These days, I am facing a fairly serious conundrum in my capacity as an investor.
Sure, the last ten years have been good to us.
On the property side in particular, we initially became landlords by accident. However, we subsequently went on to accumulate a reasonably sized portfolio of investment properties.
Objectively speaking, rising prices have played a big role here.
The mathematical effect is straightforward. Interest rates and yields compress, the value of our properties goes up. Nothing more to it.
However, it is the psychological benefit that is far more important here.
Rising prices validate our strategy – and give us the confidence to continue allocating a significant chunk of capital to real estate:
At the same time, the continued growth in prices is making our job increasingly harder.
Gone are the days when folks were scared to get into real estate – and banks were stingy with financing.
Nowadays, the market is on fire, buying property seems like a total no-brainer – and banks are bending over backwards to give you a mortgage.
The animal spirits are spilling over beyond the single-family home segment, too.
There’s been an influx of “retail” investors in the $1m – $3m commercial / multi-family segment (which is where I focus my attention these days).
It’s tough to compete with investors who price properties at cap rates 40-50% below market.
Or assume they can get away with paying zero in taxes.
Or buy properties across the street from a gas station / right next to dry cleaners without even thinking about an environmental inspection.
The list goes on and on. And so, I just can’t help but wish for a correction.
Sure, when the market gets a collective kick in the nuts it will hurt me as well. It will become much harder to secure mortgages at attractive rates – and refinance them once the property has been stabilized.
But as a long-term net buyer of real estate, the upside from being able to acquire on the cheap FAR outweighs the near-term turbulence.
A similar phenomenon is playing out in the stock market.
Everyone (except for the people who hate the stock market) is happy with the way equities have rallied post-Covid.
Last week, the S&P 500 has reached the milestone of doubling off those March 2020 lows:
Sure, it’s encouraging when all you see in your brokerage account is a sea of green.
But for any long-term net buyer of equities, this is absolutely terrible news.
The magic money machine can only do so much – as illustrated by Vanguard’s most recent take on equity returns going forward:
Now, things may or may not work out according to the chart above. But if you ask me, lower returns going forward are a near certainty.
It will take time for valuation multiples to normalize after a long stretch of multiple expansion.
Thus, if you have been investing for a while, it’s pretty much a guarantee that the money you’ve put to work a decade ago will generate a far higher return than the equities you are buying today.
Now, this doesn’t mean that you should go all cash and wait for the inevitable correction.
Data shows that to be a far inferior approach to good old-fashioned, regular investing.
Besides, what if the correction never comes? What if the stock market just goes nowhere for a couple of years while earnings catch up?
Next thing you know, it’s 2025 and you are still waiting to buy the dip.
The broader point here is that if and when volatility does come, you want to embrace it, not shy away from it.
The FIRE community agonizes over the unpredictability of the stock market, because it messes with those SWR numbers.
But the irony is that it’s the very unpredictability of the stock market that gives rise to an SWR in the first place.
If the stock market was as safe as the bond market, investors wouldn’t require a 6 – 8% return on their money.
Instead, they would be perfectly happy with 0.5%. Good luck getting to financial independence on that return.
In a similar vein, if the property market didn’t crash every decade or so, flushing out a bunch of unlucky overlevered investors along the way, there would be no way to make 10%+ returns in real estate.
Poof – say goodbye to the asset class that created hundreds of thousands of millionaires over the past 50 years.
Even the job market functions in a similar way.
Being an accountant means you are unlikely to ever be unemployed. This is why a bunch of risk-averse people become accountants in the first place, creating a solid supply of talent – and keeping wages down.
Contrast that with being an entrepreneur.
After a few years, you are virtually unemployable. But, to compensate for that risk, entrepreneurship offers upside potential that good old accounting could never match.
In both investing and life, the idea of accepting and embracing volatility is not an intuitive one. But at the end of the day, it might well be the most important skill to develop.
Thank you for reading.