Thoughts on Investing in Times of Volatility

[Brian Formulak]

With all of the volatility in the stock market, I wanted to offer some insight into my investing experience and how I position my overall portfolio to get through extreme volatility like what we are currently seeing.

I have been investing in real estate for the past 25+ years, but I would never solely invest in real estate even though in times like these a lot of people get the urge to get out of the market and either cash-out or invest in something else, such as real estate. Real estate is a great investment and has been a consistent source of personal returns for me for decades, but I will explain below why you can’t solely invest in real estate, and why you shouldn’t panic and sell your stock portfolio.

In the modern investing era, the stock market has averaged a 10% annual return. However, you cannot get an investment return without investment risk. Because of this, some years cause a lot of emotions because you see your portfolio keep dropping. It’s very easy to see this and want to sell all of your stocks and get out, and many do. I am not a financial adviser and this is not financial advice, just my personal opinion but selling after a large drop in the markets is not the right thing to do, and this is why.

Since 1990, if you missed the best 25 trading days because you sold all of your stocks, then your annual returns since then would be the same as 5 year U.S. treasury bonds - you might as well not have the risk for the low returns. This is very important because the majority of the best 25 trading days since then have come directly after the worst 25 days. This is meant to articulate that over time, the market averages out and drives a solid return and for that reason, you need to have the ability to stay in the market after a large drop.

This is where the benefit of diversifying, especially in real estate, comes into play. The stock market can drop 30% in a month, a recession can pop up, but people still need a place to live. This is exactly why I love rentals. In recessions, appreciation will not occur and people will sell their houses, however, rental markets stay strong because those same people selling their houses need a place to live, and they end up renting.

I design my portfolio to be mixed between the stock market, investment funds, private equity, and of course REIs, specifically rental properties. We see the importance of that more than ever now. My stock portfolio has taken a hit over the past month, but as this is occurring I am still receiving my rental cash flow checks every month that provides me income to pile up to reinvest when the market turns around. Having this mix allows me to capture high returns from the stock market in good markets, but also provides me the diversity and cash flow for when things get tough.

I encourage all of you to speak with your financial advisers and ask how you can better diversify your overall portfolios with a mix of stocks and mention that you would like to have some real estate rental investments in your portfolio as well. They will know best how to design the best plan for you. Just remember to work with them in times of volatility, and if you aren’t nearing retirement, don’t panic sell after a huge drop in the market. 

Good luck, and I would like to hear your thoughts/strategies.