,000 deposit and at the end of the year you have $10,200 in your account. But the inflation rate is 4%, so the product that cost $10,000 at the beginning of the year now will be $10,400 at the end of the year! So you have lost money because now you can buy less of it than before.

Asset classes of financial assets such as Cash, Bonds, and Stocks are susceptible to inflation as they are purely based on money. And money becomes worth less through inflation. Do you know what the definition of money is? Money is merely a ‘medium of exchange’ – it was invented because barter trade was not practical. But it has no real value in itself. If the Central Bank decides it needs more money, it can choose to print more at any time.

As well as also being susceptible to inflation, asset classes like Derivatives (e.g. options or structured products) and Alternative Investments (e.g. closed-end mutual funds) bear additional hidden risks – apparently even the people who created them did not fully understand them, which was one of the factors that caused the Global Financial Crisis in 2007-2008.

Commodities (e.g. gold or silver) and Property are real assets. This means they are physical items that can be touched and felt and are of finite nature. Therefore, their prices will automatically rise if inflation rises (all other factors being equal). If inflation increases, especially to unusually high levels, people will buy more real assets, pushing up their prices due to higher demand. In contrast, monetary assets will lose some of their value through inflation, whereas real assets increase their value and hence are a good protection against inflation.

 


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