As savvy goal-based investors know, diversification is one of the keys to long-term portfolio success. We all know that it’s unwise to keep all our eggs in one basket, which is one reason investors often turn to alternative investments such as private equity real estate or venture capital to balance their portfolio and hedge the risk of more common investments such as stocks, bonds, and mutual funds. Yet there are more ways to think of diversification than simply the industry or type of fund you’re investing in.
Investing internationally is an excellent way to ensure that your portfolio will reap the rewards of being fully diversified on multiple levels. The data has proven many times that it’s important for people to invest in different asset classes and regions to maximize diversification and increase their portfolio’s odds of success.
Here are some of the ways your portfolio can benefit from international diversification:
Sophisticated investors who seek big potential upsides often seek out international investments—especially in emerging markets—which can be purchased at a discounted cost with measured risk. While the United States economy provides investors with numerous upsides, it remains relatively stable and mature, equating to limited growth potential. Emerging markets, on the other hand, are where all the growth is happening; investors simply can’t find these stocks in the U.S. economy.
Africa, for instance, is home to 10 of the fastest-growing cities in the world. In these locales, populations are growing, business is booming, and both domestic and international investors want a piece of the pie.
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In 2010, South Africa was listed as one of the top emerging national economies alongside Brazil, Russia, India, and China, comprising the influential group known today as BRICS. Cape Town’s luxury real estate market was even recognized as the second-fastest growing on the planet. With businesses flocking to Cape Town, Johannesburg, and other high-growth South African regions, the spike in investor interest is unsurprising.
One of the main benefits of international diversification is that these investments often follow different market cycles, as their performance is tied to different geo-political factors. For instance, while political pessimism in the United States may negatively impact our country’s stock market, other countries’ investments can remain unaffected. Therefore, when our economy is down, international investments can help boost portfolio performance by equalizing at-home losses with international gains.
International diversification means more diversification in currency, which can reduce expected volatility and risk in the long term. In addition, when the exchange rate between the U.S. dollar and the currency of an international investment changes, it has the potential to increase your investment return. By investing in international real estate, you will generate cash flow in a different currency to maximize diversification. Plus, you’ll get a lot more bang for your (American) buck. For example, in early December 2018, $1 (USD) would equate to 14.35 South African rand (ZAR).
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Thanks to OppenheimerFunds, we know that 76% of the world’s companies valued over $1B in market cap live outside of the United States. With so many international companies making waves in both the local and global arena, it would be unwise to dismiss such a huge potential for investment growth in international markets. Plus, recent data suggests the U.S. economy will account for a smaller percentage of the world’s wealth in years to come.
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According to finance guru Paul A. Merriman, “U.S. multinationals don’t give [investors] much exposure to value, small-cap, small-cap value or emerging markets — every one of which can be a powerful return booster.” Therefore, if you think you have a hand in international investing simply because you have invested in U.S. multinational businesses, you’re wrong. International diversification requires investments specifically made within foreign markets.
International Man claims that “foreign real estate is the new Swiss bank account.” Although there are a number of considerations to be made when adding international investments to your portfolio, international diversification can be an excellent way to help you achieve your long-term goals. Foreign real estate is one of the best places to get started.
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We’re officially announcing today an extremely exciting partnership between our firm and FWJK Developments, the largest private property developer in South Africa. FWJK Developments has, for the past two years running, been awarded the prestigious PMR Golden Arrow award in the top Diamond category for the best property developer in South Africa.
Illovo Central – Johannesburg, South Africa
Our partnership is set to bring a pipeline of incredible real estate co-development opportunities to the US investor market. And we couldn’t be more thrilled to be committing to 10 years of co-investments together with FWJK, who we consider to be one of today’s leading property developers in the world.
Over the last 10 years, FWJK has successfully developed over R4.6B of beautiful medium-to-high rise properties, yielding large returns on equity to their shareholders. FWJK’s mission is to be Innovators of Practical Development Solutions. They value beautifully designed buildings which are economically feasible yet attractive to potential investors.
35 on Main – Cape Town, South Africa
As FWJK’s exclusive US based private equity firm, we’re so delighted to offer US investors access to this in-demand and high growth market.
South Africa is currently the African continent’s second largest economy by GDP and is a gateway into many other lucrative opportunities. And with FWJK’s offices in the country’s main metropolitans: Cape Town, Johannesburg, and Durban, we are strategically positioned to leverage all of the very best opportunities that South Africa has to offer its investors.
Ridge 8 – Durban, South Africa
As a native born South African living in the US, our Founder & Managing Director, Justin Too, has personally witnessed South Africa’s rapid growth and innovations. And he believes the opportunities there are limitless to those looking for global exposure in what we believe to be the best asset class for savvy investors.
South African private equity real estate is our specialty at JTOO Ventures, and together with FWJK’s experience & expertise, we are positioned to offer the world a decade of some of the most elegant properties ever developed.
We’re so excited to co-develop and co-invest together.
And together, make history!
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Attempting to time the market frequently leads to underperforming portfolios and disappointed investors. Yet employing buy-and-hold investment strategies, incorporating long-term alternative investments, and carefully monitoring progress against specific life goals can lead to a wealth-generating portfolio with the potential for long-term success.
Investopedia puts it this way: “If volatility and investors’ emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice.”
Image credit: Betterment.
As the best gardeners know, reliable, long-term growth takes time and careful cultivation. The same is true for a successful portfolio: investors need long-term professional management that works behind the scenes, along with a diverse blend of stocks and alternative investments such as private equity real estate. At JTOO Ventures, we plant capital into fertile, high-yield opportunities so our investors can passively monitor their growth and free themselves from the stress and anxiety of trying to time the market.
Market timing is an investment strategy in which investors attempt to predict the market’s future performance. Usually, investors make these predictions based on speculation, past performance, or mathematical assumptions. Unfortunately, studies have shown that “past performance was not an indicator of future outcomes 96.22% of the time,” hence why most mutual funds come with fine print that reads: “past performance is not an indicator of future outcomes.”
Image credit: Wake Forest University.
Still, many investors blatantly reject well-documented research and continue to predict how the market and specific industries and funds, will perform. Using those predictions, investors then make decisions about when to be in the market and when to get out. Although market timing allows for potentially higher returns, there are a number of reasons why the practice is not recommended even for professional investors.
According to Merrill Lynch, “One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments.” Essentially, if an investor misreads the market and isn’t invested during peak months, they could incur huge losses.
In addition, even the brightest minds don’t have a great track record when it comes to analyzing and predicting market trends. Data from numerous sources, including the SPIVA U.S. Scorecard from the S&P Dow Jones Indices, shows that active managers frequently underperform. During a 15-year period, “92.2 percent of large-cap managers missed their marks, while the number was 95.4 percent for mid-caps and 93.2 percent for small-caps.” In Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior, the data “shows that when investors react, they generally make the wrong decision.”
Image credit: Gensler.
With the well-documented pitfalls of market timing, many sophisticated investors are now demanding buy-and-hold investment strategies. As the name suggests, this long-term approach involves buying and holding investments for a long period of time, which allows the market to move through its natural cycles without negatively impacting your portfolio.
Buy-and-hold investing is an excellent complement for goal-based investors, as it requires looking toward the future instead of being fixated on outperforming the stock market today. Hugely successful investors like Warren Buffett and Peter Lynch are often remembered for their buy-and-hold investment approaches. Their strategies focus on the long-lasting, underlying value of each investment, not its day-to-day market swings.
In a CNBC interview, Buffett discussed why buy-and-hold strategies are the most successful approach. According to the billionaire and philanthropist, “The money is made in investments by investing and by owning good companies for long periods of time.”
Of course, the buy-and-hold investment strategy still requires ongoing maintenance and professional management. Yet this long-term strategy has proven to be significantly more successful than attempting to time the market. The Dalbar study clearly finds that disciplined investors with long-term time horizons are more likely to reap the rewards that the market has to offer.
Menlyn Link – Johannesburg, South Africa
So where do buy-and-hold investors like to put their money? Actor Will Rogers puts it best: “Don’t wait to buy real estate. Buy real estate and wait.” Private equity real estate is extremely well-suited for long-term, buy-and-hold investors. Since real estate prices aren’t correlated to the cycles of stocks and bonds and are driven more by supply and demand than market speculation and timing, returns are higher compared to other alternative investments with similar expected risk.
Not only is real estate less volatile than the stock market, it’s also more predictable: many investors trade stocks speculatively, but when you invest in real estate, you are investing in a physical piece of land—a tangible building with a solid underlying value. As the world population continues to rapidly grow, so does the demand for high-quality real estate, especially in the main metropolitans of the fastest growing cities.
When exploring how the length of an investing period impacted annual returns from 1928 to 2014, Betterment clearly demonstrated: “Amongst all the edicts investors should heed, one stands out above all others: It’s time in the market that builds returns, not market timing.”
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Illovo Central – Johannesburg, South Africa
The market is an unpredictable beast. In a bull market when funds are performing well and optimism is high, investors try to time the market and pour money into stocks hoping to strike big. Yet when the market inevitably dips, people who are solely invested in stocks and bonds face huge losses.
To weather the stock market’s instability, many sophisticated investors—from ultra high net worth individuals to public pensions—seek alternative investments with high returns and low volatility. Unsurprisingly, real estate has emerged as their investment of choice. Due to its unique characteristics, long time horizon, and creative methods for yielding high returns, private equity real estate remains a solid investment with great upside.
Here are some of the most notable advantages of real estate investments.
Disciplined investors know that real estate is an excellent long-term investment, but that doesn’t mean they’re giving up short-term benefits. One of the biggest advantages of real estate investments is they generally provide a regular stream of rental income that’s higher than typical stock dividend yields. This passive cash flow is one of the main reasons investors prefer real estate. Rental income can make up about half of the returns on real estate investments and can help you build equity in your property.
Coral Point –Umhlanga, South Africa
With a little creativity, real estate provides investors with many unique ways to leverage their money to build wealth. For instance, mortgages let investors purchase real estate with a relatively small initial investment. Rental income generally pays down the mortgage each month and these investment opportunities continue to appreciate with time. Investors can also utilize the equity value of their real estate investment by taking out a home equity loan to get cash or a home equity line of credit (HELOC).
Menlyn Link – Johannesburg, South Africa
Real estate investments provide significant tax sheltering, which is essential for high net worth individuals to wisely protect and significantly grow their wealth. Robert T. Kiyosaki said it best: “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” Rental income is not subject to social security and Medicare taxes, and depreciation and mortgage interest deductions work in an investor’s favor. Lastly, the IRS doesn’t tax real estate appreciation, providing an incentive to hold real estate long term to minimize your tax exposure.
Northern Lights – Sandton, South Africa
Private equity real estate investments aren’t correlated to stock market fluctuations, which makes them an excellent choice for goal-based investors. Real estate investments can remain unaffected despite market volatility. Because they achieve different investing goals than traditional stocks, private equity real estate is a great way for savvy investors to diversify their portfolio.
The Vogue – Cape Town, South Africa
Known for its excellent appreciation, real estate is an investment opportunity that’s well-suited for individuals with a long time horizon. A number of factors—both internal and external—contribute to real estate appreciation. In Cape Town, South Africa, the country’s unique geographical features have resulted in a fixed supply of real estate. As demand naturally increases, real estate prices have soared, providing an incredible investment opportunity.
In terms of internal factors, investors can make smart improvements that tangibly improve the value of their real estate investments. While there may be short-term dips in real estate, disciplined investors who seek a long-term investment will almost always see their investment opportunities appreciate.
Ridge 7 – Umhlanga, South Africa
Unlike stocks which fluctuate and are dependent on numerous factors that are entirely out of your control, real estate investments offer more security and peace of mind. Like gold, oil, and diamonds, real estate is a hard asset with meaningful intrinsic value; both the property and the land on which it sits provide value. Therefore, “By choosing the location and asset quality wisely, investors can benefit from the security of knowing that they own an asset that has the potential to earn income regardless of what happens to the existing tenant(s).”
Obs Court – Cape Town, South Africa
As mentioned above, stocks and bonds are tied to a number of factors, many of which are completely out of your control. Real estate investments, on the other hand, are improvable. Selecting responsible tenants, proactive management policies, appealing marketing campaigns, creative financing strategies, cost-effective and strategic improvements to structure and aesthetics—all of these can impact your investment property’s value and make a long-term, positive impact.
35 on Main – Cape Town, South Africa
Famous real estate investor and philanthropist Louis Glickman’s simple words help explain why people have been drawn to real estate for all of history. He says, “The best investment on earth is earth.” While purchasing stock in a company does entitle you to a tiny slice of “ownership,” in reality your position is shared by thousands of other investors. With real estate investments, you own a specific, physical building. You can look it up on a map, or point it out to friends and family as you drive past. The tangible nature of real estate gives owners a certain amount of pride that intangible investments just don’t have.
Zero2ONE Tower – Cape Town, South Africa
Private equity real estate investments are a great way to hedge your portfolio against inflation. As governments across the globe print more money to stimulate the economy, inflation rises and the value of many goods and services struggles to keep up.
Real estate, however, is one of the few assets that reacts proportionately to inflation. When inflation rises, home values and rents generally rise with it. While nearly all real estate investments react this way, rental properties are especially effective since rents can be adjusted upward during inflationary periods.
Illovo Central – Sandton, South Africa
Providing consistent cash flow, greater security, and broad tax sheltering are just a few reasons why more sophisticated investors are adding private equity real estate investments to their portfolios. As part of a diversified portfolio, these investment opportunities offer long-term value and high returns regardless of how well the rest of the market is performing. With a rapidly growing global population driving demand, real estate investments are only going to become more lucrative with each passing year.
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Zero2ONE Towers – Cape Town, South Africa
Think about your biggest dreams and goals. Perhaps you want to retire early and purchase a houseboat or vacation home for your family. Maybe you always had a business idea in the back of your mind and eventually want to bring it to life. Or maybe you want to ensure that when your daughter gets accepted into her dream college, you can afford to pay the tuition without scrambling for cash.
We all have different life goals and financial situations, which is why a one-size-fits-all investment approach simply won’t cut it. Instead, investment advisors recommend goal-based investing, which centers on the simple idea that your portfolio is successful when it can fund your most important goals.
In goal-based investing, we help clients identify specific life goals (and related time horizons) and then build a portfolio that suits those unique needs. Instead of reacting to short-term dips and spikes in the market, our long-term strategy and performance metrics are based on the progress being made toward our investors’ concrete goals.
This increasingly popular investment approach redefines the term “risk.” Jean Brunel, author of “Goals-Based Wealth Management,” explains how goal-based investors measure risk as “the probability of not achieving your goal,” rather than focusing on subpar returns. By shifting the focus away from beating the stock market, investors can better weather market volatility while knowing that their portfolio is designed to get them closer to their goals every year.
Due to the long-term nature of goal-based investing, private equity real estate and other alternative investments are well-suited for such portfolios. As David Scherer, Principal of Origin, states, “advisers are taking a page from the real estate, private-equity playbook by timing their investments for maximum returns when the asset will be sold, rather than constantly chasing short-term gains.”
For many sophisticated investors, real estate is an excellent alternative investment due to its superior returns combined with lower volatility. By nature, Scherer claims, real estate is a goal-seeking investment: “Value-added real estate projects work long-term to create value in under-performing assets, building both an income stream and market value.” So when creating a diverse portfolio that’s meant to achieve long-term goals, private equity real estate is an excellent choice.
Ridge 7 – Durban, South Africa
While the exact details of our goals vary greatly from person to person, many investors share some of the same basic desires. These are frequently centered around some of the following categories:
If you are tired of following the short-term rises and dips of the stock market and want to make sure that your portfolio is optimized for your biggest dreams, it’s time to make your money work for you. If you’re interested in using a goal-based investing approach, then ask yourself the following questions:
We complement goal-based investing with private equity real estate investments that provide higher risk-adjusted returns compared to alternative investments. By looking at your individual goals and assessing your tax situation, risk tolerance, and time horizon, we can suggest real estate investments that will help you achieve your goals and diversify your portfolio to win.
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