I recently read an article referencing comments of Ray Dalio, the billionaire hedge fund manager who founded Bridgewater Associates, the world’s largest hedge fund. Unlike the scope-limited mutual funds (large cap, small cap, etc) that inhabit the portfolios of most 401k/IRA holders, hedge funds exist to exceed market performance via use of a myriad of strategies whether stocks, bonds, options, commodities, short-selling, using leverage and more. Ray has a deep understanding of the financial markets and the economy…his words carry weight!
Here are the key points Ray made in this article titled, “Billionaire Ray Dalio Says Cash is Trash and Equities are Even Trashier: SPY“:
- Cash will be a losing investment…even if you are earning say 2% in a short-term bond or savings account, you would be losing -6% to -7% annually with inflation running over 8%.
- Three things will continue to push stock prices down: inflation, the Federal Reserve interest rate increases, and the softening economy which may be heading into recession.
- Real-return assets are the best investments in this environment (I would argue in any environment). Real return is what is earned on an investment after accounting for taxes and inflation.
One of the more obvious asset classes that meets Ray’s criteria is real estate. A typical multifamily investment delivers year-in and year-out an 18%+ average annual return and the depreciation deduction wipes out most if not all of the income taxes. Let’s say that you do no tax planning and the full capital gains taxes due on the back end averages 3% per year (20% max capital gains rate x capital gains at 65% ot total divided by 5 year hold period equals 2.6%, rounded up to 3%) . This would mean your real return for multifamily would be 6% (18%-9% inflation – 3% capital gains taxes). Most other asset classes cannot consistently deliver this return especially in hard times.
That’s why Willie and I have heavily over-weighted our portfolios towards real-return commercial real estate – from multifamily to self-storage to mobile home communities. We don’t worry about diversification….concentration in an asset class (like a business owner’s investment concentration in their business) is not an issue when you are highly skilled and have a deep understanding of your market.
This concentration has been freeing because we don’t have heartburn now on our stock portfolios during periods of market decline because they are a much less significant part of our net worth. We are not having to get in and out of the market trying to find the bottom. We are not – like we were in 2009 – hoping and praying it would not take too long to make up the multi-year gains wiped out in a fraction of the time it took to build them. Now, we feel confident in at least doubling our net worth every five to six years through real estate just like we have accomplished the prior 5 years.
If you are now jittery about the market, we understand, we have been there. This blog has shared how we decided to deal with the rocky wealth-building path the market provided, which was to shift a substantial portion of our portfolio to real estate. So, there are two important next steps we can offer you:
1) Schedule a call if you want to discuss the pros and cons of increasing your exposure to real estate for faster wealth building (without being a landlord). It’s not for everyone…we can help you see if this action fits your situation.
2) If you’ve decided more real estate diversification is right for you now, contact us to find out about any current or upcoming investment opportunities. If you have not become a member of our GrowAbility Equity Club, go ahead and become a member by clicking on the button below, and you will automatically be notified of new investment opportunities:
Thanks for being a part of our community. Until next time, keep growing your ability to accelerate your wealth building….glad to be a part of this journey!