EGP - My Investment Plan For 2023

Summary

• A plan is essential to avoid making emotional decisions.
• There are three main things that I want to achieve in 2023.
• I also discuss some of my Top Picks for 2023.

The end of the year is quickly approaching and if you still haven't made an investment plan for the next year, now is the time.

Having a clear plan and then sticking to it is especially important today because we live in an uncertain world and the stock market has become very volatile.

Without a plan, you will risk making emotional decisions that you could regret later. It is the plan that gives you the discipline to consistently follow your investment strategy, regardless of what the market throws at you.

With that in mind, my investment plan is quite simple.

There are three main things that I want to achieve in 2023:

1. I want to make steady additions month after month.

2. I want to seek greater diversification with alternative assets.

3. I want to accumulate larger positions in REITs specifically.

Below, I discuss these topics in more detail:

1) Follow a Steady Accumulation Strategy

This first point of my plan is probably the most important.

I am making the conscious decision to not attempt to time the market.

I am convinced that it is not possible to predict what the market will do in the short run and so I don't worry about it.

This is not just my opinion as several studies prove this point.

To give you a few examples: a study by JPMorgan ( JPM ) found that the average individual investor has only earned 2% annual returns and that's largely due to failed attempts at timing the market:

Then another study by JPMorgan also found that if you missed the 10 best days in a year, your returns would be very materially lower:

A lot of people today appear to think that prices will keep going lower as we head into a recession and the Fed keeps hitting interest rates.

But it just isn't that simple.

The market is a forward-looking machine and these expectations are already largely priced in. We cannot know how much it is priced in and that's why we cannot time the market. Perhaps, the market has already priced too dire expectations in and it will end up being positively surprised if and when we hit a recession.

We cannot know so we don't worry about it.

Prices are already down significantly, especially in some specific sectors like REITs ( VNQ ), and the best time to invest is when prices are low. I don't want to risk missing these opportunities and I plan to make steady additions to my portfolio, month after month, and won't try to time the market. We have done that throughout 2022 and we will keep executing the same accumulation strategy in 2023.

2) Seek Greater Diversification Benefits

The world is today extremely uncertain.

Russia's disastrous invasion of Ukraine could still turn into a third world war, and if China decides to invade Taiwan, the threat of a world war would be even greater.

I want some protection against these significant risks, and the best protection is diversification.

Today, I am very heavily invested in commercial real estate via REITs, stocks, and some preferred shares.

In 2023, I want to add more diversification to that with the addition of some alternative asset classes.

To give you a few examples:

In 2022, I started to build a farmland allocation in my portfolio with an investment in Farmland Partners ( FPI ), a farmland REIT, and FarmTogether, a farmland crowdfunding site.

Farmland is a safe haven in today's world because people always need to eat, we are not making any more land, and the global population keeps growing. Besides, wars disrupt global supply chains and only make US farmland more valuable.

Another example is Latin America. Until recently, I had no exposure to Latin America, but recently, I began to build a large investment in Patria ( PAX ), which is the mini-Blackstone ( BX ) of Latin America. It is an asset manager that helps institutional investors invest in Latin America and it earns fees for managing these investments. I think that the war in Ukraine and the threat of an invasion of Taiwan are going to push a lot of investors to invest in Latin America, which is far away from tensions and has historically served as a safe haven during times of high geopolitical uncertainty:

So going into 2023, I plan to keep diversifying my portfolio with larger investments in farmland, Latin America, and other less-correlated investments that could save my portfolio in case we are hit with a major black swan.

3) Accumulate Larger Positions in REITs Specifically

Finally, I will keep investing heavily in my favorite sector, which is REITs.

I think that they offer the best risk-to-reward in today's market because of six key reasons:

• Reason #1 - exceptionally low valuations: They are priced at huge discounts to their net asset value. Some REITs trade as low as 50 cents on the dollar. This essentially means that you get to buy high-quality real estate at a 50% discount to fair value. If you were offered such a deal in the private market, you would probably jump on the opportunity, but somehow, investors are reluctant to buy REITs because they are publicly listed and fear volatility. Just to give you an example: BSR REIT ( BSRTF ) owns mainly rapidly growing apartment communities in Texas and it is priced at a 40% discount to its net asset value.

• Reason #2 - benefits from inflation: The high inflation of the past year has led to significant rent growth, and this makes REITs even cheaper because their cash flow has grown considerably even as their share prices collapsed. Today, rent growth remains very strong in some property sectors. EastGroup ( EGP ), as an example, is hiking rents by 20%+ for its industrial properties as leases expire.

• Reason #3 - protected from rising rates: Most REITs use little leverage with a 35% LTV on average, the debt is fixed rate, and maturities are long at nearly 10 years. As such, the rising interest rates often have very little impact on their profitability, and by the time most of the debt is refinanced, rates will likely be lower again.

• Reason #4 - less exposed to geopolitical risks: Most REITs own properties only in the US and they are, therefore, less exposed to geopolitical risks. Companies like Apple ( AAPL ) are much more exposed to these risks since they produce a lot of their products in China. Another good example would be McDonald's ( MCD ), which had to take a major impairment as it left the Russian market.

• Reason #5 - better protected from recessions: Most REITs own properties that are essential to their tenants and they earn rental income from long-term leases. Therefore, their cash flow does not change materially in a recession. This explains why REITs have historically enjoyed nearly 2x better downside protection than other stocks during recessions.

• Reason #6 - high income and upside potential: Because REITs are heavily discounted, they are priced today at high dividend yields and offer significant upside potential in the recovery. It is not uncommon to find REITs that offer a 6-8% dividend yield and offer 50%+ upside potential just to recover to a conservative estimate of their net asset value.

The last time REITs were this cheap was following the pandemic crash, and they then doubled in value in the following year:

I already have large positions in REITs and expect to keep accumulating much larger positions in 2023. It is rare to get to buy good real estate at a steep discount and so I don't want to miss these opportunities.

Bottom Line

I am sure we can all do something to improve our portfolio in 2023.

My plan is to:

• Consciously avoid attempting to time the market.

• Make steady purchases month after month.

• Diversify my portfolio by including more alternative assets.

• Buy larger positions in REITs specifically.

What's your plan? Let us know in the comment section below.

For further details see: