Dollar-Cost Averaging in Private Real Estate
Time and time again, history tells us that trying to time the market may work out for some in the short-term, but that it’s a fool’s errand over the longer-term. When using the stock market as an example, the evidence of this point is overwhelming. From 1998 to 2017 the stock market generated a 7.2% annualized return. If an investor missed the 20 best days of those 20 years due to misjudgment of the ups and downs of the market, their annualized return would have been only 1.15%. Considering that nobody can predict when the next 20 best days will happen, the key is to stay invested for the longer-term.
Thankfully, there is a more prudent strategy that investors can employ to smooth out, or even minimize, the price at which they invest at without trying to time the market. This strategy is called dollar-cost averaging and it can not only be applied to stock market investing, but also to investing in other asset classes, such as open-end private real estate funds.
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Dollar-cost averaging is a systematic process in which an investor divides the total amount of capital they’d like to invest in the particular asset by the number of periodic contributions they’d like to make, or invest, in that asset over a period of time. The resulting dollar amount for each periodic contribution is then invested at a strategic frequency determined by the investor (example: every month, every three months, etc.) This effort attempts to reduce the impact of asset pricing volatility on their overall investment and minimize the average asset pricing in which they have invested at by the time they’ve made all their period contributions.
The example below depicts the impact of employing a dollar-cost averaging strategy when investing $1 million in Origin’s IncomePlus Fund from the first quarter of 2020 through the third quarter of 2020.In the example above, the investor invests at an average price per unit of $9.59. If that same investor invested the full $1 million in the first quarter of 2020 instead of dollar-cost averaging, their average price per unit would be $10.00.
However, the optimal dollar-cost averaging frequency is not a one-size fits all strategy for every investor and every asset class. For example, an investor planning to invest in small cap technology companies in October 2020 may take a more conservative approach and plan to dollar-cost average their technology investment with monthly, or even weekly, contributions over the next 12 months due to broader volatility and pricing concerns that exist in the technology sector today. On the flipside, if that same investor is also planning to invest in private multifamily real estate starting in October 2020, they may employ a different dollar-cost averaging strategy for multifamily real estate than they do for their investment in technology companies.
Origin’s IncomePlus Fund employs a diversified strategy and has an evergreen structure with monthly re-pricing, allowing investors to employ a dollar-cost averaging strategy via the fund’s four to six contribution windows per year. The Fund also offers a distribution reinvestment program (DRIP), allowing investors to further dollar-cost average and take advantage of compounding returns by automatically re-investing their monthly distributions back into the Fund.