As someone deeply immersed in real estate investing, the allure of tangible assets and the potential for significant returns are undeniable. However, my investment strategy isn’t confined to private real estate and businesses alone.
Despite the potential high yields in real estate, I maintain a balanced portfolio by investing in index funds. This approach isn’t about hedging bets but about crafting a diversified investment portfolio that aligns with both my immediate and long-term financial goals.
In this blog, I’ll share why index funds still play a crucial role in my investment strategy, even as a real estate investor.
Why I Still Invest in Index Funds:
1. In Retirement Accounts:
For me, index funds are a cornerstone of retirement planning. In these accounts, my goal isn’t to achieve extraordinary wealth quickly but to ensure steady growth and security for the future. Index funds, known for mirroring the market’s performance, provide a reliable vehicle for this purpose. They allow me to build a retirement nest egg that benefits from the broader market’s returns, which historically have been positive over long periods.
2. As Insurance Against Private Investing and Business Mistakes:
Investing always involves risk, and real estate is no exception. To mitigate the potential downsides of private investments and business decisions, I use index funds as a form of financial insurance. By regularly contributing to these funds through dollar-cost averaging (DCA), I minimize the impact of any poor decisions in other areas of my portfolio. This strategy provides a safety net, ensuring that not all my capital is exposed to higher-risk ventures.
3. Taxable Accounts for Liquidity:
Liquidity is another reason I allocate part of my portfolio to index funds, especially in taxable accounts. Real estate investments are inherently illiquid, taking time and the right market conditions to convert into cash. In contrast, index funds can be sold much more quickly and with fewer transaction costs, providing ready access to funds when needed.
Why Index Funds Over Individual Stocks?
Choosing index funds over individual stocks is a strategic decision supported by substantial data. While I believe it is possible to beat the market, historical evidence shows that over 90% of investment managers cannot consistently beat the market’s returns. This statistic underscores the challenge and unpredictability of stock-picking, which even professionals struggle with.
On the other hand, index funds offer a way to harness the market’s overall growth, which tends to be positive over the long term. Index funds provide a compelling low-cost option for investors looking for a reliable investment without constant monitoring and analysis.
Meanwhile, this allows me to focus time and energy on identifying investment opportunities in private real estate and businesses, where the markets aren’t as efficient as public markets and more significant discrepancies between price and value exist. This ultimately leads to above-average returns compared to indexes like the S&P 500.
Would I Ever Invest in Individual Stocks?
While my primary focus is on areas within my circle of competence—accounting, financial services, digital marketing, and real estate—I remain open to investing in individual stocks. However, I would only consider this for companies where I have a deep understanding of the industry, see a clear opportunity, and believe in the business model. Like Warren Buffet, my interest in such stocks would not be speculative; instead, I would invest because I believe in the business’s long-term potential, with the stock serving as a means to acquire a stake in its success.
Conclusion
Diversification is key to any robust investment strategy, and for me, that includes balancing real estate investments with index funds. This blend not only mitigates risks but also ensures I am prepared for various financial needs and goals throughout my life. Whether it’s building a retirement fund, safeguarding against investment missteps, or ensuring liquidity, index funds are an essential part of my financial plan.
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