Investing for the long term — getting stable non-volatile returns

With recent outbreaks of COVID-19, oil wars between Russia and Saudi Arabia, and threats of recession from major stock market selloffs, market volatility is at an all time high. Almost 11.5 trillion dollars of gains since 2016 have been wiped from the market in only 3 months. As long term investors we want to capture the greatest value over time and minimize our exposure to the volatility of the current market conditions.

Over the last 20 years, we’ve seen commercial real estate real estate generate higher annual returns than both US stocks and bonds, yet hold significantly less volatility than traditional equities (see below).

Source: Predex, Bloomberg and NCREIF. Standard Deviation of Returns is defined as the first standard deviation of annual variance for the 20 years ended December 31, 2017. Private commercial real estate reflects the NCREIF Open-End Diversified Core (ODCE) Index through December 31, 2017. U.S. Bonds reflects the Barclays Capital Aggregate Bond Index, which covers the U.S. taxable investment-grade fixed-rate bond market. Stocks are represented by the total return of the S&P 500 Index.

Why Private Commercial Over REIT’s?

In general, private commercial real estate is relatively uncorrelated to the market. Long term portfolio stability can be greatly improved by adding an asset uncorrelated to market swings — meaning this kind of investment can be essential to counterbalance historic selloffs. REIT’s in comparison are often bundled into general market behavior. In the 2008–2009 financial crisis, for example, traders grouped REITs with banking and financial stocks, supporting huge sell-offs. Ultimately, REIT’s are commodities that can be traded day-to-day creating volatility patterns in-line with other asset classes like equities or bonds.

(A correlation of 1.0 means two assets move in lockstep; a correlation of -1.0 means they move in opposite directions; and a correlation close to 0.0 means they are uncorrelated)

As of December 31, 2017. Indexes represented: Private real estate (NCREIF Fund Index–Open End Diversified Core Equity (NFI–ODCE), REITs (FTSE NAREIT U.S. Real Estate Index), US stocks (S&P 500 Index), US bonds (Bloomberg Barclays US Aggregate Bond Index).