Why long-term wealth preservation may require investors to rethink what “risk” actually means
Risk is one of the most misunderstood concepts in investing.
For many investors, risk means one thing: losing money.
More specifically, it often means watching an investment decline in value over a relatively short period. As a result, investors naturally gravitate toward assets they perceive as stable and away from investments that fluctuate more significantly. But volatility is only one form of risk.
There is another that can be much less visible—and potentially just as damaging over a long investment horizon: The risk of not generating enough growth.
The Difference Between Volatility and Long-Term Risk
An investment can fluctuate significantly from year to year and still produce strong long-term results. Conversely, an investment can appear relatively stable while failing to generate enough return to keep pace with inflation, taxes, withdrawals and increasing living expenses.
That distinction is especially important for investors whose assets may need to support them for decades or eventually transfer to the next generation.
Historical performance provides an interesting illustration.
According to the research accompanying this analysis, U.S. stocks outperformed bonds in 98% of rolling 20-year periods dating back to 1926.
During the periods when stocks outperformed bonds, the average 20-year stock return was 804%, compared with 230% for bonds. When bonds outperformed, the difference was far narrower: an average 257% return for bonds compared with 239% for stocks.
Past performance, of course, does not guarantee future results. But the historical comparison highlights an important principle: Avoiding volatility and avoiding risk are not necessarily the same thing.
The Risk of Not Keeping Up
Consider an investor whose primary objective is preserving wealth.
Moving heavily toward conservative assets may appear to accomplish that goal because the portfolio experiences fewer dramatic swings. But what happens if the portfolio doesn’t grow sufficiently?
Inflation reduces purchasing power. Expenses increase. Taxes affect returns. Retirement withdrawals reduce principal. Assets may also need to support a longer lifespan than originally anticipated.
Over 10, 20 or 30 years, insufficient growth can become its own form of risk. And unlike market volatility, it may happen so gradually that investors don’t recognize the problem until years have passed.
The Same Principle Applies to Real Estate
This is where the conversation becomes particularly relevant for property owners.
Real estate investors can become very comfortable with assets they have owned for many years. A property may be debt-free, have a low property-tax basis, generate predictable rent or simply carry tremendous sentimental value.
Those characteristics can make the asset feel safe.
But the more important question is: Is the property still performing the job you need it to perform?
An investor might own a property worth several million dollars that generates relatively little income compared with its current equity. Another property may require significant management, capital improvements or ongoing maintenance while producing modest appreciation.
Meanwhile, that equity may potentially be positioned differently to pursue greater income, diversification or long-term growth.
That doesn’t automatically mean the property should be sold. It means the asset deserves to be evaluated based on where the investor is going—not simply on where the investor has been.
Market Insights: Look at the Portfolio, Not Just the Property
One of the most useful shifts for long-term real estate investors is moving from a property mindset to a portfolio mindset.
Instead of asking whether an individual property is a “good property,” consider how it functions within the entire portfolio.
Look at income generation, appreciation potential, concentration, liquidity, debt, management requirements, tax considerations and future capital needs.
A highly appreciated property can still be an inefficient use of equity. A lower-growth asset may be valuable because it produces reliable income. Another property may provide diversification or strategic development potential.
There is no universal answer. The objective is to understand the role each asset plays.
Neural Marketing Insight: Why Investors Hold Too Long
There is also a behavioral component to risk.
People generally feel the pain of a loss more intensely than the satisfaction of an equivalent gain. That can encourage investors to prioritize avoiding visible short-term losses over pursuing less certain long-term opportunities.
Real estate adds another psychological factor: familiarity.
An asset owned for 10, 20 or 30 years feels known. The investor understands the tenants, neighborhood, expenses and history. A different investment introduces uncertainty. Familiarity can easily be interpreted as safety. But familiarity and investment efficiency are not necessarily the same thing.
Successful portfolio decisions often require separating the emotional comfort of ownership from the financial performance of the underlying asset.
Success Story: From “Should We Sell?” to “What Should This Equity Accomplish?”
A common challenge I see with long-term property owners begins with a seemingly simple question: Should we sell this property?
But that is rarely the most useful question.
A better conversation starts with understanding what the owner wants the equity to accomplish next. Does the family need more income? Less management responsibility? Greater diversification? A different geographic exposure? Estate-planning flexibility? Opportunities for the next generation?
Once those objectives are clear, the property can be evaluated within a larger strategy.
Sometimes the answer is to hold. Sometimes it is to improve or refinance. And sometimes repositioning the asset may make more sense.
The important part is that the decision becomes intentional rather than simply defaulting to what feels familiar.
The Better Question About Risk
Investors cannot eliminate risk. Holding cash carries inflation risk. Bonds carry interest-rate and purchasing-power risk. Stocks carry market volatility. Real estate carries market, tenant, liquidity, regulatory and property-specific risks.
Even doing nothing carries risk. The goal, therefore, shouldn’t necessarily be to avoid risk.
It should be to understand which risks you are taking, why you are taking them and whether you are being adequately compensated for them.
A Question for Property Owners
If you own investment real estate, consider asking yourself: If I had the property’s current equity sitting in cash today, would I buy this same property again?
If the answer is immediately yes, that tells you something. If the answer is no—or even I’m not sure—it may be worth taking a closer look at the portfolio.
Your real estate portfolio should reflect where you are going, not simply what you accumulated along the way.
If you are evaluating a long-held property, considering a 1031 exchange, consolidating multiple assets, increasing income, reducing management responsibilities or repositioning real estate for the next generation, a portfolio-level analysis can help identify the opportunities—and the risks—that aren’t always obvious when looking at one property at a time.
Davenport Real Estate Group can help you evaluate your real estate holdings from a portfolio perspective and determine which assets continue to support your long-term objectives.
This article is for general informational purposes and is not investment, tax, legal or financial advice. Historical investment performance does not guarantee future results. Consult your financial, tax and legal advisors regarding your individual circumstances.
