My equity partners and private Investors tend to ask me the comparison question. “Which do I think has higher Investment risk, stock and mutual funds or real estate?” For the average Investor looking for the least risky Investment option, the popular consensus is to hand your money over to a financial adviser and have them Invest in a mutual fund or something similar that is diversified. Or your company will tell you to put your hard earned savings into their 401k plan which by definition is also simply Invested in a mutual fund through their own financial advisers.
When the average Investor thinks they are Invested in mutual funds or a 401k they tend to separate this from stocks and the stock market and there for believe this to be less risky….maybe it’s just the terminology but they are in fact one and the same.
The idea that this strategy is less risky than investing in real estate does not make sense and the stock market shows us this all the time.
So I am going to cover this one question I get from new equity partners “Which do I think has higher Investment risk, stock and mutual funds or real estate?” The risk comparison tends to lean toward the idea of “liquidity” that stocks and mutual funds are “more liquid” than real estate investments. Meaning the more liquid an Investment the easier it is to sell or get out of the Investment and therefore “less risky.”
I believe this to be the exact opposite, let me give you a clear example. When the stock market crashed in 2008 the real cause was not the housing market or the banks going bust that was merely the “effect” not the cause.
It was average investors selling their stocks in massive amounts, albeit directly related to that news but….. if stocks would not have been sold there would not have been a stock market crash.
The easy ability to buy or sell your stock Investment in less than 5 seconds with a click of a button can create high volatility and price swings. The long term investor can loose several years’ worth of gains in one day or in the case of 2008 in just a few hours. One direct cause will always be easy liquidity for Investors.
RISK= EASY LIQUIDITY + LACK OF PRICE CONTROL
What is crazy to me is that most novice Investors want easy liquidity and consider that to be safe, today that is a popular consensus with the average Investor. Most investors are not looking at the whole picture and nobody is there to explain. When it comes down to it they want easy liquidity because the lack of “control” they have over the rise and fall of price for their stock or mutual fund Investment. This to me is the real risk, that outside factors can cause price movement for your stocks and mutual funds leaving you no control but to buy or sell.
The smartest and wealthiest Investors want their Investments or markets to not be easily accessible to buy or sell. This actually creates more value and more stability within that particular market.
Real estate especially commercial real estate is one of those markets and because of low liquidity it is not easily affected by economic factors and other world events. Though to be fair there are some risks to owning real estate as an investment and low liquidity or lack of push button selling could be considered risky.
I must say thought the number one factor of real estate investment risk is lack of education, knowledge and a strategic plan for your investment purchase. With this foundation in place we have much more control over performance.
As apartment building Investors we have more control over our Investment and value is not tied to how the property down the street is performing. Apartment buildings should be considered “Investment Businesses” and we can control the value of that investment business by 2 key factors- decreasing expenses or increasing income.
With our Private Investor Program we are able to offer Investors the ability to have more control and tax benefits through participating in Equity Partnerships with ASP Commercial Group.
For novice real estate Investors who just don’t have the time to take care of real estate Investments, participating in Equity Investments with real estate companies is a great way to start growing your portfolio and having more control over your Investment.
I won’t get into that here but I hope I did a good job explaining this risk factor when it comes to easy liquid investments. I am sure other Investors will have their own opinion but this is why I love real estate particularly apartment building Investments.