Why it is essential you diversify your portfolio outside of traditional assets that are directly tied to the financial markets.
Imagine the following scenario…
You’re at the company Christmas party, and Joe still won’t let you live down that time you got drunk at the Christmas Party 11 years ago and knocked over the company’s 50th anniversary cake.
You laugh it off because in a few months you’ll be retired and on a 6 month vacation to Europe while Joe will be sitting in board meetings and planning next year’s Christmas Party.
You’re all set for retirement, or so you think. You followed the advice of financial advisors, and maxed out the contributions to your 401(k) and IRA accounts. They are well diversified in small, medium, and large cap stocks. There are a few bond funds in there for good measure.
A few weeks before your last day, something terrible happens. It’s all over the news. The Dow Jones has fallen by 1,100 points in a single day.
Wall Street is in a panic as everybody begins to sell off their holdings, the market is in free fall.
A week later, your portfolio is down almost 40%.
You’re looking at your retirement account and realize, if you retire now and start drawing on your retirement funds, you will either going to be living on the streets in 20 years, or will have to eat Ramon Noodles for the rest of your life.
The Need for Diversification
While the above story is pure fiction, this was reality for many people during the 2008 financial crisis as they realized they might have to postpone retirement another 5, 7, or even 10 years.
Even though the victims of the last financial crises had their portfolios “diversified” into various stocks, bonds, and mutual funds - all these investments were still directly tied to the financial markets.
And usually during a crash, the entire market suffers as people panic and sell their holdings at a rapid pace.
This scenario can be mostly avoided by diversifying your portfolio into alternative assets, which aren’t directly tied to the financial market, and when the financial markets are in free fall, alternative assets, such as real estate, remain largely unaffected.
Why Real Estate?
In the case of real estate, tenants will still need a place to live, and will still being paying rent, thus producing cash flow. Especially with B/C class properties, demand usually rises during recessions as people begin to look for affordable housing.
In addition, real estate isn’t liquid as stocks, bonds, and mutual funds, so values don’t fall as rapidly in the event of a crises. And in some cases, values may even rise due to the higher demand for affordable housing.
A Different Scenario
Let’s take a look at a different scenario, where you diversified your portfolio outside of traditional assets, and were still able to retire despite a major crisis taking place.
You’re are 60 years of age and plan on retiring at 62. You are well in tune with financial markets and their cycles.
You realize that the markets are at all-time highs and decide to sell off a portion of your traditional assets and allocate them to alternative assets, specifically real estate.
A good friend of yours introduces you to a real estate syndicator, who is currently putting together a few deals in growing markets in the southeast. You like the syndicator and understand the plan for the property, you decide to invest.
About a year goes by and there a crises, leading the markets to take a 25% loss in just a few weeks. As time goes on we realize it will take a few years for the market to recover but you’re not worried.
Your investment in the property has remained largely unaffected by the crisis, in fact there is a slight increase in tenant applications as some decide to downsize.
The property will continue to bring in strong revenue in the form of rents paid by tenants and throw off significant cash flow. Your distribution checks are enough to still allow you to retire and provide enough time to wait for the markets to recover before you need to tap into that part of your portfolio.
The Bottom Line
We are currently in the third longest expansion in United States history as of this writing in Q1 2018, and some believe this may turn into the longest yet. It seems like every other day the Dow Jones is hitting record highs.
But the party won’t last forever… It never does.
Sooner or later we will face a crash or major correction that will send the markets into free fall like in 2008. While many believe the next rescission won’t be as deep or as long as the 2008 recession, there is still need for concern.
Now may be a great time to sell off a portion of your portfolio and invest a portion into alternative assets, such as real estate in order to protect yourself for the next down turn.
Babylon Property Group, LLC provides private investment opportunities for qualified investors looking to diversify their portfolio outside of traditional assets found in typical 401(k) and IRA plans. For a FREE consultation, please fill out our investor questionnaire, or contact us directly by phone at (631) 253-1609 or email at email@example.com.