The Efficient Portfolio Strategy

The Efficient Portfolio Strategy

In my earlier days, 𝐛𝐮𝐲𝐢𝐧𝐠 𝐫𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐚𝐧𝐝 𝐠𝐨𝐥𝐝 was vital in building an investment portfolio. The rationale worked earlier because both the real estate and gold diversified the portfolio and reduced the risk because they had a 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞 𝐜𝐨𝐫𝐫𝐞𝐥𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐰𝐢𝐭𝐡 𝐭𝐡𝐞 𝐞𝐪𝐮𝐢𝐭𝐢𝐞𝐬 𝐚𝐧𝐝 𝐛𝐨𝐧𝐝𝐬 𝐦𝐚𝐫𝐤𝐞𝐭.

Thus, when all your investments in bonds and equities would dip during a slow down, the real estate and gold portfolio would trade higher and come to your rescue during the bad times.

𝐇𝐨𝐰𝐞𝐯𝐞𝐫, 𝐢𝐧 𝟐𝟎𝟐𝟐, 𝐭𝐡𝐢𝐬 𝐫𝐚𝐭𝐢𝐨𝐧𝐚𝐥𝐞 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐰𝐨𝐫𝐤.

With the 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐫𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐩𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨, the real estate market behaves like equities and bonds. For instance, in the COVID slowdown, the real estate value dipped at the same rate as bonds/equities and no longer acted as a hedge against your equities/bond investments.

So i analysed the Indian real estate market to decide whether the real estate should become a crucial part of your portfolio. I looked at the following:

1)𝐂𝐚𝐩 𝐫𝐚𝐭𝐞𝐬 𝐚𝐧𝐝 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐃𝐞𝐯𝐢𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐑𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐦𝐚𝐫𝐤𝐞𝐭 𝐢𝐧 𝟐𝟎𝟐𝟐
2)𝐓𝐡𝐞 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐫𝐞𝐭𝐮𝐫𝐧 𝐚𝐧𝐝 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐝𝐞𝐯𝐢𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐍𝐢𝐟𝐭𝐲 𝟓𝟎 𝐢𝐧𝐝𝐞𝐱
3)𝐄𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐫𝐞𝐭𝐮𝐫𝐧𝐬 𝐚𝐧𝐝 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐃𝐞𝐯𝐢𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐅𝐢𝐱𝐞𝐝 𝐃𝐞𝐩𝐨𝐬𝐢𝐭𝐬

Then i developed an efficient portfolio by maximising returns and reducing risks.

Finally, I used the 𝐒𝐨𝐥𝐯𝐞𝐫 𝐟𝐮𝐧𝐜𝐭𝐢𝐨𝐧 𝐢𝐧 𝐞𝐱𝐜𝐞𝐥 𝐭𝐨 𝐝𝐞𝐭𝐞𝐫𝐦𝐢𝐧𝐞 𝐭𝐡𝐞 𝐨𝐩𝐭𝐢𝐦𝐚𝐥 𝐫𝐞𝐭𝐮𝐫𝐧 𝐟𝐨𝐫 𝐭𝐡𝐞 𝐩𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨

My analysis shows that 𝐜𝐚𝐩 𝐫𝐚𝐭𝐞𝐬 𝐟𝐨𝐫 𝐫𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐜𝐨𝐧𝐭𝐢𝐧𝐮𝐞 𝐭𝐨 𝐝𝐞𝐜𝐥𝐢𝐧𝐞, implying that the rental prices for real estate do not increase at the same rate as the property prices in India. For 2022, the Cap rate is 6%.

Thus, 𝐫𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐢𝐬 𝐧𝐨 𝐥𝐨𝐧𝐠𝐞𝐫 𝐚𝐧 𝐚𝐭𝐭𝐫𝐚𝐜𝐭𝐢𝐯𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐟𝐨𝐫 𝐬𝐞𝐜𝐮𝐫𝐢𝐧𝐠 𝐡𝐢𝐠𝐡𝐞𝐫 𝐫𝐞𝐭𝐮𝐫𝐧𝐬, 𝐧𝐨𝐫 𝐝𝐨𝐞𝐬 𝐢𝐭 𝐫𝐞𝐝𝐮𝐜𝐞 𝐭𝐡𝐞 𝐩𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐫𝐢𝐬𝐤 𝐝𝐮𝐫𝐢𝐧𝐠 𝐫𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧 𝐩𝐞𝐫𝐢𝐨𝐝𝐬.

However, I can develop a portfolio with higher returns and a similar risk of owning real estate by allocating my capital between FDs and stocks.

Thus, in my view, in 2022, equities will continue to be the best investments for retail investors beating real estate and gold.