There have been 36 stock market corrections since 1950, according to data from analytics firm Yardeni Research. That means the S&P 500 has declined more than 10% at least once every two years.
While the next correction will come, and may be short-lived, the potential for a crash always exists. What if the market drops 22.6% in one day, as it did on Black Monday in 1987? And what if a high portion of your wealth is tied up in equity investments?
If the history of the market teaches us anything, it’s this: There will be a major correction. 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’ve expected a market correction for a long time, yet it hasn’t come. There are lots of positive indicators. A major correction might not happen in the next few months, or even the year. But it will happen, and the value of financial assets will decline,” says Don Wenner, CEO of DLP Capital Partners.
To prepare for the downturn, you must think about your goals and needs. Over 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 a 10%, 20%, or 50% loss?
“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. What would you do if your portfolio declined from $500,000 to $250,000?
Finally, 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 instance, a Motley Fool article in December 2019 listed stocks to avoid if a recession hits. Among them were LVMH, a luxury goods conglomerate, and Huazhu Group, a hotel company. Notice the focus on luxury retail and travel. Much of that is discretionary spending (which slows during downturns).
After careful discussion with your advisor, exit those assets that could decline significantly in a downturn. It will give you cash to capitalize on opportunities when a recession hits.
“At DLP, we’re currently selling our housing investments we think will become more illiquid and will not generate as strong of cash flow through the next cycle. These are assets we don’t plan to own long-term. Exiting those now gives us cash on hand to be liquid and capitalize on opportunities,” notes Wenner.
Overcoming volatility with cash flow and liquidity 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).
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.
“In a recession, 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. 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.
The Housing Fund will enable us to 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 plan to achieve those returns by leveraging DLP’s proven direct residential real estate lending and equity strategies. This will allow 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|
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 11%+ annual return net to investors.
The Lending Fund has averaged returns of 13.92% 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!