Low Volatility - Risk/Return Ratio


Stock prices go up and down, sometimes a whole lot.  A painful example is the 2008 recession and the dramatic dip in stock prices.  Other investment classes also have a lot of volatility, big ups and big downs.


Commercial Multifamily Assets have a history of much lower swings in prices.  These swings are measured as volatility, how high they go up and how low they go down and how long. 


Like every other asset class, there are cycles.  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 low volatility, not as large swings in prices, much more stability.


This low volatility is good.


As we have learned by experience and the math proves, it is harder to recover from the loss years  and quite painful to have to liquidate during the big down cycles of volatile investment instruments.


The “Sharpe Ratio” is a way to measure the combination of volatility and return on investment across various asset classes.  Dr. Dennis Bethel of 37th Parallel notes the following graph from The US Treasury data, that shows the Sharpe Ratio over the last 20 years for NPI to be the best among others classes such as Corporate Bonds, Large Cap Stocks, Small Cap Stocks, and other major asset classes.  This means there is 3 to 4 times less volatility in Commerical Multifamily Real Estate, according to Dr. Bethel. (NPI is The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) the accepted index created to provide an instrument to gauge the investment performance of the commercial real estate market.)

Here is another chart showing the returns on three portfolios.  Portfolio C with 20% in real estate holdings along with other assets has done the best over the past 20 years (8.54%).  It also has the best Sharpe Ratio (0.75).

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