I recently attended a conference with a roomful of investment professionals – supposedly a group of smart guys managing many millions in investments.
The presenter asked an interesting question: How much would you estimate the stock market will make in a normal year? The average response was around 8%. (Fifteen years ago the answer no doubt would have been between 10% and 15%.)
The presenter’s next question was: How much would you estimate the bond market will make in a normal year? The average response was around 1-2%.
The conclusion was that a diversified portfolio of 60% stocks and 40% bonds for a typical retiree would be anticipated to return only 5-6%. This is not a satisfactory answer that would produce a secure retirement for many retirees. Retirees would need to either reduce what they need their portfolio to produce or find other ways to generate income.
(You need to know that this was a real estate conference, and the products being demonstrated were direct investments in real estate.)
How It Works:
Direct real estate produces monthly dividend checks these days in the range of 5-7%. Direct real estate does not trade on the stock market so investors do not experience the wild volatility with daily price changes. This is a nice feature that helps reduce portfolio losses during difficult times, and it helps me sleep better at night.
Direct investment in real estate is not a liquid investment; your money is tied up in real estate. In order to get your money back, you need to wait until the manager sells the building. This is a negative feature for some investors. However, isn’t part of your portfolio permanent? Yes, you may need access to cash for a new car, for travel, or for emergencies – and your portfolio should be designed to provide this. But isn’t the bottom fourth of your portfolio a piece that you never plan to touch?
Some direct real estate funds place 90% of the money into real estate and 10% into a bond fund. This is to provide the ability for investors to request their money back before the real estate would be sold. If everyone asked for their money back at the same time this would be a problem, but typically this doesn’t happen. This “more liquid” method of direct real estate typically offers a lower monthly dividend, but it’s still currently over 5%. We have been using this kind of investment to replace some of the bonds in our clients’ portfolios. We believe bonds may be risky in this environment where interest rates are poised to rise.
In both kinds of direct real estate, investors receive regular dividend checks, but they also have the opportunity to participate in additional capital gains of the properties. One won’t know how much this will be until the properties are actually sold or appraised, but typically the total return is higher than the 5-7% from the dividends.
Of course it should be noted that real estate could decline in value, but over my lifetime these declines have been temporary.
Personally, I have been increasing my allocation to direct investment in real estate, and I think it is appropriate for many of my clients. However, this type of investment requires a face-to-face meeting to discuss the pros and cons, many of which I have touched on above. We need to make sure that such an investment would be suitable for your personal financial plan. I encourage you to give us a call and ask to meet with us to evaluate this option.
Committed to your successful retirement,