Timing the market is generally a losing game. Instead of waiting for the perfect moment, investors and financial professionals should consider reallocating portfolios sooner rather than later.
The S&P 500 has soared 53 percent over the past two years1, leaving equity-heavy portfolios with more risk than investors may have originally intended. As shown in the bar graph below, a portfolio allocated 60/30/10 to equities, fixed income, and direct commercial real estate on December 31, 2021 may now be more than 180 basis points underweight to real estate as of December 31, 2024. Rebalancing may be needed to bring allocations back in line with original risk and return objectives.
Modeled Overweight/Underweight to Commercial Real Estate, bps
Sources: S&P 500, Bloomberg Agg Values, NFI-ODCE Index
Why is this so important? Consider the performance of the equity markets from mid-December 2024 to mid-January 2025, when the S&P 500 dipped nearly four percent.2 This left unbalanced investors with a bigger impact on their portfolio return. While it may seem like a blip, the scenario underscores how quickly the equity market can turn downward, making hard-earned gains disappear.
The Advantages of Direct Commercial Real Estate in an Investment Portfolio
Hedge Against Inflation: Commercial real estate values and rental income generally increase with inflation. The Consumer Price Index, an index that measures the prices paid for goods and services (aka inflation), is commonly used to adjust rental rates.
Diversification for Portfolio Efficiency: Asset diversification with a commercial real estate allocation may help reduce overall portfolio risk, as real estate typically has a low correlation to stocks and bonds, meaning it can help offset the volatility of some traditional investments.
Consistent Income Potential: Commercial real estate properties generate rental income, often with long-term leases, providing consistent cash flow for investors.
Appreciation Potential: Over time, well-located commercial properties tend to appreciate in value, offering capital gains opportunities.
Given this backdrop and the advantages of direct commercial real estate investments, now is the time for financial professionals and investors to think about taking a portion of equity gains off the table. By maintaining a 60/30/10 allocation that includes real estate, portfolios can endure challenging economic conditions with moderate risk levels.
Rebalance portfolios now, before the market does it for you.
1 https://www.cnn.com/2024/12/31/investing/stock-market-end-of-year-wrap/index.html
