Ten years into a bull market, we are often asked how we feel about investing today versus staying on the sidelines and waiting for “real” opportunities to arise. In this post, we uncover a few common misconceptions around the “right” time to invest, whether in stocks or real estate. Most interestingly, the data suggest that regardless of asset type, it rarely pays to wait.
Is it possible to time the market?
It’s tempting to look back on any stock chart and convince yourself that with the right perspective, you might be able to “call” the next turn in the market. Of course, hindsight is 20/20. But sophisticated investors and advisors generally recognize the exceptional difficulty (or luck) associated with market timing. As a result, the more common recommendation is a “dollar cost average” approach to investing: put money into the market on a regular basis to achieve long-term returns in line with overall market performance. For those who do decide to “wait for a dip,” numerous studies have shown that the opportunity cost of sitting on the sidelines typically far outweighs any ability to buy stocks cheaper down the road.
A few more recent studies take this idea one step further: what if I have a lump sum of money to invest today? Should I invest it gradually over, say, a year? Or should I put all into the market right away? While it may seem counterintuitive, historically it has almost always made sense to invest that amount immediately. A well-known Vanguard study published in 2012 illustrates that, going all the way back to 1926, a lump-sum investment in stocks or bonds would have outperformed 12-month dollar cost averaging roughly 65% of the time. On average, an investor who put $1mm work immediately would have ended up with $55k more after ten years than by using a dollar cost average approach.
Is real estate different?
But what about real estate investing? We frequently hear the claim that real estate cycles are easier to predict. Which means investors often see less risk in waiting for the market to turn and for bargains to arise. Not surprisingly, history suggests otherwise.
First, private real estate has historically experienced less frequent “down years” than the stock market.1 Somewhat related, as the chart below illustrates, US real estate has offered relative stability. Over the past 20 years, the asset class has produced positive returns across any five year period inclusive of the financial crisis. Perhaps most importantly, the average volatility of these returns has been much lower than the stock market (in fact, roughly 40% less than the S&P 500 over that time frame).2
While past performance is not necessarily indicative of future results, these dynamics suggest that successfully “timing” the real estate market is actually more challenging than timing the stock market. Which gets to the heart of why investors have likely been increasing allocations to the asset-class over time: the potential to earn equity-like returns, but with more bond-like risk.
But what about today specifically?
Of course, if we saw clear warning signs that pointed to an imminent downturn, we might be tempted to raise a red flag and suggest investors wait. Within the commercial real estate market, we identify three factors that have historically caused periods of underperformance:
- Too much debt
As a real estate manager, we’re not in the business of predicting the timing or severity of the next recession. But we do believe we are able to take a view on real estate supply and debt. In both cases, we see little cause for broad concern.
Debt: Commercial mortgage debt has historically grown slightly faster than nominal GDP. Since the financial crisis, the US has seen a multi-year deleveraging, followed by a few years of credit growth roughly in line with the long-term average (see chart below). Anecdotally, lending standards, especially for new construction, remain significantly tighter than pre-crisis.
Supply: We identify certain pockets of oversupply across the country (for example high-end residential in New York City), but do not see an acute risk of broad-based oversupply in the system. The chart below illustrates this relative dearth of new commercial building relative to GDP in recent years.
Given these dynamics, we favor an approach that treats real estate as a permanent allocation within an investor’s portfolio alongside equities, fixed income, and other alternatives. We welcome you to review our other posts where we address questions around the sizing and composition of this allocation.
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- Based on number of negative return years for NCREIF-ODCE index and S&P 500 since ODCE index inception (Dec 1997).
- Based on standard deviation of annual returns for the NCREIF-ODCE index and the S&P 500, 1998-2018.