Why liquidity is bad for Stock Investors
and Illiquidity is Good for Real Estate Investors
- Passive Wealth
- May 26, 2021
- 6:57 pm
I bet at this point in your investing journey, someone has told you that Wall Street has the advantage over real estate because….
"Stocks and bonds are liquid! If things go wrong, you can sell really easily!"
That way of thinking is completely wrong. Liquidity is actually a disadvantage of Wall Street.
They’ve just used some psychological tricks to get you to think that it’s an advantage. They’ve preyed on your fear of loss (we all have that fear!) to get you to think that you can beat the system and protect your downside by being able to panic sell with 3 clicks of a mouse.
Wall Street preys on your fear of loss
They tell you that when the market takes a dive, it’s good to be in liquid investments because you can sell really easily and take your chips off the table. But they also tell you that down markets are the time to buy! “Be greedy when others are fearful and fearful when others are greedy,” right?
Let’s take a look back in time to ancient history, March 2020….
This unhappy chart is the S&P 500 up through mid-March 2020 (Yahoo Finance)
That scary red arrow indicates all of the investors who took ‘advantage’ of the liquidity of their stocks, and sold when it became clear that Covid was going to impact the entire world.
Honestly, who can blame the panic sellers for selling?? It looked like things were going to get really bad, and for some people they really did! Worldwide commerce effectively ground to a halt, and the real economy is still dealing with the aftermath.
But those folks who panic sold were actually making the wrong move. Because wouldn’t you know, the Federal Reserve fired up the printers…
And by September of 2020 the market was back to pre-Covid highs in dollar terms (Yahoo Finance)
The “right” thing to do was to buy the dip. But most investors don’t do that. They sell and get out of the market out of fear of loss.
This is why real estate’s illiquidity is an advantage.
We real estate investors are simply unable to do the knee jerk panic sale that so many stock & bond investors do in every market crash.
We can’t sell our properties in 3 clicks of the mouse. We have to make a plan, find a buyer, put together a deal, and close. That process takes months! In that amount of time we have more than enough opportunity to think through our options and make a well-considered decision. We can’t get scared and take a 30% loss because we’re afraid of how much worse it might get tomorrow or next week.
In my experience through the covid crisis, the overwhelming majority of my tenants continued to pay. For those that didn’t, our property managers worked very hard to get government assistance for their rent, and many were able to qualify. Rents continued to rise, cap rates continued to compress, and our property values kept rising.
When the stock market crashes, people panic sell out of fear. Rarely is that the right long term decision. Real estate investors cannot panic sell, and that is a good thing. We have to either make it work or make a logical, thought through decision about selling.
That’s all for now. I hope this has helped to shift your thinking a bit. Do you disagree? Or have anything you’d add? Shoot me a note and let me know.
