Hi folks. Ron Dickinson, Certified Financial Planner, CPA. I have a question for you: What’s included in your retirement portfolio? Most people would say, “Well, I have some stocks and I have some bonds.” In fact the universal answer for a retiree is 60 percent stocks, 40 percent bonds.
So the next question is, “How has that been working for you?” Are you confident that that will achieve your retirement goals? You see, I have a lot of people come in to see me that are concerned with the stock market volatility – the daily ups and downs from gyrations that impact what your portfolio is worth.
It’s unsettling at times. And when you look at bonds that are paying less than two percent, and if you had to pay money to the mutual funds and maybe to your adviser or broker, you might be making next to nothing on the bond portion.
So how is that 60-40 portfolio really working for clients? As for me, I feel somewhat confident in stocks. But as I get closer to retirement, I admit I’m getting more conservative as well. So I want to project for myself forward. I say, “Well, it would probably be 60 percent stocks and 40 percent real estate.”
Now that’s an interesting twist. But let me tell you why I have more confidence in real estate as a portfolio stabilizer and income generator. Remember that I’m talking here about private real estate. We’re buying actual bricks and mortar, and we’re not trading on the stock market. This gets rid of the emotions and the volatility, and in fact it’s based on the appraised value of the buildings, which has tendency to go up (but there are times when it doesn’t).
We make a nice income stream, and the income can be two, three, four times what you would expect from bond funds. We get rid of the volatility, plus at the end, we get some capital gains.
But to be fair, there is always two sides to every coin, isn’t there? So liquidity is the question that comes up. Can I get my money back? That’s the first concern most of my retiree clients have.
They often say, “Well, I’m too old for that. I need to have access to my money.” So my question is, “Do we need access to all of our money at any instant all the time?” If I look at your portfolio, we start at dollar zero, and build up to whatever it is, let’s just say a million dollars. Do you need access to all one million at every second of the day?
Now most of my clients will say, “I want to live off the income and not touch that principal.” But as a financial planner, I say, “Well, we need to earmark some of it as liquid because you might walk in and want to buy a car or take an extra vacation or buy a second home, or something bad might happen. So that portion we’re going to keep very liquid with the majority of your portfolio. But there’s a layer down here somewhere that’s never-spend money, isn’t there?
You hope to never dig into your principal or not down to the very bottom part at least. So that part of your portfolio is perfect for private real estate. We’ve been adding about 20 percent to our portfolios. So as a universal answer, we’re going with 60 percent stocks, 20 percent bonds, 20 percent real estate. Real estate can give us an income and stability that we don’t find in other portfolios.
So let’s talk about what that is. These are private deals. Some of them are across the nation where we go with other investors. Some of them are local deals. We’ve done stuff in Omaha and right here in Council Bluffs. For example, we buy apartment buildings on our own, put our clients into the deals, and our returns are steady.
Liquidity is not immediate, but typically we have a plan of five to six years turnaround time, so eventually we will get our money back. This has been a nice enhancement to our portfolios. For those people who don’t qualify for these larger deals and still want liquidity, we have deals where you put your money in and it’s semi-liquid. They will take the pool of money from everybody, and then put some of it in real estate and some of it in a bond fund. The bond fund money is used to pay people that want their money back, so we have always been able to get access to our money when we want it. Naturally, these deals are going to pay a little bit less. They are not going to pay the full price that a private real estate deal would pay, but they have been a nice enhancement to many portfolios.
So, real estate is something I think people should strongly consider including in a normal portfolio. We’ve taken an aggressive stand by moving real estate up to 20 percent of portfolios. We might even move to 30 percent for folks.
So it has become a niche for us. As a CPA, I can read the financial statements from these real estate companies and understand them a little bit better than maybe the average adviser can. So it’s something we’re adding to our clients’ portfolios. I like it for myself and am doing it with my own money. Why wouldn’t I do it for our clients as well? So if you would like to know more, we would be glad to discuss this with you. Thanks.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]