Is the Stock Market Overvalued? Time to Diversify?

The NASDAQ is trading five percent higher than before the COVID19 Pandemic hit. The S&P 500 has come back almost 85 percent from it low point in the last six months. Yet most of us agree that with restaurants at half capacity, travel and lodging at historic lows and many people sheltering in place, the economy isn’t near what it used to be.

This is why many market analysts believe the stock market is due for another market correction. Here are some recent articles on this very subject.

Equity Over-valuation Composite Indicator

Equity Over-valuation Composite Indicator

If it is overvalued and there is a correction, it will pay to have diversified your investment portfolio.

Craig Martin, president of the Family Wealth Consulting Group and an expert on alternative investments and diversifying portfolios, stated,

"A common way that investors attempt to protect their capital from the whims of equity markets is to allocate some of their money to alternative investments. By definition, these alternatives are not stocks or bonds, so they have dissimilar price movements and are not correlated directly to the equity markets.

Typically, as the prices of stocks move in one direction, alternatives (like real estate) don’t follow in the same direction.
"Alternatives in your portfolio that are not correlated to equity markets are very effective at reducing portfolio volatility. So, what is the benefit to owning a portfolio with reduced volatility?

Nobel Laureate, Harry Markowitz, author of Modern Portfolio Theory, it is possible for investors to design an optimal portfolio to maximize returns by taking on a quantifiable amount of risk. Essentially, investors can reduce risk through diversification using a quantitative method.

A simple rule is to mix asset classes with non-correlated price movements. In return, this will build an effectively diversified portfolio.

Obviously, just choosing any alternative doesn’t make your portfolio less volatile. You must choose those that offer a solid return, such as real estate or other instruments not affected by equity market price movements. Good, non-correlated alternatives should be able to produce income and not be significantly affected by short term market movements.

Allocating a portion of your portfolio to well-chosen alternatives is a prudent long-term investment strategy. This will reduce the risk of volatility and give you the opportunity to still earn competitive returns.

Multifamily is a great alternative for investments for these three reasons:

Best Risk-Adjusted Returns

Over the 25-year period from 1992 through 2017, multifamily real estate provided the highest average annual total returns (9.75%) of any commercial real estate sector with the second lowest level of volatility (7.75%), according to research cited in a 2018 report by CBRE, the world’s largest commercial real estate investment firm.

Millennials Place Strong Demand on Rental Properties

According to data from the U.S. Census Bureau, renting represents the most common form of housing for the millennial generation, the largest generation in U.S. history. The national rate of homeownership for millennials aged 25 to 29 was 31% and for millennials aged 30 to 34 it was only 45%.

Increasing Demand for Workforce Housing

According to the 2017 State of the Nation’s Housing study by Harvard Research, while construction of high-end Class A properties has increased in recent years, it has fallen for the Class B and C properties. In other words, workforce housing is facing a shortfall of units. That study found that, in the decade between 2005 and 2015, the supply of rental housing stock increased by nearly 100% for high-end units, but during that same period the stock of affordable units fell by 2%.

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