Although I’m now a finance professor in my early 40s, it wasn’t until I was 29 years old in my MBA program that I took my first finance class. My second finance class was Investments with the renowned Ken French. Professor French was well known in finance circles for co-developing the Fama-French three-factor model, which expanded traditional asset pricing by showing that size and value factors help explain stock returns beyond market risk alone. Alongside his co-author and Nobel Laureate Eugene Fama, he fundamentally challenged the long-standing Capital Asset Pricing Model (CAPM), demonstrating empirically that CAPM fails to fully capture real-world return patterns—reshaping modern portfolio theory and empirical finance.
On the first day of class, the first thing Professor French said was, “If you are not going to pay much attention in this class, just remember this.” He proceeded to write 1-800-VANGUARD on the board. This ended up being one of the best courses in my MBA program, and the common theme that French stressed was how difficult it is to outperform the market. As stock investors, he encouraged us to focus on keeping our fees low and investing in low-cost mutual funds.
At that point in my life, I was somewhat new to finance, although as an undergraduate mathematical economics major, the concepts were not too foreign-sounding. Still, I had spent the seven years after undergrad in law school and then practicing law as an Air Force JAG, and I had not developed a personal finance thesis around how I should invest. Hearing such a smart and respected voice in investing, like Ken French, say that he wasn’t smart enough to beat the public equity markets made me confident I should not expect to do so either.
After my MBA program, I took a job in corporate finance at Walmart Inc., ready to employ the wisdom I had learned from Professor French when it came to investing. I kept it super simple, and I was thankful that Walmart offered low-cost mutual funds in its 401(k) program. For the next few years, it was relieving to have such a simple strategy. I was confident that it was not worth my time to study various stocks, as I believed I was maximizing my expected return by investing in just a couple of passive equity indexes.
I still believe this is the best approach to investing in stocks today.
Expanding My Portfolio
As I accumulated some wealth in stocks and realized there were certain time periods in history, like the early 2000s, when stocks returned close to 0% over a 10-year period, I realized that I didn’t want all my eggs in one basket. Sure, some might say my wealth wasn’t in one basket but rather thousands of individual stocks, but the reality is the returns on those stocks were very correlated. Thus, I had a change in my mindset and became open to the idea of investing in new asset classes beyond the stock and (to a much lesser degree) bond indexes in which I was invested.
Professor French never opined that equity index funds were the only thing we should invest in, but I had internalized that as a mantra nonetheless.
I began exploring which new asset classes I might consider. In my mid-30s at that point, I was far from retirement, and I knew I wanted something growth-oriented that didn’t have a strong correlation to the stock market returns, where most of my net worth was invested. I knew I wanted to go beyond 1-800-VANGUARD. Additionally, because I knew I would not need the money for a long time, I was willing to give up liquidity if I felt I could get a premium for it.
Private real estate seemed to be a good fit.
More information here:
5 Bad Arguments Against Private Real Estate Syndications
How to Start Investing in Real Estate
Trying Out Real Estate Investing
I had some experience with real estate. I had owned a few homes during my life, and I became an accidental landlord when I moved and found the going rent more attractive than a likely net sales price. Still, at that point in my life with a wife and three kids, I had no desire to actively manage a rental home business. Private real estate—where I would become a limited partner providing only financial capital to a general partner, who would actually manage the purchase, operations, and eventual sale of property—was attractive. As I started researching which private real estate funds I should consider, I realized online communities existed where investors shared their experiences, opinions, and perspectives on various general partners and their offerings. This gave me more confidence that I could learn how others were assessing deals and use my own background in finance to feel comfortable writing the five- and sometimes six-figure checks needed to invest in this space.
As I was developing my own strategy, I never forgot the message of humility that I learned from Professor French. I kept a healthy skepticism that it would be simple to find the right properties and avoid the bad ones. So, I restricted myself to investing in private real estate funds instead of individual syndications. The funds offer more diversification without lower expected returns. They typically own anywhere from 3-4 properties to as many as high double digits. I also sought diversification in geography and real estate type (multifamily vs. industrial vs. office vs. retail). Last, I restricted myself to investing in general partners who had strong reputations within the online communities I had discovered.
More information here:
I Want to Invest in Real Estate, But I Also Want to Be Totally Lazy About It: What Are My Options?
A Tale of 2 Sponsors: How My Real Estate Investments Have Had Vastly Different Results
Why Real Estate Makes Me Feel Comfortable
Now that I’m in the middle of my first decade investing in private real estate, I sometimes find myself in the middle ideologically when it comes to investment approaches. I very much understand the appeal of the Boglehead mindset that urges simplicity of passive stock (and bond) index funds with as few as 1-3 funds making up an entire portfolio. For many people, especially those who dislike hassle, this may very well be best for them. For me, the complexity I have introduced has been manageable, and I sleep better at night feeling like I am a little better diversified in case we have another lost decade in the stock market. I suspect that there are a lot of smart people in finance, like Ken French, who may well understand that passive indexing is probably best for the stock market allocation of their portfolio but who are willing to invest in other less correlated assets despite the added complexity.
On the other side of the spectrum, I’ve met quite a few real estate investors who have no allocation to the stock market. They often deride the stock market as “paper assets” that they view as little more than gambling. The stock market frustrates them because they don’t feel like they can control it the same way they can control real estate assets. I often find their beliefs to be illusory. Whether picking sponsors they at one time thought were infallible who subsequently underperformed or experiencing external shocks like the Federal Reserve raising interest rates, I don’t think real estate investing removes uncertainty the way many of these investors believe.
Now, my philosophy on investing is very similar to Dr. Jim Dahle’s in that I believe so many different allocations are reasonable. My current target is 50% stock, 10% bonds, 40% private real estate (half equity, half debt). I find that this has the right amount of simplicity, diversification, and illiquidity that is right for my family and situation. For others, I understand where a three-fund portfolio could perfectly achieve one’s goals, especially for someone who values simplicity more than I do.
I have been surprised, though, how often I’ve found people who are not just confident in their own plan for themselves but also confident that their plan is best for others. To me, this is overreach. As a new columnist for WCI, I hope to bring this balanced and open perspective to considering real estate and other investment topics.
Interested in exploring private real estate investing? Make sure to sign up for the free White Coat Investor Real Estate Newsletter that will give you important tips for investing in this profitable asset class while also alerting you to new opportunities. Start your due diligence with those who support The White Coat Investor site:
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Have you added real estate to your portfolio? What do you like about it? Do you sleep better at night knowing that you’re more diversified?
