There's no way around it – stock market values will always fluctuate, and occasionally they are even quite volatile. About every few years there is a correction or a crash.
This can make investors uneasy, and you wonder if they should take certain measures to combat or otherwise deal with the market fluctuations. Let's take a closer look at what you could do if you're worried about volatility – with a focus on some smart real estate trades you could make.
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1. Do not panic
First of all, don't rush into action. Even if the stock market has just swooned, you shouldn't take any action until you've carefully considered your decisions.
As long as you think long term, you should be fine. The US market will probably recover from a correction within a few months (or even years) and then reach new highs. Downturns can also bring great buying opportunities, so keep a small amount of cash on hand so you can strike when stocks of strong companies drop to favorable levels.
If you're a real estate investor, the volatility of the stock market may not affect you too much – but it can. For example, if a market downturn is accompanied by an economic downturn, some of your tenants may not be able to pay their rent – or it may limit your ability to raise rents.
2. Have an emergency fund
One thing all real estate investors should have – and this goes for stock investors and non-investors as well – is an emergency fund that will cover at least three to six months of your household expenses. This can be your salvation when the unexpected happens (and the unexpected happens a lot) and you lose your job, your car needs a new transmission, or you have a big medical bill to pay.
But an emergency fund is of particular value to real estate investors. It's easy to appreciate the benefits of owning rental property when tenants' checks start coming in regularly. But there will be times when the properties sit vacant for a while and you still have to make mortgage payments, insurance payments, tax payments and so on. Even if the timing is unpredictable, costly repairs are inevitable. At some point, your property is going to need a new roof, your furnace is going to break, or you're going to have to take care of some other major maintenance.
3. Free yourself from all high-interest debt
All investors and non-investors should pay off debt with high interest rates as soon as possible. If you want to invest in real estate (or even stocks) and pay 20% interest on 25.000 U.S. Dollars in credit card debt, you'll pay about 5.000 US dollars for interest alone. Once you pay off that debt, you won't have a 5-year debt for many years.000 US dollars more.
With regard to real estate, it pays to follow interest rates. If you are thinking of buying one or more properties, it is better to do it sooner rather than later. Rental rates are rising, and so are mortgage rates. The difference between an interest rate of 4.5% and one of 5.5% or 6% may not seem like much, but it can result in monthly payments that are hundreds of dollars higher, and tens of thousands – or even hundreds of thousands – more in total interest payments. Also note that average property prices have risen sharply in many places, so a particularly large down payment – or private mortgage insurance – may be required to buy a property.
4. Consider investing in real estate
If the volatility of the stock market scares you, you should consider real estate. The value of houses and other real estate is usually not as volatile as that of shares – however, it also does not increase as fast in the long run. The average home value has increased 5.5% annually since 1940, which seems pretty good, but the stock market has averaged annual gains of nearly 10% over many decades. And as my colleague matt frankel has noted, the houses are much bigger than they used to be. Taking this into account, property values have risen on average by about 1.5.
Nevertheless, you should at least consider diversifying your portfolio with real estate – or you want to get into real estate in a big way. You may also like the idea of owning rental properties because they can provide you with a fairly steady stream of passive income – as long as your properties remain rented and the income more than covers the mortgage payments, insurance, taxes and utility costs. Before you buy a property, you should read up extensively on real estate investments, because they can be more complicated – and risky – than you might think.
One advantage of investing in real estate is that you usually get some leverage over the debt: if you take out a mortgage, you can buy a property worth 250.000 US-dollars with a down payment of 50.Buy 000 US dollars. With shares, it is much more risky to invest with borrowed money, d.H. To buy on margin. For your 50.000 US dollars you just get 50.000 US-dollars in shares. One disadvantage of buying real estate over buying stocks is that you can't just sell part of a property if you suddenly need a lot of money. You either have to sell the entire property or maybe take out a loan to do it.
5. Consider investing in reits
If you want to invest in real estate but don't have a lot of money for a down payment and/or don't have the temperament or energy to be a landlord, real estate investment trusts (reits) can be an excellent option. These are companies that buy large portfolios of real estate (often of a certain type, e. B. (apartments, retail stores, medical facilities, office space, warehouses or data centers) and then rent out these buildings. When you are doing well and successful, you tend to buy more and more property.
Reits are traded like any other stock and usually offer quite high returns, as they are required by law to distribute at least 90% of their taxable income to shareholders as dividends each year.
There are also broad-based REIT indexes you can invest in through exchange-traded funds (etfs) – so you can invest your money in many different reits.
If you are not completely comfortable with volatility, you should also look at their "beta" when checking different reits. The beta is a measure of volatility and is used by most online stock data aggregators (including reits) – like yahoo! Finance – recorded. A beta of 1.0 is neutral, d.H. The security in question is about as volatile as the overall stock market. A beta of 1.5 means that the security is 50% more volatile than the market, and a beta below 1.0 means that the security is less volatile. Realty income, a REIT that focuses on retail real estate, recently had a beta of 0.8, meaning it was only 80% as volatile as the market. Public storage, a REIT focused on warehouses, on the other hand, recently had a beta of 0.26, so it's not too volatile.
Market volatility makes many investors uneasy, but smart investors know to expect it and how to deal with it. For many, it's best to do nothing – just hold on to the stock and wait for a rebound. For others, a sharp market decline means it's time to look for shares on sale. Some reduce their overall risk by increasing their portfolio with low beta and perhaps solid dividend stocks, as these can generate income in both good and bad economic times.
Because of the passive income they can provide and some of the lower-risk options this asset class offers, real estate is certainly an investment option worth considering as the market fluctuates.
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This article reflects the opinion of the author, which may differ from the "official" recommended position of a motley fool premium advisory service. Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier and richer.