Do you have your retirement investments in mutual funds, ETFs, or bond funds in your retirement accounts like 401Ks, IRAs, or pension funds?
If so, keep on reading so that you get informed and prepare to adjust your investments, if needed!
You may remember that the 2008 market crash was primarily caused by the collapse of the residential real estate market, specifically due to massive issuance of subprime mortgages and the subsequent default of those mortgages by borrowers.
These defaults triggered a chain reaction throughout the financial system, causing widespread panic and eventually leading to a global recession.
This time around, a possible recession will be caused by commercial real estate fallout… As businesses shut down or downsize their operations due to the high inflation, the demand for commercial real estate, especially, office space, is declining…
While the 2008 crisis was caused by the residential real estate market, the current risks are mainly associated with the commercial real estate sector, which has been heavily impacted by high cost of money (aka inflation) and limited access to financing (fallout of smaller regional banks).
While the latest rate of inflation is slightly lower than in the previous months, it’s still a long way to go down to the 2% that Federal Reserve targets as a goal.
And high inflation can cause a major fallout among regional banks, as we’ve witnessed recently with several regional banks…
Regional banks are typically more exposed to local economic conditions and industries, which makes them more vulnerable to the effects of inflation.
National banks are larger and more diversified, with having operations across the country and even globally, which can provide some insulation from regional economic volatility.
Regional banks play a critical role in financing commercial real estate projects, particularly for small and medium-sized businesses.
When regional banks experience losses or defaults, this can have several impacts on the commercial real estate market…
For example, Problems with Regional Banks cause:
1. Reduced Lending: Most commercial real estate holdings are heavily leveraged… Losses or defaults among regional banks can lead to a reduction in the amount of money that regional banks have available to lend to commercial real estate projects. (CRE).
2. Tighter Credit Standards: Banks already have tightened their credit standards in response to losses or defaults, making it more difficult for individuals and businesses to qualify for loans. This also causes a slowdown in the commercial real estate market (CRE), as businesses are unable to secure the financing they need to sustain or expand existing operations.
3. Increased Lending Interest Rates: Losses or defaults among regional banks can also lead to increase in interest rates for commercial real estate loans, as banks try to mitigate their risk. This can make it more expensive for businesses to borrow money, which can result in a slowdown in the CRE market.
4. Asset Write-Downs: When banks experience losses or defaults, they may be forced to write down the value of their assets, including their commercial real estate loans. This can result in a decline in the value of these loans on the bank’s balance sheet, which can impact their profitability and their ability to lend in the future.
All of these factors related to instability among regional banks can contribute to a slowdown in the commercial real estate market, as businesses are less able to secure financing, and have to deal with higher interest rates.
Why would YOU care about the potential commercial real estate fallout today and how it relates to your stock market investments via mutual funds, or ETFs (exchange-traded funds), or municipal funds, etc.?
Commercial real estate fallout can trigger a recession and overall financial fallout because it plays a crucial role in the economy.
The commercial real estate market is closely tied to many other sectors of the economy.
A significant downturn in the commercial real estate market can have several damaging economic effects, like:
Damaging effects of the CRE downturn:
1. Job Losses: The commercial real estate market provides jobs for construction workers, architects, engineers, property managers, and other professionals. These job losses can result in a reduction in consumer spending and a further slowdown in the economy.
2. Reduced Consumer Spending: When commercial properties like shopping malls, restaurants, and retail stores experience vacancies or closures, it can lead to a reduction in customers’ traffic and consumer spending in the surrounding areas. This can result in a slowdown in the broader retail sector and a further decrease in economic activity.
3. Further Credit Tightening: Losses in the commercial real estate market can also lead to further credit tightening, as banks become more cautious about lending money. This can make it more difficult for businesses to secure the financing they need…
As you can see, the commercial real estate market is closely tied to the broader economy, and a significant downturn in this market can have several negative effects.
These effects can lead to a recession, job losses, reduced consumer spending, credit tightening, and can impact your stock market investments, whether you’re invested via mutual funds, Exchange-traded funds (aka ETFs), index funds, municipal funds, bond funds, etc. in your retirement accounts (401K, IRAs, or pensions.)
Ways You Can Protect Your Investments
There are at least 5 ways you can protect your investments in mutual funds, ETFs, bonds, and index funds against a potential fallout in commercial real estate:
1. Diversify: One of the most effective ways to protect your investments against a downturn in commercial real estate is to diversify your investment portfolio. By investing in a variety of asset classes, such as value dividend-paying stocks, precious metals (gold & silver), and residential real estate investment trusts (REITs), you can spread your risk and reduce your exposure to any one market segment.
2. Avoid Concentration in Commercial Real Estate Funds: If you are concerned about the impact of a commercial real estate downturn on your investment portfolio (like I am), you may want to avoid investing in funds that are heavily focused on this commercial real estate sector.
Instead, consider diversifying your holdings across different sectors, such as technology, healthcare, commodities, and consumer goods.
3. Know What You’re invested in and Monitor Your Investments: If you are invested in the stock market via Mutual Funds, ETFs, Index Funds, or Bond Funds in your retirement accounts or pensions, know what assets these financial instruments exposed to.
Very often people have no idea what their mutual funds are investing in… If you work with a financial adviser, ask questions about the specific assets you’re invested in!
It’s essential to keep a close eye on your investments and monitor any potential risks or red flags.
Review the performance of your funds with your adviser and analyze their exposure to different sectors and asset classes, especially Commercial Real Estate (CRE).
4. Consider Low-Cost Index Funds or ETFs not related to CRE: Low-cost index funds and ETFs (Exchange Traded Funds) are popular investment options that provide broad market exposure while minimizing costs. These funds typically track benchmark indexes like a S&P 500, and also provide exposure to a diversified range of stocks across different sectors and industries.
5. Be a Strategic Investor: Stay Invested for the Long Term. Strategic investing is a long-term strategy, and short-term fluctuations in the market are to be expected.
By staying invested for the long term, you can ride out market volatility and benefit from the compounding effects of long-term growth.
Here’s the summary of what I shared with you today:
In order to reduce your risk and achieve your long-term investment goals, you’ve got to protect your investments against a potential fallout in commercial real estate by creating a well-diversified portfolio, knowing what assets you’re invested in, monitoring your investments, and staying invested for the long term.
Remember, financial ignorance is VERY expensive…
To Your Health, Wealth and FREEDOM!