My portfolio strategy for periods of volatility
The market has been going down lately, and that’s really not surprising considering that:
- Inflation is at its highest level in 40 years and seems out of control.
- Interest rates are expected to rise in the short term.
- Valuations remain high in most sectors, leaving no margin of safety.
- People also forget that the pandemic is still here and a new variant could appear at any time.
- Finally, Russia has gathered more than 100,000 troops near the Ukrainian border, endangering the security of the whole world.
It seems that everything is down, without exception. S&P 500 (SPY), Utilities (XLU), REIT (VNQ) and Tech (QQQ) stocks are all down around 10%.
But worst of all, highly innovative tech stocks, such as those held by ARK Invest (ARKK), have seen their valuations halved or worse. Some popular stocks like Peloton (PTON), Zoom (ZM) and Robinhood (HOOD) have lost more than 2/3 of their value, and more and more people are concerned that these stocks could serve as a leading indicator of what is to come. arrive for the rest of the market:
The impact on my personal portfolio
As I explain in a previous article, my portfolio strategy differs from most other investors in that it is heavily allocated to real/alternative assets such as REITs, MLPs and crowdfunding:
Some of my biggest investments looking ahead to 2022 included:
Source: Mid-America Apartment (MAA)
Net leasehold properties such as Wendy’s (WEN) restaurants:
Source: National Commercial Properties (NNN)
Source: Enbridge (ENB)
Source: Gladstone Land (EARTH)
Crowdfunded property-backed loans with yields of up to 12%:
The reason I like to invest so much in real assets is that in my opinion they offer the best risk-reward ratio in the world today:
Their valuations remain much more reasonable.
They profit from inflation and tend to outperform when rates rise.
They are less exposed to geopolitical risk.
They generate substantial cash flow and pay high dividends.
They can serve as a safe haven in times of volatility.
As a result, recent market volatility hasn’t affected me as much as most other investors, especially those looking for trending tech stocks.
Sure, my wallet took a little hit too, but the impact is no reason to lose sleep. Some REITs/MLPs are down 5-10%, but others are actually up over this period, and my investments in crowdfunded real estate assets are intact.
This puts me in a strong position to now direct capital to the most disadvantaged segments of the market and capitalize on the new opportunities that have emerged from the recent volatility.
Stay fully invested but rotate the capital
Billionaire investor Howard Marks explains in one of his notes that:
“Because we don’t believe in the predictive ability needed to properly time the markets, we keep portfolios fully invested whenever attractively priced assets can be purchased. Holding investments that are falling in price is unpleasant, but missing out on returns because we didn’t buy what we were hired to buy is inexcusable.”
This is exactly what I do with my portfolio and also what we do with our model portfolio at High Yield Landlord.
We don’t try to get in and out of the market, as countless studies prove that consistently making profits by timing the market is impossible. We remain fully invested, which is especially important in today’s inflationary world. With current inflation, it doesn’t take long to lose considerable purchasing power.
However, what we do occasionally is rotate capital from one section of our portfolio to another to take advantage of volatility. To be more specific, we are raising capital from investments that have performed well of late and reallocating it to struggling sectors that have become more opportunistic.
Below I first highlight 3 types of investments I use to raise capital, then outline what I buy with them.
Apartment REITs (Capital Raising):
Some of my apartment REIT investments are still valued at almost never-before-seen levels today. As an example, my largest apartment REIT (OTCPK: BSRTF), which accounts for almost 7% of my portfolio, is up significantly even as other sectors tumble:
This is a position that I plan to reduce in order to unlock capital for other opportunities.
MLP (Capital Raising):
Energy-focused real estate asset companies such as MLPs (AMLPs) have also performed remarkably well in recent years. They increased significantly in value despite the volatility:
Currently, my most prominent position in this space is at Enbridge (ENB) and is near its historic highs. Now may be the time to unlock some capital by reducing my position size.
Real estate loans (fundraising):
Finally, my mortgage portfolio has not been impacted by the recent volatility. These loans are private and illiquid, but their terms are usually 6-12 months, which means that new loans come due every month and I transfer the proceeds to other opportunities. If you want to learn more about my crowdfunded loan investments, you can read a separate blog post by clicking here.
What do I buy with these profits?
I use this product to accumulate three types of investments at the moment:
Tech stocks (accumulated)
For most of 2021, real assets like REITs were exceptionally cheap relative to tech stocks. However, that is now starting to change with more and more tech stocks priced near pre-Covid levels, and I am using this opportunity to better diversify my portfolio.
I started accumulating a few tech companies that I had on my watch list for over a year now. Patience paid off in this case. Among other things, I buy:
PAR Technology (PAR): I think it is ideally positioned to develop a large restaurant SaaS business, but its growth prospects are very cheap due to the complexity of the business.
Wise PLC (OTCPK:WPLCF): It’s down almost 50% from its peak, but its growth is actually accelerating in 2022. I’m a customer and I use it for all my money transfers international. I don’t know of a better alternative and they have long term growth potential.
Coinbase (COIN): Instead of buying individual cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD), I decided to invest in Coinbase instead to gain indirect exposure. I see it as the best pick and shovel game about growing the crypto economy.
Beaten Growth REITs (accumulate)
It’s not just tech stocks that have fallen lately, it’s growth stocks in general, including some of our favorite REITs.
To give you a few examples: Crown Castle (CCI) is down 20% despite doing better than ever. With a dividend yield of 3.5% and annual growth of around 8%, investors can expect double-digit total returns with below-average risk. Couple that with multiple expansion and you have an extremely compelling risk-reward proposition.
REIT net lease (cumulative)
Finally, we have added a considerable amount of capital in high quality net rental REITs that are still priced around 20-30% from pre-covid levels, despite generating 10-to-10 cash flow. 20% higher than before covid.
The discount only exists because of inflation fears, which should subside over the next 12 to 24 months, which should then lead to a recovery in net rental REIT stock prices.
Property Income (O), for example, is currently priced at a 20% discount from pre-Covid levels, and the discounts only become more significant if you adjust for the accretive impact of its acquisition of Vereit. It generates more cash flow than ever and also increases its dividend. While waiting for the recovery, you earn a monthly return of 4.5%. Not too bad coming from an A-rated blue-chip.
My asset-rich portfolio structure has led to substantial market outperformance in 2021 and the recent decline has not been significant.
We believe the time is right to pivot capital from outperforming sectors to underperforming sectors, and that is what we have done at High Yield Landlord as we seek to beat market averages: