are everywhere. We have a huge defense indus- try with thousands of companies who rely on the U.S. Department of Defense for most if not all their work. If there were a substantial change to our defense policy, all of those companies could be at risk. Or if there are fifty apartment buildings all focused on providing student housing, what happens to the apart- ment complexes if the school closes (or provides solely virtual classes)? Again, the apartment complex may be well maintained and well man- aged, but all the apartments in that community rely on a common party for their livelihood (the same would be true for any town with one large employer). There would be little diversification to have multiple apartment complexes in that same town even if they target different price points or demographics. If you want to diversify, you need to watch out for single counterparties that affect many of your investments. To move away from a common coun- terparty risk, you may need to add geographical diversity or industry diversity or property-type diversity to your portfolio. COUNTERWEIGHTS When the stock market crashes, it seems like all stocks go down, even those with companies that are doing well. There are lots of reasons for this including the prevalence of index funds that have to sell proportionally when shares are redeemed and the Chicken Little mentality of day traders. Yes, some stocks take less loss than others, but that is small consolation. Because these invest- ments go down (or up) in tandem, we
describe them as correlated. On the other hand, there are in- vestments that go up when the stock market goes down – and for the same reasons . Adding investments that act as counterweights when stocks fall is another important form of diversity. Precious metals, real estate, cryptocurrency, and fine art all might be hedges that are uncor- related or even anti-correlated with stocks and bonds. (Uncorrelated means that the investment is unaf- fected by the other investment and goes up or down on its own. An- ti-correlated is like a seesaw. When one goes up, the other goes down and vice versa.) This principal may be applied to diversification of your investments. Look for investments that are either uncorrelated or anti-correlated with what you have. In real estate, if retail stores are going out of business in favor of online shopping, per- haps investing in last-mile delivery warehouses would be a good coun- terweight. If the trend continues, the warehouses will become more invaluable and mitigate the losses to the retail. If I ask you how much you have in investments, what would you tell me? Would you say you have $10M in stocks, bond, and real estate, 1,000 doors, 50 rental properties, 1,000,000 square feet of COUNTERS rentable space, 1,000 ounces of gold? What are your investments denominated in? Too many investors denominate their wealth in dollars (or other currency). Investments in currency are always devaluing as the currency loses ground to inflation. And with
all the money printing in countries around the world, the potential for a collapse of currency is of substantial concern. But wealth denominated in assets maintains whatever the pur- chasing power of the assets is. This is the reason so many of the wealth- iest in the world have placed their money in real estate. Real estate has the advantages of being something tangible that can provide an income as well as a source of wealth. And that income can fluctuate with the currency to maintain purchasing power. An intriguing way of denominat- ing investments may be in crypto- currency. Cryptocurrency does not automatically devalue because of inflation. Yet, it acts like a currency (at least some types do—see my pre- vious articles about cryptocurrency types). Cryptocurrency may provide diversification from dollar-centric in- vestments that would hedge against a currency collapse. Forget the lies your stockbroker told you about diversification. Re- member to watch for hidden coun- terparties, look for investments that are uncorrelated or anti-correlated with the ones you already have, and be careful how you denominate your wealth. •
Steve Streetman, president of StreetSmart Investments, LLC, a commercial real estate investing company, is an avid cryptocurrency investor and has worked
in cryptography and high-end computer modeling for over 30 years. He teaches commercial real estate investment courses and is a real estate agent with RealInvestors Real Estate Services. His book “Cryptocurrency and Real Estate: How Bitcoin and BlockchainWill Transform Real Estate Investing” is anticipated to release in 2020.
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