Here’s an interesting blog article I just caught up with. It’s dated from the beginning of this month, but the info is as fully valid today as 3 weeks ago. It may help to give us all some perspective on how worried to scared to terrified we should, or should not, be.
Well worth your time… Very complete reading.
Well articulated but the bottom line is same accurate song, basically keep calm and carry on, keep your eye on the long game …
One bit for the long view it makes me think about? He points out that small cap is currently relatively cheap on a valuation basis. My question is if that is an opportunity to rotate into the sector, or, if the fundamental shifts that may be in progress are going to raise the barrier for small caps to successfully compete against the established big guys going forward?
Knowing the limits of anyone’s insights here… am I right that the following is an ill-advised decision?
A family member in their early 70s, retired, with something like 1.5 million in retirement accounts.
The other day they said to me, “I don’t trust the stock market because all the things, and don’t want my retirement to get wiped out, so I’m thinking of buying some nearby undeveloped property with 10% of my savings.”
My response was, "I don’t know if your fears for the near-term are valid, but even if they are:
- You are betting that property value will rise (or fall less) at a rate better than the stock market. How do you know that is true? Has it been true in your area in the past? If the stock market craters, do you imagine that whatever causes that to happen will not impact property values?
- Owning property means annual costs (taxes, maybe other things?). Do you know what those are and have you factored them in?
- Property, particularly undeveloped property, is not a liquid asset. You’re in your 70s and so are drawing down your retirement. What if you need that $150,000? How long will it take to sell that parcel at an advantageous price?
- If you are truly scared, there are other vehicles for that kind of money that will give interest to beat inflation. For that amount of money, you could just find the best interest yielding account at your bank and stick it there.
I am correct in this, yes?
Also, this family member recently moved their money out of a national brokerage to someone local to them. I asked what this person said when they told them the plan. They told me: “they said ‘lots of people are investing in real estate’… but didn’t say if it was a good idea or not. That’s not really their job.”
Is that also true? I get that an advisor probably shouldn’t say “do this/don’t do that”, but what’s the point of having ‘a person’ if they won’t at least raise possible risks when you come up with a plan?
I’m pretty sure I talked them out of the idea, but I’d appreciate validation (or counter-arguments) and some deeper discussion about “diversified” investment and what that really means, and how one should look at risk/reward in one’s final 25 years.
I think your instincts are good. Obviously property can be a great investment, but it’s not necessarily so. It has to be somewhere in demand, and honestly, $150,000 seems like a pretty cheap piece of property for anywhere in demand. A friend of mine inherited 40 acres in WY that his father bought a couple of decades ago. It’s out in the middle of nowhere, and hasn’t appreciated much. In the mean time, it’s been way more hassle than its worth for him, living in the UK.
If I were talking to someone in that age range who was looking to move to minimum risk, I’d say money markets are paying ~3.5% and (predominately) government bond funds like FTBFX are at 4.25%, and both pay out monthly, though the distributions are taxed as income. But that’s probably not a big deal for someone in that age presumably not making $450k/year. The nice thing about both is that if rates rise, so will the yield, though in the case of FTBFX you would also see an erosion of the NAV.
All that said, this is one of my complaints about this era of cheap money- fixed income sucks, and one is forced to either be in the markets or get by on razor thin spreads between yield and inflation.
Anyway, with a horizon of 25 years I’d probably put 33% in something like bonds and let the rest ride in index funds, since that should be enough time to ride out whatever is coming.
Does she need the money to fund retirement, or is this just the pile she wants to leave behind? If the latter, I’d stay mostly equities.
Build a ladder of 13-week T-bills. Slightly better interest, rock-solid. Unless there is a reason you might need the full $150k quickly (and buying land says probably not), about $11,000 available every week if you need cash out.
Is it possible that the land is undeveloped because it’s not possible to be developed? Or that no one really wants to develop that land when there are better locations nearby? In other words, your family member may not see much appreciation from the land. At the very least, talk to a real estate agent about what the development possibilities are.
What kind of undeveloped property was this?
It obviously sounds like a quite illiquid and probably long term investment, and if undeveloped it’s not going to provide any rental income. I think one would need to be prepared to do quite a bit of research to try to evaluate potential future value (location, zoning, utility connections etc) and holding costs (tax, insurance etc).
Not something I would consider. As I’ve said before, if I knew of a good diversification program, I’d be using it. As it is, I keep a fair percentage of assets just in MM accounts at the moment.
This sounds like a bit of a red flag to me. I’m not saying that the “friendly local advisor” is necessarily a scam artist. But one hears horror stories about this sort of thing.
This. I am a volunteer income tax preparer. Every year I see clients, mostly elderly women, whose retirement accounts are being churned and drained by account “managers” who are charging them thousands of dollars/year for taking their money. Unless you are a multimillionaire who can take advantage of some of the more arcane tax breaks, never allow anyone to trade your account.
Jumpin’ in here. Okay I read the OP and I’m jumping in to share that our approach was to invest in index funds tracking the S&P, and it was pretty much look at it a few times a year, and ride it for the long term. When the market dropped this was a good thing because our money went farther, we could buy more shares.
I’m very fortunate in that da wife and I have very similar approaches to investing and saving. Actually she’s a little better at it than I am — I’m more of the spender than she is. But our approaches and philosophies match closely. But yeah, like a typical UCSB alum I like to party and have a good time!
And then also 22 years ago we bought a small house to rent. Soon after we bought it then the crash of 2008 hit. Oh well we’re not in it for the quick flip, we’re in it for the long term. We were in the red for a long time but we figured that we were feeding our investment, feeding our retirement. No urgent rush to jack up the rent because, Location Location Location and all that, we had faith that our house would turn around and recover. Slowly, it did.
We manage it ourselves. No property management company. We screen the tenants ourselves and luckily we’ve done pretty well with that. In the 22 years we’ve had only 3 tenants and they’ve all been excellent. They are meticulous, neat, and tidy. They take really good cars off our house. All 3 tenants have. Any time there’s anything wrong they text us right away and we fix it right away, and we thank them for ‘complaining’ because we truly want to know when there’s something wrong so we can stay on top of it. It also kind of helps having a slum lord owner around the corner because by comparison our tenants see that place and they know those tenants and they’re very happy being in our house.
We stay a little under the market in terms of rental rate. We do not bump the rent every year, maybe about every 3 years. The value is in having the excellent tenants. Right now Zillow says we’re $500 below market rate so for January 2027 we’re going to bump up the rent. A little, not the whole $500. I’ll email them in the summer and give plenty of heads up notice that in January the rent’s going up.
Some years ago, one November we did a crazy thing. In a fit of generosity and we could afford it then, we said Merry Christmas / Happy Holidays, thank you for being an excellent tenant and for December keep the rent. Crazy thing, right? In 22 years we’ve only done that once. It was fun to do and we felt really good doing it.
We live reasonably. I drive a (okay it’s new) '24 Subaru OBW and da wife drives an old '12 Nissan Leaf that she really loves! It’s an ugly thing, to my eye anyway, but she loves it. Do I want a Porsche 911? You bet I do! I always have but, yeah, I’m not going to get one. Not in the near future anyway.
It’s been a fun ride so far and we’re doing okay. We had some very bad health scares in '23 and fortunately we’re doing okay now. We’re both retired, I’ll be 65 next month and she just turned 60. The nest egg we’ve scurried away will be able to fund us for a while such that I won’t have to go flip burgers for McDonald’s. Which was my first job at 16 and I thought that might be fun to do. But no I won’t do that. At least I don’t have to do that. We’ve been fortunate, and we are grateful.
Thanks for listening.
No, this is definitely funding retirement. Which is already underfunded (adding to her anxiety about volatile markets).
Yeah, this is a piece of my concern. She lives in an area with LOTS of empty land. And, maybe it could be a good investment. But she doesn’t have the savvy or experience to evaluate the viability of things. She wants this piece of property in part because to the layman it looks, I assume, like a reasonably interesting parcel. But also because it happens to be there in this moment when she’s feeling an imperative to get out of stocks based on how she’s interpreting the daily news.
It all feels very reactionary and emotion-driven without any validation or real planning being done, in a time when she is already stressed about being able to meet long-term financial needs with what she has invested currently.
I can be ultra-conservative in things like this (leaning strongly towards inaction), but it makes me think of the advice “don’t make any major financial changes after a spouse has just died”… the idea being that making choices with big consequences in an unplanned and reactionary way can be a high-risk endeavor.
I feel like in an attempt to mitigate risk, she’s contemplating introducing greater risk.
Yes. I don’t really know, and have to decide how much to stick my nose in. But it all feels a bit… untethered, and while “the person managing my account at [Fidelity? Vanguard? I don’t reacal] was replaced by a young guy who didn’t communicate well, so I moved my accounts to the agency that already does our taxes, where the guy has decades of experience” sounds reasonable, it also sounds like it’s opening one up to all kinds of risks if this one guy makes a mistake, or does something sinister.
I hadn’t come into this thread thinking about that part of the story, but the more I talk about it, the more I think it might be helpful for me to get some more concreted information about what is going on. If only to be able to give more contextually appropriate advice.
Oh, one thing about screening the tenants ourselves… for our very first tenants 22 years ago we thought our place wasn’t the most appropriate for a young family. But one of the best applicants we got was a young couple with two young boys, and they liked our house. They thought it would work for them. I thought they had potential but my wife was against it.
We arranged an interview to meet them. I said, please bring the boys we’d love to meet them! So we sat in the kitchen as we met and talked. The boys were 8 and 6 and they were being boys, walking around the empty house, exploring.
As we talked I was mindful of the parents. Did they have their ‘radar’ on? Were they aware that their boys were walking around, exploring?
You see, I raised 3 kids from my first wife. My current wife never had kids of her own, so she never had to deal with the whole ‘watching your kids like a hawk’ deal. When we got married my kids were housebroken, and they were teenagers (so yeah, this wife got to deal with their Attitudes!).
Anyway, back to the screening meeting. I was keenly aware that the parents were fully aware of what their boys were doing. They got points for that. But the real kicker was, when the parents said to them, “Hey boys this isn’t our house, please don’t run around like it is!”, the real kicker for me was, did the boys listen to them and did they mind their parents?
And they did. Out of the corner of my eye, while on the one hand saying to the parents, “Oh your boys are fine, they’re just being boys” (which was genuine and sincere on my part), I was also keenly aware that the boys stopped in their tracks and minded their parents.
This was a good quality family. Boys are gonna be boys, yes, but like just about every kid they need to be reigned in once in a while.
They were our first tenants and they were great! They stayed with us for about 6 years and they kept our house clean and tidy, and squared away. They stayed until they were able to save up money and buy their own house — another reason why we like staying a little below market for our rental rate. We like to think that we are successful with them if they can do that. And so far we are 2 for 2. Our second tenants, with us for 10 years, were also able to do that.
So this too is part of our investment philosophy.
BTW, our second and third tenants did not have little children. Not by design. That’s just how it worked out. But yeah, while our house isn’t ideal for a young family, if one wants to rent from us they have to meet our minimum requirements.
And I did just get a little info that the “local person” is in fact a significantly sized regional agency with name recognition and legitimacy and decades of community engagement, so I feel a little less concerned about that piece of the story. I was undersold when initially told about it.
Even if churning the account isn’t what’s happening, there are other ways to do poorly. One national investment firm (that shall remain nameless) advertises widely that they “don’t sell commissioned investments” but have a fee arrangement that, they say, “We structure our fees so we do better when you do better.” How do they do that? From what I’ve Googled, they take roughly one percent of the overall portfolio as their fee. So the relative who comes to them with $1.5 million already accumulated will give up $15,000 before the advisor has done anything at all. And another $15,000 next year, even if the portfolio remains flat. That why I prefer a national, low-cost company. (Vanguard in my case, though Fidelity or Schwab are good too.)
Me too.
I think you’re instincts are good and you’re on the right track. If this relative is interested in investing in real estate, a REIT fund is probably a better idea, somewhat less correlated with stocks, diversified, and without the hassle of owning actual real estate.
Aye there’s the rub. As a general case having 10% of retirement portfolio invested in real estate as an asset class seems wise. It adds diversification and putting together the income it produces with value appreciation may do as well as equities over time. But owning a specific property is like buying a specific stock. Maybe if you are a great stock picker but I would be hesitant to bet 10% of my portfolio on any individual equity.
Maybe she can have her concern of diversification from equities validated, and her intuition that real estate is a very good vehicle for diversification noted as on point, but guided to putting that 10% into a REIT instead? Caution if they are in a high tax bracket though - REIT income is income not capital gains.
ETA what @We_re_wolves_not_werewolves said!
Yeah assets under management seems to be a pretty hefty tax. FWIW yesterday morning I answered an unknown number that didn’t look to be spam. A real advisor from Merrill Lynch which is actually affiliated with our company funds reaching out on how others of the doctors in our company have been taking advantage of ROTH conversions and did I have a financial planner. Took “not interested right now thank you” well at least.
OTOH. The other week my wife and I went out with another couple. They are both physicians of similar age to us, one still working, one retired from the VA, and clearly as a couple very dependent on the advice of their planner, with comments like their planner assured them they could afford the fancier new car he just splurged on. These are two very intelligent individuals. I think that many people are scared that they will act irrationally on their own or are afraid of missing out on something the expert knows?
You could cast a wide net and reel in any number of investment firms that offer the same hook, line and sinker.
And yes - taking a percentage does in fact meet the standard of “we do better when you do better”. I will point out that most of these companies offer pretty big discounts from their 1% starting point the larger your account is.