There's no way of avoiding it -- values in the stock market will always fluctuate, and occasionally, they will be quite volatile. Roughly every few years, the market will undergo a correction or a crash.
That can make investors feel unsettled, wondering whether they should be taking certain actions to combat or otherwise deal with market volatility. Here's a look at what you might do if you're worried about market volatility -- with a focus on some savvy real estate moves you might make.
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1. Don't panic
First off, don't act rashly. The stock market may have just swooned, but don't take any actions until you've carefully gone over your decisions.
As long as you have a long-term focus, you should do OK. The U.S. market will likely recover within a few months (or possibly a few years) from any correction and then go on to hit new highs. Downturns also can bring big buying opportunities, so you might want to keep a modest pile of cash on hand so that you can pounce on the stocks of strong companies when they drop to bargain levels.
If you're a real estate investor, stock market volatility may not affect you too much -- though it can. For example, if a market downturn is accompanied by an economic downturn, that could result in some of your tenants being unable to pay rent -- or it might limit your ability to raise rents for a time.
2. Have an emergency fund
One thing all real estate investors should have -- and this goes for stock investors and non-investors as well -- is an emergency fund sufficient to cover at least three to six months' worth of your household's expenses. This can be a lifesaver if the unexpected happens (and the unexpected often does happen) and you lose a job, or your car needs a new transmission, or you face a large medical bill.
But an emergency fund will be of particular value to real estate investors. It's easy to appreciate the upsides of owning rental properties when tenants' rent checks are coming in regularly. But there will be times when you have vacant properties for a while, and you'll still be on the hook for mortgage payments, insurance payments, tax payments, and so on. And while the timing of them may be unpredictable, costly repairs are inevitable. Eventually, your property will urgently need a new roof, the furnace will die, or you will have to handle some other major maintenance.
3. Get out of any high-interest rate debt
All investors and non-investors should pay off debts that carry high interest rates as soon as they can. If you want to invest in real estate (or stocks, for that matter), and you're paying 20% interest on $25,000 in credit card debt, you're forking over around $5,000 annually, just on interest. Once that's paid off, you'll have many years ahead of you without having to pay that $5,000.
Meanwhile, in a real estate context, interest rates are worth following. If you've been thinking about buying a property or several, you might want to buy sooner rather than later. Benchmark interest rates are headed higher, and mortgage rates are, too. The difference between a 4.5% interest rate and a 5.5% or 6% one might not seem huge, but it can result in monthly payments that are hundreds of dollars more, and tens of thousands -- or even hundreds of thousands -- more in overall interest payments. Note, too, that median home prices in many places have soared, so buying property may require an extra large down payment -- or private mortgage insurance.
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4. Consider investing in real estate
If the stock market's volatility has you spooked, real estate is worth considering. The values of homes and other properties don't tend to be as volatile as stocks -- though they don't tend to grow as briskly in value over the long run, either. Median home values have grown at an annualized rate of 5.5% since 1940, which might seem pretty good, but the stock market, over many decades has averaged annual gains of close to 10%. And as my colleague Matt Frankel has noted, homes are much bigger than they used to be. Adjusting for that, home values grew by roughly 1.5% on average.
Still, at a minimum, you might consider adding some real estate to your portfolio for diversification's sake -- or you might want to get into real estate in a big way. You may also like the idea of owning rental property because it can provide a fairly steady stream of passive income -- as long as your properties remain rented with the income more than covering mortgage payments, insurance, taxes, and related costs. Before buying any property, read widely on real estate investing, as it can be more complicated -- and riskier -- than you might think.
One advantage of real estate investing is that you'll usually be utilizing a fair amount of leverage: If you take out a mortgage, you might buy $250,000 worth of property with $50,000 down. With stocks, investing with borrowed money -- i.e., buying on margin -- is a much riskier proposition, so your $50,000 will simply give you $50,000 of stocks. A downside of buying real estate as an investment versus buying stocks is that if you suddenly need a lot of cash, you can't just sell part of a property. You either need to sell the entire property or perhaps take out a loan against it.
5. Consider investing in REITs
If you want to invest in real estate, but don't have a lot of money for down payments and/or don't have the temperament or energy to be a landlord, real estate investment trusts (REITs) can be a terrific option. These are companies that buy large portfolios of properties (often of a certain type, such as apartments, retail stores, medical facilities, office space, storage units, or data centers) and then lease those buildings out. When they're healthy and performing well, they tend to keep buying more properties.
REITs trade like any other stock, and they generally offer fairly high yields, because, by law, they're required to pay out at least 90% of their taxable income as dividends to shareholders annually.
There are also broad REIT indexes that you can invest in via exchange-traded funds (ETFs) -- putting your money into a host of different REITs.
If volatility is a key concern, one thing you might look at when checking out various REITs is their "beta." Beta is a measure of volatility, and most online data aggregators for stocks (including REITs) -- such as Yahoo! Finance -- will track it. A beta of 1.0 is neutral, meaning that the specific security is about as volatile as the overall stock market. A beta of 1.5 means the security is 50% more volatile than the market, and any beta below 1.0 reflects a security that's less volatile. Realty Income, a REIT that focuses on retail properties, recently had a beta of 0.8, meaning that it was just 80% as volatile as the market. Public Storage, a REIT focused on storage units, on the other hand, recently sported a beta of 0.26, so it's not too volatile at all.
Market volatility can make many investors skittish, but savvy ones know to expect it and how to deal with it. For many, the best thing to do is nothing -- simply hold onto your shares and wait for a recovery. For others, a sharp market decline means it's time to go shopping for stocks on sale. Some like to reduce their overall risk by loading up their portfolios with low-beta stocks, and perhaps solid dividend-paying stocks, as well, because these can generate income in both good and bad economic environments.
Because of the passive income it can provide and some of the lower-risk options this asset class offers, real estate is certainly an investment option worth considering during market volatility.
Selena Maranjian owns Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
