ARE YOU READY FOR VOLATILITY?
Why Volatility Is Not Your Friend
Volatility can be fun.
Ask the thousands of people who enjoyed riding the roller-coasters at the theme parks this past week. Up, up, up they go, click, click, click and then over the top and a steep drop and wild swings.
Perhaps you enjoy a good roller coaster, the dramatic dips and unexpected turns.
How about when it comes to your investment portfolio or nest egg. You might like those big ups. But, how about the big downs.
Some investments can be quite volatile. That is the word for it.
VOLATILITY
Volatility. Big up, hurray! Big downs, oh no!
Stock prices go up and down, sometimes a whole lot. Stocks can be quite volatile.
Joe, a good friend of mine, became so frightened in one of those big corrections that he sold the stocks in his retirement fund as they were going down.
He lost a lot, and not just on paper.
He hasn’t recovered yet. And not just financially.
It had an effect emotionally. He lost confidence in himself. Volatility can do that.
One of those very painful downward moves was in the 2008 recession and the dramatic dip in stock prices. Volatility can be scary.
Every investment class has some volatility, even cash, relative to other investment classes. Bonds are volatile. Precious metals are volatile. Crypto-currencies can be really volatile, can’t they?
We want some volatility. We want to see some growth in our investments. But, there is such a thing as too much.
LOWER VOLATILITY
Did you know that compared with other asset classes, Commercial Multifamily Assets have a history of much lower swings in prices? You will see that in the orange bars on the chart below. The orange bars show the annualized risk of various asset classes.
Multifamily investments as a whole go up and down, of course, but don’t make big moves in either direction. The orange bar, showing annualized risk with commercial real estate is the second lowest of the six asset classes.
Stocks are among the highest in annualized risk of big ups and big downs. (The data was from treasury.gov)
Data was not included for retail real estate (personal homes) But, we all know in the 2008 recession, retail home prices took a big dip down. Multifamily property prices were remarkably stable during the great recession. Multifamily properties have demonstrated low annualized risk, low volatility.
As with every other asset class, there are cycles with multifamily investments. They just are not as dramatic.
Inflation and interest rates and unemployment and other external forces do have an effect on the values of multifamily properties. And local forces, such as new employers or an employer leaving an area, can change values in individual markets.
But, as a whole, this asset class has historically low volatility over 20, 30, and 40 year periods. The chart shows the 20 year period 1993 to 2013. Multifamily properties values do not take large swings, as they do in some investments. Multifamily assets are much more stable.
The “Sharpe Ratio” is a way to measure the combination of volatility and return on investment across various asset classes. The grey bar in the chart below notes the Sharpe Ratio. A higher ratio is considered by many as a better investment, less risk from volatility.
Commercial Real Estate is 2 to 4 times less volatile than these other investments. For example, Commercial Real Estate assets have 25-percent of the volatility compared Large Cap Stocks and 50% of the volatility of Corporate Bonds
(For fuller explanations of the Sharpe Ratio and volatility in asset classes see an article, published on TheStreet.Com. https://www.thestreet.com/opinion/real-estate-best-performing-asset-class-during-the-past-20-years-13861401
LOW VOLATILITY IS GOOD
Do the math.
If your portfolio loses 10% of its value. Say your $100 loses $10 in value and is now worth $90. Just to get even, you have to have a gain of $10 which is an 11.1% gain on your $90 value, just to get even.
It is harder to recover from losses than it was to take the loss.
What if your portfolio loses 50% of its value? Say your $100 loses $50 in value and is now worth $50. Just to get even, you have to gain $50, which is a 100% gain on your current $50 in value.
The bigger the dip the harder it is to get even again. This is why lower volatility is good.
Perhaps you know this through your own experience. You may have had a 401(k) lose half its value in 2008. This is why it took so long to get back to where you were. The math simply proves the point.
Volatility on a roller coaster might be fun, but not in our retirement portfolio.
It can be quite painful to have to liquidate during the big down cycles of volatile investment instruments.
For example, if you are drawing down your nest egg during your retirement years, and your investments experience a big dip because of volatility, you will be drawing out a larger part of your nest egg during the down years, making the problem even more detrimental.
This is why you might want to avoid volatility in your portfolio.
APARTMENT INVESTMENTS HAVE DEMONSTRATED LOW VOLATILITY
We find apartments or the Commercial Multifamily Asset to be the better sector within the commercial space. It has low volatility within an asset class that has low volatility.
Multi-family wins with long-term return on investment and overall stability of the investment.
We also appreciate the efficiencies of the larger multi-family properties we own. We cover return and relative safety in other articles.
The multifamily space, as an asset class, has proven itself over time and promises to have a long life well into the future. Why? Because shelter is a basic, foundational necessity in life.
Those who study history, who understand the forces of supply and demand, who know the difference between basic needs and changing preferences, see strength in the Commercial Multifamily sector for decades to come.
A MAJOR REASON FOR THIS STABILITY
Apartments are not going away, at least any time soon. People need a place to live.
Not everyone wants to or is able to buy their own home.
The youngest and oldest generations have shown a steady, high demand for rentals. And everyday working people – teachers, public safety workers, health care, service industry, construction workers, among others – often prefer a good rental for their family.
Perhaps they don’t want the hassles of taking care of the yard. Perhaps they like the ability to pick up and move more easily. Perhaps it is the cost or location.
Housing is a basic need and will continue to have steady demand. This is one of the key reasons multifamily investments are so stable.
ADD STABILITY TO YOUR PORTFOLIO WITH AN INVESTMENT IN APARTMENTS
Did you know multifamily investments are within your reach? You may have thought you didn’t have enough money or enough time or enough knowledge to add multifamily to your portfolio.
Through the power of a syndication, a partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets. You can.
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Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.