Should you invest only in equities (stocks and bonds)? What about only in real estate? This is a big debate in the FIRE community. But, in my opinion, you should invest in both! That’s what is called a hybrid investing approach.
And it is the best approach to reach your goals of financial well-being and financial freedom.
Just look at my financial plan!
Still not sure? I’ll give you 10 reasons why!
But first, an admission…
I have to say that recently I have doubted the exact assertion that I am making here.
Selenid and I have seen how real estate investing has been the primary driver in our increase in net worth for -$400,000 to over $500,000 in less than 2 years. We’ve also seen how just one property completely changed the trajectory of our net worth as shown here.
So, I have thought about what our plan would look like if we pulled everything our of equities and went all in on real estate. This really only got to the though experiment phase and not close to any action taken. But we did put a lot of though into it.
In the end, we came to the same conclusions as I will lay out here.
However, I think it’s important to admit this. Because that temptation will come. So be prepared!
10 reasons a hybrid investing approach is best
We all know about and agree with the advantages of diversification.
By diversifying, you ensure that if one asset class that you invest in goes down, your whole portfolio and savings doesn’t go down. You have other asset classes that do not correlate and might go up or stay the same while another goes down. This reduces volatility and maintains a stable financial foundation to your plan.
That’s why I recommend at least a stock:bond split in your financial plan.
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Adding real estate just diversifies your portfolio further.
Especially recently, there is a lot of concern about inflation. People are concerned, maybe rightfully…I don’t pretend to know for sure, that the value of their money is decreasing.
And they fear that while they are investing and making a return of, say, 7%, inflation will cut that down. For instance, if inflation is 5%, your real return on investments is now only 2%. That likely won’t be enough to build up your nest egg sufficiently.
I don’t worry too too much about inflation. I expect that equities like stocks and bonds will accommodate the inflation and “inflate” themselves as well.
But, I also invest in cash flowing real estate. That cash flow comes from rents that my tenants pay me. If inflation occurs, those dollars that I am paid in rent will inflate as well. Actually, they will inflate in roughly a 1:1 ratio.
Therefore, real estate investing (when done appropriately like with my hybrid strategy) hedges against inflation.
How To Actually Buy A Real Estate Investment Property
How to Screen & Analyze Investment Properties the Right Way
Real estate offers massive tax advantages.
Real estate depreciation creates paper losses that offer the real gains (via cash flow) that I make from my real estate investing. Therefore, all of my real estate income the past year was completely and legally tax free.
More over, this year, Selenid is working to obtain Real Estate Professional Tax Status (REPS). This will allow us to offset our W2 taxable income with the paper losses from real estate. This will save us a huge amount in taxes.
These benefits can even pass on to you in some passive real estate investment opportunities like syndications.
Yes, investing wisely with equities in tax-advantaged investment accounts is tax efficient. Even investing in a taxable account can be quite tax efficient using low cost index funds like VTSAX.
Finance Flash Go! Episode #6: Active vs. Passive Stock Investing
But they are never as tax efficient as real estate investing.
4. Use your investment returns now and later
What’s a major reason that some people state as the reason they only invest in real estate?
It’s because they want to use the returns on their investments (i.e. cash flow) now! With real estate investments, you can use your gains right away to either re-invest, buy a new car, or support your financially free lifestyle.
This is in comparison to investing equities with retirement accounts that have penalties up to 10% for early withdrawal before a certain age. I’ve even heard some people refer to retirement accounts as “money jail.”
I don’t subscribe to such a dogmatic viewpoint. It’s really nice to have some investment returns to spend now. That’s a big reason why I love real estate investing. (I use my real estate investment returns to re-invest in more real estate).
But, I also like to have some money safely stored away for later. I think this provides a nice psychological cushion for me and my family. And investing psychology is important. Part of the reason that I feel so comfortable aggressively building my real estate portfolio is that I know it’s not all that I rely on for my future.
Real Estate Investing: The Good, The Bad, and 50% Returns!
5. Spread out the risk of “market emotions”
All markets are influenced by an emotional component. As much as we may like to think they are not. They are.
The stock and real estate markets are certainly no different.
By investing in both, I spread out the short and long term risk that the emotional volatility of each market presents.
Maybe this could fall within the diversification benefit that I shared above, but I think this is important enough to be its own reason in favor of a hybrid investing approach.
6. Increase your salary
Up until now, most of the individual advantages that I have discussed are related to real estate investing. However, equity and stock investing have their own unique advantages in and of themselves as well.
The biggest in my opinion?
Most physicians are going to make W2 income. Especially these days are true private practice becomes more rare. (I’m not saying this is how it should be, I’m just saying it’s how it currently is trending…)
Included in most employment contracts is a retirement investment account (401k) employer match. This means that if you don’t invest in the retirement account, you won’t receive the employer match.
This is like leaving money at the negotiating table. No real estate investment is worth that, in my mind.
Score another point for the hybrid investing approach!
7. Work in both efficient and inefficient markets
This reason has a lot to do with investing psychology as well.
As investors, we like to feel secure in our investments. But we also like to tinker. It’s natural.
A hybrid investing approach presents the best of both worlds in this regard. The stock market is efficient. Tinkering will actually make your investments do worse in 80% of the time. And that’s a nice, comforting fact to know. It means that we can invest via a simple approach and know that we will reach our financial goals! We just need to save 20% of our income, invest passively in low cost index funds according to our asset allocation, and re-balance yearly!
Finance Flash Go! Episode #37: Rebalancing Your Investments
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But…the lure of the dark side is difficult to resist. Too many people get bored with this approach and want to try and take a more active role. And this leads to them losing!
However, the real estate market is inefficient. This means that there are strategic ways to maneuver in the market to make yourself more money. That’s what I do.
I do my tinkering in the real estate market and don’t tinker at all in the stock market. It’s the best of both worlds.
And now I think I’ve said the word “tinker” enough…
8. Give yourself an escape hatch
It’s a lot easier to pivot your strategy one way or the other within a hybrid investing approach.
If I want to ease off of real estate, I can easily transition with a fully developed equity investing plan in play. And vice versa.
Too many people get caught too far in one end of the swimming pool or the other. Then when a change is desired or needed, analysis paralysis, market concerns, or other factors limit their flexibility.
9. There’s too many viable options not to do it
Let’s be real. Most of you are likely investing in equities like stocks and bonds. How you are doing it (actively, passively, etc.) is another thing. But you are likely doing it.
What is holding you up from a hybrid investing approach is like the real estate side of things.
Maybe you’ve heard that real estate is too risky. Maybe it seems too complex. Perhaps you’re worried about needing to fix a toilet at 2 AM.
The truth is that there are a full range of ways to invest in real estate. From completely passive real estate investment trusts (REITs) to passive syndications and funds to active investing like I do.
Learn about all of them in this complete guide.
Pick one and start somewhere. It’s too easy not to.
10. It’s fun
I put this last because it’s probably the worst reason of all. But I couldn’t exclude it completely.
Real estate and stock investing have both becomes hobbies of mine. Hobbies that pay me money. I enjoy them. If I never started my financial education, I would never have discovered these passions that bring me joy.
So I think its a good enough reason…
How can you get started with a hybrid investing approach?
Read these posts!
- 5 Steps to Increase Your Net Worth Right Now
- Learn How to Set Your Financial Foundation!
- Stress Free Stock Market Investing Is Easier Than It Seems!
- The Complete Physicians’ Guide to Real Estate Syndications
- 7 Financial Habits of Highly Successful Physicians
- The Simple Habits That Will Make You Financially Successful
What do you think? Do you use a hybrid investing approach? Why or why not? Did I miss any key reasons? Let me know in the comments below!
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11 thoughts on “10 Reasons a Hybrid Investing Approach is Best”
Dude, I’m too lazy to do real estate! Good for you man for getting “passive” income from real estate!
Let me start off by saying I really enjoy reading this and listening to doctors and dollars. I’m not a physician but a old friend of the prudent plastic surgeon. I already cleared all debt besides my mortgage. Take full advantage of my 401k and roth ira. I mess around as a hobby in stocks. Invest generously in 529’s for the kids. HSA is maxed also. Next step in my mind is real estate. I go between working an investment property myself, which I have some experience in, and just buying a large undeveloped area of property which I see a much larger return in the future that I can sit on with little taxes and no headache. Any advice? I’m more worried about the time investment of managing properties vs the time I get with the family. Other than my hobby stock investments everything else is automated and takes zero time away from my personal life with the family.
You’re killing it. I obviously am a huge fan of real estate investing. I think that the best way to do it is through direct ownership of cash flowing rental properties. Owning land can be risky because you are betting on market appreciation which is never a given. A lot of people got burned this way in the previous real estate crash. But, with cash flowing properties, market appreciation is really just the cherry on top of it happens. Even in a down market, you don’t really care about the arbitrary market value of the property because it is still putting money in your pocket via rent and mortgage paydown by tenants!
Also, I totally hear the aspect of not wanting to take time away from family. I’m the same way. By automating things you can really decrease the active time involvement and to me, the minimal time is worth it.
Your outlook is very similar to mine. I have lost on real estate investing but still would like to have a hybrid outlook.
Guidance on real estate investing would be much appreciated.
I would like to be the
The Prudent General Surgeon
———With your help!
Hi Michael, I’m sorry to hear about your past REI experiences but I really do believe in it as a powerful vehicle for physicians when used responsibly. This can include more passive opportunities or active direct investing like I do currently.
This post is a great overview to start with and links to more concentrated posts on specific types of real estate investing:
And please don’t hesitate to reach out with any questions!