Managing Your Money

Investors these days are wondering where to turn, not only to protect their nest egg, but to achieve returns that are above 1-2%.  Looking at where the wealthy are currently investing their money can give the rest of us some direction as to where we might consider investing our own.  Based on an asset allocation report* for the end of 2015, which represents 400 of North America’s wealthiest people, it’s clear where the ultra-high net worth are putting their money.  Based on the report, 27% of their investments are in real estate, 23% in public equities, and 22% in private equities.  So now the question becomes, how can you, as a “regular” investor, access investments like the ultra-wealthy can?

Public equities, being their second largest holding, is basically the stock market.  Anyone can buy shares of public companies, either directly, or through a mutual fund or ETF (exchange-traded fund).  Private equity, the third largest asset group, is more difficult to access than public equity, but is definitely accessible for many investors. Private equity is buying shares in private companies, whose shares are not traded on the stock market. There are many exciting opportunities that exist in private equity, however, most are only available to “accredited” investors who meet certain financial criteria. (See below for more info.)

“Good real estate investments provide a steady income, usually much higher than GICs or bonds”

So why might real estate be the largest holding of many wealthy investors? There are a number of reasons. First of all, real estate is an asset class on its own, which means it doesn’t fall into the category of stocks or bonds. It is usually considered as an alternative investment. Many investors like the idea of “hard” assets.  That is, assets that they can see and touch. Most real estate investors are looking more for regular income from their investment, and less for capital appreciation, although an increase in value is common. Good real estate investments provide a steady income, usually much higher than GICs or bonds.  Typically, real estate is un-correlated to the markets, which makes it a great way to diversify your portfolio. People just tend to react differently than they do to the stock market. When the stock market drops, lots of people get scared and think about selling.  With real estate the thought process seems to be different.  If the value of your real estate goes down, most people won’t consider selling, and might even consider buying more.

Those of you thinking that you might want to add a real estate component to your portfolio, may be thinking, “I don’t have tons of money to go out and buy real estate”, so what’s a better way to get it into your portfolio?   There are a number of ways that you can access real estate with your investments.  Each has its pros and cons. Here are some examples.

Direct investment involves going out and buying a “real asset”, and then renting it out, with the intention of making a profit.  That real asset could be anything from a condo, to an apartment building, to an office building, to a shopping centre.  There are definitely some pros and cons to direct investing – the most obvious disadvantage being the cash requirement.  While buying a condo might be feasible for many people, buying a shopping centre is not.  It’s also much harder to diversify when you’re buying individual properties on your own.  On the positive side, you assume all operating control, rent policy, etc., and without paying a management fee. Therefore you often have an opportunity for a higher income and return on the property.   This is generally not the first choice for most investors, and it involves the most work and the most investment.

Private real estate partnerships (or private pools) are a great alternative to direct investing for investors who want to access commercial or other types of properties, but with smaller amounts of money, and nothing to manage.  Private partnerships basically group together investors, and pool everyone’s money together. The person or company responsible for the purchase and management of the property will charge a management fee, however, the potential for higher return with little involvement, makes this kind of investment very attractive for many investors seeking a good, stable income.  Most of these private real estate investments are only available to accredited investors.  Many experienced Investment Advisors and some real estate brokers have access to, or knowledge of, these types of opportunities.

“One simple way to buy-in to real estate assets is to buy shares in a public real estate company that trades on the stock market” 

Now on to some simpler ways to invest in real estate. One simple way to buy-in to real estate assets is to buy shares in a public real estate company that trades on the stock market.  These companies often own many properties, in a variety of geographic regions.  They often operate their businesses in different areas of the real estate industry – development, management, lending, etc. Therefore you automatically get diversification with minimal investment, and easy liquidity.

Another area of real estate investing which has become popular is REITs (Real Estate Investment Trusts), and real estate funds.  REITs, which are like a mutual fund in the sense that they are a diversified basket of properties, are usually traded on the public stock exchange, like a stock.  While stocks are driven by the earnings of the company, REITs are driven by the rental income from the properties it holds. Investing through REIT shares, or a real estate fund, doesn’t give you the ability to choose the particular properties in which you’ll be investing , like the direct or private investing does, but it does give you instant diversification, more transparency, and more liquidity than the others do.  You can also invest smaller amounts of money, and in many cases you don’t need to be an accredited investor. REITs and real estate funds can be purchased through an Investment Advisor or discount broker.

Investment decisions should be made as part of an overall financial plan; always considering your investment objectives, and doing your due diligence

As I always emphasize when it comes to investing, investment decisions should be made as part of an overall financial plan. It’s just too easy to get “sold” on an investment that “sounds good”. Having a solid financial plan, always considering your investment objectives, and doing your due diligence, will help ensure your investment decisions are wise and well informed.

To find out more about the criteria to be considered an accredited investor, or our upcoming Real Estate & Private Equity presentations, please visit my website at www.EphtimiosMacNeil.com or contact me at the info below.

* Tiger 21 Quarterly Asset Allocation Report for Q4 of 2015, available at www.tiger21.com

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with 20 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected].

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Commissions, trailing commissions, management fees/expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, their values will change and past performance may not be repeated.  Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NB, NS, PEI and NL. Additional administrative support and policy management are provided by PPI Partners. Richardson GMP Limited, Member Canadian Investor Protection Fund.