Are you nauseous from the stock market roller coaster yet? We are. Might have already puked a few times in fact.

Or, maybe you are like us and you’ve tried shifting into new types of funds that claim to have less fees. But, like us, you aren’t really sure if they are actually accelerating your path toward retirement (i.e. freedom from handing over time time for income)? 

First let’s define investment risk.

Investment risk is the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. We could also say, it is a measure of the uncertainty level of actually achieving the expected returns of the investor. 

I am sure you have read the investment warnings – Past performance is no guarantee of future results or There are no guarantees when it comes to investing. 

Let’s take a close look at investing in stocks versus real estate, the four basic risks of investing, how tos mitigate risk when growing your money through real estate secured notes, and why the stock market can be much riskier than real estate.

The key is not to look for investments that are risk-free (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk.

Risk #1 – Market Correction

Stock Market Volatility and Your Retirement Timing 

One of the most common fears and possibly the biggest reason would-be investors remain on the sidelines is for fear of a sudden market correction.

During a downturn, investors may exit quickly (which only solidifies their losses). Others aim to accept short-term losses in exchange for long-term gains. Historically, the market bounces back, but clinging to that “trust” is challenging during the downward trend.

The volatility of the market also means that your entire portfolio could be worth less at the exact moment you were hoping to retire, or liquidate. Of course, as retirement draws closer, most people transition to more conservative stock portfolios, but even those can drop in value. This can force someone to work for another 5-10 years as they wait for the market to rebound.

I can’t imagine being ready to retire, only to find out that I need another 5 years to be able to afford my lifestyle. That sounds like crushing news.

Volatile Stock Market Returns: An Example

Let’s consider $100,000 in the stock market for 20 years (2000 – 2020). The S&P 500 reports an average of 6.5% return for those years. Already, that is fairly low. But if I planned to retire in 2018, my return would be even lower at 4%. 

Looking at a 4% return, I know I’d be inclined to keep trudging along at my 9-5 and hope for better performance.

Notes Secured by Real Estate

Recessions are sometimes good for note investing. Often recessions are often paired with a downturn in employment, which can lead to more people defaulting on their mortgages. 

When defaults are on the rise, note investing inventory increases. The price for notes often drops as the institutions push to get the non-performing notes out of their portfolio. This means as the economy moves toward a recession, our returns often go up. 

The great part is, the inventory doesn’t dry up when times are good. Banks are constantly adjusting their portfolio and selling their performing and non-performing note assets. 

We like to think that recessions come with more opportunity to help individuals who need a little more support in keeping their home. Banks may not have the systems in place to do this, but we do. In fact, banks are still selling notes from the 2008 crash

Risk #2 – Competition

Emerging (and Evaporating) Companies in the Stock Market

Are you an expert in the intersection of technology and entertainment? Well, we aren’t.

When Netflix stormed the scene, they beat out Blockbuster because they got ahead of the technology and consumer trends. They also targeted the same audience. We didn’t see that coming until it had already happened.

Consumers don’t have insight into technology development or companies’ operations. Thus, new competitors can have a significant impact on investment returns. It would be impossible to review the P&L statement for every company in your stock portfolio.

Real Estate Investing: Niche Strategies and Predictability

Real estate doesn’t just appear on the scene, or even evolve super quickly. Physical space, regulations, permits and more all limit the speed and progress of real estate growth. New homes are often built as top of the line, but in several years they predictably become outdated. 

Housing is basically housing. 

Note investing is even harder to break into since the concept of cash-flowing off of paper is confusing enough to turn most people away. (We aim to make it way less confusing, of course.) But even if there were more operators coming into this space, the supply of notes can likely handle the increase in demand. 

Risk #3 – Consumer Behavior 

Your Investment Controlled By Your Crazy Uncle with Stocks

There are so many companies who create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products. 

However, it’s impossible to predict the term length of those products’ and companies’ popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it.

With managed funds, you’ll be getting a mix of companies on the rise and companies in the decline. But, there will always be an element of your money being at the whim of consumers.

Real Estate Investing: Basic Human Needs

When you invest in real estate, you’re investing in a basic human need that will never go away. That is the need for a safe place to live.

As long as humans have existed, we’ve required a roof over our heads, and that need has only strengthened over time, especially with rising population trends. 

More than that, investing in notes comes with a full suite of due diligence to know and understand the asset before even making an offer. This means fewer surprises and more exit strategies.

Risk #4 – Lack of Control and Transparency

Killing Returns with Stock Market Fees

Investing in stocks is like buying a train ticket. The train is leaving, with or without you. Whether you’re on board or not is up to you.

When the market is sailing upward, the ride is smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable and you better buckle up.

Let’s go back to that $100,000 we invested in 2000. We found that we got a 6.5% return by 2020, with a value of $238,726.

Then comes the fees.

The average expense ratio for actively managed mutual funds is between 0.5% and 1.0% and can go as high as 2.5% or even more. Some passive index funds (ETFs) have a typical ratio of about 0.2%. Most investors have a combination of these portfolio types, so we’ll use 1.0% as an average.

So a 1% fee is taken each year. Instead of being worth $238,726, your $100k invested twenty years ago is now only worth $193,303. Yikes. That is a return of only 4.68%.

If you’d like to see the numbers here, I’ve included them at the end of this post.

Real Estate Note Partnerships’ Transparency

When you invest in a note fund or put your money into a JV Partnership, you know exactly who is on your team. The operators, like us at Flow State Investing, provide all of the purchase and management details, and you can reach out directly to ask questions and provide feedback

The breakdown for how everyone gets paid is clearly outlined in the entity documents at the beginning of the relationship. These percentages are always industry-standard, meaning if you go hunting for another note partner, they should be the same. Plus, with monthly or quarterly updates, you have ongoing transparency into each deal

No hidden fees that slowly chip away at your retirement funds.

Further, note investing is one of the less “risky” asset classes since there are so many exit strategies possible. You can be assured that your capital is well preserved.

This is why we always stress the importance of doing your own due diligence on your partners and their track record. How long have they been buying notes and at what scale? A casual note buyer looking to scale up may not have the experience necessary to detect a bad note. A team with over a decade purchasing non-performing notes, on the other hand, now they know what to look for to get the best returns.

Conclusion

There are lots of people who love the stock market. It is certainly more of the “set it and forget it” strategy. Unfortunately, the system was not built to put wealth in your pocket. 

The key here is to invest. Period. It is the best and fastest way to stop trading your time for money. 

Understanding the risks of different investment options will help you make better decisions. Because that money you see sitting in your savings account? It’s losing value (because of inflation) with every passing second.

And if someone offers you a “Risk Free” investment or a “Guaranteed” return, don’t believe it. 

Start Your Path To Better Returns and More Free Weekdays

Join the Flow State Investor Circle to start learning more and explore if a note partnership or investment is right for you. Start building those passive income streams now, to live life on your terms and start taking Monday through Friday off too.