One of the biggest tests for investors — and, for savvy investors, one of the biggest opportunities — is how they behave when the market gets rocky.
There are essentially two things every investor can do when the market suffers a downturn. These might sound oversimplified, but it is important to distill these options as far as possible:
- They can do something.
- They can do nothing.
As the SVP of Investments at Fundrise, I interact with people building strategies around their financial futures every day, and the happiest investors generally (in terms of panic, stress, and overall returns) are the ones in the latter group: those who are able to sit back and comfortably watch the market follow its due course, regardless of temporary ups and downs.
Of course, they don’t enjoy this kind of luxury and confidence because they’ve truly done nothing. Rather, they’re able to view market turbulence calmly because they’ve made a series of wise decisions far in advance. These choices together construct a resilient portfolio, which means they now have the advantage of “doing nothing” while other investors feel compelled to act in the pressure chamber of the market’s volatility.
On the opposite end of the spectrum, many investors who “do something” in reaction to a declining market, do so for the wrong reasons, at the worst possible time, because they feel their hand is forced. They panic. They sell low. They see their account value dropping and they force sales because their portfolio hasn’t been properly engineered to withstand the market’s gales and tides. Or, often worse, they think they can time the market and shuffle one set of investments for another. That’s almost always a decidedly bad idea, as one of the market’s fundamental characteristics is its hazardous, stubborn unpredictability.
There are naturally exceptions: professional investors, like those steering massive institutional portfolios, are paid to court risk and are incentivized to maximize returns at all costs. They might be poised to deploy stores of cash to scoop up investments at discount prices while the market is depressed. It’s worth noting, though, that even professional investors tend to fare badly when they try to time the market. EIther way, it is their job to react, and in their own way these investors are prepared too, for this very situation. Generally, most individual investors are not prepared, and they may be much more content with one of the well-formulated portfolios that reward patient observation.
But how do you prepare properly? The answer — as it often is in investing — is diversification. That is, the construction of a portfolio across a variety of assets so that when one piece of the market moves, other pieces are likely to compensate. What I’m referring to here is not the simple stocks-plus-bonds diversification model investors have defaulted to for decades.
Instead, in today’s investing ecosystem, there is now a deeper, more fortified model of diversification available to investors at every level. And for investors interested in preparing properly, there are preemptive steps you can take immediately, today, toward a more perfectly diversified portfolio. One powerful resource is private market real estate, which is now available to everyone, not just institutional or accredited investors like in the past. This kind of real estate is an approach to the broader, key strategy: alternative, private asset classes, of which real estate is one of the most ancient and well-established types.
To see why that deeper diversification is so crucial, let’s take a look at a recent market snapshot: the stock market’s troubles in 2018.
A season of trouble for stocks
At the end of last year, stock market investors went for a bumpy ride.
Months earlier, much of the market had appeared strong, continuing the sustained growth of the longest bull market in history. But in 2018’s closing months, investors weathered a season of whiplash-inducing volatility, which pulled the stock market into a series of gut-wrenching plunges. Using Vanguard’s Total Stock Market ETF as a proxy for the whole market, we see that stocks overall ended 2018 firmly in the red for the year, with a disappointing net return of -5.13%.
Economic trouble wasn’t contained to the stock market. Other public investments correlated closely, as they typically do. Looking at real estate (as that is my specialization), public real estate investments also faltered: Vanguard’s Real Estate ETF (representing public Real Estate Investment Trusts (REITs)) finished in the same, negative range as stocks, with -5.95% net returns for 2018.
But beyond the public markets, other investments were telling a different story. Specifically, many private market investments found themselves insulated from some of that volatility and downturn.
At Fundrise, our private real estate investments delivered 2018 performance that looked quite a bit different: a platform portfolio of Fundrise assets finished 2018 with an overall positive return of 9.11%. That’s approximately 14% ahead of the stock market’s performance.