Admittedly, we are not definitionally in a “bear market”. Bear markets are marked by wide-spread pessimism, and usually begin with a sell-off of 20% from peak values. That said, while we’re not technically in bear territory, the past few trading days have left investors shaken, if not stirred.
We have already told the story of how and why real estate attenuates and diversifies a portfolio, and adds significant returns without volatility in bull markets. But, what happens when the bears come to visit? Just a snapshot, I compared the value of our portfolio with the S&P over the past 10 trading days, with both indices normalized to 100 as of the close of business on 11/7. The results are remarkable:
Note that the ACCRE value is down about 1.3% over the past 10 trading days, but the S&P has declined about 6.1% — over 4 times the rate of decline. (By the way, ACCRE is up 2.4% so far in November!) Further, ACCRE has exhibited little if any volatility, but for the past two days. We expect ACCRE will turn in positive returns for the month, and stay in bull territory going forward. Those of us with ACCRE in our portfolios are stirred, but not shaken right now.
So, why the difference? There are several important reasons why real estate attenuates a down market. Three of these are:
- Carefully chosen real estate is usually backed by long-term commitments which transcend short bear runs. People still need places to live, to work, to store stuff, and to go see the doctor. If you chose the real estate carefully in a bull market, the same fundamentals continue to hold in a bear market, at least in the intermediate term.
- REITs are cash-cows, and behave a bit like bonds. What’s more, this means that when markets slope downward, there is at least a slight disincentive for regulators to put the squeeze on interest rates, thus benefitting rate-sensitive investments like REITs. (Note that the similarly-rate-sensitive DJ Utilities are only down about 2.6% during this same 10-day trading window, and in fact have rebounded about 1.8% during this sell-off.)
- Real estate is a serious, core investment, and not a trading asset. As such, real estate is the last thing sold off and continues to be accumulated by serious-minded investors. Thus, real estate values reflect actual long-term fundamentals and not the whims of the trading strategy du jour.
We’re not knocking tech stocks, and truth be known, we personally own a few. That said, our serious money is, and continues to be, in real estate.