Traditional estimates vary between 13 and 26 percent. However, recent evidence indicates that more may be prudent.
Actively Campaigning Google
If you Google this query, you won’t get many results.
Over a century ago, direct real estate investment was restricted to country club members alone. The typical accredited investor gained access to real estate crowdfunding in 2013 and the average retail investor in 2015.
This is just too fresh for the majority of financial experts and the majority of financial counselors to even be aware of, much alone give suggestions.
Make Your Best Estimate?
Without detailed information, some conventional consultants rely on rules of thumb. Historically, it was considered that public market investments (stocks, bonds, mutual funds, ETFs, etc.) were the finest and safest wealth generators over the long run. Therefore, experts may advocate allocating 80-90 percent (or more) of your portfolio to this. Any remaining funds might be used to experiment in other endeavors, such as real estate.
Before 2017, the stock market’s long-term returns against real estate had never been appropriately evaluated. (More on this later.)
In its absence, institutions and scholars attempted to develop their own norms.
Organizations
Deutsch Bank’s Real Estate Division (RREEF) discovered that most institutions hold 10 percent of their assets in core (extremely conservative) investments.
Lazard Advisors discovered in “The Impact of a Real Estate Allocation in a Diversified Portfolio” that the Yale Endowment devoted 20% to real estate that year (the Yale Endowment is renowned for outperforming the stock market over many decades). Yale brought it down to 17% by the end of 2014.
Using the scant evidence available at the time, academics sought to provide an explanation. For instance:
- A report by Urdang (BNY asset management business) cited research by Stephen Lee of the Cass Business School in London, concluded: “Ideally, investors would allocate 26% of their assets to private real estate, but actual allocations are substantially lower owing to perceived risks and illiquidity.”
Who Can’t Simply Show Me the Data?
However, all those mentioned above were called into doubt by a bombshell. The first thorough evaluation of the returns of various investments was concluded at the end of 2017. And to virtually everyone’s amazement, it was discovered that a particular sort of real estate investment (non-leveraged residential properties) yielded higher returns than the stock market with less risk. This was an earth-shaking finding.
Consequently, many investors and data-driven financial advisers may explore a more significant allocation when I write this in early 2018. In the past, I believed that a 10 to 25 percent allocation was appropriate for me. Now I may consider increasing it to 20-45%.
And I feel much better about investors I know who have an 80 to 90 percent allocation to residential homes without debt. They no longer seem so insane!
Your actual proportion will depend on various factors, including your risk tolerance and life stage (working, retired, etc.). I strongly advise you to speak with a financial adviser with expertise in real estate investment to determine the optimal strategy for your portfolio.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.