To say that there have been jitters on Wall Street this week would be an understatement.
On Wednesday, the Dow dropped 800 points for the most significant one day drop of the year. Triggered by historically low bond yields, investors fearing recession, unloaded their Wall Street assets.
Check out some of the headlines from the past couple of days:
“Recession fears 2019: why everybody’s worried yet again.”
“Recession fears are back — should you be worried?”
“Wall Street tumbles on growing recession fears.”
While the general investing public reeled in the wake of recession chatter this week, there was a class of investors largely unaffected by the selloff – the ones invested in real assets, an alternative investment largely shielded from downturns.
Sure there are exceptions where real estate tanks with the rest of the economy like in the last Financial Crisis, but even that situation was unique in that real estate was tainted by Wall Street due to asset-backed securities that tanked from subprime loans. For the most part, real estate has been a resilient asset class shielded from broader economic downturns.
But what if there was a way for investors to be involved in commercial real estate without the high cost of entry and without the analytical headaches?
Tired of heightened volatility in the equity markets and low bond yields – on full display this week – the wealthy and institutions like university endowments have long turned to alternative investments like real estate for uncorrelated, above-market returns.
Alternative assets like real estate are not correlated to the stock market, offer diversification, and potentially higher returns when compared to Wall Street offerings. In fact, alternatives have historically provided higher returns at lower risk.
So while the rest of the investing public reeled this week from Wall Street losses, those invested in real assets were shielded from the mayhem. That’s because tangible assets are built to weather recessions, and here are some of the reasons why:
| Above-Market, Risk-Adjusted Returns |
Real estate has consistently beat the S&P 500 without the volatility. Because real estate is not correlated to the stock market, it offers diversification that allows for higher returns at lower risk when compared to mutual funds, stocks, and bonds.
| Cash Flow |
People don’t just stop needing housing in a recession. Lease agreements ensure continuing cash flow from both residential and commercial real estate in a downturn. While most investments like stocks, gold, bitcoin, etc. bank on appreciation, real assets generate consistent cash flow from leases that in most cases, are recession-resistant.
| Diversification |
With its breadth of real estate options across segments, price, and geographic location, just to name a few, real estate offers the type of diversification built to weather economic storms.
| Asset-Backed |
Because real estate is backed by a tangible asset, the chance of a real estate investment going to completely zero is nearly impossible.
| Appreciation |
Appreciation, along with cash flow, is ideal for building wealth. While prices fluctuate over time, in the long-run real estate values have always gone up and consistently outpaced inflation, and there is no reason to think that is going to change.
| Leverage |
Widespread access and availability of conventional and unconventional financing for acquiring real estate allow investors to leverage their investment capital to acquire multiple properties instead of just one, allowing for accelerated wealth creation and growth. For that reason, leverage acts as a wealth multiplier not available with public equities.
When a tornado hits, the ones that are least prepared are the ones that are most devastated. The ones that are prepared are able to weather the storm and sip tea in their personal shelters while their neighbors run for public shelter.
The wealthy brush off recession news because their investments in real assets are built to withstand economic storms today as well as in the long run. So, while everybody else panicked this week and unloaded their Wall Street assets, the wealthy sat back and ignored the noise, knowing that their cash flowing real estate would protect them from downturns.
What’s the good news?
It’s never too late to get into real estate.
Unlike stocks, real estate is an inefficient market – meaning, there are still informational advantages available for savvy investors to profit from bargains. Public companies, which are covered by the 24-7 news cycle and subject to stringent informational and reporting requirements, offer no opportunities for exploiting informational advantages – at least none that are legal. With real estate, your neighbor next door is under no obligation to report to the public that he’s planning to retire and just wants a quick sale of his property so he can head to Florida sooner than later.
Not only is it never too late to get into real estate investing, but the opportunities to qualified investors are more ubiquitous than ever before. It used to be that to invest in a private real estate fund; you had to be wealthy or well-connected since advertising these offerings was prohibited. However, with recent regulatory changes to securities laws, the playing field has been leveled so that now investors at all levels can pursue the types of opportunities once the exclusive playground of the wealthy.
So take advantage of the opportunities now available to all accredited investors to protect yourself just like the “mega-wealthy”. Tangible assets offering cash flow, appreciation, and diversification are the investment vehicles the “mega-wealthy” use to protect their fortunes and are what you should be seeking out to safeguard against economic downturns.
How will your investments fare when the next recession hits?