The Mainstream Financial Press Has This All Wrong
Over the weekend I read one of those Q&A articles in a mainstream financial publication. A reader had written in to ask how he should invest a windfall of US$250,000.
The answer was typical mainstream financial advice that boiled down to: Determine your level of risk tolerance based on your age and then allocate some percentage of the US$250k to stocks and the balance to bonds.
Financial editors must know that the investment world includes more than stocks and bonds. Nevertheless, rarely do you hear them talk about anything else. It’s what they know and something they’re able to write about every day… whether what they write warrants publication or not.
Telling someone who just came into a windfall of US$250,000 to split the money between stocks and bonds (60% stocks and 40% bonds was used as an example) is one way to start a quick and easy (I’d say superficial) conversation about risk and diversification, but it is a far cry from actually helping someone diversify.
In addition to stocks and bonds (and the mutual funds that invest in them), any investor with capital has opportunities to invest in precious metals, strategic and rare earth metals, commodities, currencies, and real estate… both at home and internationally.
I’m all about diversification. Although the majority of my investment portfolio is in real estate, my assets are diversified across economies, currencies, and property types.
I wouldn’t recommend someone who came into a windfall of US$250,000 put all that capital into real estate overseas… or even that he put all of it in real estate, period. However, real estate should be considered for part of the diversification strategy.
Standard mainstream financial thinking has people withdrawing 4% of their assets from their brokerage accounts per year to live on in retirement. The theory is that your stock and bond portfolio should grow at a rate of 8% to 10% a year, allowing you to make those withdrawals and still keep up with inflation.
With real estate you should be able to generate a net yield of at least 5% to 8% a year from a rental property. In addition, that property should, in most cases, appreciate at least at a rate that allows you to keep up with inflation, depending on the market.
It’s not as easy to invest in a rental property as it is to invest in a stock, of course. Plus, rental properties require you to find tenants, collect rent, pay utility bills, make repairs, etc.
However, just as a mutual fund comes with a manager who builds and manages the stock portfolio, you can hire a property manager to handle all aspects of your rental property. You don’t have to fix the leaking toilet yourself if you don’t want to.
What about high dividend paying stocks or REITs that can pay out as much as 15% or more in annual dividends? The volatility of those investments is greater than the volatility associated with owning a rental property. Still, REITs can have a place in a diversified portfolio.
Real estate investments also require more cash up-front than a stock portfolio. Unfortunately, we don’t all have a US$250,000 windfall to play with.
That said, I know a half-dozen property investments right now that you could get into with less than US$50,000… including at least one that requires less than US$25,000…
Lief Simon
Editor, Offshore Living Letter
