Asset Allocation and Inflation

Part 15 of Inflation for Real Estate Investors

This series is an EXPANDED VERSION of the new book I just published called Inflation for Real Estate Investors.

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Asset Allocation and Inflation

Inflation can significantly impact the balance of your investment portfolio, including how your assets are allocated. For real estate investors, understanding and managing this impact is important for maintaining a diversified and effective strategy.

While some real estate investors focus solely on real estate and are dismissive of other asset classes, many of us recognize the value of a more balanced and nuanced approach to asset allocation.

• Real Estate Growth Versus Other Investments - During periods of high inflation, real estate portfolios often grow faster than other investments like stocks and bonds. This is due to inflation’s influence on property values, rental income, and therefore cash flow, which can lead to faster wealth accumulation. In contrast, the stock market and related assets may continue performing at historical levels, often without a direct correlation to inflation. As a result, the value of your real estate investments may outpace other assets, causing shifts in your overall asset allocation.

• Unexpected Portfolio Imbalances - When real estate assets grow disproportionately due to inflation, you may find yourself with a higher concentration of your wealth tied up in real estate than originally planned. This imbalance can expose you to risks associated with lack of diversification and liquidity. It’s essential to periodically reassess your portfolio to ensure it aligns with your long-term goals and risk tolerance, even as certain assets outperform others due to inflation.

• Regular Asset Allocation Reviews - High inflation can cause rapid changes in asset values, making it important to evaluate and potentially rebalance your portfolio more frequently. Adjustments may involve increasing investments in underweighted asset classes, such as stocks, bonds, cash to maintain a diversified portfolio that meets your preferred asset allocation strategy. This proactive approach helps mitigate risks and ensures that your wealth is not overly concentrated in any one asset class, even during periods of rapid growth in real estate.

Let’s look at a few examples super interesting examples, so you can see what we’re talking about and the impact it has on you, the speed you can acquire your portfolio (which is very surprising), and more…