Wall Street is rarely kind to those who choose to play its roulette wheel. The Federal Reserve has been propping up the stock market with near zero interest rates and quantitative easing since the financial crisis of 2008. The recent historic drop in the Dow, followed by a huge rebound, only highlights how volatile and unpredictable investing in the market can be.

If you play long enough, the house always wins. Isn’t it time to get out of the casino before it’s too late?

As an individual investor, the deck is stacked against you.

For the past 7 years stocks have trended upward, enabled by the Fed’s low interest rate policy. This has lifted prices for most stocks well above real fundamentals in the economy. In addition, the introduction of automated trading algorithms have made already opaque market moves more volatile, substantially increasing fluctuations.

Meanwhile, multibillion dollar players lurk in the shadows, creating discrepancies between fundamentals and stock behavior. Hedge funds control such vast quantities of capital that the impact of a single trade could wipe out a lifetime of growth for an individual armed with substantially less information.

Wall Street fund managers and their complex algorithms aim to make their money at the expense of individual investors—while you try to play the market they are sitting, waiting to pounce.

Ignore the noise, underwrite from the ground up, and look for real value.

At Fundrise, we believe that well-underwritten hard assets, while less liquid, have a greater potential to weather volatility and outperform the stock market over the long-term.

If a senior loan or mezzanine position has strong underlying fundamentals, when it matures, the principal and return will be paid off irrespective of changes in the stock market.

We’re value investors with the motto: ignore the hype, underwrite from the bottom up, and identify real value.

Unlike stocks, which often see large price swings from arguably irrelevant factors such as investor sentiment, herd mentality, and “predictions,” real estate experiences much less pricing volatility.

Moreover, individual real estate investments are affected by a comparatively smaller number of risk factors, which more closely reflect their true value. By cancelling out the noise, these real assets can provide an attractive alternative with betas near zero.

Here’s a comparison of the factors that impact real estate (pulled from a recent Fundrise deal!) and the public markets:

Seattle Stabilized Boutique Apartments - Drivers & Fundamentals

  • Amazon.com growth & innovation, ability to attract talent
  • Proximity to headquarters for other multi-national corporations such as Starbucks, Microsoft, Costco, and Boeing
  • Proximity to University of Washington
  • Fixed long-term debt until 2055
  • Demographic growth of downtown Seattle
  • Employment in and overall economy of Seattle
  • The need for housing is a basic necessity in downtown Seattle
  • Nearly-stabilized asset with minimal execution risk
  • Steep discount to San Francisco cost of living

Wall Street Equity Market - Drivers & Fundamentals

  • Asian Markets
  • European Markets
  • Emerging Markets
  • Interest rates/Fed policy
  • International monetary policies
  • European economic stability
  • Fundamentals (Corporate earnings, profitability)
  • Sentiment
  • Momentum
  • Large institutional players
  • Technical analysis
  • Political risks
  • Inflation
  • GDP
  • Expectations
  • Geopolitics
  • Manufacturing Data
  • Unemployment numbers
  • Liquidity (time of year)
  • Scandals
  • Supply & demand
  • Commodity prices
  • Foreign exchange rates

Seattle Stabilized Boutique Apartments - Risks

  • Tail risk of Amazon.com, Microsoft, and Starbucks moving their headquarters to Iowa
  • Nuclear attack
  • Oversupply of apartments in the immediate vicinity if the market becomes too hot for too long (would require a 50% move in rents to impact our investment)
  • Natural disaster
  • Sponsor personal balance sheet management triggers technical default with senior lender

Wall Street Equity Market - Risks

  • China weakness, slowing growth
  • The Fed hikes rates too much too soon, or not enough
  • Nuclear attack
  • Negative sentiment
  • Eurozone deflation
  • Global wage stagflation
  • Strong dollar headwinds
  • ISIS, unrest in the Middle East
  • Poor corporate earnings
  • Unstable commodity prices
  • Poor manufacturing performance
  • Poor employment numbers
  • Natural disasters

Deflation in Europe won’t materially impact the pricing of the development of a boutique apartment building, but it could very easily wreak havoc on the US stock market.

Last year when the Ebola scare hit, the VIX jumped, and the Dow plummeted. Airline shares fell more than 20% after news that an Ebola patient had flown a day before being diagnosed.

The impact on the value of our investment in a Seattle apartment development? None.

And, the actual impact on the core business of any major US airline? None.

If last week’s volatility underscores anything it should be this: diversification outside of just the stock market is key to efficiently building wealth and mitigating risk. It’s also the secret to weathering turbulence in any macroeconomic environment.

One final takeaway

There’s an old poker saying that Warren Buffett used in a February 1988 letter to Berkshire Hathaway shareholders, “If after ten minutes at the poker table you do not know who the patsy is—you are the patsy.”

If you saw volatility in the stock market last week, take a look around the table…