There have been 54 stock market corrections since 1928, according to data from analytics firm Yardeni Research. That means the S&P 500 has declined more than 10% once every 1.7 years. This has investors questioning how they can outperform and outlast the current market volatility.
Simply put, the potential for a crash always exists, even when the good times are rolling. There’s no greater proof of that than the first quarter of 2020. As the new year arrived, expert investors were predicting another great year for stocks. Then, the COVID-19 pandemic hit, and it all came crashing down.
Within 22 trading days, the S&P 500 dropped more than 30%—the fastest in history. The lights on the historic bull market burned out. And we entered bearish times.
For those with a large portion of their wealth tied to equity investments, the Coronavirus outbreak has been especially painful to endure. But not all is lost—ever. These tough times are temporary and we will return to normalcy. Also, you can take steps to protect your wealth from the volatility we’ve seen recently. And you can come out in better shape.
If the history of the market and the events in early 2020 can teach us anything, it’s this: A major correction will occur. Stocks and home values will decline. Most asset classes will experience disruption.
So, the question is: How do you protect your wealth from market volatility?
In this article, we’ll discuss how you can not only survive market volatility, but also take advantage of it and earn solid returns.
Analyze your goals and needs
From March 2009 to November 2019, the S&P 500 gained a whopping 468%. That makes the current bull run of the 2010s the longest and best ever.
It’s easy to sit back and enjoy the profits in such a market. However, you must plan for a downturn if you hope to protect your wealth.
“We expected a market correction for a long time, and it seemed like it would never come. Then, COVID-19 suddenly hit us and shut down everything. And we began to see the value of financial assets decline. The thing to remember is, downturns always happen,” says Don Wenner, CEO of DLP Capital Partners.
To prepare for such downturns in the future, you must think about your goals and needs. Considering the next 6-10 years, ask yourself:
- Will income and distributions be critical to you? If so, how much do you expect to need? Will liquidity be very important?
- When do you need to withdraw money? Is growth over the next 5, 10, or 20 years important?
- If you start losing a lot of money, can you stay strong and wait it out? Can you withstand losses like what we’ve seen with the COVID-19 recession?
“If you have the luxury of a longer horizon, that can make a significant difference in how much the next cycle matters to you. You must consider your investment willpower. Too often, investors see the decline in the portfolios and exit at low points,” states Wenner.
Numbers back up Wenner’s point. According to market research firm Dalbar Inc, the S&P 500 Indexed averaged an annual return of 9.85% from 1995 to 2015, yet the average investor only earned 5.19% annually.
So, be honest about how much investment willpower you’ll have. Many investors believe they can push through the downturns, but fear strikes in and they make poor decisions.
For instance, if you had $500,000 in an S&P 500 ETF as the Coronavirus outbreak began affecting markets, you may have seen your portfolio decline to $335,000 within three weeks. What would you have done? Or what did you do if you had a similar scenario?
To further protect yourself, consider reducing those assets most exposed to a downturn. Continually examine your portfolio with your financial advisor. Consider the assets that will be most exposed during a downturn.
For example, the Coronavirus pandemic mostly halted domestic and global travel. This killed revenue for major hotel chains. During the first quarter of 2020, major hotel brands, such as Hilton, Marriott, and Hyatt, all suffered 50%+ declines.
It’s hard to predict recessions, especially when it’s the result of a public health crisis like COVID-19, but thorough analysis and discussions with your advisor can show you which assets have the most risk. If you exit those assets, that gives you cash to capitalize on buying opportunities during the recession.
“At DLP, even though we didn’t know exactly when a downturn would come, we’ve been preparing. We’ve sold off 250 million worth of properties since 2018,” notes Wenner.
“We strategically chose housing investments we felt would become more illiquid and difficult to manage during a recession. These were assets we didn’t plan to own long-term. We were able to sell at peak pricing and earn more than 30% annual returns on those properties. Exiting those has given us cash on hand. This enables us to be liquid and capitalize on buying opportunities.”
Overcoming volatility with cash flow and security from real estate investments
To protect your wealth from market volatility, you have to prepare. That means making investments that produce income and don’t experience as much volatility. After all, if you generate cash flow during a market correction, you won’t feel the squeeze as much.
Stocks that offer solid dividends and do historically well during market downturns make sense. For instance, Procter and Gamble, a consumer staples giant, has a dividend of 2.36% and has held up better than many others during recessions (not many are skipping toothpaste and laundry detergent). And as we’ve seen during the COVID-19 outbreak, toilet paper sells well during a crisis.
Real estate investment trusts (REITs) make sense too. Like consumer staples, most people aren’t forgoing on homes during a recession. Furthermore, REITs produce cash flow, making them highly resilient to downturns. Except for the 2008 housing crisis, REITs have outperformed the S&P 500 by more than 7% during late-cycle periods. Data shows that real estate investments, such as REITs, do offer protection against volatility. For stocks, standard deviation is 19.7%, according to Seeking Alpha research (standard deviation is a measure of market volatility). Compare that to every real estate investment class. As CBRE research shows, all types of property are less volatile.
Multi-family investments earn better returns than other real estate investments and have less volatility (except retail).
“DLP Capital Partners focuses on resident housing investments. Why? Because housing investments give us stable assets that will be in demand in all markets. Plus, we make short-term loans to real estate investors. That produces monthly income from the investment. With cash flow, you won’t be forced to exit in a soft market,” describes Wenner.
Specifically, DLP invests in affordable and typically workforce housing. Since the 2008-2009 recession, there has been much more development of luxury housing. This has created a shortage of affordable rentals. Supply doesn’t meet demand in nearly all markets. That makes workforce housing particularly attractive, especially if you want consistent returns and protection from volatility.
“As the Coronavirus-induced recession continues, we believe affordable workforce housing will perform very well. Luxury housing, especially in markets with a lot of supply, could get hit hard as people are pushed into more affordable communities. Rents will be strong and occupancy will be high in the affordable space,” attests Wenner.
Winning with the DLP Housing Fund
“At DLP Capital Partners, we aim to mitigate risk and capitalize on opportunities. To achieve that, we operate by two principles: No losses and consistent returns—even in turbulent markets like the one in early 2020. Real estate, a historically stable asset class, allows us to produce consistent income for our investors without losing money,” details Wenner.
In 2020, we’re proud to launch a new $1 billion flagship fund: The DLP Housing Fund.
During tough times like those brought by the Coronavirus, the Housing Fund will continue helping our investors succeed. The evergreen REIT consists of a mix of equity investments in single and multi-family real estate and debt funding to experienced operators (that debt is backed by single and multi-family housing).
Overall, the Housing Fund aims to provide annual returns of 12%+ net to investors. We achieve those returns by leveraging DLP’s proven direct residential real estate lending and equity strategies. This allows you to maximize your liquidity with monthly distributions and equity returns.
The Housing Fund gives investors other notable benefits too, such as tax sheltering through depreciation and 1031 tax-deferred exchanges. You can also exit your investment annually (no long-term lockouts or forced sales of properties to satisfy a wind down of the fund).
“The Housing Fund is an industry-first hybrid fund combining both debt funding and equity investments in a single fund. It’s designed to produce consistent, high-yield returns while providing liquidity and security to its investors,” notes Wenner.
|Fund Type||Real Estate Equity|
|Fund Investments||Direct Real Estate Ownership & a minority of investments in Secured Real Estate Loans|
|Direct/Indirect Security||Equity Ownership in Real Estate|
|Inception Date||January 2020|
|Distribution Frequency||Monthly (Pref), EDC Distributed to Investor Accounts Annually|
|Targeted Monthly |
|Preferred Return||6% Net; Paid Before 1.5% Management Fee|
|Management Fee||1.5% Subordinate to Preferred Return|
|Targeted Annual Return Net to Investor||12%+ Net|
|Return Split||80/20 Upon Achieving 6% Preferred Return &|
60/40 Upon Achieving 12% IRR to Investors
|Benefits of Leverage||Yes|
|IRA Investment Option||Yes|
|Tax Shelter through Depreciation||Yes|
|Target Fund Size||$1 Billion|
|Target Minimum Investment||$250,000|
|Minimum 5% |
|Must Be Accredited||Yes|
|Audited Financials||Yes, CohnReznick|
|Legal Counsel||Seward & Kissel, LLP|
During the COVID-19 recession, DLP Capital Partners has begun making moves to strengthen the fund for the long-term. Since many operators didn’t prepare well, that equals less competition for deals and the chance to buy properties at a discount from operators that need cash. Lower interest rates, lower prices, and lower leverage also create the potential for higher yields.
As you can see, you can make it through difficult periods with the right investment.“We can’t control the weather, politics, or global competition, etc, but we can control our activities and the ways we choose to react. The DLP Housing Fund is well-positioned to capitalize on the volatility and distress the market is facing in 2020. Certain factors, as well as our consistent cash flow and disciplined operations, will enable us to achieve our targeted returns and distributions for investors. You can’t get that with stock market investments,” adds Wenner.
A snapshot of DLP’s other fund
The Lending Fund produces income for investors through leveraged loans to qualified real estate entrepreneurs. The fund has both equity and debt investments and aims to provide 10%+ annual return net to investors.
The Lending Fund has averaged returns of 13.86% since its inception in 2014.
Maintain and grow your portfolio—without putting your wealth at risk
By analyzing your needs, goals, and risk tolerance, you can choose investments that will put you in the best position now and over the long run. As you invest, stick to the plan you’ve made with your financial adviser. Don’t let emotions, like fear and panic, lead you to poor decisions.
More importantly, don’t think only of the good times. Prepare for downturns. They will come. To do that, choose investments that provide stable growth, cash flow, and liquidity. Real estate is one of these investments.
At DLP Capital Partners, we have real estate investment funds, such as direct lending funds and REITs, that can not only protect you from volatility, but also enable you to capitalize on opportunities during downturns. If you’d like to discuss how you can protect and grow your wealth, contact us at (610) 488-2375 to arrange a meeting with one of our investor success managers.
We’d also like to take this opportunity to invite you to any one of our upcoming investment dinners. Don’t miss out on the chance to hear about the DLP Housing Fund!