Warren Buffett, to say, “when he talks, people listen” is an understatement. Buffett’s life, as far as investing, his success, leadership, and money are recognized across the world.He has built his wealth long-term to over $80.9 billion as of 2019, making him one of the richest men in America. As CEO of Berkshire Hathaway, Warren, lives by a certain set of values that he uses to invest and make other life decisions. Buffett’s only two rules for Investing, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1. Another Warren Buffett quote regarding the stock market is,“Remember that the stock market is a manic depressive.”This statement for any financial analyst, adviser or simply a consumer of daily financial news, rings true. Equity markets swing wildly from day to day on the smallest of news, rally, and crash on sentiment, and celebrate or vilify the inanest data points. Buffett was also quoted saying, “Price is what you pay. Value is what you get.”In other words, don’t focus on short-term swings in price, focus on the underlying value of your investment, and said,“beware of the investment activity that produces applause; the great moves are usually greeted by yawns.”From a man who has made a fortune on companies like Apple, American Express, General Motors, UPS, Johnson & Johnson, MasterCard, and Walmart, this is sage advice.High returns with low risk is the key was and is his motto, and better said in his words,“risk comes from not knowing what you are doing.”Buffett thought that the temptation to believe that success in one area you know very well will then allow you to easily analyze and conquer another area you don’t know. This temptation to step out of your scope of knowledge and away from your lucrative investment comfort zone in to a new arena or unknown territory is much greater once you’ve had some good returns and your self-confidence and ego may be running high but should be resisted with vigor. Buffett himself has kept out of the technology sector for the most part, given his lack of knowledge of the sector. Buffett said it best:“Never invest in a business you cannot understand.”Invest for the long term he said and,“only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”That investment for the most part and for those of us who aren’t Warren Buffett is in REAL ESTATE.For those of us who aspire to live in uneconomically peaceful life, or non-entirely volatile financial lifestyle, or better said by Buffett himself a, “Manic Depressive”stock market, the best investment that comes to mind that best fits his advice and has proven to more often than not yield profit and is has the most flexibility in down markets for many century’s is REAL ESTATE. Real estate is one of those investments that Buffett said, “you’d be perfectly happy to hold if the market shut down for 10 years”.
Four Essential Elements of Successful Investment Portfolio
There are four essential elements of a sound and successful investment portfolio which are,effective diversification,active allocations,cost and tax efficiencies. Let’s look at each of these four essential elements in more detail.Effective diversification/strategic asset allocation strategy traditional views of diversification tend to focus on asset classes (e.g., equity, fixed income). Asset classes are essentially just legal definitions, and while they help steer you towards diversification, they’re not the only thing to focus on. Effective diversification requires you look at the underlying source of risk. Diversifying across the underlying source of risk, whether it’s related to the yield curve, the performance of a company or the inflation environment, is the core of a solid investment strategy.
Effective diversification requires you look at the underlying source of risk. Diversifying across the underlying source of risk, for instance, if you had held Lehman Brothers stock in your equity portfolio and Lehman Brothers bonds in your fixed-income portfolio, you would have held assets that belong to two different asset classes, but the risk you held was not linked to the asset class it was linked to Lehman Brothers. By implementing effective diversification as a strategy, you may be able to stabilize your portfolio by minimizing company overlap between your stocks and bonds.
While most portfolios are heavily exposed to the performance of companies (think equities and high-yield bonds), inflation may be the greatest risk that you face in retirement. During periods of unexpected inflation, equities and fixed-income investments may lose money; having assets in your portfolio that generally rise along with inflation is a central element of effective diversification/strategic asset allocation strategy.
Active Allocations/Tactical Asset Allocation Strategy
Research shows that markets are relatively efficient (i.e., most information is already priced in), thereby making the markets or individual stocks difficult to predict in the short term. Over three- to five-year periods, however, Nobel Prize-winning research indicates that markets are somewhat predictable.
Markets that look expensive today will tend to perform worse than markets that appear cheap today and vice versa. By monitoring global markets, investors may be able to avoid bubbles and take advantage of potential growth opportunities.
Use this research with caution—a tactical asset allocation strategy based on valuation isn’t the same as near-term market timing. There is no magic piece of evidence that tells you when to get in or out of the market. After all, what looks cheap today can get cheaper. What the research tells us is that the patient is often rewarded, but that’s not always the case.
Whether you’re on your own or working with an adviser, paying fees is a fact of life when it comes to investing. If you’re going to pay fees, make sure you’re getting good value. When you consider advisory and custodian fees, investment expense ratios and transaction costs, you could be paying almost 3% in fees annually. That’s too much!
Research from Vanguard (the powerhouse of indexing firms) shows that the value of a good financial adviser may cover their fees over time. Advisers add value by managing their clients’ feelings of fear and greed, building effectively diversified portfolios, monitoring markets for bubbles and opportunities, minimizing the opaque costs embedded in investment products, reducing clients’ tax burdens, recommending other investments such as REAL ESTATE to their clients portfolio which will add a much needed safety net to the volatility and potential stock market crash, as history has shown is a real possibility.
I do think it’s possible to do better than passive investing. Research shows that by having exposures like REAL ESTATE you have a chance of outperforming a purely indexed approach over time. As a result, it’s worthwhile to add REAL ESTATE to your portfolio to add real value and equity over time.
Finally, if you can find a strategy that offers a positive expected return with a lower risk factor, then the diversification benefits of adding more cost-effective REAL ESTATE to your personal portfolio is worth your while to acquire. A good experienced REAL ESTATE agent specializing in areas most sought after such as locations in cities with high projections of future residents or popular immigration locations of interests (e.g. MIAMI, New York City, Los Angeles.) is key to finding sound investments that have potential to increase in value over time or at the very minimum keep safe your investment capital.
The real measure of an investment strategy is how much of your money you get to keep. That’s where incorporating tax efficiencies into the investment philosophy come in. Research has shown that comprehensive tax planning can save investors 75 basis points annually. It might not sound like much, but with compounding, it’s a big deal.
One way to achieve greater tax efficiency is by increasing your use of tax-advantaged vehicles. Another approach is to use asset location strategies to minimize taxes by determining where assets should be held to take advantage of the best tax treatments. Proactively harvesting losses also helps offset future gains and can further bolster your bottom line.
While there are many ways to invest, there is no magic portfolio to be found. Even though building an investment approach based on the above concepts doesn’t guarantee the outcome you want, you can know that a portfolio built on the above concepts is rooted in a research-driven approach that, over time, has tended to provide the outcomes investors need.
There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss.No strategy assures success or protects against loss. Past performance is no guarantee of future results.Stock investing involves risk including loss of principal. However, investment studies have shown, REAL ESTATE in general has for many centuries been the most proven vehicle of safeguarding and enhancing an Investment Portfolio with highest yields of return with little risks.
Morally and ethically, Financial Adviser's should advise their investors/clients to spread their risks evenly to include REAL ESTATE, regardless of whether the adviser is rewarded financially. Each State has different law’s in place regarding commissions or bonuses to unlicensed individuals who serve as third party procurers of a real estate property sales. However, a good Financial Adviser is one who regardless of his own interest owes a fiduciary to their client to advise their client based on the clients needs and not their own.Creating and/or maintaining an investment portfolio that includes REAL ESTATE is necessary to safeguard their clients from the perils of a market crash. A portfolio without REAL ESTATE is vulnerable to this potential eventuality, therefore, it is negligent not to recommend to a client an addition of REAL ESTATE.