Does Your Investment Mix Align With Your Risk Tolerance And Financial Goals?

ASSET ALLOCATION MIX

Does Your Investment Mix Align With Your Risk Tolerance And Financial Goals?

Most investors have heard of asset allocation mix.

It is frequently used to split investments between different asset classes or market segments.

Some financial advisors use it to encourage people to invest in bonds which tend to have lower volatility than stocks.

But volatility is not the only risk that needs to be considered.

When he started investing Bob’s financial advisor told him to put more money into bonds as he grew older. The reasoning was that stocks are more volatile than bonds.  Sometimes stocks have large increases.  But they can also drop a lot.  Who remembers the stock market dropping 40-percent?  While bonds can go up and down, the extremes tend to stay in a narrower range.

Bob followed his advisor’s advice.

Later he checked his portfolio and saw something interesting.  The rest of his portfolio did better than bonds.  The bonds did not perform very well.

What went wrong?

Inflation went up.

Interest rates went up.

The expected Income from bonds did not keep up with inflation.

He would have had more income in retirement if he had left his portfolio alone.

SOLUTION

During our early years of investing my wife and I made the same mistake as Bob.  We invested in bonds through a mutual fund.  But while the fund paid a quarterly dividend, the value of the bonds and fund kept dropping.  That is not what investments are supposed to do.  

In the succeeding years we learned a few more lessons.  For a long-term outlook, stocks outperform bonds.  Real estate can meet and exceed the goals of bonds in a portfolio.  It has the ability to provide an additional source of income.  And it can provide a total return greater than the traditional returns observed in the stock market.  Thus, real estate is a superior tool for asset allocation.

Asset allocation needs to provide an investment mix that addresses risk tolerance and financial goals.

WHAT ARE YOUR FINANCIAL GOALS

Have you defined your financial goals?  What does your investment portfolio need to provide?

Are the goals short term or long term? How many years until you plan to start utilizing the cash flow?  Some people are waiting for a traditional retirement.  Others plan an early retirement.  And some people are taking year-long sabbaticals or mini-retirements, then going back to work and continuing to grow their portfolio.

What are you seeking with your investments?  Appreciation and equity accumulation?  Or is it time to invest for cash flow?  Or are you seeking a mix of cash flow and appreciation?

RISK TOLERANCE

What is your tolerance to risk?

You can put money into a bank certificate of deposit, or CD, paying 1.0-percent interest and insured by the Federal Deposit Insurance Corporation.  You are guaranteed that you will get your principal back in a year, along with interest.  No worry about volatility except that a dollar next year won’t buy as much as it does today.  You are covering one type of risk but taking on another.

Some risk is necessary.  If we try to stay too safe, then we miss out on potential returns.  But if we take on too much risk then our financial future could be in jeopardy.

Earlier in life we can take on more risks as we have time to recover.  Later in life we need to place more emphasis on protecting our principal and its ability to provide us with income.

We may also ask, is the purpose of asset allocation mix to reduce risk?  Or is it to seek multiple good opportunities, increasing the odds of investing in some of which will be great?

WHAT RISKS ARE YOU TRYING TO COVER

There are several types of risks that we should be aware of when investing.  Each type of investment typically induces some risk when addressing another.

Volatility

Different investments expose us to different risks in the market.  Volatility is frequently mentioned.  Buying a mutual fund vs. individual stocks reduces overall volatility.  While a single stock can go up or down significantly in a single day, a large group of stocks will generally not change as much or as fast.  Real estate tends to move much more slowly and steady.  Have you watched the value of your house over a few years?  How much does it change from day to day?  Or month to month?  Some assets are much more subject to volatility than others.

Inflation – this is the biggest risk not addressed when financial planners sell investors on asset allocation.  During the building years we want to grow our portfolio as quickly as possible.  Later, when we are ready to enjoy cash flow, we want to ensure the cash flow increases every year at a rate that meets or exceeds the real inflation rate.

Market segments

Have you ever noticed how some market segments perform great for a while then fall out of favor?  Like tech stocks and the dot-com bubble?  And some segments tend to be more consistent.  People always need housing.

Personal credit

Some investments, like single family rental housing, may require using personal credit to get a mortgage.  This may or may not concern you if you have great credit and cash flow.  On the other hand, consider what if you could purchase leveraged real estate without using personal credit, such as in a partnership?

Vacancies

Vacancies are an inherent risk of real estate.  Tenants occasionally move out.  This goes for single family homes, apartments, self-storage units, mobile home parks and others.  What is your vacancy risk with a single-family home?  Compare this with five units vacant in a 100-unit apartment complex.  Which one do you think would provide the most consistent income?

Are there other risks that we should be considering?

HOW REAL ESTATE CAN PROVIDE EXCELLENT ASSET ALLOCATION

Real estate can be an excellent tool for providing asset allocation.  It can provide a steady stream of income, such a monthly rent or quarterly payments.  It’s more than a hedge against inflation.  Leveraged equity increases returns when inflation strikes.

Single family rentals can provide good returns.

Multi-family real estate spreads vacancy risk across more units.

HOW DOES ASSET ALLOCATION MIX APPLY TO MULTI-FAMILY INVESTMENTS?

We can invest in multiple different properties or syndications.

While building a portfolio one might want to focus on investments that provide an excellent total return with little emphasis on cash flow.  When you are ready for your portfolio to provide income to live on then you can seek investments that provide a steady cash flow or preferred return.

We can vary the investment type such as apartments, mobile home parks and self-storage.  Or we can choose one type and invest in multiple syndications with different partners.

How much should someone invest in one investment or property?  That depends on the size of your total portfolio and your risk tolerance.  It might be 10-percent of your portfolio.  Or it could be more or less.

For example, let’s take a sample $500,000 portfolio.  A syndicator has an offering with a $50,000 minimum investment.  A $50,000 investment might fall within your risk tolerance.  But investing $200,000 of a $500,000 portfolio seems like a high percentage.  This is especially true as you get closer to living off of your portfolio income.  On the other hand, if you have a $2,000,000 portfolio then you might be willing to invest more.

Disclaimer: This is not intended to suggest how much anyone should invest in a particular syndication.  It is to give an example as to how the investment amount should align with your risk tolerance.

Asset allocation could mean investing in 10 different syndications.  A loss in any particular syndication might hurt, but it would not be catastrophic.

FINAL THOUGHTS

Asset allocation mix is usually presented as a measure to reduce risk.  That is a defensive position.  Instead, we can take an offensive position and use asset allocation mix to take part in an array of opportunities.  This increases the probably of reaching our financial goals with the cash flow desired.

HELP US GET TO KNOW YOU BETTER.

Attune Investments provides a better return for our investors. And we make a positive impact on people’s lives and our world.

If you want to learn more about how others invest with us, we invite you to join our club and talk with us. See below.

You can own multifamily assets through a syndication partnership with other investors like you, working with managing partners experienced in apartment complexes.

CONNECT WITH US. Subscribe to our blog. Subscribing now can increase your knowledge and comfort with this asset class. It’s free.

We publish an article every week.

Take one more step: Join our ATTUNE INVESTORS CLUB to gain more personal access to us. JOIN HERE.