An investment portfolio is a little like a baseball lineup. Smart managers know where to place batters with different skills in the right spot in the batting order. Similarly, when a portfolio is properly constructed, each investment plays a different role and they all work together to maximize team performance.
- Cash and government bonds are the “contact hitters” of a portfolio. They may not have a lot of flair, but they rarely strike out and will consistently do the little things to help the team, like legging out an infield single—or delivering a safe, moderate return. You want them near the top of your order.
- Stocks and mutual funds tend to “hit for average.” At any given moment, they may perform great or they may disappoint. But over the long haul, they consistently deliver opportunities to score.
- And then there are the “power hitters” of the lineup, the ones that swing for doubles and homers instead of singles. They account for plenty of production, but they also tend to make more outs.
Private equity real estate fits into that last category.* When it hits, it hits hard, delivering solid income and strong asset appreciation. But its misses also tend to be bigger. If space sits vacant or tenants get behind on rent, values suffer. Worse, properties can be difficult to liquidate when the market goes soft.
Still, just as there is always a place in any lineup for a batter or two who swing for the fences, real estate makes sense for a great many investors. It may even be an all-star performer.
*Note: For those looking to get acquainted with real estate, but nervous about the risk, a group of real estate investment trust (REIT) stocks can be a good way to start.