Glossary for Investors

Downside Protection

Downside protection is the risk mitigation of an investment losing value. Portfolio managers can minimize losses via stop-loss orders, purchasing assets that are negatively correlated to the asset being hedged, or broad portfolio diversification, among other strategies. By proactively working to prevent loss, investors can more quickly recover their portfolios and realize higher upside over time. 

What is Downside Protection in Commercial Real Estate?

As an alternative asset, real estate can serve as a strong addition to a portfolio when diversifying for downside protection. Because private real estate is highly uncorrelated to the stock market, its value is not affected by the same volatility or economic downturns. This means that a portfolio will be less affected by short-term fluctuations or losses if the stock market declines, as it continues to earn dividends on the long-term investments. As investors benefit from alternative asset allocation on a high level, they can also diversify within real estate, with each additional investment further diversifying their risk profile. 

Real estate also acts as a hedge against inflation, mitigating the risk of losses associated with the decreasing purchasing power of money. Because property values tend to stay on a steady upward curve over time, and higher home prices often equal higher rent, real estate investments can provide recurring income that keeps pace with or exceeds inflation in terms of appreciation. During inflationary periods, investors may consider allocating to private real estate as a method of downside protection

While investments will always carry risk, there are a multitude of ways to minimize it based on individual investment strategies. See here for more information regarding risk mitigation in EquityMultiple investments.

 

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