Stocks and Bonds Falling in Lockstep... What about Syndications?

The Wall Street Journal is running a story today entitled: "Stocks and Bonds are Falling in Lockstep at Pace Unseen in Decades." The gist of the story is simple: investors have fewer places to turn for true diversification in the public markets than in the past.

Once upon a time an investor would be urged to diversify, say, a retirement account such as a 401(k) with 80% stocks and 20% bonds as a younger investor, increasing the percentage of bonds over time and decreasing the percentage of stocks as an older investor. There is a powerful logic to this advice: the riskiest assets such as stocks could both go up more and could fall more whereas the less risky assets such as bonds would serve as ballast, rising and falling less. The closer an investor is to the time when they need to funds, the less risk they should take (i.e., more bonds, less stock) and the two could be expected not to go down at the same time to similar degree.

It once was assumed to be the case that when stocks were rising, bonds were just trundling along and throwing off a bit of fixed income. But when stocks fell, bonds would perform better--lessening the blow of the stocks falling through the power of diversification. It made for at least a smoother ride over time. As Investopedia puts it, stocks and bonds have historically been called "uncorrelated assets."

Today's WSJ article suggests that's no longer true. Stocks and bonds are today perceived less as "uncorrelated" assets. This situation leaves "investors with few places to hide from the market volatility." In numerical terms: the S&P 500 Index is down 13% for 2022 and the Bloomberg U.S. Aggregate Bond Index is off 9.5% over the same period (through early May). That look as though stocks and bonds are relatively correlated, not uncorrelated.

The older investor who thought they were safer in bonds than in stocks--and maybe even could expect the bonds to rise in value as stocks fell--was in for a nasty surprise in early 2022. Both types of assets fell--a lot.

This site is not intended to give investment advice (we hope we've said it often enough: this is for informational and entertainment purposes, not advice of any kind), so what follows is not a prescription. But we do point out what we've seen in our own investing lives: the addition of private real estate investments can provide diversification that is harder to come by recently in the public markets.

It is hard to know exactly how private real estate has done over the same period. But one company, Fundrise, offers some insight through their quarterly reporting. (We have had an investment account with Fundrise for several years. They have reported 21 straight quarters with positive returns).

Through the end of Q1 2022, Fundrise reports that their returns have exceeded those of both publicly traded stock indices (as measured by the S&P 500, e.g.) and publicly traded REITs:

Fundrise accounts: 3.49%

Publicly traded REITs: -5.27%

Publicly traded stocks (S&P): -4.60%

These figures include both dividends and capital appreciation.

Do these data points suggest that private real estate will always perform better than publicly traded REITs or stocks and bonds? Of course not. Past performance is never a guarantee of future results, as they say. But these data do suggest a few things:

Private real estate investments may well represent an uncorrelated investment to stocks, or at least a less correlated investment than publicly traded bonds.
Even if you decide to devote the bulk of your investments to publicly traded stocks and bonds, you may still wish to have alternative investments that are uncorrelated or less correlated to those publicly traded securities. It is possible that private real estate through syndications (and/or crowdfunding sites such as Fundrise) could fulfill this function.
At least in Q1 2022, stocks and bonds fell almost in lockstep. At the same time, private real estate may have been a bright spot in a portfolio--at least it was for us, judging from our Fundrise returns which were far better than the returns of publicly traded securities in our retirement accounts.
There is a powerful need for more transparent reporting of returns from private real estate syndications. It is hard to make the case across the board that private real estate is differently correlated than stocks and bonds if there's little to no reporting of performance that an average investor can access. We have been pleased with our Q1 cashflow from our syndications (no new downside surprises) and asset prices seem to continue to rise, but can we really know that for sure?