{"id":164765,"date":"2024-01-15T19:19:38","date_gmt":"2024-01-16T02:19:38","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=164765"},"modified":"2024-07-12T09:23:15","modified_gmt":"2024-07-12T15:23:15","slug":"how-to-protect-your-investments-from-volatility","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-to-protect-your-investments-from-volatility","title":{"rendered":"With So Much Uncertainty in the Markets, Here\u2019s How Smart Investors Protect Their Investments"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7573841359\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Remember the container ship that got wedged in the Suez Canal in March 2021? Within days, hundreds of ships halted. In less than a week, 12% of global trade halted.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This is merely one simple example of volatility. A tiny event in some remote corner of the world made life perilous and unpredictable for a billion people. The shockwave reverberated across the Earth.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">There are many more examples like this<\/span>. <span data-preserver-spaces=\"true\">COVID-19 <\/span>spawns in Wuhan, China, and creates a once-in-a-100-year worldwide pandemic.<span data-preserver-spaces=\"true\">&nbsp;<\/span>Or<span data-preserver-spaces=\"true\"> more theoretically, one butterfly flapping its wings spawns a hurricane on the opposite side of the globe.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Volatility Is The New Normal&nbsp;<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Interest rate hikes these past 18 months may not look like volatility. Rates consistently rose. But if you look at a graph of interest rates over decades, it looks more like volatility. Many&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-guide-to-real-estate-syndication\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">syndicators<\/span><\/a><span data-preserver-spaces=\"true\"> and investors were lulled to sleep by historically low rates for a long time.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1318\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/fredgraph-68.png\" alt=\"\" class=\"wp-image-164769\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/fredgraph-68.png 1318w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/fredgraph-68-300x102.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/fredgraph-68-1024x350.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/fredgraph-68-768x262.png 768w\" sizes=\"auto, (max-width: 1318px) 100vw, 1318px\" \/><figcaption class=\"wp-element-caption\"><em>Effective Federal Funds Rate (1955-2023) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/\" target=\"_blank\" data-type=\"link\" data-id=\"https:\/\/fred.stlouisfed.org\/\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You can\u2019t avoid volatility. But you can avoid many of its consequences. How? There are three things to keep in mind:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Broad diversification&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Rigorous due diligence<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Long holding periods&nbsp;<\/span><\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">No one we know of has done this better than Warren Buffett. And that\u2019s why he\u2019s one of our investment role models.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Here\u2019s a look at each of these concepts.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Broad Diversification<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Berkshire Hathaway is broadly diversified across various asset types, geographies, operators, and strategies. And the company has positions in multiple locations in the capital stack.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If you\u2019re a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">passive real estate investor<\/span><\/a><span data-preserver-spaces=\"true\">, we believe you should consider diversifying across various asset types, geographies, operators, and strategies\u2014and even consider various positions in the capital stack.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">My fund has been putting our advice into practice. Here is a picture of our current asset mix:<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1542\" height=\"730\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2.jpeg\" alt=\"current asset mix\" class=\"wp-image-164772\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2.jpeg 1542w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2-300x142.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2-1024x485.jpeg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2-768x364.jpeg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image3-2-1536x727.jpeg 1536w\" sizes=\"auto, (max-width: 1542px) 100vw, 1542px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">And here\u2019s a picture of where our funds are invested within the capital stack:&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1388\" height=\"834\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image2-3.jpeg\" alt=\"capital stack position\" class=\"wp-image-164771\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image2-3.jpeg 1388w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image2-3-300x180.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image2-3-1024x615.jpeg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image2-3-768x461.jpeg 768w\" sizes=\"auto, (max-width: 1388px) 100vw, 1388px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/how-the-best-real-estate-investors-diversify-their-portfolios\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Diversification<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;should protect investors from the volatility many investors experience. Investing across this wide array of factors will likely dampen the highest highs from one investment but also dampen the potential losses of a bad one.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I recommend you take that trade all day long.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Rigorous Due Diligence<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Buffett does a masterful job of choosing companies to acquire and invest in.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">It looks like magic. But it\u2019s not. Buffett stays focused on a handful of critical criteria. He sometimes refers to these simple criteria as jumping one-foot hurdles.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Buffett is a master at eliminating emotion from his buying and selling decisions, always looking for assets that can be acquired for less than their intrinsic value. This typically creates a wide margin of safety between his investment and the true value of the asset.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">My fund tries to follow Buffett in this path, and we encourage you to do the same. We use a 28-point due diligence checklist to help us in this process. And some of these points have many subpoints.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">For example, our underwriting analysis includes a third-party NOI audit. And our background checks sometimes include checks on other parties to the deal. A recent check found a lender (not the operator) whose CEO spent time in jail for multiple fraud charges. That\u2019s not OK with us.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Clear value investing criteria and unrelenting focus on our standards have resulted in us saying no to a very large percentage of the deals we review. Here\u2019s a snapshot from a recent six-month period.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1999\" height=\"713\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4.jpeg\" alt=\"investing criteria\" class=\"wp-image-164773\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4.jpeg 1999w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4-300x107.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4-1024x365.jpeg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4-768x274.jpeg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/01\/image4-1536x548.jpeg 1536w\" sizes=\"auto, (max-width: 1999px) 100vw, 1999px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The best investors I know are excellent at saying \u201cno.\u201d We recommend you do the same. Buffett said: \u201cThe best investors say no a lot. The very best investors say no almost all the time.\u201d<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Long Holding Periods<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Buffett is big on this one. He once said: \u201cOur ideal holding time is forever.\u201d<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">At 93 and 99, Buffett and the late, great Charlie Munger (rest in peace) have made investments that will profit their investors long after they hang up their slide rules.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Why are long-term holds so beneficial to investors like Buffett\u2014and you?&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Long-term holds avoid the pressure to sell at unfavorable points in the cycle.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Long-term holds tend to be paired with long-term, fixed-rate debt, which is not at risk when interest rate hikes devastate short-term, variable-rate borrowers.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Long-term holds can harness inflation to provide higher cash flow and appreciation.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Long-term holds can often kick the can down the road to avoid friction costs and capital gains taxes.&nbsp;&nbsp;<\/span><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Long-term holders have captured many of the benefits on this list. And they have avoided many of the pitfalls some syndicators, and their investors are experiencing now.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Noncorrelation to Wall Street<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You\u2019ll notice this feature was not one on my original list of how Buffett avoids the effects of volatility. When Buffett chose to operate a public company, he gave up this benefit. But I\u2019ll argue that his long-term focus and lack of care about share prices (Berkshire\u2019s or those of their holdings) is an offsetting factor.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This is one thing I love about private real estate. We are not beholden to the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-vs-stocks-performance\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mood on Wall Street<\/span><\/a><span data-preserver-spaces=\"true\">, a war in the Middle East, a CEO scandal, or a random tweet.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As a real estate investor, your cash flow and appreciation are not independent of external factors, but your real estate values don\u2019t rise and fall daily or monthly based on stock market sentiment.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Can you avoid volatility entirely? No way. But you can avoid many of its deadly side effects through diversification, due diligence, long hold periods, and noncorrelation.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em><span data-preserver-spaces=\"true\">Note: Thanks to my friend, Perry Marshall, author of 80\/20 Sales and Marketing, for his observations on world events, volatility, and butterfly wings.&nbsp;<\/span><\/em><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_c054ad89ef619f5adddd8988be8f421a\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_14bbb56a1a46be13c2e7a3fa6c0f0736\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<div id=button-custom-event-block_15d506d4df6f89f7ad404a2e6e10409c class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/how-to-protect-your-investments-from-volatility&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/how-to-protect-your-investments-from-volatility&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Mr. Moore is a partner of Wellings Capital Management, LLC, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (\u201cPPM\u201d) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188 or email invest@wellingscapital.com. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisors before investing.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Remember the container ship that got wedged in the Suez Canal in March 2021? Within days, hundreds of ships halted. In less than a week, 12% of global trade halted.&nbsp; [&hellip;]<\/p>\n","protected":false},"author":214608,"featured_media":164768,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7385,7119],"tags":[],"class_list":["post-164765","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-wealth-management","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/164765","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=164765"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/164765\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/164768"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=164765"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=164765"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=164765"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}