“Real estate investment among wealthy individuals [with more than $800,000 to invest] is set to rise to 30 percent of the average portfolio for the next few years from 28 percent now, according to [a Barclays global] survey. That excludes properties used as a principal residence. Most rich people, other than the extremely wealthy, should have no more than 10 percent of their assets in property, said [Mike Dicks, the London-based head of research at Barclays Wealth].”
“I was surprised how big a share of their wealth property represents,” [said Dicks]. “It’s not what I would tell grandma. None of our data suggests that would be a good allocation.”
Wealthy Investors Plan to Buy More Real Estate, Barclays Says [Bloomberg]

36 thoughts on “An Emotional Bricks And Mortar Asset Allocation For The Wealthy”
  1. Holding a third of assets in real estate doesn’t strike me as excessive. Dicks thinks it is triple too much, but he isn’t quoted as suggesting any alternative allocation.
    Does anyone here have suggestions on how to allocate a million in assets ? Lets say for someone reaching retirement in the next two decades.

  2. I agree with the Barclay’s guy. Holding 30% of investment assets in real estate is psycho. That’s especially true if you’re at the lower end of this group with investments of under, say, three million. That’s putting way too much of a not-that-large nest egg at risk in a volatile, risky asset class. Real estate can crash and stay down for many, many years. As we are seeing now!

  3. I’ve never quite understood why people constantly refer to the S&P 500 as the end-all of investment. If you had invested in small caps or emerging markets or bond funds, you’d be up, and in some cases significantly. Certainly, many many individual stocks would have been good investments too. The comparison is simply false — both are different types of investments with different characteristics (e.g. different time horizons, different liquidity, different costs, etc.).

  4. Because that is the benchmark against which the financial industry measures itself when talking politely with their clients (J6P). Yes, it would have been smart to invest in oil in March, or gold in 2002, or small caps/emerging/bonds whatever. Just like it would have been smart to get out of real estate in 2006. However, in the casino economy in which now all find ourselves, it’s pretty difficult to know when to leave the table.
    In the case of Mr. Dicks above, the first question I’d ask is “what is he selling.” Oh, he works for a wealth management firm? Of course he doesn’t like real estate.

  5. But you’re missing the point. For most people real estate isn’t a real investment in the same way as any of those asset classes you describe. For most people (including Joe Sixpack), real estate functions as housing (a consumable) and as savings (paying down one’s principal), and not as investment.
    True investment with respect to housing happens in two ways: 1) return as a rental when you have a cash flow-positive property; or 2) return on speculation after you have made an educated guess in anticipating a real estate trend (e.g. predicting that X neighborhood would become the next prime area). Most people don’t do either of those things when they purchase real estate.
    Also, the financial industry’s clients are most certainly not Joe Sixpack-types, but rather institutional investors and the wealthy. The financial industry’s excellent marketing folks have done a good job convincing people otherwise.

  6. The point of this SS thread is what would be the proper weighting of RE in a wealthy person’s portfolio, not the average person’s. I agree that for the average person property is not an investment, rather a consumption item. But let’s imagine someone with a low-seven-figure net worth ($3-$7 million) – what’s the right amount of real estate exposure there? My hunch is that if Mr. Dicks were your FA, he’d want all of it at his disposal, which may not necessarily be in our millionaire’s best interest.

  7. Sure, but you referred to Joe Sixpack for some reason, so I addressed that point.
    Mr. Dicks might want all your money, but he also might suggest that someone with $3-7M invest in various forms of safe investments like Treasuries for cash preservation. 30% of that is between 900K-2.1M, which sounds like a vacation home or something.
    To answer Milkshake’s question, many would suggest Treasury STRIPs for cash preservation + higher risk (but not necessarily high risk) investments for the rest. That’s essentially what fancy insurance products do, only without the massive fees paid to the company that sells them.

  8. Asset allocation depends on, of course, if you’re an active or passive investor. Put another way- how did you make your money? If you’re a law partner or successful business owner, chances are you’re not an active investor in either stocks or teal estate. Get a financial advisor and follow the recommendations above.
    But if you’re an active investor both stocks and RE can take on much different forms. Example- I know many RE investors who are 90%+ invested in RE. It’s what they know and what they can manage. And if they did not over leverage, they can ride out the downturn. The key is if your active or passive.

  9. “Does anyone here have suggestions on how to allocate a million in assets ?”
    Oh that’s easy, the amount of an asset that you should be holding is:
    lots, just before they go up and
    none, just before they go down.
    On the other hand if you don’t have any confidence in your ability to know when things are going to go up or down then buy a variety of stuff and hope. In professional financial advice circles this is called “diversification”.
    The key advantage to choosing an asset allocation according to standard financial advice is that you will be able to nod sagely if your portfolio happens to go up. If it happens to go down then you will be able to console yourself that you were doing the “right” thing and you’ll have the rest of the herd to commiserate with which will reassure you that “nobody could have seen this coming”.

  10. That’s simply ridiculous. 10% is way too low.
    Of course a guy working for a company that mass-markets ETFs would push everyone to be into stocks, bonds, derivatives, commodities through ETFs. Everything but cash and actual real estate.

  11. Most professional RE investors I know own property exclusively and invest only a bit in stocks/401. The cash reserve they keep is for the operations/rainy day fund for their properties.
    Unlike what diemos (sarcastically) proposes above, active investors tend to specialize and go deep in an investing area. Of course, they will have some diversification, such as residential vs commercial, regional, etc but it is quite different than what diemos described, which is for passive investors.

  12. 45yo hipster is mostly right here. Most people who casually invest in real estate probably wouldn’t even want 30% in RE, but those who are active investors in RE would probably want more than 30%. 10-20% in RE/REITs probably isn’t far off for most people because most people don’t know what the hell they’re doing. I would suspect that most people who don’t specialize in RE would probably hurt their overall return with RE holdings at 30% of their portfolio, without reducing risk sufficiently to compensate for that lower return.
    Diversification has its strengths and weaknesses. Sometimes diversification fails too (e.g. the most recent drops in investments were across many different supposedly uncorrelated asset classes), but passive investors are probably best off with it.
    More active investors tend to diversify much less. For example, Warren Buffett would likely suggest having bigger bets in fewer investments for active folks, but would mainly suggest index funds for the vast majority of people.

  13. “Most professional RE investors I know own property exclusively and invest only a bit in stocks/401.”
    I would classify you as a small business owner in the rental business with an exposure to real estate values. But perhaps that’s just semantics.
    To my mind an active investor just means someone who pays attention to the market and tries to predict asset price movements.
    “Unlike what diemos (sarcastically) proposes above”
    The delivery was snarky but I’m 100% serious on the content.
    Making asset allocations on the basis of some formula is an admission that you have no idea what you’re doing and are just hoping for the best.

  14. You really should pick up a book on Modern Portfolio Theory sometime. Asset allocation based on backdating is not the same as having no idea what you’re doing. In the vast majority of cases, the future is generally like the past. That is not to say that there is nothing new under the sun, but it is unlikely the human psychology or the way various asset classes behave during the business cycle have fundamentally changed. It is a common conceit that one lives in unique times and that is it “different this time.”
    Many, many regular Socketsite posters make this mistake, particularly with regards to Real Estate. How many predicted that we would see 50% or greater drops in San Francisco real estate by 2012, a prediction that seems more unlikely by the day.
    If you are 20 years from retirement and have $1M to invest, you should probably be about half in fixed income and the rest in the stock market. 30% of $1M only gets you a smallish four unit building in a bad neighborhood in the Bay Area, but if you have more to invest, putting some in Real Estate makes sense, especially since it has good inflation protection characteristics.
    I personally lean towards more foreign stocks than a traditional portfolio advisor would recommend. I think you can lean a bit on your allocations based on macroeconomic factors, but most market timers generally fail. I wonder how Satchel is doing these days. I know he predicted further stock market weakness back in March, I hope he didn’t trade based on that prediction. I notice he doesn’t come on here and brag about his gains anymore.

  15. Satchel left when someone threatened to go all Web 3.0 on his and socketsite’s ass. Neither you nor flujie nor current events ran him off.

  16. Aw, you guys got it all wrong. Satchel didn’t buy, could care less about what people thought about his predictions, and he wasn’t scared away by his stalker.
    Instead he moved to Florida. He’ll be back here to make some parting comments sometime soon. I can see it now:
    “Ah, life is good here in south Florida. We rented a 5br sprawling mansion for peanuts. A lot of the local banksters left town and settled in the Caymans (I wonder why ?) and left a large surplus of luxury homes. Florida taxes are much more conducive to wealth accrual. Public schools here are just as bad as SF, but no problem because St. Xavier is just down the road and you know it is top notch because not only the bishop but even the rabbi send their kids there. The only thing that I miss about SF are the hills for biking. South Florida is flat and the steepest grade is the leadup to the I-95 interchange. Have fun in your imaginary welfare state. I’m back to pushing little green squares around to outsmart our elected bankster enablers.”
    … well I’m just guessing there.
    [Editor’s Note: And now back to the topic (asset allocation) at hand…]

  17. MSOD
    Very nice – you do a good Satchel.
    I bet he’s in Florida as well and probably is in escrow on some cash-flow real property in NY.

  18. The US Financial Sector Is Now in Structural Employment Decline
    So yeah, lots of people working in the financial sector have had to retrain. My wife, who is an expert in real estate finance for low income housing works for HUD now. College grads in particular are not going to Wall Street anymore.
    The whole sector is in a permanent decline, which is probably a good thing for the real economy.
    Investing 30% in real estate seems excessive, but having at least 10% in a REIT is a good idea.
    One way that it might work is if you do your own property management, but that is real work, just ask FAB.

  19. The 1980-82 recession lasted 23 months, had a peak unemployment rate of 10.8% and an overall contraction of 2.2% in GDP.
    By comparison, this recession lasted 18 months, has so far had a peak unemployment rate of 10.2% and had an overall contraction of GDP of 3.2%.
    The early 80s recession was worse by most standards, though the more recent one had a steeper overall drop in GDP.
    We could still get a double dipper this time around, but I think that this is unlikely.

  20. What part of “half right” don’t you understand, NoeValleyJim?
    Your wife’s (private sector?) financial job has been replaced by a government financial job (I assume the FHA is a govt financial job, and required little retraining?), and it’s far too early to say we won’t have a second dip. Even your hero Krugman is sounding a warning:
    This administration’s policies are (barely) indistinguishable from its predecessor’s, except for rhetorical nuances. And a study has already compared a “reconstructed” U6 to be worse than the 80’s recession.
    Like I said, the cheerleaders are “half-right”, just like LMRiM (and others) were. A coin toss.
    No need to pile on a guy who has overreacted and moved to Florida to get away from it all 🙂
    The glass always seems half-full with you, even when it’s got a hole in the bottom. Except when it comes to automobiles, of course 🙂

  21. Diemos- yup, I think we’re essentially saying the same thing, and I agree that passive investors need to diversify. My goal was to shed light on the notion that many RE investors are essentially 100% invested in RE. They will have a cash reserve but that can be for operations (especially when rents dip or in the case of commercial if they get a vacancy- which can be protracted in commercial spaces.) Or they may be cash rich for a period, until they find their next acquisition. The point is most (but not necessairly all) RE investors specialize and focus and do not split their investing between property and stocks. I’m talking about non institutional investors here, of course.
    Another point I want to make is wrt risk. Say your net worth is 5 mil, you support a family and you live off your assets. You’re probably going to allocate resources pretty conservatively and only actively trade a fraction of your net in volitile sectors (like what lmrim claimed he did). But let’s say you’re worth 100 mil. Then you can make some pretty agressive bets with tens of millions if you choose. I think there were a few russian billionaires who took it in the shorts pretty significantly this year. I think one dude went from 10 or 20 billion down to only 1 billion! They made big bets and lost this time. But they may regain alot of wealth in the future with big bets. The point is, they can ‘afford’ to do this without it effecting their lifestyle.
    That is why you have to be disciplined and fully understand exactly what you need and want to spend money on. In that sense lmrim and I had a certain kinship as we both lived off our assets but are both pretty calculating in our need to dispense income on non essentials. And btw, I think the guy moved to Florida. Perhaps he’ll see his name euloglized in this post and chime in. Give him a few months and I’m sure he’ll get bored with FL RE and come back here!

  22. I think us “cheerleaders” were more like 3/4 right, but perhaps you are correct. I think that I am personally more of a contrarian or perhaps a Doaist in general outlook than a true optimist. I was certainly not optimistic in 1999 or 2005, in fact I was shouting Cassandra-like about the risks we were facing as a society.
    Speaking of Cassandra, here is a little story you might find amusing. During the 2003-2006 run-up my wife worked at a major insurance company helping analyze low-income real estate financial deals for risk. She kept telling the front end guys that the numbers they were coming up with were bogus and than they were being way too optimistic. So she shot down a bunch of deals and forced others to be reworked. Finally the sales team got sick of her and ran her out of the company.
    Fast forward to today and she is out in the job market after our daughter was old enough for her to go back to work and she is interviewing at Citi and JP Morgan. In both jobs, they wanted to bring someone on to help clean up a bunch of non-performing portfolios of low income properties that were written with way too optimistic financial assumptions. She actually did get offered one of those jobs but it was in New York and they couldn’t move the job here and we didn’t want to move there. But the HUD (not FHA) job did come through.
    I will see if she is willing to talk about what she is seeing there, it is all stuff that the Socketsite community would find amusing.
    You don’t think that reversing the Bush tax cuts (the biggest tax increase in history!), overhauling health care, a climate change bill and reforming the financial sector are significant changes? ? I sure do. It is true that none of them have actually happened yet, but the wheels of legislation move slow for a reason. They all will pass, over the screaming of the Glenn Beck crowd.

  23. “reversing the Bush tax cuts (the biggest tax increase in history!)”
    Funny that you refer to “reversing” them. All it would take is for Congress to DO NOTHING, and those cuts would self-reverse. The tax cuts sunset because that way they looked cheaper in the CBO budget estimates.

  24. “I think us “cheerleaders” were more like 3/4 right”
    i second that bro. that’s quite accurate 3/4 vs. 1/4 for the doomsday bears. unemployment picture improved today too:-)

  25. The fat lady hasn’t sung yet.
    No, she hasn’t. But when she does, it wouldn’t surprise me in the least to trip over a bankrupt 50yo hippie on the streets of the Mission. Hopefully, I’ll still be nimble enough to miss the urine and feces everyone’s been talking about, lol.
    Ah hubris….

  26. The fat lady hasn’t sung yet.
    She’s getting ready to sell her house after the Superbowl. I’m guessing the Silent Gen will finally get their revenge and join the Coalition of the Willing before the Boomers (devastating Boomer RE wealth).
    That said, NVJ, I hope you’re right about the economy improving. Also, I was at the School Choice (aka. lottery) fair this past weekend checking out the different elementary schools in my district (east bay). Clearly a corner has also been turned over here and the Great Reurbanization continues (plenty of folks like LMRIM’s wife serving with the PTAs). Still don’t think this can support the outrageous RE prices, but areas with ‘good enough’ schools are holding out (and enrollment continues to increase).
    And for a little counterpoint to reurbanization…

  27. Anyone who makes a clearly false statement like “California has been losing people for at least a decade” is not really worth taking very seriously. But I wouldn’t be surprised if the point that medium sized cities are growing faster than big cities is correct.

  28. NVJ, he’s using annual data collected by the Internal Revenue Service on county-to-county migration, so, I believe, he’s not including immigration from foreign countries in his survey (which is how CA ends up net positive?)

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