As the equity markets continue to soar to new heights in the eighth year of the current bull market, many investors are asking themselves just how long it can continue. Concerns about unrealistically high valuations and geopolitical risk are causing some investors to rethink just how much of their portfolios they want allocated to stocks.
Even with the Federal Reserve slowly raising interest rates, the yield on Treasury bonds and other traditional fixed income instruments remains well below the level most investors expect to receive. Interest rates are also holding down the yield on corporate bonds, which can have the disadvantage of being so highly correlated to equity performance. Investors in that sector are being forced to take on additional risk, either in terms of credit or duration to boost yields.
That brings us to alternative investments, which can provide diversification that is not correlated to the performance of the stock and bond markets. There is a wide range of alternative strategies and vehicles that advisors can add to client portfolios, and some of them — real estate and marketplace lending, among others — can provide investors with steady income streams with higher yields than traditional fixed income.
A recent survey by Tiger 21 revealed that high-net-worth investors have been moving more of their assets into real estate. In fact, those surveyed had an average of 33% of their portfolios in real estate.
Historically, real estate investors have also benefited from the appreciation of the underlying properties, in addition to a current income stream. As with any investment, however, there is always the possibility that values could fall, so investors should do their due diligence.
The most direct ways for individuals to get into the real estate market often require a great deal of hands-on involvement in order to get the most benefit. One option, made popular on cable TV shows like “Flip That House,” is to buy a fixer-upper to renovate and resell, or “flip.” While some people have made money from this approach, if your clients don’t have the skills to do much of the work themselves the payback is not as large. Another option is to buy either a single or multi-unit property for rental. But in becoming a landlord, the investor takes on risk from vacancy or bad tenants, unpredictable maintenance expenses, and the time commitment it takes to manage the property. Additionally, when such real estate is held in a retirement account, advisors and their clients should be aware of the potential for an IRS-prohibited transaction.