Volatility in Stocks and Property

Diversifying assets in a portfolio to mitigate the effects of market volatility is a commonly known practice. If you want to hedge against volatile equity markets, property can be a good alternative. 

The stock market offers several advantages, like high liquidity and easy access, which you can’t find in property. But on the other hand, it’s a property market that offers benefits like lower volatility than the stock market and less correlation with public market investment performance.

Thanks to these differences real estate investments are complementary to investment portfolios allocated largely to stocks or bonds, as they provide meaningful diversification.

Volatility and correlation are the key measurements which illustrate the advantages and disadvantages of each market type. 

Correlation shows the degree to which investment performances are related to one another. Investments can have positive, negative or no correlation with each other. You should remember that your portfolio is more diversified if you hold investments with little or no correlation.

Volatility is a way to calculate risk over time. When volatility is appropriately spread, a portfolio has a lower risk of loss in the event of poor performance from a given company, sector, market etc.

Volatility and correlation exist in every investment, but their amounts vary by different features like investment type, and market.

Public and Private Markets – Correlations and Other Values 

Markets can be categorised in many ways, but the most fundamental distinction is between private and public markets, where the main differences are the buying/selling dynamics.

Public Market Characteristics 

The main characteristics of the public market are:

– high efficiency, thanks to prices set by the market

– transparency of transaction details (public information about an investment)

– low transaction costs (low costs of the transaction), which facilitate high-volume trading

Thanks to these attributes, investments can be sold and bought quickly, so the public market offers high liquidity.

However, these attributes bring higher volatility too. Especially efficiency, which enables high trade volume. And, when the volatility is combined with a correlation of investment, the stabilisation and diversification of a portfolio are diminished.

Investors may not even realise how correlated their stocks are. Sometimes, companies from totally different industries share the same risk because of relying on the same fundamental inputs as oil. An increase in oil prices may cause a loss of profit in furniture and grocery companies because of increased transportation costs. And if you own investments in both, the negative risk is doubled in this scenario.

So, despite the upsides of the public market, a portfolio composed of public traded investments only is possibly more correlated than you may realise.

Stocks are usually very volatile during highly inflationary periods. At the beginning of this month (May 2021) increase in inflation rates have caused a drop in European stocks prices and Wall Street’s main indexes, led by tech-related stocks.

Private Market 

The private market operates differently than the public market, and thanks to this, they have the power to make a complementary, diversified portfolio. 

Private Market Characteristics

The main characteristics of the private market are:

– inefficiency

– higher transaction costs

– fewer buyers and sellers than on the public market

– information not public, not shared across parties

– prices are negotiated

Because of these characteristics, it can seem unprofitable at first glance, but the private market has less correlation and volatility than the stock market. It also allows investors to earn above-market returns in a way that is impossible in an efficient market.

Private market investments are traded at a lower frequency, which results in fewer changes to their real values. Daily changes are generally minor and less frequent than in the public market, meaning investors in property don’t tend to check on their investments on a daily basis.

Private market property has a lower trade volume, so it is less liquid than stocks, but it helps to prevent volatility in the values.

Property is a unique hard asset too. It can earn income while hedging inflation because they are naturally limited. At the same time, a rise in inflation would possibly cause a rise in the prices of many asset classes.

In the private markets, buyers and sellers can negotiate the prices of an asset, so investors can get above-market returns. This is possible because of a limited number of sellers and buyers.

Why should you care about low correlation and volatility?

Investments with low correlation help you to reduce the risk of the portfolio.

If you have uncorrelated assets in your portfolio you don’t have to worry if one of them unperformed, because the strong performance of the other will mitigate the risk.

If you want to diversify beyond an all-stock growth allocation, investing in property could help with that balance. Some people don’t want to do this, as individual investment property requires both lots of capital and hands-on participation.

Nowadays, you can invest in property without owning it, by investing with P2P platforms, like Sourced Capital. It is a good way of diversifying a portfolio and decreasing investment volatility. What’s more, your funds are much more liquid while you are investing in P2P than when you’re holding a property.

If you want to learn more about investing in hands-off property without purchasing it, please contact our Investment Team on email investorteam@sourced.co or tel. 0333 900 9999

Investment Behaviours in a Covid-19 World

Coronavirus has had a massive impact on the UK economy – in 2020 it shrank by 9.9%. The contraction “was more than twice as much as the previous largest annual fall on record”, said the Office for National Statistics.

GDP in last 15 years

After growing in October, the economy shrank in November, and then rebounded in December, so it seems that we will avoid a double-dip recession.

GDP in 2020

 

Faced by the biggest economic shock in global history, the fact that a lot of investors decided to change their portfolio could be surprising. But the even bigger surprise is the fact that about 35% of them reacted by increasing their exposure to higher-risk investments.

Following the latest Schroders’ Global Investor Study, an annual survey taken by more than 23,000 investors from around the world, suggests that a vast proportion of investors saw an opportunity in February’s large economic decline to invest further.

The survey was carried out between the 30th of April and the 15th of June in 32 different countries worldwide. It probed investors about their actions following the lockdown.

78% of investors participating in the survey decided to make some changes in their investment portfolios, and about 35% of them moved “some” or “a significant proportion” into high-risk holdings.

Investors Behaviour in 2020

Changes in Investment Portfolios in 2020

Taking risks when investing can often depend on the investor’s age. Younger people are keener on taking risks, so the results suggest, investors aged 18-37 were almost twice as likely to alter their portfolios than those aged 51-70 were not surprising.

Investment performance has become a bigger priority for investors over the last year, as about 83% of them think about their portfolio at least once a week. Before COVID-19, only 35% of them were doing this.

Investment income

Investors expect to receive an income of 8.8% from their portfolios over the next 12 months, which is lower than the 10.3% income they expected in 2019.

Investment incomes depend on the average returns of investment.

Last year, at the beginning of the pandemic, we prepared an article which discussed 5-year average returns from different investment types. In the table below you can see an average annual rate of returns (2015-03/2020).
Read more here: Classic cars, coins and fine wine have been the best investments in the last five years

Average anual rate of returns (2015-03/202)

Yields of the most popular investments have changed during the pandemic, take a look at the chart below.

Average Investment Returns in 2020

Average Investment Returns in 2002 vs. from 2015 to March 2020

FTSE 100

The UK FTSE 100 index fell by 14.3% during 2020, and it is one of the poorest performances among the largest international stock index.

The FTSE 100’s was so weak partly because of the pound’s strength, which erodes the value of multinationals’ overseas earnings.

Gold

When the stock markets crashed, gold hit new highs and many analysts predict even further gains. The return rate for gold varies from 2002 to 2020, but we saw mostly positive returns. In 2020, the return of gold hit 25%.

Wine

Despite challenging times, fine wine displayed low volatility relative to most financial markets.

Bonds

Last year, bond returns fell, partly because of the cutting of interest rates and committing to keeping them at a low level by the central banks. The UK corporate bonds returns reached 3.5% at the height of the crisis.

Sourced Capital

The P2P analyst, 4th Way, claims that P2P investors made a positive return during the pandemic, especially compared to stock markets.

The global crisis hasn’t had a big impact on Sourced Capital investment returns. The average investment return was a solid 12.13%.

Some P2P platforms had to close or suspend their activities, because they had problems with nervous investors who wanted to withdraw funds as soon as possible. A few couldn’t find a balance between withdrawal requests and maintaining liquidity to approve and fund loans.

Fortunately, Sourced Capital had a relatively good year. With over 20 projects funded, the full amount invested was over £10,000,000.  

To learn more about Sourced Capital, download the lenders guide.

Capital at risk. Not covered by the FSCS. Past returns are not necessarily a guide to future returns.

 

 

Sources:

UK economy suffered record annual slump in 2020

Market shock: how did investors react to the impact of Covid-19?

FTSE 100 suffers worst year since 2008

FTSE 100 suffers worst year since financial crisis

Return on gold as an investment since 2008

Cult wines 2021 Outlook

Why we see opportunity in UK corporate bonds

Which bonds for 2021

How the pandemic has changed P2P lending

P2P outperformed UK stock market during the pandemic

 

 

Helping with the Housing Crisis one Step at a Time

According to the Commons Library, estimates have put the number of new homes needed in England at up to 345,000 per year. The number of new homes created annually has been growing for several years but it is still not enough.

Part of Sourced’s mission is to help tackle the housing crisis by making quality, affordable homes across the UK. Sourced as a network are currently building and developing over £270,000,000 of property across the UK.  From conversions and HMOs to large scale new build developments, the Sourced group are passionate about helping to improve communities and with this in mind have chosen Centrepoint as its 2021 charity of the year.

Centrepoint is the UK’s leading youth homelessness charity, supporting over 14,000 young people every year.

There are lots of reasons why young people become homeless. It can be from relationship breakdowns, because of physical or mental health, exclusion from school, leaving care, gang crime or they may be a refugee.

To kick start their fundraising, a group of the Sourced HQ team and network are taking on the challenge of completing 121,000 steps each, over 10 days in March (20th-29th) in support of Centrepoint’s work to help homeless young people take their first steps out of homelessness.

Centrepoint estimates that 121,000 young people aged 16-25 in the UK are facing homelessness, a statistic made all the more shocking during the crisis we find ourselves in at this time.

With the money we raise for our Move in March challenge, Centrepoint will be able to continue to positively change the lives of so many vulnerable young people across the UK, helping them on the path to a future they deserve.

▪ £20 could pay for a first counselling session for a young person, helping to give the support needed to recover from past experiences.

▪ £80 could provide a study kit including basic study items, such as stationery, backpack and books to help with their education.

▪ £150 could pay for some smart clothes for interviews or their first job.

The Sourced team taking part are from all over the UK and are already stepping up to the challenge (excuse the pun!). In total, the 25 steppers will need to take more than 3,000,000 steps between them! The whole team and network wish them good luck and a big well done. For anyone who’d like to share their support, you can find out more and donate here.