The list of recent corporate layoffs is long. After the widespread layoffs in 2023, it appears that the bleeding is still not at an end. Google, Amazon, and UPS are among those planning to slash staff in 2024.
Mass layoffs are often a response to economic downturns, cost-cutting measures, shifts in business strategy, and, in some cases, automation (i.e., AI). While it is a necessary evil for the companies doing the dirty work, layoffs can have a ripple effect on the economy and the public markets as a whole. Layoffs have the immediate effect of decreasing consumer spending, with many households suddenly faced with reduced incomes.
As with the many other market drivers that prey on investor vulnerability and emotions, layoffs can also impact the stock market, which directly impacts the portfolios of investors heavily allocated to soft assets like stocks. If investors get jittery and recession fears creep in, the negative impact on the stock market can be substantial, as recently seen in the early days of COVID.
In the wake of recent corporate layoffs, along with those planned for 2024, many investors are reevaluating their portfolios and assessing the risk of loss to their portfolios before it’s too late. They’re also evaluating their options for mitigating risks in order to preserve their assets.
Economic uncertainty underscores the importance of insulating a portfolio from losses. This uncertainty also underscores the importance of fortifying a portfolio with tangible assets that are not easily swayed by investor and consumer confidence and that are capable of withstanding a variety of economic challenges, including recession, inflation, and unemployment.
Investments that offer stability and resilience against market volatility are a must during volatile times. While soft assets and paper wealth are the most vulnerable to market volatility, tangible assets like real estate offer more protection. Case in point, in 2022, while tech billionaires lost billions “on paper,” real estate billionaires actually thrived.
In 2022, Elon Musk, Jeff Bezos, Mark Zuckerberg, and seven other tech billionaires lost a collective $575 billion “on paper.” In contrast, the wealthiest real estate billionaires that landed on the Forbes richest list got wealthier between 2022 and 2023. According to Forbes, the fortunes of the real estate billionaires on the 2022 Forbes 400 list increased by $5 billion in 2023.
Diversification is essential to insulating a portfolio against economic uncertainty, but it’s not the type of diversification that Wall Street touts. It’s not about spreading risk across industries and segments in the stock market; it’s about diversifying away from Wall Street altogether.
When all your baskets of eggs are in the same warehouse and that warehouse burns down, not having all your eggs in one basket is not going to save you. The same goes with stocks. In a market crash, diversification across multiple industries and segments will not save a portfolio because a crash spares no stock.
True diversification entails diversifying away from the more vulnerable assets, like soft assets, towards hard assets, like real estate, that can withstand shifts in investor sentiment and market volatility.
Real estate is ideal for insulating portfolios in uncertain times because it’s a historically reliable and safe asset.
Real estate is a tangible asset, meaning it has intrinsic value. Unlike stocks or bonds, the value of real estate is not solely dependent on investor demand, financial markets, or market drivers like corporate performance, geopolitical conflicts, and the media. The tangibility and illiquidity of real estate prevent massive declines in value during uncertain times.
Real estate is an ideal hedge against inflation. As prices rise, so too can the value of real estate and rental income, as COVID demonstrated, which helps investor income keep pace with rising prices and preserve purchasing power.
Cash-flowing real estate generates reliable income from rent that can offset losses from other assets.
Over the long term, real estate consistently appreciates in value. This appreciation, along with cash flow, can boost ROI and pad portfolio values.
To maximize the power of diversification through real estate, investors should focus on properties in resilient markets, those with strong job growth, and diversify across different segments of real estate (i.e., multifamily, industrial, vacation rentals, etc.) to mitigate risks.
To insulate yourself from the stress of the recent wave of corporate layoffs, consider allocating to hard assets like real estate, which has a proven track record of insulating portfolios from recessions, inflation, and general market instability.