Hang a Garlic Wreath | Use Real Estate to Protect Your Portfolio and Improve Performance
Every October the many retailer displays in black and orange remind us that Halloween is upon us. The ultimate origin of Halloween is a topic for debate but nowadays we celebrate it by honoring the ghoulish and the dead. Today we are also celebrating another ghoulish black death: Black Monday, the second largest one-day drop in recorded stock market history. On October 19, 1987 the Dow Jones Industrial Average dropped 22.6% in one day! This was followed by equally enormous drops in stock markets around the world. (Coincidentally, we also celebrate Black Monday, Tuesday and Thursday associated with the stock market crash of 1929 which led to the Great Depression.)

Every stock market tragedy initiates a host of analysis and tools to prevent it from happening again, and the 1987 fiasco was no different. Computerized trading programs exacerbated the panic and pandemonium, creating massive order backlogs and accelerating the markets free fall. Following this crash new rules were put in place, known as circuit breakers, to put the brakes on trading and give panicked markets a chance to regain their composure before resuming business. Generally these circuit breaker rules are: if the market drops 10% early in the day trading is halted for up to an hour. If the drop is 20% later in the day or 30% anytime during the day, trading is suspended indefinitely.Like a time-out for a child throwing a temper tantrum, these programmed trading suspensions make very good sense given the snowball effect of a stock market in emotional meltdown. But what is most significant is that this troubled child has to destroy 10%, 20%, even 30% of the market’s value – in a single day – before we do anything about it! We may have learned to take news of stock market ups and downs in stride; but when it comes to your own investment portfolio are you really prepared to absorb those kinds of losses? You’ve diversified your holdings so you’re not overexposed to any single stock, but what do you do when the entire market drops 30%?

Most investment experts will tell you that you can diversify away your company risk, you can even diversify away your sector risk, but you can’t diversify away your market risk (also known as systematic risk.) Most investment experts, however, only deal with the stock market. In fact you can drastically reduce all these risks, including market risk, by diversifying beyond the volatile stock market. By adding real estate to your long-term investment portfolio you can significantly improve performance while hedging against the unpredictable volatility of the stock market. As discussed in Take the High Ground real estate is a non-correlated asset, transactions are complex, each property is highly unique, markets are very local in nature, and information flows are decidedly inefficient. The real estate market does have its cycles but they are long-term in nature and property values simply do not drop 20% in a day! Adding real estate to your portfolio will help ensure this never happens to you.

If you invest in the right real estate, in the right place, and with the right time horizon, the irrational ups and downs of the stock market will leave you undaunted and confident that you will achieve your investing objectives. Of course investing right comes in many flavors. Next we’ll discuss one of those flavors, a powerful but often misunderstood real estate asset class: pre-developed land in the path of growth.