To say the markets are in turmoil would be putting it lightly. In the summer of 2021, everyone was so sure and upbeat about the markets. Flush with stimulus cash, the stock and crypto markets were at all-time highs.
However, 2022 was a different story. Stimulus money stopped, and inflation took center stage as the free flow of money came home to roost in the form of rising prices. Throw into the mix Russia’s invasion of Ukraine and the ensuing shock to oil supply and energy prices, and you had a recipe for market disaster.
In June of 2022, inflation hit 9.1%, a rate not seen since the ’80s. Inflation, high energy prices, supply constraints, recession, and political conflict weighed on the markets. For 2022, the S&P 500 was down 19.44%. The Dow was down 8.789%, and for crypto, Bitcoin was down 65%.
If you modeled your investing after the masses in 2021 and 2022 and followed the pied piper of meme stocks and Wall Street, you would be significantly poorer today. If you had followed the advice of celebrities like Matt Damon and Tom Brady, who were touting crypto as the future, you would be even poorer.
One prominent guy who bet on crypto and lost, then committed fraud and embezzled funds to cover those losses, may be imprisoned. In December of 2022, Sam Bankman-Fried, the 30-year-old CEO of crypto exchange FTX was indicted by the Justice Department on eight counts of fraud, money laundering, and campaign finance offenses. Touted as the next young tech wizard, Bankman-Fried’s company is now bankrupt, and its CEO could face prison.
At a time when meme stocks and crypto were all the rage, ultra-wealthy investors bucked the trend by ignoring the next big things and relying on tried and true investments.
If you want to know how to model your investment strategy in 2023, follow the smart money and where the high-net-worth investors are putting their money.
According to a recent Coldwell Banker Real Estate survey, half of the affluent investors surveyed said they were investing in property to diversify. None of this should be news about how HNWIs invest. They have always relied on real estate as a hedge against inflation. Why? Because cash-flowing real estate has historically proven to be the ideal counter to inflation.
Cash-flowing real estate proved its resiliency in the face of economic turmoil and a downturn during the COVID pandemic. Residential rental real estate proved to be an ideal hedge against a market downturn when this segment was spared the negative impact of pandemic-related lockdowns on offices and shops. It has also proven to be a relatively high-yielding hedge against inflation as rental rates across the board have been able to keep pace or even exceed inflation.
Here is why HNWIs gravitate towards income-producing real estate in the face of inflation. Unlike public equities, real estate can thrive from inflation. Real estate can work in your favor by leveraging inflation – even increasing your income as inflation rises. This was evidenced by rising rental rates in 2022 that kept pace or exceeded inflation in many markets.
Besides its value in the face of inflation, HNWIs have historically relied on income-producing real estate as a reliable long-term investment offering income, appreciation, tax benefits, and a shield against market volatility. Inflation is the perfect counter in the face of inflation and market uncertainty.
HNWI not only coveted cash-flowing real estate for its valuable wealth-building and preserving attributes but also for the peace of mind it provides in the face of economic turmoil – providing a consistent stream of income in the face of potential job loss or reduction.
Another reason HNWIs gravitate towards cash-flowing real estate is their ability to invest passively. Many investors are familiar with real estate as a proven wealth creation and preservation tool. Still, most don’t have the time to be a landlord and deal with collections, evictions, overflowing toilets, and all the other headaches of managing an investment property alone.
The good news is that any investor can enjoy the same inflation-hedging and volatility-shielding advantages of cash-flowing real estate without the headaches by investing passively in a private company specializing in cash-flowing real estate investing such as multifamily, single-family residences, and affordable housing.
By investing in one or more private investment (i.e., private equity) real estate funds, HNWIs can leverage the expertise of multiple experts across multiple geographic locations to generate multiple streams of passive income diversified against potential losses from an economic downturn.
HNWIs leverage this income and underlying appreciation for reinvesting and accelerating wealth building exponentially. Any qualified investor can model these investing habits of HNWIs to build and maintain their passive income streams and generate their wealth.
For investors seeking to avoid the mistakes of 2021 and 2022, why not turn from the masses and model your investment strategy after HNWIs who are leaning on cash-flowing real estate to grow their portfolios and preserve capital in the face of inflation and recession in 2023?
