It’s not surprising that many investors are confused by current markets and aren’t sure where the smart places to put their money are. Here’s what you need to know, and how to balance the blind optimism with sound financial decisions.
The Icarus Market
It seems like many markets are just flying towards the sun with wax wings and not a care in the world.
Whether it is the Gamestop and Robinhood scandal, a tweet from Elon Musk that sends bitcoin rocketing or investors piling into the wrong stock, some sectors seem to be riding on pure speculation with the blinders on. Or at least hoping they aren’t the last ones holding the hot potato when the music stops.
There is no question that the roller coaster is exciting. Yet, there is a lack of real fundamentals supporting some of these dramatic swings.
Hope Is Not A Strategy
It is good to be optimistic. It doesn’t feel good to miss out on big wins. Though hope alone is not a strong or reliable investment strategy.
We even see this in some real estate markets. Despite the fact that giant employers like Salesforce have said staff can now work from home indefinitely, some developers are building even bigger and more expensive buildings in San Francisco and New York City. Some have been featured in the headlines claiming they believe beautiful new community spaces will be a magnet to pull people back to working in offices. Nevermind the fact that there may already be a 50% oversupply of space in some places.
The same can be true in some residential property markets too. Home sales prices have set new records over the past year, as have sales volume.
There may be strong supporting fundamentals in some locations which have been undervalued and are reaping a windfall of new residents who are seeking new types of housing and new locations. In other cases, prices may already be beyond what a retail home buyer can afford to pay and live there. They may only make sense for speculative house flippers and Airbnb hosts.
The media seems to be exclusively focusing on the upside, though investors shouldn’t overlook the real data. There are close to $90B in defaulting residential mortgage loans just waiting for foreclosure moratoriums to expire.
For some amateur investors who are ignoring this data, they are going to be trying to surf big waves with concrete boots on.
Interestingly there are sectors where there is surprisingly little or even declining amounts of distress. Including vacant land and multifamily property loans.
Multifamily may be poised to rise with a solid foundation as a wave of new renters hit the market. Governments are stepping up to pay or subsidize rents in a historic way.
Making Cents & Dollars Of The Current Market
It is absolutely understandable that investors don’t want to miss out on the big gains they see in news headlines. It is rudimentary human nature.
However, these speculative bets have to be over balanced by tangible assets. Given the swings and underlying fundamentals at play today, individual investors may need to restructure portfolios 90/10 in favor of hard assets and cash flow. If one of those wild bets hits a 100x return, you’ve done well. Especially if you’ve weighted your portfolio with solid cash producing assets like multifamily rentals. You are less likely to lose your capital, yet reap all of the gains when it is raining gold.