Reasons might include:The benefit of owning is cost control. However, if she has reasonable rent control, then she might be fine. Why does she need a surrogate?Of course not. But perhaps I mis-phrased my earlier assertion. Here's what I meant:Nope. I don’t want to feel stupid buying stuff that results in lower returns.An, ahem, alternative view, is that appeal of alternatives is neither as a hedge nor as a vigorous profit-maker, but for psychological reasons. Suppose that a person has many millions of dollars in index funds - stock and bond, US and ex-US. Yay! But wouldn't it be nice to own something tangible... to directly own some businesses, land, real estate? To feel that one is wealthy, through direct and active participation in the economy, instead of just logging-in to one's Vanguard account from time to time, starting at numbers and commas?
Suzie and Cindy both live in Southern California, in a VHCOL area. Suzie has $6M in her Fidelity account, in a 3-fund BH portfolio. She also owns a $2M house outright. Because it's a VHCOL area, the house isn't exactly ostentatious... good area, strong school district, near the coast... but only around 1400 sq ft, built in the 1950s. Cindy meanwhile has $8M in her brokerage account, also 3-fund... but she lives in a small apartment.. Suzie has a natural diversifier for her $8M net worth: her house. Cindy does not. Can Cindy replicate Suzie's real estate diversification, without outright buying a house? I mean, maybe she's scared of buying, or her job is unstable, or she's not sure where she's going to live. So... what might Cindy do, as surrogate for a house?
1. Cindy envies Suzie, over the latter's good fortune in the real estate market.
2. Mistrust of a 3-fund portfolio offering sufficient downside protection in a protracted bear market.
3. Wanting to have something tangible to show for her wealth... and not just paper assets.
4. The pleasure of consuming some of her money (as a possessor of property) without her consumption diminishing the asset.
5. Belief that real estate offers stock-like returns with bond-like volatility (debatable, of course).
These are, to varying extents, also plausible reasons, for why one might want to buy a private business directly, or get involved in private equity... by the latter I mean coming-in as "angel investor" to a start-up, and getting a seat on the board.
Statistics: Posted by unwitting_gulag — Fri Sep 27, 2024 7:53 pm