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As Americans continue to adjust to the new reality ushered in by the novel coronavirus outbreak, individual investors have kept a watchful eye on the stock market, which has become increasingly volatile. While staying healthy, practicing social distancing and taking care of loved ones should absolutely remain top priorities, many investors are anxious about protecting the value of their portfolios as the economy changes.
Throughout the history of the United States, there have been several events that have significantly impacted our way of life and, conversely, the nation’s financial markets. The Spanish Flu pandemic of 1918 was less concerning from an investment standpoint because its effect on the markets was minimized by the continuation of World War I. The terror attacks of 9/11 influenced markets to drop sharply, though they subsequently recovered after a relatively short period of time. The Great Recession in 2008 led to a loss of nearly $8 trillion in value, causing investors to pull huge sums of money out of their retirement and other accounts — several months later, we saw the beginning of the longest bull market in history.
One lesson we’ve learned from these periods of turmoil is that no two economic crises are quite alike, and each has its own unique characteristics. As we analyze today’s global pandemic and its impact on investors, as well as which investments have the potential to offer a higher margin of safety, we must keep in mind the cyclical nature of the markets and their resilience throughout these types of events.
As investors examine their portfolios in the current environment, here are some things they should be considering.
It’s Normal To Be Nervous
Today, we are in an environment where liquidity is waning, translating to consumers having less money not only for luxuries, but for necessities as well. To soften the blow, the Federal Reserve’s interest rate cut to nearly zero should alleviate some of the costs associated with borrowing money, and the federal government passed a $2 trillion stimulus package. In a cautious marketplace with an undeniably high level of concern, this relief should help corporations and individuals continue to fuel the economy. As history has proven, stocks and bonds will eventually rebound, despite the short-term volatility they exhibit today.
Assess Opportunities To Invest In High-Quality Real Assets
There are a variety of real assets one can consider investing in during a downturn, such as infrastructure, precious metals, land and natural resources, among others. One historical favorite among institutions that has seen increased capital allocations over the years is real estate.
Multifamily properties in particular, which house a broad cross-section of America’s workforce, are often considered better positioned to weather volatility, as people will always need somewhere to live. Investors should consider a few key aspects when evaluating multifamily real estate deals:
• The track record of the sponsor and its financial profile.
• The terms of the debt that will be secured by the property.
• The tenant mix.
• The sponsor’s business plan for the property.
Explore Investment Options That Provide Access To High-Quality Real Estate
• Real estate investment trusts (REITs): One option is to purchase REIT shares on the open market. However, because REITs generally have large portfolios, it’s hard to examine each asset individually. Moreover, because the shares trade on a securities exchange, they are subject to volatility, especially in the current economic climate.
• Private equity real estate: Another option is to invest in a real estate private equity fund. While this investment vehicle avoids share price volatility, the capital an individual must commit is typically very large — often $500,000 or more at a minimum — which makes these investments cost prohibitive to most. This choice also doesn’t offer great insight into or control over the fund manager’s investments.
• Buy an investment property: In a low-interest rate environment, well-capitalized investors can more easily invest directly in property. Unlike the previous options, which are passive investments, direct investing is more time-, labor- and capital-intensive.
• Real estate crowdfunding: Platforms like ours offer individuals a cost-effective option to invest in portfolios or individual assets. However, like any investment option, individuals must be highly selective about which platform and opportunities they select, even more so during uncertain times.
The Facts On Real Estate Crowdfunding
I can say from firsthand experience that the opportunity for real estate crowdfunding is significant, but as with any investment, it isn’t risk-free. Investors must perform due diligence on platforms they seek to invest with to determine if they position themselves in the right geographic markets, partner with reputable sponsors, underwrite thoroughly and realistically, and communicate transparently. This is even more crucial in today’s environment where investors are exercising caution when seeking yield.
Not all crowdfunding platforms employ these practices and have already made investments that are unlikely to succeed as we move toward a market downturn. While the evolving pandemic adds uncertainty to any investments’ viability, it will be far from the only reason for failure. A platform with leadership that has experience investing in real estate throughout market cycles, is well-capitalized, strongly underwrites each deal and gives investors detailed information to help them make informed decisions is likely better suited to navigate an economic downturn, protect investors’ principal and generate attractive returns.
In Summation
In periods of extreme market volatility, investors should fight the urge to make rash investment decisions. They should examine their short- and long-term needs, study past high-profile market-moving events, reevaluate their risk profiles and identify yield opportunities with appropriate levels of risk. While the future is uncertain, the lessons of past market cycles and the stability of sound investments in real assets are promising to those looking to maintain and build wealth.