Location…location….location is the real estate path to success. During discussions with many investors the subject of real estate comes up repeatedly. Many believe that real estate carries no risk or very little risk.
During a recent conversation with a successful business person we discussed equities in a portfolio. This investor said he would not invest in stocks because he did not want to lose 30 or 40 or 50% as seen during the 2008-9 crash. He held his wealth in land, as in raw land.
This conversation represents many investors, although most deal with commercial real estate with a steady cash flow. What these investors do not realize is that the value of their real estate did go down during this recent crisis. I believe the reason more people make money in real estate than in the equity markets is that they cannot see the value of their holdings on a daily or hourly or even by the minute.
The only way to compare the two investment classes is to have an independent professional appraisal done at least monthly. Naturally this is unreasonable and a very expensive solution. There have been numerous studies on this subject and the common conclusion is that real estate follows the equity markets whether up or down.
On the residential real estate side, a house in my neighborhood was put up for sale in 2008. It remains unsold. It is a very nice home on a golf course. Is it because there are no buyers? Or is the seller unwilling to lower their price? Or both?
Even for those with commercial holdings with a steady cash flow. If the equity markets were to go down and stay down this cash flow would dry up. Many of the expenses would not go away if the cash flow would end.
The question needs to be asked, why do investors focus on the long term when dealing with real estate and then focus on the short term when dealing with the equity markets?
Could their emotions be guiding them? No one asked how much did you lose in your real estate holdings during the 2008 crisis. However many panicked when the equity markets were down 38% and sold at the low. The transparency of the equity markets makes your investments visible for all to view. Your ego will be bruised when the equity markets are in a ‘bear’ market.
Investors need to understand that the equity markets are actually the greatest wealth creating tool on the planet.
Like any tool, equities need to be managed correctly.
Warren Buffet has been a successful investor for a very long time and he has two basic rules: “Don’t listen to forecasts, and don’t try to time the market”. Your focus when investing in the equity markets must be long term.
Please do not misunderstand, I do not think real estate is a bad asset class. It is an asset class like all others, with positive and negative components. Real estate can be a valuable part of your overall portfolio. It should only be part of your diversified portfolio.
With the help of an investor coach you can build a prudent portfolio that is best suited for you and your unique situation. It is not about, what is the best stock today? Or should I be in or out of the equity markets?
It is about developing YOUR prudent portfolio and remaining disciplined.
Because of the attention the media pays to the equity markets you will need help in controlling your emotions. This is true in both down and up markets. Many will try to concentrate their portfolio in the ‘hot’ asset class. Only to be disappointed and discouraged when this ‘hot’ asset class suffers losses.
You will need an investor coach to build the right portfolio and keep you disciplined.
To succeed long term in the equity markets you need to follow three simple rules:
- Own equities
- Globally diversify