How can you insulate your investment portfolio from growing wildfire threats?
Every year wildfires seem to set new records for frequency, area damaged and costs of damages. This is especially true on the West Coast. It seems to have become just a matter of when and how bad, not if.
Of course, the same may be true of hurricanes in the South as well.
These disasters affect all types of investments in different ways from businesses to public stocks. It is also a threat to real estate and mortgage note investors.
So, what are some of the things you can do to protect your investments and portfolio performance?
Risk Adjusted Returns
Investments should be evaluated based upon risk adjusted returns, not just the best case scenario of forecast returns.
Be smart about where you invest. Just because everyone else seems to be doing it doesn’t make it smart.
There are clearly areas which are more prone to these threats. Where threats are elevated, those risks must be factored into expected returns, and priced into what you are willing to pay for an investment.
For example, if you are in a wildfire prone area, then you need to account for that happening at some point during your ownership. Just as if you are buying a property in a 100 year flood zone, and plan to hold that asset for 100 years, you have to calculate that damage will occur at least once during that time.
In turn, you can pay more for assets in safer areas, even with lower projected returns, because of lower risks.
Obviously, if the only thing in your portfolio is six condos on Miami Beach, the risks are high that your entire portfolio can be wiped out in just one storm. Your income will stall and so will returns, until that is fixed. The same goes if all of your portfolio is in a wildfire prone area.
So, diversify your holdings in different geographic areas.
Reviewing your insurances should be on your annual to-do list. Ensure premiums are paid up, coverages are optimized up or down to cover your investments and to avoid overpaying.
Also consider multiple layers of insurance or umbrella policies which could kick in to cover your income and returns.
Be sure any tenants or borrowers also have their insurance up to date.
A great fund can also help. It can build-in diversification and consistency in overall returns, and protect you with broader collateral. Let your fund manager worry about and deal with all these issues, while you just collect your agreed upon returns.
Find out more about investing in secured debt and real estate, go to NNG Capital Fund