As the dust starts to settle from the COVID-19 induced Great Lockdown, many investors will be faced with economic decisions that will impact their finances both in the near and distant future.

Fearful of change, many investors will stick with the status quo and stay invested in Wall Street financial assets; while others, tired of Wall Street volatility and uncertainty, will consider alternative investments for the first time – specifically, real assets.

Before I get into why the rich and a record number of investors who are novices to the alternative asset class are turning to real assets, let’s first look at the state of financial assets.

FINANCIAL ASSETS

Most investors invest in stocks and bonds because:​

  • Everybody does it.
  • It’s what the talking heads on TV and in the financial services industry preach and what financial advisors peddle.
  • It’s all they know.
  • It’s convenient.

Even though financial assets are convenient and everyone is familiar with them, they may not be the best assets for achieving your long-term financial goals.

Bonds –

Once touted for their wealth preservation benefits, bonds may have made sense back in the ’80s but they no longer make sense in the present.

Back in the ’80s the 20-year treasury rate exceeded 15% in some years. As of today, the 20-year rate is at 1.23%. That doesn’t even keep up with inflation.

I can’t imagine any asset allocation in which it would make sense to include bonds in the mix.

Stocks –

The problem with stocks is that trading them is essentially white-collar gambling. Profiting from stocks is speculative – relying on timing the market to buy and sell stocks either directly or through derivative strategies in order to maximize profits and minimize losses.

The problem is not many retail investors are successful at stock market investing with the average retail investor averaging returns of 2% per year. Once again, this does not even cover inflation.

The pros do no better as more than 90% of professional managers (i.e., advisors, mutual fund managers, and hedge fund managers) fail to even match the S&P average return over a 20-year period.

Besides the gambling aspect of the stock market, there’s the added problem of volatility. Wall Street liquidity is a two-edged sword as it allows investors to trade based on emotion – turning the stock market into a roller coaster that can wipe out fortunes and retirements in one day.

Right now, it’s a particularly bad idea to invest in the stock market.

Why?

​​Because it’s way overvalued. Stocks are overpriced and when they’re overpriced, the market tends to correct them.

But how did we get here in the first place?

​​COVID-19 and the ensuing economic stimulus.

After the coronavirus landed on our shores in February and spread like wildfire – triggering nationwide lockdowns – the economy went into a tailspin. Unemployment skyrocketed to levels not seen since the Great Depression and the stock market crashed in March – losing more than 30% of its value.

In response, Congress passed an economic stimulus package that included stimulus checks to individual and married taxpayers of at least $1,200 apiece.

What did taxpayers do with these stimulus checks? Millions of them threw them into the stock market at rates not seen before.

Charles Schwab, TD Ameritrade, E*TRADE, and Interactive Brokers all saw record new sign-ups, while millennial-favored Robinhood, which offers free trading, saw a historic 3 million new accounts in the first four months of 2020.

These amateur investors snatched up stocks like a kid in a candy store and with little discretion. Many even gravitated to penny stocks and stocks of financially distressed companies – even ones who filed for bankruptcy like Hertz.

For perspective, the average price/earnings (PE) ratio has long been a reliable measure of the stock market’s value.

The PE ratio measures the average of the Dow company stock prices compared to their earnings. A price disproportionately higher than earnings indicates overvalue.

The Dow has historically traded at a PE ratio of 15. By contrast, the Dow is currently trading at a PE ratio near 28 – nearly double the historic average. Stocks are clearly overvalued. The selloff in September is only the beginning as experts predict further corrections down the pipeline until prices stabilize more in line with historical averages.

REAL ASSETS

If my explanation for not investing in financial assets was dizzying, that is exactly why the smart money is allocating even more of their portfolio in real assets. They want to avoid the Wall Street chaos in favor of the more predictable and stable real asset class.  Why​ real assets?

​​Here are the reasons:

Higher Income –

Commercial real estate has reliably provided higher risk-adjusted returns than financial assets over time.

Greater Overall Returns –

Besides wealth-generating cash flow, real assets have intrinsic value that appreciates over time independent of inflation. Annual rent growths and increasing property values all factor into growing a real asset’s value over time.

Insulated Cash Flow –

Long-term leases, staggered over time, and spread across multiple properties in multiple geographic locations ensure continued cash flow through good times and bad.

In downturns, with a diversified portfolio, if income from one property falters, the income from the other properties are sufficient to carry your portfolio through the storm.

Inflation Protection –

Accelerated inflation devalues bonds but because of the intrinsic value of real assets and their consistent appreciation are a great hedge against inflation.

Low Volatility –

Real assets are illiquid and are insulated from Wall Street madness and emotion-based investing. An investor can not simply divest themselves of real assets from the swipe of a cell phone screen.

Unlike low-yield bonds and speculative stocks, cash flowing real assets have historically offered above-market income and appreciation while providing a shield from Wall Street volatility and insulated against recession.

In a market downturn, a diversified portfolio of real assets is ideal for preserving income.