Hey investors, how are your investments holding up? The stock market has been crazy over the last few weeks due to the COVID-19. Investors pushed the stock market to a new high in February because we were too complacent. We were investing for the best case scenario and didn’t take the COVID-19 outbreak in China seriously enough. Many of us thought the coronavirus could be contained before it comes to the US. Sadly, that was a mistake. The US now has over 500 cases of COVID-19 in 33 states. Once it’s clear the coronavirus has arrived, investors reacted and the stock market dropped like a rock. Unfortunately, many investors hoped for the best and didn’t prepare for the worst.
I’m not any smarter than you or any other investors. However, I went through 2 big stock market crashes since 1996. Here is what I learned from those two crashes.
- Dot-com bubble – You have to stay invested. Keep buying stocks when the market crash. This is especially important when you’re young. If you’re 25, you have plenty of time to wait for the stock market to recover. Just keep investing.
- Global financial crisis – I learned from the previous crash that I needed to keep buying and I did. However, it was a bit different this time because I had more money invested in the stock market. I kept investing, but I couldn’t buy much with my income. I didn’t have any extra money to take advantage of the down market. At the time, we had 100% equities.
The main thing I learned from these 2 crashes is to keep investing. Don’t sell all your stocks when the market crashed. It’s difficult to figure out the right time to sell and even harder to time getting back in. However, you also need a strategy you can stick with. We’re older now and we don’t ever want to see our portfolio drops by 50% again. That’s why I diversified a bit and invested more in alternatives in recent years. Now, our portfolio has stocks, bonds, rentals, REITs, real estate crowdfunding investments, and international stocks. Today, let’s go over those alternative investments and see how they’re holding up. Did it work or should I have just invested 100% in stocks? We’ll go from my favorite to least.
Real Estate Crowdfunding
Over the last few years, real estate crowdfunding has become my favorite alternative investment. Basically, you invest in a real estate project and reap the profit when the property is sold. Some projects also generate income during the holding period so that’s a bonus. Here are the main reasons why I like real estate crowdfunding so much.
- I like investing in real estate. These projects are backed by real properties so your investment won’t drop to $0. In the worst case, the property will be liquidated and you’ll recoup some money.
- I could invest in up and coming locations. Previously, I invested in local rentals, but the price has gone up so much over the last 10 years. Now, it’s very difficult to make money through rents in Portland. There are better opportunities in other states like Texas and Idaho.
- These are long term investments. I prefer to invest in projects that take about 5 years to complete. These shouldn’t be affected by short term news like the coronavirus. The income from retail projects might drop a bit, but that’s just short term. People still need a place to live so apartment complex projects shouldn’t be affected.
- Minimal correlation to the stock market. My investments are holding their value for now. I think the sponsors (companies that run the projects) can probably benefit from the lower rates.
However, we haven’t been through an economic downturn so I’m not sure how these projects will really hold up. They should be fine, but you never know. That’s why I focus on investing with companies that went through the 2009 housing bubble. If they survived then, they should know how to deal with a downturn. For now, I limit real estate crowdfunding to less than 10% of our portfolio. If they work out well in the long term, then I’d probably increase our allocation more.
If you’re interested in real estate crowdfunding, signup with CrowdStreet to see the projects on their marketplace. There are many impressive office buildings and apartment complexes on offer right now. Investors want to diversity.
Here is the spreadsheet of how our RE crowdfunding investments are doing so far.
Next are rental properties. Currently, we have 2 units, a rental condo and a unit in a duplex. We live in one unit and rent out the other. The local rental properties are a great alternative to the stock market. People still need to live somewhere and the stock market isn’t going to change that. The rental income should be stable.
However, I can’t be a DIY landlord anymore. I need to go to Thailand to help out my parents more often. Mrs. RB40 doesn’t want to deal with them so we’ll consolidate to just our duplex at some point. I tried several property managers, but I’m not happy with them. They’re happy to take a cut (10-12%), but they aren’t very helpful when issues arise.
Anyway, our rental income is holding steady. This is a very good alternative to the stock market if you can handle being a landlord. You can check on our rental income here. I update that page monthly.
Okay, this is the last category in real estate. A portion of our portfolio is invested in REITs. These are companies that own and operate real estate which generates income. Most of our REIT investment is in VNQ, Vanguard’s REIT index fund. In theory, REIT should provide a good alternative to the stock market. In reality, we’re still investing in stock. When the stock market drops, REIT companies drop too.
We can see that VNQ tracks the S&P 500 index pretty strongly. VNQ is doing better, but not by much. It seems REITs aren’t a true alternative to the stock market after all. They pay out more yield than most stocks. That’s the main thing I like about them. I’ll probably reduce our REIT allocation in the future because it’s not a good alternative. I’ll allocate more toward real estate crowdfunding and the stock market instead.
Another alternative to the US stock market is international stocks. However, it’s hard to beat the US stock market. When the US stock market drops, the world stock markets drop too. Let’s see how our international investments are doing.
Developed international markets
Mrs. RB40’s retirement fund is invested in a 2040 life cycle fund. It has a good percentage of international stock allocation.
The developed international market index isn’t doing too well this year. In fact, the US stock market has been a better investment for a long time. Maybe we should manually allocate her retirement account instead of going with the lifecycle fund. What do you think?
I have some emerging market index funds in my retirement account, mostly VWO. They aren’t doing too hot either. That’s understandable because COVID-19 started in China. That whole region got hammered hard economically.
For now, I think I’ll stick with emerging markets. China will keep growing and it’ll become the biggest economy in the world soon. The US stock market has been a better investment over the last 10 years, though. We’ll see how it goes.
Ugh, bonds. The 10-year treasury rate is now under 1%. You’ll lose money after accounting for inflation. However, bond is still an important part of our allocation, especially as we grow older. Usually, I keep about 20% in bond/cash, but I increased it to 30% last year. Now, it’s back to about 20%. If the stock market keeps dropping, I’ll consider moving more into equity.
This is what I learned from the last recession. It’s good to have some allocation in bonds so you can take advantage of a recession. On the other hand, a big bong allocation will decrease your returns during the good years.
Here is how VBTLX did so far in 2020, way better than the S&P 500.
That’s all our alternative investments. Let’s summarize.
- Real estate – so far so good except REITs. The REITs collate too much with the stock market. I might as well invest in stock or go with real estate crowdfunding.
- International markets – pretty bad. In particular, I don’t see a point of investing in the developed markets (mostly Europe and Japan) anymore. The emerging markets are okay. They’re not doing well, but there is still potential. It seems international markets are not a good alternative to the US stock market.
- Bonds – still the best alternative to the US stock market. When the stock market goes down, investors still flee to safety.
I want to cover a few more things for completeness’ sake. These are part of our net worth, but I don’t look at them as investments.
- Primary residence – as good as any place to park your money. Our home is holding its value pretty well for now. I don’t think a recession will make a big difference since we don’t plan to move anytime soon.
- Intellectual property – my blog. Currently, I value it at 2x annual income. I’m pretty sure my online income will drop significantly if we get a recession.
- Pension – I have a very small pension. It’s only worth about $20,000. Pensions and annuities are a great alternative to the stock market. The payout should be steady regardless of how the stock market behaves.
That’s it for our alternative investments. Generally, I’m happy with how our net worth is doing. It’s down 5% so far in 2020, but that’s much better than how the stock market is doing. I’m okay with that. IMO, the stock market will drop more this year. It’s a good time to have some alternative investments in your portfolio.
What about you? Do you have alternative investments? What’re your favorite alternative investments to the stock market?
Image credit: Tim Gouw
Source: Retire By 40
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