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Follow Ultra-Wealthy Investors to Survive a Bear Market

The Dow dove more than 3,600 points this past week on Coronavirus fears.

The problem is it wasn’t the actual economic effect of the virus that drove the plunge, but the fear of its impact – fueled by hysterics and fear-mongering pedaled on social media and the news. Last week’s stock market volatility was unprecedented, highlighted by three days of nearly 1,000 point drops.

We thought the 800 point drop in August from inverted rate fears was bad, but what that event and the events of the past week have reminded us is that the stock market is an irrational market. It does not reflect economic reality.

Because of instant liquidity where stock positions can be disposed of instantly with a click of the screen, panic can easily take hold – driving massive selloffs like we saw last week.

A look at the real-world effects underlying the Coronavirus outbreak highlights the irrationality of investor behavior.

According to economists in a recent Reuters poll, the impact of the Coronavirus outbreak on U.S. economic growth will be negligible. Any negative effect will likely be attributed more to fear than any actual slow down in productivity due to lost time at work from ill workers.

Based on reliable health statistics, the Coronavirus shouldn’t invoke the type of panic that has gripped the global economy.

As of Monday, it had killed 2,618 people, mostly in China, where the rate of new infections appears to have peaked. By comparison, the Sichuan earthquake in May 2008 killed 69,000 or more without leaving any noticeable trace on the Chinese economy.

In the U.S. alone, the flu has already caused an estimated 26 million illnesses, 250,000 hospitalizations, and 14,000 deaths this season, according to the Centers for Disease Control and Prevention (CDC).

Last year, there were an estimated 61,000 deaths from the flu, according to the CDC. Against the backdrop of the flu, the Coronavirus no longer seems like the existential threat the news would have you believe.

The Coronavirus has exposed the stock market for what it is – an uncertain and irrational marketplace where fortunes rise and fall more on speculation rather than on any solid economic fundamentals.

Do you know which investors didn’t even bat an eye last week as the rest of the public ran for the hills?

The ultra-wealthy investors. They play less and less in the public sandbox – preferring alternative investments uncorrelated to Wall Street. These alternative investments typically account for more than 80% of these investors’ portfolios.

What is the one alternative asset class these ultra-wealthy investors favor over any other?

They favor commercial real estate – where most of these investors allocate at least 25% of their entire investment portfolio.

Why do the ultra-wealthy favor commercial real estate over any other investment class?

Because commercial real estate provides certainty in a world of uncertainty, the ultra-wealthy thrive on certainty. They don’t speculate and leave their fortunes to chance, which is exactly what investing in the stock market entails.

The ultra-wealthy and institutional investors like university endowments have long favored commercial real estate for a variety of reasons. Commercial real estate has a proven and established history of profitability – providing the highest risk-adjusted returns of any investment asset class over time.

For above-market returns and a hedge against recession, commercial real estate offers the best of both worlds:

    • The 20-year return on real estate has averaged 10.6%, while a 60/40 mix of stocks and bonds during this same time returned an average of 7.32%. Throw in the bonus of low correlation to Wall Street and the broader markets and commercial real estate becomes that more superior to Wall Street offerings for building true wealth.
      • Commercial real estate also lends itself to multiple levels of diversification through a variety of geographic locations, asset classes, compensation structures, and hold periods. Investments spread across the country and the world in various recession-proof asset classes with a mix of compensation structures and hold periods ensures that ultra-wealthy investors will receive uninterrupted cash flow in any economic environment.

Passive investing through private investment funds offer the added benefit of being able to leverage investment capital across a variety of funds embracing the type of diversification discussed above.

The ultra-wealthy are happy to defer to the expertise of others as time is more valuable to them than the money given up to have someone else manage the investment.

To survive the next bear market, follow the ultra-wealthy investors who were already prepared for last week’s stock market debacle. The truth is they’re always prepared.

The good news, it’s not too late to allocate your investment portfolio away from the volatility and uncertainty of Wall Street.

The move to an asset class that has historically provided consistent cash flow and predictable and reliable appreciation for its investors – all backed by a tangible asset.

Mike Foley

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