Why you should Diversify your investments with Real Estate

​Real estate investing plays a critical role in portfolio diversification far beyond simply being a different type of asset. Investors can acquire a real estate company's publicly traded stock or invest in privately held real estate either directly or passively. A private investment in real estate, like multifamily housing, will be largely insulated from the forces that influence public stock markets. As a result, private assets are particularly well suited to reducing investment risk through diversification.
 
Public Markets Offer Limited Diversification
 
Buying publicly traded stocks in different types of industries and companies might look like diversification. However, diversity means more than investing in different things within a single market, and the public arena forms only part of the investment universe. For example, the managing director of investment consulting at Ascent Private Capital Management at U.S. Bank called the S&P 500 a single egg basket in a March 2021 interview for Barrons. [1]
 
Furthermore, the current state of public securities in the United States has actually become less diverse. The New York Times reported in 2018 that the number of publicly traded companies on U.S. stock exchanges had fallen by 25% since 1976. [2]
 
Declining numbers of publicly traded companies mean that the remaining companies have consolidated their influence over markets. Within the S&P 500, the tech giants Alphabet, Amazon, Apple, Facebook, and Microsoft comprise almost 25% of the whole index. [3] An increasingly consolidated environment promotes asset correlation.
 
The Threat of Asset Correlation
 
Asset correlation describes the process of how stocks or assets behave in relation to each other. Assets moving up or down together within a public stock market demonstrate positive correlation. Negative correlation occurs when one asset goes up when another goes down. Asset activities that show no relation to each other are non-correlated. [4]
 
According to Modern Portfolio Theory, an approach recognized with the Nobel Prize in Economics in 1990, risk goes down when investments are diversified among non-correlated assets. The absence of correlation among investments can potentially lead to higher returns over the long term. [5]
 
Private Real Estate Has Low Correlation With Public Markets
 
Returns from private real estate investments consistently display little to no correlation with public securities and bonds. For this reason, they have a strong potential to increase risk-adjusted returns for investors previously invested mainly in public stocks and bonds. [6]
 
Private Real Estate As an Inflation Hedge
 
Real estate can demand value increases in relation to inflation. Because rent and property value have a greater ability to rise in relation to inflation compared to other assets, real estate can help a portfolio keep pace with inflation. [7]
 
Multifamily properties keep up with inflation as new tenants sign new leases or existing tenants renew leases at elevated rent levels. This gradual process protects investors' revenue over the long term. Additionally, inflation generally adds to the appreciation of an asset should it eventually go on the market at a higher price. [8]
 
Institutional Investors Seek Alternative Assets
 
Passive real estate investing offers individuals a way to replicate the alternative asset diversification strategy leaned on by institutional investors. Investors at that level embrace private assets as a way to limit exposure to public market volatility. According to a 2020 survey of institutional investors by the Natixis Center for Investor Insight, the majority of respondents turned to alternative assets to mitigate public asset fluctuations caused by the pandemic. Additionally, 71% of institutional investors were attracted to the higher returns possible with private assets. [9]
 
Passive investment in multifamily real estate connects people with the advantages of private equity while shielding them from the day-to-day work of property development and management. After completing the investment transaction, the investor gains quarterly cash disbursements from rent collection and the eventual sale of the appreciated property.
 
 
[1] [3] https://www.barrons.com/articles/future-returns-investing-beyond-the-s-p-500-01617126920
[2] https://www.nytimes.com/2018/08/04/business/shrinking-stock-market.html
[4] [5] https://www.thebalance.com/what-is-asset-correlation-2894312
[6] [7] https://www.bankofsingapore.com/research/the-role-of-real-estate-in-a-diversified-portfolio.html
[8] https://www.huffpost.com/entry/5-reasons-to-choose-priva_b_11687934#:~:text=Here%E2%80%99s%20why%2C%20along%20with%20four%20other%20compelling%20reasons,they%20are%20highly%20correlated%20to%20the%20stock%20market.
[9] https://www.institutionalinvestor.com/article/b1lp93ql4fzhq2/Nothing-Can-Keep-Investors-From-Pouring-More-Money-Into-Alternative-Assets