Tips from Street Smart Series where they provide you with building blocks for your portfolio
Please consult with your attorney, accountant, and/or tax advisor for advice before making any investments.
Overview
Alternative assets like real estate can help prop up an investor's portfolio in the event of a market downturn by providing diversification.
Allocation requires diligence and accounting for an investor's preferences.
According to experts, costs of living have risen by as much as 9.1%. The stock market is taking investors on a turbulent rollercoaster ride, and interest rates are up big-time. Luckily, there are many strategies for navigating economic confusion and mayhem. Let’s begin by comparing various investing instruments, stocks, cryptocurrencies, and real estate- their pros, cons, and everything in between. Considerations to take into account before investing:
Baseline considerations- the asset’s risk level, price (cost of entry), returns, liquidity conditions, tax implications, and financing opportunities (debt, margins, and leverage).
How do these investments stack up in changing economic environments, and how are they affected by macro factors like inflation rates, interest rates, and the market cycle?
Risk Preferences and Planning
"The greater the risk, the greater the reward" vs. Aesop's timeless fable “slow and steady wins the race.”
Different investors hold different attitudes towards risk. The bottom line is that investors should determine their risk preferences, risk-prone versus risk-averse before they begin investing to ensure their portfolio holdings remain aligned with their financial plan.
Stocks and crypto assets are regarded as high-risk investments. Real estate, on the other hand, is considered by investors as a lower-risk investment category.
Price and Barriers to Entry
Investing in real estate has a higher minimum investment than investing in stocks, both in terms of the upfront cost, as well as transaction costs.
There are several ways around this:
Public Real Estate Investment Trusts (REITs), shares in a pool of real estate properties, pay dividends consisting of rental income and capital gains typically on an annual or quarterly basis.
Investing in properties through real estate investment platforms like Landa.
Returns and Appreciation
Not all assets appreciate over time, and not all markets appreciate equally.
Historically, the stock market has experienced higher growth than any other asset class, including the real estate market, yet stocks remain considerably more volatile than investment properties. Real estate, on the other hand, is considered a historically stable asset that appreciates over time.
Furthermore, the added value of real estate versus the stock market extends to cash flow advantages. The ability to leverage an investment as a result of both stability and cash flow creates returns that can outperform the stock market.
Liquidity Conditions
How many days does it take to sell a 4-bedroom property at the asking price? The answer to this question is the liquidity level of the property.
Stocks remain some of the most liquid assets in the world, sold in a matter of seconds, whereas real estate properties are considered some of the most illiquid assets. Property can take months, even years, to sell.
The Takeaway
Diversification is a cornerstone of any investor’s portfolio.
Every asset has its unique characteristics, advantages, and risks. Ultimately, there is no need to choose between investing in real estate, the stock market, or any other asset class. Investing across assets is a great way to diversify your portfolio.
Hopefully, this read provided you with valuable pointers to consider before you begin or continue your investing journey.
Stay tuned for Part II of this series which will highlight additional diligence steps and findings such as tax implications, financing opportunities (debt, margin, and leverage), interest rates, and hedges against inflation.
