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In A Volatile Stock Market Diversify With Real Estate

27 Aug
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I Don’t Like Roller Coasters Either

Even when I was a kid, I wasn’t a fan of roller coasters. I’d tell myself that if I managed to get off the ride alive, I’d be ahead of the game.

Those same thoughts came back to me this week watching world stock markets. Fortunately for me, I don’t like stock markets any more than I like roller coasters and for the same reason.

If you have the time and the inclination to pay attention to market movements, daily economic news, business details, and whatever else the talking heads on CNBC and Bloomberg are prattling on about day to day, you might have a chance of making a buck investing in stocks. That or take a long-term view, buying and sitting on your stocks, happy to ride out the ups and downs over time. Still, every once in a while you’re likely to suffer heart palpitations when the stock market roller coaster hits a peak and then comes down hard, as it did this week.

At one point, after six down days, the U.S. market had lost all its 2015 gains and most of its 2014 gains. Indices were up yesterday, presumably as value investors jumped in.

Meanwhile, On The Safe Side...

Meanwhile, my real estate portfolio has held steady this week, as it does most weeks. No violent, overnight ups and downs with real estate. Yes, prices can go down, even dramatically, as they did in many markets in 2008/2009. Those downs present buying opportunities… just as this week’s down stock values created buying opportunities for stock investors.

Right now, some interesting markets, especially in Europe, are still down, at the bottoms of their curves and beginning to work their way up.

That’s why I bought an apartment in Algarve, Portugal, a few weeks ago and why I’m looking at property in Waterford, Ireland, right now. These two markets are at the start of upward trends. I acted quickly in Portugal because I found a well-located apartment that fit our specs and suited our needs my first weekend shopping. I’m taking more time with the search in Waterford, because, even though I lived here for seven years, I’m not sure what type of property (country house with land, city townhouse for rental, etc.) makes the most sense for my family and me long term. That’s ok, because, unlike stocks, you don’t have to make a snap decision to get in on a property market’s upswing.

In the cases of Algarve and Waterford, I’d say that the next six months or so are the window to act before the real bargains become harder to find. The euro is up slightly versus the U.S. dollar this week; still U.S. dollar holders have greatly expanded buying power in euro-land. If you want to buy property denominated in euro, this is the time to act.

Where and what specifically to buy depends on your investment goals. Market antics this week remind us that one goal investing in real estate overseas achieves for you is reduced volatility compared with buying stocks.

Along Portugal’s Algarve coast, you could buy a rental property that you could expect to earn a good net yield—properties I viewed and considered, including the one I’m buying, should earn a conservative 8% net per year renting during the summer season alone—as well as reasonable appreciation over the next five years. Add in some off-season rentals during the winter, and you could break into double-digit cash flow… with whatever appreciation this market sees as the cherry on top.

A net annual yield of 8% isn’t as sexy as S&P 500 gains of 25% in 2013 or 12% in 2014. On the other hand, those 2014 gains disappeared this week.

In Ireland, you’re not likely to get better than a 5% net yield per year from a rental investment. However, markets outside Dublin are at or close to their market bottoms. Waterford has my attention for this reason, as well as the fact that rentals are under-supplied here. Moreover, you could buy a small rentable apartment for as little as €50,000.

I’m not trying to talk you out of investing in stocks. I buy stocks… just like I sometimes rode roller coasters when I was a kid. I’m all about diversification, meaning I don’t eliminate any option entirely but look to build as well-rounded and as varied a total investment portfolio as possible. I’m not dissing stocks; I’m making the point that stock investors should be buying overseas real estate. Dismissing real estate as part of your overall diversification plan is short-sighted.

Real estate investing may be less exciting that watching stock market tickers, but, for me, that’s the point. You don’t have to watch your real estate investments closely every day or ever minute-by-minute, hoping that the market doesn’t fall 6% or more before you’ve finished your morning coffee.

Lief Simon

Mailbag

“Lief, I just came across your July 21, 2014, letter about Fidelity cutting off mutual fund investment from overseas. In the past three weeks I have received an email from Fidelity that they are cutting off all investment from overseas residents on Oct. 1, 2015. Your advice all these years about having a U.S. address stands!

“The sheeple in the USA are getting closer and closer to being sheared.

“Thought you might want to know that it seems the plan moves forward.”

L.K.