How much real estate should individual investors and family offices have in their investment portfolios?
Although uncertainty in the global markets may be the new norm, investors with a well-balanced portfolio are strategically more prepared to preserve their wealth, while enjoying consistent returns and dividends. The only question that remains is how much the role of real estate should play into a balanced portfolio.
Diversification vs. Going All-In
While some individuals have done well making big bets, the same can be held true of lottery winners. The stories of these winnings are so sensational to the average investors because they are so rare and elusive. Whether you are a new investor starting out and have little tolerance for risk or an affluent family office engaging in riskier investments like tech startups, having a balanced portfolio is critical to the long-term stability of your capital.
The Myth of Stock Market Diversification
Many investors think that they are diversifying when they follow their broker’s advice to invest broadly across the stock market and funds. Stock brokers routinely admit they can’t time the market and don’t know what will go up or down, thus suggesting a wide variety of investments across various sectors has become commonplace. The problem with this strategy is that while your investment capital may be diversified across several companies in different industries, the stock market is highly volatile and is tightly intertwined together.
When stock prices begin to take a hit in the news, investors tend to adopt a “herd mentality” and sell off quickly, almost without regard to the underlying fundamentals. Large corrections in the marketplace can happen in a moment’s notice and take years to recover form. For example, if the market goes down by 50%, it doesn’t just need to come up 50% to restore investors back to their original position, it must go up by 100% to get back to par. Even if average annual returns were 10%, that would take 10 years just to get your money back.
Your Home Isn’t An Investment
The volatility of the stock market has forced many investors to branch out to other asset classes such as: precious metals, bonds, and real estate. Unfortunately, many confuse their own residences, second homes, and vacation properties with being investments. Your home is not a true investment. You still need somewhere to live. Most aren’t flexible enough to trade homes and condos and move as fast as the market does. In Canada, homes and estates can present high dollar amounts, but they typically do not offer the liquidity of real investments. This means that many investors are underexposed to real estate as an asset class. For those planning for retirement, it may be wise to incorporate income producing commercial real estate to your portfolio, to diversify your risk and benefit from the consistency of monthly rental payments.
Real estate is a necessary component of any diversified investment portfolio. Although experts will continue to differ on how much of a portfolio should be allocated towards each various asset class, you should always invest at a level at which you are comfortable. The optimal mix may vary slightly depending on market trends and your investment needs. Before making any investment in commercial real estate, you should seek the advice of knowledgeable real estate professionals that understand your local market and can guide you in making profitable investments that will provide consistent returns to your portfolio for years to come.