Between the recent stock market hits and the coronavirus pandemic affecting, well, everything, the economy is having a tough time. It seems alarming, and it can be extremely stressful for those whose investments are tied to the ups and downs of the economy. Losing money is never, ever easy — I’ve gone through two notable experiences in my life where I lost large chunks of money in investments that didn’t pan out how I expected. One happened despite my due diligence, and one happened because the 2008 recession hit and caught many people off guard. I’ve written about both experiences and shared the lessons I learned.
The main takeaway? Each time I lost money, I had that same, awful feeling of losing control — of my money, of my investments, and of my decisions. That’s the terrible feeling that many are experiencing now, and the main reason why I stopped investing in the stock market. These experiences heavily shaped the way I think about investing. Not only did I want to protect my money, but I wanted to avoid ever again enduring the other very real cost: the stress, worry, and uncertainty inevitably attached to any uncontrollable and unpredictable investments.
For over a decade now, I’ve been a proponent of non-traditional investments, which are investments or funds that invest in assets other than the typical stocks, bonds, or mutual funds. To most of the world, it seems like non-traditional investments are still a big secret. Financial advisors are hesitant to tell people about these options, not to be sneaky, but because it takes a lot of due diligence to vet each non-traditional investment, as they are not cut from the same cloth. Non-traditional investments can vary wildly with how they are structured.
An enormous benefit of non-traditional investments is that they can be structured to have control, predictability, and transparency, if done right. These are key components to every investment we have built at Hughes Capital.
No investment is ever 100% risk-free, but what you CAN do with a non-traditional investment is understand your risks and then work to minimize them. This is how you can create more of the control factor. We built what we call “recession resistance” into our Buy and Hold Fund and Secured Portfolio option, by:
Buying affordable homes in the lower pricing rung
People always need a place to live, so when a market downturn happens, people downsize, and this housing category always has tenants.
Diversifying our assets across many cities and states
If something horrible were to happen in a single geographical area, like large employers leaving the area or a natural disaster, only a small portion of our portfolio would be affected, not heavily affecting the overall return.
Structuring the investment on cash flow, NOT appreciation
Because of this, we don’t have to worry about the ups and downs of the economy or the fluctuations of the housing market. We make our money monthly through cash-flowing properties, not on hoping the market will go up and we can sell at the right time.
During this whole unbelievable experience with the pandemic, we’ve been able to witness firsthand how our investments have been affected so far. The good news is that the impact has been minor. We believe we will experience some impact on the rents we’ll be collecting over the next 30 to 90 days as our tenants face economic challenges. However, will only be temporary. In some of the cities where we invest, moratoriums have been placed on evictions, and we will work through that process on a daily basis like we do with all property management issues we encounter.
No matter how you slice it, our homes should stay mostly full because people always need a place to live and we are the affordable choice.
What about the value of the homes? We don’t care about that since this is a long-term investment built around cash flow, not home value. Some of the values may have gone down, but it doesn’t matter to us. We have planned this investment structure 10, 20, 30 years out and this will only prove to be a blip in time.
So let’s talk about predictability. When was the last time you were able to predict what the stock market was going to do? The stock market relies heavily on the random social and economic events of the country and the world. Just think, economic experts could not have predicted COVID-19 and its effect on society. Whereas, in our investments, we can actually predict how our properties will perform because they’ve performed similarly for decades. It doesn’t take much for us to predict what our occupancy rate will be every week within one percentage point.
How does transparency factor in? Well, compare owning an Apple stock to investing in a small, family-owned non-traditional investment. Can you call up Tim Cook, Apple’s CEO, when the company’s stock dips and demand an explanation? Good luck. Could you go golfing or grab dinner with the fund managers of your non-traditional investment? Often, yes (or at least a zoom call!). It’s easier to get access to the company’s documents, plans, worries, wins, and everything going on in the heads of the non-traditional investment managers and their team.
Many people are afraid of non-traditional investments because they are the “unknown.” But the real irony is that the stock market and other investments tied to the economy can have many more unknowns and are absolutely out of your control. At Hughes Capital, we feel so strongly about this that we’ve made it a mission to educate others on the benefits of a well-structured non-traditional investment.
It’s been a crazy few weeks, but we’re planning on getting some R&R out of all this. Yes, we’re getting lots of rest and relaxation with our extra time at home ― but what I am really talking about is “recession resistance.” With our investments not tied to the performance of the economy or the frightening roller coaster ride of the stock market, we want to tell you that there ARE other options out there if you are willing to look beyond traditional investments. Your money doesn’t have to be out of your control, and you don’t have to lose sleep during the inevitable recession.
So ask yourself: Are my investments recession resistant?