Asset Allocation: How Commercial Real Estate Solves Diversification Needs
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How does commercial real estate investment solve diversification needs with its new larger role in asset allocation?
Even though some notable investment leaders say investors should be focusing versus diversifying incredibly broadly as most stock brokers suggest, many sophisticated investors and private funds appear to be shifting larger percentages of their portfolios to alternative assets including commercial real estate.
It's hard to pick and mold winners for the average individual investor. You don't have the billions and influence to make a startup, product, or stock a success against the odds. Not like Warren Buffett, Peter Thiel or the panel of investors on Shark Tank do.
At the same time, blind diversification doesn't serve individuals much better. Walk into more brokers' offices and you'll be invested in 100s of stocks, funds, and funds of funds, without having any idea what you are invested in. You do it because everyone including your broker says to diversify; however, most brokers and other people actually don't know what's going to work. Blindly diversifying is like putting one of your casino chips on each number of a roulette table. It's not a reliable way to get ahead, and often leave clients completely exposed to risks of stock market volatility.
How can commercial real estate investment solve the dilemma and equation?
Real estate is a hard tangible asset. That means protection for investment capital. If you're wiped out in the stock market you'll have nothing to reinvest and rebuild with. While property values can change over time the hard asset always remains. There is capital growth potential (both organic and forced through improvements). Regardless of that performance, real estate has the ability to produce steady cash yields, and that's vital for every level of investing.
Even a single commercial property can also provide an exceptional amount of diversification in a portfolio as well. That starts with multiple tenant properties. If you have 10, 20, or 200 tenants that offers broad diversification. Even if 5% or 30% fail to perform in a crisis, the others can ensure the investment is still profitable.
With a commercial real estate property your diversification comes from having tenants in various industries, like a multifamily owner can have tenants in different career fields to ensure ongoing performance. The same goes for a retail owner who has a mixed tenant base in different industries or redeveloping an underperforming asset to a mixed use property with perhaps retail and office tenants.
If you want to diversify and remain in control of the diversity and of your returns, then commercial real estate has a lot to offer. It can even bring together the best of both investment styles. Which is likely one of the reasons it continues to gain traction with sophisticated investors.
How are you solving the balance between the need for consistency and growth in your investment portfolio?