Nick writes:
Hi. I often scan your site and you seem to have collected a group of savvy and knowledgeable contributors. Here’s my question for you and them: What is the opposite of real estate? I know diversification is a smart strategy and many investors limit their risk by investing in something that flourishes when their main investment founders. Is there any sector or type of investment that traditionally performs well when real estate investments do poorly?
I disagree with your foundational premise. Diversification is for those who don’t know enough about what they’re doing. They fear loss of investment capital so they ‘balance’ each part of their portfolio with something that will generally perform better if their opposite does badly.
It’s called Playing Not To Lose.
Diversification is centered on risk and its reduction. I submit that your risk is greater or lesser based upon the degree to which you absolutely know what you’re doing in real estate. Let’s take an example.
If a few years ago the investment choices in your local market were becoming less appealing, and you took the equity in your properties to Phoenix, how would your net worth look now? In 2003 in San Diego my clients were hard pressed to find units that still made sense on a month to month basis, and could be acquired with low down payments. They knew it would only get worse as prices continued to rise. (which they did of course)
They didn’t look for something to balance this move. Phoenix now is in the middle of a correction and my clients are still doing just fine. They’ve increased their net worth significantly, and later this year or early in ’08, will take their increased equity and trade some of it to yet another growth region.
The difference between those who stayed ‘safe’ in SD and those who took some or all of their SD equity to Phoenix is, in anyone’s judgment, staggering.
Knowing what you are doing reduces risk. Having generous cash reserves is what I’d recommend instead of putting a governor on your growth via diversification. I’ve included a link below which talks about how a couple billionaires think diversification is for the birds. They’re two of the most highly respected investors in the world today.
In the end Nick, your next move might be to find an investment real estate broker who you think really knows what they’re doing. Reducing your risk through diversification is like limiting a V-12 Mercedes to 65 MPH. Why have the car in the first place when an ungoverned 1999 Honda Civic can pass you like you’re standing still? 🙂
Here’s the promised link: Diversification
Chris says:
Wide diversification is only required when investors do not understand what they are doing.
Warren Buffett
That quote pretty much sums up my views on this.
Driving a V12 Mercedes at 65mph? Thats like barely off idle, waste of a good V12.
January 23, 2007 — 8:38 pm
NVmike says:
A lot of expert investors, financial planners and even fund managers got caught with the portfolios down when NASDAQ tanked in 1999 and when RE tanked in 2005.
The unlucky ones thought they knew what they were doing. The lucky ones understood their own limitations and were diversified.
As always, caveat emptor.
January 23, 2007 — 9:50 pm
Jeff Brown says:
Chris – And it’s a sin to wast a good V-12. 🙂
January 23, 2007 — 11:45 pm
Jeff Brown says:
Based on that take, Buffett and Soros must be the luckiest bastards in the world. 🙂
Buffett and Soros based their judgment solely on their ability to assess reality.
If Buffett vets a company’s management and doesn’t find them wanting, he strongly considers either buying their stock, or the company altogether. To show his confidence in the management, he keeps them on. AND they are told to call him, because he won’t be calling them. He doesn’t micro-manage.
When Berkshire Hathaway wasn’t hurt by NASDAQ’s fall, it was because they’d (Buffett) already formed an opinion of the management of most of the companies. And it wasn’t positive, to say the least.
January 24, 2007 — 12:05 am
NVmike says:
Based on that take, Buffett and Soros must be the luckiest bastards in the world.
Buffett and Soros have access to advisors, information and large cash reserves that few others can match.
Asking average investors to invest like Soros or Buffett is like asking average drivers to get into their sedans and drive like Jeff Gordon.
Sure, some will make it to the finish line, white-knuckled, pedal to the floor, but many others will make just one small mistake along the way … and then it’s crash and burn time.
January 24, 2007 — 5:15 am
Jeff Brown says:
NVmike – You’re absolutely right about ‘average’ investors. Of course, folks in any industry that really know what they’re doing, are not average. And frankly, what I might call ‘small time’ real estate, i.e., small units, home flips, unit rehabs, and the like, don’t need Buffett-like knowledge.
Buffett and Soros has advisors? Everyone at that level has advisors, and they can’t carry those two guys’ jock. Why?
Because they really know what they’re doing. You simply can’t get away from the principle.
January 24, 2007 — 9:24 am
Chris says:
Who said 2005 was a bad year for RE? Certainly some flippers that are not on a professional level have been caught, but that is just one group. People made a ton of money in RE in 2005, and 2006, and so far 2007 is looking real good!
Some of the best investment advice I was ever given:
“don’t be average”.
A professional investor should be making money when the market is going up, down, and sideways.
January 24, 2007 — 9:35 am
Brian Brady says:
Ask Robert Kiyosaki and Donald Trump why they agree with Jeff. The wealthiest of Americans DOMINATE an asset class and profit from it.
January 24, 2007 — 9:44 am
Jeff Brown says:
Chris – It isn’t rocket science, is it? When people refer to ‘pros’ it’s almost a throw-away word. Words have meaning, and my working definition for pro is…wait…here it comes….someone who really knows what they’re doing.
I’m predicting my clients and my firm will have a record year this year. Good luck Chris.
January 24, 2007 — 9:45 am
Jeff Brown says:
Brian – Never too proud to get an assist from the most opinionated mortgage broker in America.
January 24, 2007 — 9:49 am
Chris says:
Yep Jeff rocket science it most certianly is not.
There are professional’s out there, you just have to hunt for them. For example Trump is a high profile professional.
January 24, 2007 — 8:43 pm
Jeff Brown says:
Chris – What Trump did to earn so much respect in the business was to learn from his mistakes. He knew what he was doing, but went against his own research hoping against hope he could somehow over power reality. He doesn’t do that now, and look at what he’s acommplished. Wow
January 24, 2007 — 9:23 pm