Investments

A: In any given time period, stocks can outperform real estate or vice versa. Our blog post: Rental Properties vs. The Stock Market goes through an example of an actual property based on actual expenses and anticipated growth rates. A balanced portfolio of stocks and bonds, held for 30 years with no leverage, is likely to equal or possibly even exceed the 6.64% that our real estate investor (also with no leverage) is expecting in our example. Another consideration that favors stock portfolios over real estate is that a stock/bond portfolio is less hassle and more liquid. That being said, there is still a place for real estate. It is a good diversifier to be held in addition to stocks, bonds, and other asset classes. It also can provide tax benefits from interest expense and depreciation deductions.

A: No, although we frequently shift our allocation to the asset classes we feel offer the best risk vs. reward at a given time. This means we may reduce stock exposure and increase bonds or other types of investments. Many investors want to go to cash periodically (e.g., sell everything). This type of market timing is almost impossible to get right because you must sell at the right time and also get back into the market at the right time. Six of the 20 best days in the history of the stock market followed 6 of the 20 worst days ever in the market. I have observed that more money is lost preparing for corrections that never happen than is lost in actual corrections. Possibly my best piece of advice is; “never try to time the stock market.” For more, read: Market Timing – Why We Never Go to Cash.

A: We do not generally invest in gold and recommend that most people keep it as a very small allocation of their overall net worth (i.e. <5%). The biggest issue with investing in gold is it pays no interest or dividends and has no earnings, so its value is based entirely on speculation that someone else will pay more for it in the future. In addition, if you make money, Uncle Sam taxes gains on gold at 28% (the rate charged on collectibles) instead of the lower capital gains rate charged on almost every other capital asset (15% for most taxpayers). The only possible benefit to investing in gold is the concern about future inflation, and believing that paper money is going to be worthless in the future. For more, read: Gold and the Greater Fool Theory.

A: There are benefits to buying both types. Growth stocks are companies of the future such as Facebook, Netflix, and Tesla. These companies are fast-growing, exciting, and their stocks are typically expensive. Although you may get higher returns with growth stocks, they are typically riskier than value stocks. Value stocks (such as GE, JPMorgan, and Bank of America) historically have provided higher returns for a given level of risk, have less potential for surprises, and pay higher and more consistent dividends. However, value stocks have underperformed growth for 9 consecutive years as of 2017. It is typically smart to have a portfolio consisting of a good balance of both growth and value stocks, and that can vary based on your age, retirement plan, and financial situation. Read: Stock analysis: Stock Analysis: Value Stocks VS. Growth Stocks.

A: A bull market is a period of time when stock market values are increasing until a 20% decline breaks the cycle. Usually an economic recession brings the bull market to an end. The longest bull market lasted just under 10 years, but the average duration is under five. Some people are hesitant to invest when markets are reaching new highs.  That being said, markets can remain in an uptrend for many years where they continue to set new highs.  For more on this topic, read: Bull Market: How Long Can This Last?

A: Many people use the 4% rule as a starting point. The 4% rule is based on numerous studies that have shown that retirees historically have been able to withdraw 4% from a balanced portfolio of 60% stocks/40% bonds at the beginning of retirement, increase their withdrawals for inflation each year, and not run out of money by the end of a typical 25-30 year retirement. To learn more about the 4% rule, read: Safe Withdrawal Rate In Retirement.

A: The amount of risk appropriate for you depends on your financial plan. In general, you want the lowest risk portfolio that gives your plan the highest probability of success (not running out of money). Many people assume higher returns will give you a higher probability of meeting your financial goals. This is not always true. Consistency and predictability of returns may be equally, if not moreimportant.  Consistency of returns (lower volatility) is especially important once you’re retired and taking distributions from your portfolio. Read: Volatility Matters For Retiree Investors.

A: There are several changes you can make to your investment strategies to increase distributable income and your portfolio’s probability of not running out of money. These changes include reducing volatility and increasing the yield.  This is typically accomplished by buying certain types of bonds as well as shifting toward value stocks over growth stocks. It may also be smart to follow a pre-determined set of decision rules for when to rebalance your portfolio. A common mistake among income oriented investors is to “chase yield”.  That is buying the highest yielding stocks or bonds without understanding the risks and without regard for diversification. For more on this topic, read: Retirement Income – Maximize With These Strategies.

A: A stock option gives an investor the right to buy or sell a stock at an agreed-upon price within a certain time. The most common stock options are known as “Puts” or “Calls.” You can lock in a minimum sales price for your stock by purchasing a “Put” option if you are worried the stock may decline. Alternatively, you would purchase a “Call” option if you think the price is going up. The Call option gives you the right to buy a stock in the future at a price specified today. To learn more, read: Stock Options – How Do They Work?