Can Real Estate Replace your 60/40 Portfolio?

Overview

For investors, perhaps the most shocking thing in this wild ride we’ve been on for the past few years was the upending of the 60/40 portfolio. Since the 1980s, portfolios with 60%stocks and 40% bonds were kept in balance because typically when one went up the other fell. The average return on those portfolios was 7% between 1999 and 2022, according to BlackRock. Then 2022 hit: 60/40 portfolios lost 17%.

The big question for every investor is this: were those positive returns a matter of luck, like flipping heads 30-plus years in a row? Or was 2022 just an outlier?

The appeal of the 60/40 portfolio is clear: investors want a passive investment with decent returns and not a lot of risk. They really only have to look at their portfolio once a year to make sure they’re still allocated in line with the formula. But a 60/40 portfolio isn’t the only way to get there.

At Bonaventure, we’re confident that alternative investments such as a real estate investment trust offer a similar solution to the intent of a 60/40 portfolio. It’s a simple, long-term investment and, over a long period of time, the investment will compound. Of course, there are other alternative investments with esoteric trading strategies and hedges on commodities and things like that. But I’m talking about real estate as an alternative to stocks and bonds.

The thing is, you can walk up to our buildings and touch them. They’re real. And it’s to invest in our buildings. Most people understand the long-term value of investing in real estate.

We want people to get the benefit of that proposition without buying a single-family home and renting it to people for the next 20 or 30 years. You can get the same advantages of paying down the mortgage, collecting rent and watching the value rise without the terrible trio of toilets, trash and tenants to manage.

With a REIT, you don’t have to become an expert in real estate or know how to select a site, finance it and operate a multifamily building. But you can invest in something that’s easy to understand like housing. People will always need a place to live.

People are sometimes afraid of the term “alternative investment” but what we provide is long-term compounding. The goal of most investors is to accumulate enough wealth so they can stop working someday. Investing in leveraged real estate with fixed-rate debt offers a similar scenario to that low-touch experience of the 60/40 portfolio because it has equity-like features and debt-like features.

So, instead of the headline “60/40 portfolios are dead,” the headline should be: “consider investing in real estate to replace your 60/40 portfolio.”