Diversify Smarter: Integrating Real Estate into Your Investment Strategy

The investment landscape is undergoing a seismic shift, driven by rising inflation, higher interest rates, global geopolitical instability, and increased macroeconomic volatility. These changes signal the end of a 30-year era (1992-2022) of low inflation, declining interest rates, and expanding globalization. With this structural transformation, the traditional 60/40 equity-to-bond portfolio is being reassessed.

The Case for Real Assets in Modern Portfolios

Real assets—tangible investments such as real estate, infrastructure, and commodities—have a proven track record of delivering:

• Inflation protection: Their value often rises alongside inflation, preserving purchasing power.
• Liability-matching cash flows: Stable income streams align with long-term liabilities.
• Diversification: Returns from real assets exhibit a low correlation with equity-oriented portfolios.

Adding real assets to portfolios is particularly relevant in today’s environment. Historical data demonstrates that U.S. pension plans with just 10% invested in real assets experienced higher returns, lower volatility, and reduced maximum drawdowns compared to average portfolios. A 20% allocation amplified these benefits even further.

Here is a 10-year lookback- comparison 100% Real Estate Portfolio:

Evolving the 60/40 Model

Given the current macroeconomic conditions, diversification beyond equities and bonds is critical. A modernized strategy with an equal split—33% equities, 33% bonds, and 33% real assets—can better protect against inflation and provide reliable cash flows.

What Defines Real Assets?

Real assets are tangible investments with physical value. While real estate, infrastructure, and commodities are prominent examples, not all real assets offer the same portfolio benefits. Investors prioritize:

• Inflation protection
• Non-correlation to equities
• Income-based returns without sacrificing total returns
• Liquidity

The Role of Real Estate in Portfolio Diversification

Real estate is a key component of real assets, offering a range of benefits:

1. Recurring Income: Rental properties provide regular cash flow.
2. Diversification: Real estate is a non-correlated asset, balancing equity and bond market risks.
3. Tax Advantages: Depreciation and other deductions can minimize taxable income.
4. Tangible Value: Even in downturns, rental properties maintain functional economic utility.

Investors can gain exposure to real estate through:

• Owning individual properties
• Participating in Real Estate Investment Trusts (REITs)
• Investing in real estate limited partnerships

How Much Real Estate Should Be in Your Portfolio?

Determining the right allocation of real estate is personal and depends on factors like goals, time frame, and current investment composition. Experts often recommend a 5-10% allocation, excluding your primary residence. This allocation allows diversification without overexposure to a single asset class.

The Bottom Line is…

As global markets evolve, integrating real assets—particularly real estate—into portfolios is a prudent strategy. A thoughtfully designed allocation can enhance diversification, mitigate risk, and provide steady income in an era of higher inflation and market volatility. Discussing your financial or real estate goals with a trusted expert will help tailor the right allocation for long-term success.

Always the latest opportunities in real estate investments with The Davenport Group. We provide you with the most current information and expert insights to help you navigate the market confidently.

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