Economy, Financial Planning, Retirement

Real Estate And Investment Diversification

5/10/18 8:00 AM

iStock-817726962.jpgNew data from the U.S. Census Bureau showed that the homeownership rate in America, i.e. the proportion of owner-occupied households in this country, ended the first quarter of 2018 at 64.2 percent. That is a marked rebound from the half-century low hit during Q2 2016 and matches the highest quarterly reading since Q3 2014. The improvement has occurred even in the face of higher mortgage rates and above-trend housing inflation, thanks in part to the continued strength of the U.S. labor market, slight uptick in wage growth, and rapidly rising rent.

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The rebound in homeownership has also been helped by aging Millennials increasingly getting married and having kids (household formation), although older Americans still have significantly higher rates of homeownership due to their typically stronger financial standing. More importantly, owning real estate can play a big role in proper wealth diversification. That is a critical concept for investors of all ages to understand because during a macro shock like the 2007-2008 financial crisis, stock correlations can spike, meaning that equities which normally would not trade similarly suddenly move in lockstep, thereby removing the main benefit of diversification.

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Put simply, spreading your money across a wide variety of stocks can help reduce the risks associated with any particular company or industry but exposure to a broad market selloff will not be eliminated. To help protect against such scenarios, a retirement portfolio must therefore be diversified not just in stock allocations but also across asset classes. Bonds are a possible alternative, but their mechanics can be confusing to many retail investors. Since a house is a tangible asset and homeownership is conceptually quite straightforward, it should not be too surprising that a recent Gallup survey found Americans generally prefer real estate over bonds, precious metals, and even stocks as a long-term investment vehicle.

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Despite the high favorability, it is important to understand that real estate is far from a risk-free investment. That is something many Americans learned the hard way after the housing market peaked in 2006 and the “home values only go up” adage was proven wrong. However, this does not mean that people should avoid using real estate as a long-term investment vehicle. Instead, savers must strive to utilize every tool at their disposal (real estate, 401(k)s/IRAs, HSAs, etc.) in order to essentially diversify their retirement assets in the same way that a portfolio of stocks should be diversified. Doing this can lessen the sensitivity of an individual’s total wealth to the value of any single retirement asset and in turn help ensure financial security in old age.

 


 

Sources: U.S. Census Bureau, FRBSL, Gallup

Post author: Charles Couch

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