What goes up must come down: Think beyond traditional stocks and bondsSeptember 25, 2018
As we continue to ride one of the longest bull markets in stock market history, we have all been asking the same questions: when will it end, how bad will the downturn be and how do I protect or at least insulate my client’s portfolio from it?
There are a number of complex derivative based ways to reduce risk of losses in the event of significant market corrections, however the simplest method is by ensuring that your clients’ portfolios are truly diversified before the correction occurs.
Simply adding another asset class to a portfolio may or may not increase the diversification of the portfolio. For instance, adding a Global Equity fund or Global ETF to a client’s portfolio that is already heavily invested in Canadian and/or US stocks will not meaningfully increase a portfolio’s diversification, since over the last 29 years, the returns of the Global Equity Index have been highly correlated to the returns on Canadian equities and extremely correlated to the returns on US equities (58% and 89% respectfully).
However, you can achieve real diversification by investing into alternative assets, such as private real estate, which have historically shown no real correlation to public equities, where your portfolio should be less sensitive to traditional public market returns.
Even though your client’s have grown very comfortable with a mix of publicly traded stocks and bonds – at least until the markets’ ups and downs started making them queasy (Think back to the tech bubble bursting in 2000 or, more recently, the financial crises). The volatility of their portfolios and their corresponding anxiety should be tempered by adding private equity real estate investments to their portfolio.
The addition of private equity real estate should enhance any traditional portfolio of stocks and bonds because of its previously mentioned low correlation to these asset classes. Non-correlated assets can stabilize your portfolio. As market conditions change, an upswing in one asset class may help offset a dip in another.
Alternative investments like private equity real estate have historically exhibited low volatility of returns even during times of near catastrophic public market collapses. They act as a hedge against the boom and bust cycles of the stock market, allowing investors to ride out the downs without breaking a sweat.
To illustrate, consider the 2008 financial crisis. During this time, the TSX fell approximately 33% and the public REIT index fell approximately 38%. That year, the private apartment index experienced positive returns of 6.5%.
Key Benefits of Private Real Estate Investment Trusts (REITS):
- Attractive total returns and relatively higher risk-adjusted returns
- Downside protection during market downturns and ‘turmoil’
- Real portfolio diversification, and;
- A hedge against inflation.
In short, if private equity real estate investments are not a part of your clients’ portfolios, now is the time to consider it. Asset allocation is a large determinant of investment success. And private real estate investments have a low correlation to other asset classes, high expected returns and low volatility. That makes it a trifecta of investing.
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