How to Avoid LARGE Loses in Passive Investing

[Don Konipol]

How to avoid large loses in passive investments?

As important as due diligence, analysis, knowledge of the property type, track record of the syndicator, correctly predicting economic trends, and timing is, the number 1 way to avoid a devastating loss is 

NEVER INVEST MORE THAN 10% OF YOUR INVESTABLE ASSETS IN ANY ONE DEAL.  

If your portfolio is large enough, 5% is better.

Now, some people believe that this diversification reduces the chances for a large gain.  Not true.  For that to be true, there would have to be ONLY ONE “best” investment.  It may require more work, more analysis and more time, but if you can find one great passive investment, I bet you can find 5 or 10.  

Just how important is this “rule”.  Consider this, as an “experiment”, 24 months ago I invested $300,000 in equal amounts ($30,000 in each) in 10 speculative small REITs.  The two WORST performers are down 85% each!  If I invested the whole $300,000 in either or both of them, I’d have lost $255,000 of my $300,000. And if this represented my total portfolio, it would be like starting over.  However, one of the other REITs I invested in quadrupled in price, and as a whole I’m $150,000 positive.  By diversifying, but still investing in the most promising deals, you limit the possibility of a devastating loss without limiting your upside.  

[Brian Burke]

Great advice, @Don Konipol. One piece of advice I often repeat is that the goal of diversification is to reduce or eliminate any single point of failure.  This means investing across asset classes, geographical locations, strategies, and sponsors.  Don’t put everything in one deal, with one sponsor, or only one type of property.  And to broaden out further, invest in things outside of real estate, too.