As you may already know, diversifying should be a fundamental rule to follow when investing in order to minimize risks. Therefore, we have updated the diversification index, a simple and intuitive instrument that helps you to do so.
Thus, you can know with a simple glance the degree of diversification of your investments through Housers. This score is based on 4 major variables:
- Types of operation and Scoring.
- The number of investments.
- Geographical distribution.
- Amount of each investment.
The rating you will see can range from 0 to 100; It is based on the score obtained in each of the previous variables.
Maybe you’ve only invested in one project or a large amount in one and less in others. Maybe you’ve only invested in assets in a city or you may have all your investments of the same type, for example, in buy-to-let products. If you want to know how to improve your diversification index you have come to the right place.
How Does the Index of Diversification Work?
The individual score of each of the variables results in a global score. To achieve a well-diversified investment portfolio this score should be about 75/100.
The scores below this figure indicate that your investment portfolio is not sufficiently diversified, and it is advisable to guide your strategy to improve in those variables that you have valued negatively.
To improve your overall score, you have to determine which are the variables that have a lower rating on your chart. Depending on what they are, the strategy to improve your diversification index will vary.
This is because each of these inputs takes into account different information. However, following very simple rules, it is possible to get your investments to improve your index substantially. Below we describe each of these variables and we give you some basic tips to improve in each specific area.
Basic Tips to Improve your Diversification Index
1) Types of Operation & Scoring
In this case, the score is obtained based on how you distribute your investments between the Fixed Interest opportunities (Development Loan, Fixed Interest (Sell) & Fixed Interest (Rent)) and the Partecipative Loans (Buy-To-Sell & Buy-To-Let).
Each type of investment has its own characteristics and risks. To accumulate a large part of your investment in a single typology, guided only by the yields or by the duration, means a poorly diversified portfolio.
Under types of operation goes also the asset class in which you are investing in. The different classes are:
- New built
It will always be better to have 10 properties between commercial premises, new construction, etc. than having all your investments in residential, for example.
Invest in all types of opportunities in order to diversify your portfolio as, among others, each one has its own score. It is a graphical system that helps understanding the opportunities’ risk as well as their interest rates. The risk scoring levels are: A, B, C, D, E, F, G. The scoring levels are represented by letters that go from A (minor risk) up to G (major risk). Therefore, an opportunity with a score of A or B represents a minor risk but also a lower annual yield. Consequently, Housers’ scoring system will help you, as an investor, to determine the risk’s valuation of each opportunity.
2) Number of investments
It refers to the number of opportunities in which you have invested. The more opportunities you invest in, the higher score you will get.
Our advice is that you invest in at least 10 different opportunities to achieve a good valuation
3) Geographical distribution
This variable refers to the cities in which you have invested. It is important that you do not concentrate all your investments in one or two cities. Distribute your money among all the possibilities you can find at Housers.
Of course, you should give greater importance to large capital cities such as Madrid, Lisbon or Milan, where the markets are much more stable.
It is important that you distribute your investments among all the cities you find, and that each time a new place appears, you include it in your investment portfolio.
4) Amount of your investments
It refers to how balanced is your capital in Housers in relation to your total invested.
For example, if your total investment in Housers is 10,000 euros, to get a good score in this area that amount should be distributed between 5 and 10 opportunities, investing between 1,000 and 2,000 euros per opportunity.
It is very important that you do not concentrate all your capital in a few opportunities to reduce the different risks as much as possible.
In summary, for your portfolio to be diversified and obtain a good score you must:
- Allocate your investments between fixed interest projects and participative loans, always taking into consideration the different scores they have.
- Invest in at least 10 different opportunities and invest in all asset classes.
- Distribute the number of your investments in a balanced way so as not to accumulate a large amount in a specific opportunity and have a scarce presence in the rest.
- Take advantage of the possibility to invest in more than 30 cities in Spain, Italy, and Portugal.