In the real estate investment world, you will hear an often repeated catchphrase “You make money when you buy, not when you sell.” I am not a real estate investor, but I understand the sentiment behind this mantra. I’ve often considered the potential of applying this investment strategy to equity fund investments. Why or why can’t this approach be applied to acquiring equity assets? More specifically, I’m talking about buying equity ETFs or mutual funds utilizing similar tactics of successful real estate investors.
One House at a Time
About a year ago, I had the pleasure of reading a book by John Schaub called “Building Wealth One House at a Time”. John did a superb job of describing a very methodical way to build a small real estate empire in about 10 years. Did you notice that time frame? This is a key attribute of successful real estate investors. They think in decades, whereas many equity fund investors think in days, weeks or months. Many equity fund investors begin by building a “balanced” portfolio with several different ETFs or mutual funds. What if equity fund investors took a decade or more outlook about their portfolio? What if equity fund investors concentrated their equity contributions into funds that are “on sale” rather than equally distributing their investment dollars into their high-flying funds and the funds that aren’t doing so well?
You Make Money When You Buy, Not When You Sell
Not only do our real estate investor friends have a long-term outlook on their investments, they like to buy property when it’s “on-sale”. You can call this shrewdness or wisdom, but either way, the successful real estate investor knows how to spot a deal. The typical purchase prices I hear from real estate investors are 10% to 30% below market value. Those numbers aren’t set in stone, but it gives them a ballpark figure to decide whether to even consider a deal. What if equity fund investors only bought the funds they want in their portfolio when they went “on-sale”? This is subjective, but we could start with 5% below recent highs; many call this “Buying-The-Dip” or BTD, or BTFD. What if equity fund investors continued to focus their buy orders on those assets in their portfolio that continue to fall in price? What if equity fund investors leapt for joy when a fund that they want in their portfolio goes “on-sale” for 10%, 20%, 30% or even more below the prices they were just a few months ago?
A Balanced Portfolio is Overrated
Real Estate investors are more concerned with buying great assets at great prices than balancing their portfolio. Most real estate investors are not going buy equal amounts of property on the east side of town as they do on the west, north or south. They will usually buy where the deals are. And just because they are overweight real estate in the city, that doesn’t mean they are going to sell off a city property, so they can buy a property in the suburbs, just to bring “balance” to their portfolio. What if equity fund investors did away with the goal of a “balanced” portfolio and concentrated on buying their selected funds when they were “on-sale”? What if equity fund investors only trimmed profits on a fund when it became so large and had produced such high profits that those profits could easily buy a new position in a fund that is currently “on-sale”?
Open the Aperture of Your Investment Portfolio Lens
Most successful real estate investors are flexible. They know the perfect deal isn’t just going to fall in their lap. Some are like vultures. They circle their city, county, or state searching high and low for anything that would be a great addition to their real estate portfolio; at the right price that is. They may forego single family homes if that market shows no prospects of a great deal; and they may “settle” for a duplex that needs a little work but has great potential. You see, our real estate investor friends give themselves options. Some will even move to another city altogether to find more and better deals. Why does the typical equity fund investor give themselves so few choices? Many worldwide equity fund investors are covering the entire world of equities with a simple 3 or 4 fund portfolio-template built for them by well-meaning money managers. There is nothing wrong with these portfolios and they work well over long periods of time. But, I see flaw with these prefab portfolios. Typically, those 3 or 4 funds are very closely correlated. So, if you have money to invest weekly, bi-weekly or monthly, the opportunity to buy equities at a 10%, 20% or 30% discount will be few and far between. For this reason, I have selected 31 ETFs from 31 different Morningstar categories that have good long-term track records to invest in. This is what I mean when I say, “open the aperture of your investment portfolio lens”. I don’t think you need 31 funds in your portfolio to find great deals, but I do believe it’s going to take more than 3 or 4 funds to be able to consistently find great funds at great prices.
Now let’s see what successful real estate investors suggest to new real estate investors.
33 Recommendations Real Estate Investors Give that Equity Fund Investors Should Consider Employing
- Make your money when you buy
- Treat your investments like a business
- Diversify your investments
- Understand the risks
- Put numbers over emotions
- Make a plan
- Consider the (Equity Markets) as long-term investments
- Learn how to spot a deal
- Don’t underestimate the power of the market
- Set reasonable expectations
- Don’t limit yourself
- Be flexible and hone your craft
- Find rental properties in emerging neighborhoods (Translation – don’t be afraid to invest in Emerging Market funds)
- Pay attention to market cycles
- Stay educated
- Know The Markets
- Get to know your market
- Have a rainy-day fund
- Do your homework before listening to paid advisors
- Don’t over-leverage yourself
- Network
- Watch those expenses
- (Mutual fund & ETF) analysis isn’t as complicated as you may think
- Stay focused on your strengths – (and work on your weaknesses)
- Get all the tax benefits you can
- Work with people you trust
- Be honest
- Develop a niche
- Find help
- Do your homework before listening to paid advisors
- Know your tax laws
- Have multiple exit strategies
- Learn about market cycle theory
Resources:
18 Ways New Real Estate Investors Can Succeed In 2018 – Forbes – https://www.forbes.com/sites/forbesrealestatecouncil/2018/02/23/18-ways-new-real-estate-investors-can-succeed-in-2018/#162377ab2980
10 Habits of Successful Real Estate Investors – Investopedia – https://www.investopedia.com/investing/habits-of-successful-real-estate-investors/
24 Essential Property Investment Tips from Successful Investors – roofstock – https://learn.roofstock.com/blog/real-estate-investing-tips-from-successful-investors
If you are satisfied with your 4-fund equity portfolio and you like the “set-it-and-forget-it” style of investing, I highly recommend that you do NOT change anything you are doing. Dollar cost averaging into those 4 funds works fine, and it’s easy. But, if you think it’s worth the effort to “seek-more-alpha”, then consider studying and employing the tactics of successful real estate investors. Many real estate investing principles are actually just good investing principles. And these investing principles can work in any market, including the equity markets.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: I am not a professional investment advisor. Please perform your own due diligence or seek the advice of a Registered Investment Advisor prior to making any investment decisions.