If you’ve spent some time reading up on investing strategies and asset classes, chances are you’ve come across the term ‘volatility.’ For most people, it’s not a friendly concept.
But if investors ask, “Which asset classes are the least volatile?” real estate is likely to be near the top of most people’s lists.
What is volatility?
Volatility is the amount of change in an asset’s price over a given period of time. Assets that frequently undergo large price fluctuations (i.e. high peaks and low troughs) are more volatile. Assets whose prices move more incrementally are less volatile.
Why is volatility a problem?
Volatility is a form of risk.
A more-volatile asset is riskier than a less-volatile one. If an asset is volatile, it can be difficult to tell whether it’s going to go up or down in the period shortly after you buy in. If you bought a stock or crypto at $100, but yesterday morning its price was $20 and yesterday evening its price was $300, it’s just more difficult to predict where it’s headed next.
Because the price could potentially drop very quickly (or rise very quickly and plummet immediately afterwards) making money off of volatile investments often requires careful timing. If you buy at $20 and sell at $100, you’ll be pretty happy — but if the asset is especially volatile, the difference between profit and loss might be measured in hours, or even minutes.
For day traders and speculative investors, who have large portfolios and high risk tolerance, this can be an acceptable strategy.
To explain this one, let’s take a step back and think about price. When you sign into your brokerage account (let’s be honest, your brokerage app) and browse some stock prices, you see two things. First, you see the price you are likely to get if you buy (or sell) at this very instant. But you’re also seeing the average price of the other transactions occurring right now. The price you see is an offer created based on the aggregate of a bunch of inputs: one input for every time the asset is bought/sold.
That means price isn’t exactly the direct consequence of market forces - it’s also impacted by consumer behavior. And, consumer behavior creates supply and demand. Typically, prices move something like this:
But, the actual price of an asset is true of only a single transaction. When you see the price on a stock ticker, chances are you’re looking at some kind of average of every transaction that occurs. Because buyers want to get a good deal, and sellers don’t want to lose money, any given transaction will likely deviate from the mean by only a fraction of a percent at most.
So . . . how do prices change so quickly?
Unless something pretty unusual is going on, rapid price changes occur when there’s a large volume of transactions occurring over a short period of time. Each one might move the price by only a little, but hundreds or even thousands of relatively incremental transactions can have a huge collective impact on prices. This means that the number of players in a given market has an indirect, but important correlation with volatility:
More people → more transactions → prices move faster in real time.
Investors can receive push notifications on their brokerage apps when prices move even a small amount, and a flurry of rapid transactions can start building into a tidal wave. When this happens, one of two phenomena often follows: either a bull run or panic selling — both of which drive massive price moves.
One important takeaway from that effect is that liquidity and volatility tend to coincide. If it’s hard to sell an asset, fewer transactions will occur and prices will move more slowly. Stock markets, however, are massive nation- or world-wide clearinghouses designed for the express purpose of overcoming this problem by matching buyers with sellers and making sale easy. That’s great for investors who want higher liquidity, but it does heighten volatility (and therefore risk).
Real estate that isn’t bought and sold on an exchange simply doesn’t face this problem. It’ll be less liquid, but also less volatile. Real estate is harder to buy and sell because it’s a physical asset: it’s harder to sell your house than a stock.
Ownership shares in a private REIT or PE fund are similarly difficult to sell because of early withdrawal penalties that protect investors by reducing liquidity to protect against rapid price fluctuations. Finally, real estate assets are generally less liquid than traditional equities simply because it’s a more specialized asset operating in a narrower market of buyers and sellers.
II: Asset-Level Features
Real estate as an asset class is also more stable than, say, crypto pretty much regardless of how you invest. Even an exchange-traded REIT is usually less volatile than most other exchange-traded assets.
Real estate’s fundamentals are well-optimized for low risk and strong returns over time. Real estate is an intrinsically lower-risk asset class. While real estate is less likely to take a trip to the moon, it’s also less likely to find itself lying in a ditch.
Real estate is a tangible, physical asset that will always be relevant because everyone needs a place to live. It retains value over time, creates tax advantages, keeps climbing when inflation and recession hit, and doesn’t experience the short-term fads.
This effect is amplified when you’re working in a particular market. Where buying stocks can be fairly low-commitment, it takes serious capital and expertise to enter a new real estate market, which limits the number of buyers and gives an edge to sellers and established players — particularly niche players who know their specific market and strategy deeply. And, macro-level forces (like, for instance, nationwide recessions) are just less likely to implicate your investments if their profitability doesn’t depend on those macro-level forces. That’s especially true for a countercyclical asset like real estate.
Concluding Thoughts
It’s probably worthwhile to point out at the end that volatility can sometimes be a good thing. Sometimes. (Hey, it can make you rich overnight!)
But volatility giveth, and volatility taketh away.
Overnight crypto millionaires can lose it all the very next afternoon. For investors with longer time horizons and longer-term goals, too much volatility in a portfolio is a serious problem. And fortunately, adding real estate is a highly effective counterweight.
Real estate investments tend to be less volatile than stocks due to their long-term nature. Real estate is a physical asset, so its value can't change as rapidly as a stock since stock prices are based on the stock market and its fluctuations.
Compared to stocks, real estate can offer a more stable and predictable cash flow. For example, you'll generate monthly rental income if you've invested in a rental property. And, if you're flipping properties, you'll receive a lump sum of cash when the property is sold.
While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right circ*mstances, real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
On its own, real estate offers cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate can also enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or REITs.
Is real estate or stocks more profitable? Investments in real estate have historically earned 3% to 4% per year on average; contrasted to investments in stock market indexes earning approximately 10% annually over the long-term.
Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio. Doing so can curb the risks you'd assume by putting all of your money in a single type of investment.
Volatility. Although stock market returns generally outperform real estate investments by a significant amount over the long run, investors have to pay a price in the form of volatility. Whereas housing prices may decline by double digits in a terrible year, the stock market can decline by 10% in a matter of days.
Looking at the data, inflation-adjusted returns, even factoring in inflation, have almost always been positive in history - meaning that price appreciation for real estate is greater than the inflation rate!
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago.
Do housing prices track the stock market? There's no official correlation between stock market performance and housing prices. However, overall economic indicators that result from a stock market crash can often reverberate to the property market once stocks dip below 20%.
While the real estate market is also subject to some volatility, it is significantly less than in the case of stocks. This means that there is less risk associated with investing in real estate, which makes this type of investment safer.
Real estate is known to be one of the most stable asset classes, affording investors the opportunity to benefit from appreciation, predictable income, leverage, and tax advantages.
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
The VNQ total return was only 33%, which only translates to a 4.2% CAGR. If you look at the chart, on a total return basis, the S&P 500 beat the VNQ index, five out of the seven years. And again, on an overall basis, the S&P 500 dramatically beat REITs, using VNQ as our proxy.
As you can see, there's a lot that goes into real estate investment returns. But if you want to know the average annualized returns of long-term real estate investments, it's 10.3%. That's about the same as what the stock market returns over the long run.
What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.
Real estate investment allows diversifying your portfolio while hedging your risk against the stock market. This makes real estate a potentially safer investment option than the highly volatile stock market.
Real estate is a generally safe option for many first-time investors. Every investment comes with some type of risk, including real estate. Investors have options for reducing their risk by diversifying their portfolio with different types of investments.
The real estate market has a low correlation with other key asset classes and is less volatile than other investment markets. Real estate becomes the “star” of investors' asset portfolios as a result of the greater returns per unit of risk that results from this.
Real estate investment has undoubtedly proven to be the safest type of investment. Real estate is the first choice of almost every investor who saves. Residences, hotels, commercial properties, lands. All these real estate types bring profit to the investor if they are chosen correctly.
As a result of inflationary price increases, real estate can be an attractive investment vehicle. Due to this, real estate can be a wise choice for investment, particularly if you intend to keep the property for a while. Inflation can boost rental income, making it a good source of passive income.
Real estate works well with inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent. This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation.
Rental income: Real estate investments can provide a steady stream of rental income, which can also help beat inflation. Rents tend to increase over time, particularly in areas with strong job growth and population growth. This means that rental income can also increase over time, providing a hedge against inflation.
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
Real estate investing has played a role in helping to create 90% of the world's millionaires. Real estate investing has played a role in helping to create 90% of the world's millionaires. Real estate is one of the most effective wealth building vehicles and is an important component of a well-diversified portfolio.
One of the key advantages of investing in real estate is the decreased volatility when compared to the stock market. Since volatility describes how bumpy or smooth an asset's price changes are, the more volatile an investment, the riskier it generally is, as risk and volatility are deeply intertwined.
A stock is generally a short-term objective depending on the portfolio requirement. However, real estate is a very long-term objective and can spread over the decades. Stocks are highly liquid and can be sold relatively easily, but real estate is comparatively less liquid.
Investing in stocks is a straightforward process.This can be accomplished through any online brokerage account. A major advantage of investing in real estate stocks is that you don't have to have as much money to get started as you would directly buying the physical property.
In my opinion, real estate is one intelligent option to consider in 2023, as it often has excellent returns, tax advantages and provides diversification even in the face of a challenging economic climate. Real estate also has the potential to compound your investment.
Real estate has proven itself a worthy investment that provides cash flow and appreciation over time. Whether you're an aggressive or conservative investor, it's a great way to diversify your portfolio and can pay off in the short-term and long-term.
As this price of things increases with inflation, so too does real estate. Generally speaking, when inflation increases then housing and other real estate asset prices follow suit.
Residential real estate is unlikely to offer investors a higher return than a well-diversified portfolio of stocks, bonds, and alternative investments. Real estate's status as an illiquid bulk holding limits investor flexibility, and high transaction costs make a long investment horizon necessary.
A system is said to be in stable equilibrium if, when displaced from equilibrium, it experiences a net force or torque in a direction opposite to the direction of the displacement. For example, a marble at the bottom of a bowl will experience a restoring force when displaced from its equilibrium position.
Most importantly, the investment is illiquid. When you invest in a property, you usually cannot sell it right away. In many cases, you may have to hold the property for several years to realize its true profit potential.
Expected cash flow from rental income (inflation favors landlords for rental income) Expected increase in intrinsic value due to long-term price appreciation. Benefits of depreciation (and available tax benefits) Cost-benefit analysis of renovation before sale to get a better price.
Is real estate or stocks more profitable? Investments in real estate have historically earned 3% to 4% per year on average; contrasted to investments in stock market indexes earning approximately 10% annually over the long-term.
Summary of Why Investors May Not Want to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
If you're looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time. If you're looking for a more passive investment, stocks may be the way to go.
It all boils down to your return on investment (ROI). A good ROI for a rental property is typically more than 10%, but 5%–10% can also be acceptable. But the ROI may be lower in the first year, due to the upfront costs of buying a home.
Investors probably need no explanation why and convincing that Florida tops the list of the best states for the long term rental investment strategy. Our nationwide rental market analysis shows that, on average, you can expect the highest rate of return in the Sunshine State.
They all have varying degrees of liquidity potential. In terms of volatility, however, the stock market is the most volatile instrument, and investments are directly exposed to the ups and downs of the market. On the other hand, real estate investment is considered safer and generally appreciated in the longer run.
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago.
Real estate is a volatile investment for several reasons. For example, the value of a piece of real estate can fluctuate based on actions that you have control over.
In fact, there's more money invested in real estate than in equities in the stock market in the US. As of 2018, US real estate was estimated to be worth $49.3 trillion ($33.3 trillion in residential and $16 trillion in commercial), while total equity capitalization in the US stock market was $30.4 trillion.
Stocks: Liquidity. When it comes to investing, liquidity is the ability to get cash out of your investment easily. Stocks are far more liquid than real estate investments. 4 During regular market hours, you can sell your entire position, many times, in a matter of seconds.
If you're a property owner, the high inflation rate could be good news for you. As prices increase, the value of your property goes up as well. You may be able to sell your property for a higher price than you paid for it, or use it as collateral for a loan.
How does it affect real estate? Probable positives during times of high inflation are rising prices for rental property rates. During high inflationary times, it can be difficult to get a mortgage. High-cost mortgage rates mean buyers have less purchasing power, so many continue to rent.
While they aren't the same thing, these two types of investment tools are popular among billionaires. They appeal to people of high net worth who can afford large investments and higher risk. Such people are sometimes categorized as sophisticated investors or accredited investors.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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