Unjustified fear

[ut2sua]

Hi all,
I am new to this forum (and the idea of FIRE), but I have came up recently with the realization that time is more important than $ at some point in our lives, and I am hoping I can FIRE in a couple years if not sooner. I have some unjustified fear on certain investments, and I am asking for input on what may look like not-very-smart-investment decisions on my part. My thanks in advance to all for your comments.
DW and I are 49 and 53
2 sons: 24 and 21 both in college
My current NW
850K in my 401K - just switch from 100% S&P500 to VTTVX (Vanguard balanced fun - retirement in 2025 - ~60/40 mix)
450K in my pre tax IRA (rolled over from previous 401K) 60/30/10 Stock/bond/VNQ
750K in DW pre tax IRA 100/0/0 - VTI
600K cash (all in short term CD); having fear putting any of these into stock/bond or anything other than CD
~2000K worth of rental properties (4 houses) <- generating net ~4K/month income (after tax, insurance, maintenances etc.). Here I am fearless feeling more at ease with real estate renting (this could be unjustified too since things could go wrong with tenants; generated income is lower etc.)

Right now, I have this uneasiness of putting $ into bond because I believe interest rate will rise; I also feel like the stock market may go back down, so I am looking for some safety, but the bond funds don't look like a safe place.
I am leaning toward converting DW IRA to have more bond $ just to go against my fear (and trying to not time the market).
What would you do if you were me?

Many thanks in advance for your valuable thought

 

[freedomatlast]

Like everyone else, I have no idea what the best investments for the future will be. But like you, I have a relatively high percentage in stocks, and relatively low percentage in bonds. Also, like you I have more than most would feel comfortable with in cash so I should be able to ride out several years of a downturn in stock prices without having to sell stock at a loss. For additional diversification, I also have residential real estate as you do.

I have no plans at this time to re balance more dollars into bonds.

 

[pn3069]

"..Bond funds don't look like a safe place..." is a myth and misconception.

Individual stocks can go down really really bad (to zero) while stock funds (like total stock market) can drop by 50% as they did in 2008/2009. Bond funds don't drop by such large %

So.. you be the judge of your statement "...bond funds don't look like a safe place."

Many folks do not invest in bond funds - and you don't have to either... but please realize that the reason is not because of bond funds' lack of safety.

 

[SnowballCamper]

By my arithmetic, you're 32% stock, 10% bond, 44% real estate, and 13% cash. I think that is relatively low risk (as we generally consider risk in the stock/bond ratio). All together its $4.6 mil, enough for many to retire on.

Maybe it's time to take a good inventory of expenses to see how much you need if you retired tomorrow. Use that information to evaluate how close to retiring you are. I'd do that before making any big asset allocation changes at this point.

 

[ut2sua]

Like everyone else, I have no idea what the best investments for the future will be. But like you, I have a relatively high percentage in stocks, and relatively low percentage in bonds. Also, like you I have more than most would feel comfortable with in cash so I should be able to ride out several years of a downturn in stock prices without having to sell stock at a loss. For additional diversification, I also have residential real estate as you do.

I have no plans at this time to re balance more dollars into bonds.

Freedomatlast, thanks for your thought. It is good to know I am not totally off in my thinking. Given the common wisdom of ~60/40 stock/bond mix, I can see myself doing that in the long run, but right now, the interest rate environment is such that there is not much upside for bond investment. If I already have vested some gain in the bond market, that would feel better, but I didn't. And all of this against the common wisdom of not trying to time the market

 

[ut2sua]

"..Bond funds don't look like a safe place..." is a myth and misconception.

Individual stocks can go down really really bad (to zero) while stock funds (like total stock market) can drop by 50% as they did in 2008/2009. Bond funds don't drop by such large %

So.. you be the judge of your statement "...bond funds don't look like a safe place."

Many folks do not invest in bond funds - and you don't have to either... but please realize that the reason is not because of bond funds' lack of safety.

Thanks pn3069. There is wisdom in your words. I guess what has bothered me is this: if interest rate rise, say by 1->2%, it seems that my intermediate bond fun can drop a lot faster than the ~2% dividend could make up. But I agree with you that bond won't drop as much as stock. I feel that I still have a lack of overall understanding of the bond market however, and I would love to hear more from you.

 

[ut2sua]

By my arithmetic, you're 32% stock, 10% bond, 44% real estate, and 13% cash. I think that is relatively low risk (as we generally consider risk in the stock/bond ratio). All together its $4.6 mil, enough for many to retire on.

Maybe it's time to take a good inventory of expenses to see how much you need if you retired tomorrow. Use that information to evaluate how close to retiring you are. I'd do that before making any big asset allocation changes at this point.

Thanks for your suggestion SnowballCamper. Previously, I had mentally separated out the real estate portion of my NW (don't know why). I will definitely follow your advice to look into my expenses. I have been lacking in this area; We have spent relatively wisely, but have not had a budget in mind for a long time. Time for me to do some homework

 

[WyomingLife]

Hi all,
I am new to this forum (and the idea of FIRE), but I have came up recently with the realization that time is more important than $ at some point in our lives, and I am hoping I can FIRE in a couple years if not sooner. I have some unjustified fear on certain investments, and I am asking for input on what may look like not-very-smart-investment decisions on my part. My thanks in advance to all for your comments.
DW and I are 49 and 53
2 sons: 24 and 21 both in college
My current NW
850K in my 401K - just switch from 100% S&P500 to VTTVX (Vanguard balanced fun - retirement in 2025 - ~60/40 mix)
450K in my pre tax IRA (rolled over from previous 401K) 60/30/10 Stock/bond/VNQ
750K in DW pre tax IRA 100/0/0 - VTI
600K cash (all in short term CD); having fear putting any of these into stock/bond or anything other than CD
~2000K worth of rental properties (4 houses) <- generating net ~4K/month income (after tax, insurance, maintenances etc.). Here I am fearless feeling more at ease with real estate renting (this could be unjustified too since things could go wrong with tenants; generated income is lower etc.)

Right now, I have this uneasiness of putting $ into bond because I believe interest rate will rise; I also feel like the stock market may go back down, so I am looking for some safety, but the bond funds don't look like a safe place.
I am leaning toward converting DW IRA to have more bond $ just to go against my fear (and trying to not time the market).
What would you do if you were me?

Many thanks in advance for your valuable thought

Vanguard posts "portfolio allocation models" (Google that) which could be informative to you.

 

[ut2sua]

Vanguard posts "portfolio allocation models" (Google that) which could be informative to you.

I did. Thanks WyomingLife. I guess I need to finger out for myself what is my comfort level with AA (as you can see I have been struggling with that). The worst loss in each scenario helps, but I need to do a bit more soul searching for sure.

 

[WyomingLife]

Thanks for your suggestion SnowballCamper. Previously, I had mentally separated out the real estate portion of my NW (don't know why). I will definitely follow your advice to look into my expenses. I have been lacking in this area; We have spent relatively wisely, but have not had a budget in mind for a long time. Time for me to do some homework

You seem like a fiscally prudent person with ample savings/investments in a relatively low-risk AA. You are asking thoughtful questions.

I think the data we're missing, per above, is how much you are spending. What is your budget? What lifestyle do you need to support? Do you basically need to build a moat around your nice retirement egg, or instead do you need to generate equity-like returns to sustain your lifestyle?

 

[HarveyS]

is my math right? Your $2M in real estate is only kicking off 48k/yr, or 2.4%? Why not invest that elsewhere (equities) or REITS?

 

[catii]

Your $2M in real estate is only kicking off 48k/yr, or 2.4%

I would reallocate in real estate that will bring in a much-higher rate of return! My one property (2 units) brings in $38K net.

 

[ut2sua]

You seem like a fiscally prudent person with ample savings/investments in a relatively low-risk AA. You are asking thoughtful questions.

I think the data we're missing, per above, is how much you are spending. What is your budget? What lifestyle do you need to support? Do you basically need to build a moat around your nice retirement egg, or instead do you need to generate equity-like returns to sustain your lifestyle?

My quick estimation would be around 120K/year for the 4 of us, but I will need to do more home work on that. It might sound strange, but I have only recently given thought to FIRE, I need to think more regarding your last question.

 

[ut2sua]

is my math right? Your $2M in real estate is only kicking off 48k/yr, or 2.4%? Why not invest that elsewhere (equities) or REITS?

Thanks for asking HarveyS. Gross income is 96k. I estimated 50% as cost for property taxes, insurances, fee, maintenance etc. So 48k/yr is net income. To be fair, if I cash out, the 2mil will probably net 1.6mil (or something like that) due to capital gain tax, rental depreciation tax etc. The biggest resistance for me is probably the thinking that if the world is crashing down, I will still have some roof to live under (another unjustified fear of mine). But your question is good. I may take that option some day (going to REIT).

 

[ut2sua]

I would reallocate in real estate that will bring in a much-higher rate of return! My one property (2 units) brings in $38K net.

Thanks for sharing Catii. I elaborated a bit more on this in post #14

 

[HI Bill]

Thanks for asking HarveyS. Gross income is 96k. I estimated 50% as cost for property taxes, insurances, fee, maintenance etc. So 48k/yr is net income. To be fair, if I cash out, the 2mil will probably net 1.6mil (or something like that) due to capital gain tax, rental depreciation tax etc. The biggest resistance for me is probably the thinking that if the world is crashing down, I will still have some roof to live under (another unjustified fear of mine). But your question is good. I may take that option some day (going to REIT).

I wouldn't cash out, but would consider a 1031 exchange to more profitable properties. I share others' concerns here, that your $2M investment properties aren't thowing off commensurate profit for their cost.

 

[OldShooter]

Where is the real estate? To a professional money manager you have an imprudent concentration of assets. Illinois, Chicago, potentially California, and some East coast states are bankruptcy risks with consequent predictable large tax increases and reduced in-migration. There are also areas where housing prices are sometimes described as at a bubble level. Towns with one major industry or employer are dangerous too.

Getting the properties' yields up is fine, but a 20% hit in value is more exciting. So my first step would be to take a very hard and honest look at what plausible future events might negatively affect their value.

 

[ut2sua]

I wouldn't cash out, but would consider a 1031 exchange to more profitable properties. I share others' concerns here, that your $2M investment properties aren't thowing off commensurate profit for their cost.

Thanks for your input HNL Bill. I do ask myself question on this same thought. It is my (limited) understanding that in order to do the 1031, I need to sell all properties, then need to purchase the new one(s) within 3 months or so right? Also, I don't know if I can sell 2 houses, then buy 3 new (cheaper) ones etc.
I am just not well educated in this area.

 

[Another Reader]

Professional money managers generally have a poor understanding of real estate and a bias in favor of paper assets. They can't charge you a management fee for that real estate either.

Some of my properties declined by as much as 70 percent when the market crashed. Funny thing was that my income stayed relatively constant and then increased as more employed people needed rentals. And I bought properties for 65 to 70 percent off their previous highs during that time. All properties except one are well above their 2006 highs now that the market has recovered. And the rents rose over the same time period. As a result, I have zero interest in what professional money managers think or say about real estate.

However, the yield on the current value of your properties is pretty low. No leverage and a 2.4 percent unleveraged yield from rents is not great. My guess is the OP bought them at much lower prices and the values have increased substantially from the purchase dates.

Outright sale of these properties is likely not palatable because of the heavy tax consequences. What would you do with the money anyway? An exchange into a different market and/or property type is worth considering, if the OP is willing to try a different market or property type. Who knows if that market or property type is better? Only time will determine that.

A third option is to leverage a bit to buy a better yielding property. I would also ask myself what is likely to happen to rents over the next ten years. If you are in a strong rental market in a growing area, patience might be your friend and doing nothing could be the best option.

In your shoes, I would probably focus on buying assets for the long term. Your 600k in cash mitigates your sequence of returns risk effectively. I would not necessarily move your wife's 401k, but I might be more conservative in new paper asset purchases across the board. I put some money in Vanguard Wellington and a smaller amount in Wellesley. I'm not a bond fan, and letting some managers with an established track record assess the risk on my behalf was really the only way I could talk myself into any bonds except US treasuries.

You might also shop for some of those 3 percent CD's for that cash. Laddering out some of what you will need in cash over a few years might smooth the transition.

Overall, my perception is you are in good shape and fear is your biggest problem. I retired in 2007 only to go through 2008-2012 and I'm still here and in much better financial shape than when I started.

 

[ut2sua]

Where is the real estate? To a professional money manager you have an imprudent concentration of assets. Illinois, Chicago, potentially California, and some East coast states are bankruptcy risks with consequent predictable large tax increases and reduced in-migration. There are also areas where housing prices are sometimes described as at a bubble level. Towns with one major industry or employer are dangerous too.

Getting the properties' yields up is fine, but a 20% hit in value is more exciting. So my first step would be to take a very hard and honest look at what plausible future events might negatively affect their value.

Thanks for your input OldShooter. My rentals are in Northern CA. We do have some of the risk you mentioned. So far things have worked in our favor, but it is something for me to think about for sure.

 

[calmloki]

OP, we were heavy in primarily 1br rentals back around 2007 and in our late fifties. Managed to sell three SFRs as the housing market crashed, but couldn’t bring ourselves to sell much else. Ah well - they were all free and clear so we just kept collecting rent and running up the score. AIR, banks were paying as much or better than bonds and let us be real mobile with the cash. Never really got the bond advantage. Also fail to understand the stock market, but do have about a M there and must say it requires less attention.
We’re both about 70 now and down to 36 units. No pensions, piddling SS, but the rents keep going up and coming in. We’ve enough but suffer the same problem as you - where to tuck the money? Oregon (CALIFORNIA is as well) is a claw back state for 1031s, so even if we shifted to a no state tax state we would have tax issues.
Face it you’ve done well and perhaps in the future your money won’t work as hard. We’re well along towards having stupid amounts in bank accounts at 2-3% but loaded for any big bears that rear their heads. We just don’t have to have our money working at top form but it sure is tough changing the habits of a life.
Great problem to have.

 

[OldShooter]

Thanks for your input OldShooter. My rentals are in Northern CA. We do have some of the risk you mentioned. So far things have worked in our favor, but it is something for me to think about for sure.

Oops. Too bad. I think we humans react to these slow moving disasters kind of like the frog in the hot water.

How are the finances of the city and any commercial center cities in the area? I know that several CA cities have gone through bankruptcy -- maybe something to learn from people's experiences there.

I haven't been studying the thread but I see talk of 1031 exchanges. I wonder if you could use a 1031 to geographically diversify into RE LPs or LLCs. If your properties are not already professionally managed this could make things easier for your wife if you die.

 

[ut2sua]

Professional money managers generally have a poor understanding of real estate and a bias in favor of paper assets. They can't charge you a management fee for that real estate either.

Some of my properties declined by as much as 70 percent when the market crashed. Funny thing was that my income stayed relatively constant and then increased as more employed people needed rentals. And I bought properties for 65 to 70 percent off their previous highs during that time. All properties except one are well above their 2006 highs now that the market has recovered. And the rents rose over the same time period. As a result, I have zero interest in what professional money managers think or say about real estate.

However, the yield on the current value of your properties is pretty low. No leverage and a 2.4 percent unleveraged yield from rents is not great. My guess is the OP bought them at much lower prices and the values have increased substantially from the purchase dates.

Outright sale of these properties is likely not palatable because of the heavy tax consequences. What would you do with the money anyway? An exchange into a different market and/or property type is worth considering, if the OP is willing to try a different market or property type. Who knows if that market or property type is better? Only time will determine that.

A third option is to leverage a bit to buy a better yielding property. I would also ask myself what is likely to happen to rents over the next ten years. If you are in a strong rental market in a growing area, patience might be your friend and doing nothing could be the best option.

In your shoes, I would probably focus on buying assets for the long term. Your 600k in cash mitigates your sequence of returns risk effectively. I would not necessarily move your wife's 401k, but I might be more conservative in new paper asset purchases across the board. I put some money in Vanguard Wellington and a smaller amount in Wellesley. I'm not a bond fan, and letting some managers with an established track record assess the risk on my behalf was really the only way I could talk myself into any bonds except US treasuries.

You might also shop for some of those 3 percent CD's for that cash. Laddering out some of what you will need in cash over a few years might smooth the transition.

Overall, my perception is you are in good shape and fear is your biggest problem. I retired in 2007 only to go through 2008-2012 and I'm still here and in much better financial shape than when I started.

Thank you very much for your valuable input Another Reader. We had been through some of the ups and downs of property value similar to your experience. We made some earlier rookie mistakes such as buying rental properties but picking higher end properties as if we will live there as well as concentrating all our properties in one town. Luckily, the rental market has been good, and yes we do make $ on paper as you suspected. There are many good suggestions in your post that make sense for my situation, and I will reread your post multiple times for sure.

 

[ut2sua]

OP, we were heavy in primarily 1br rentals back around 2007 and in our late fifties. Managed to sell three SFRs as the housing market crashed, but couldn’t bring ourselves to sell much else. Ah well - they were all free and clear so we just kept collecting rent and running up the score. AIR, banks were paying as much or better than bonds and let us be real mobile with the cash. Never really got the bond advantage. Also fail to understand the stock market, but do have about a M there and must say it requires less attention.
We’re both about 70 now and down to 36 units. No pensions, piddling SS, but the rents keep going up and coming in. We’ve enough but suffer the same problem as you - where to tuck the money? Oregon (CALIFORNIA is as well) is a claw back state for 1031s, so even if we shifted to a no state tax state we would have tax issues.
Face it you’ve done well and perhaps in the future your money won’t work as hard. We’re well along towards having stupid amounts in bank accounts at 2-3% but loaded for any big bears that rear their heads. We just don’t have to have our money working at top form but it sure is tough changing the habits of a life.
Great problem to have.

Thanks for sharing Calmloki. Now that you mentioned it, it came across my mind as having rentals are similar to buying bond: lower return but the rent will keep coming in as bonds dividend would. DW and I started out with a negative NW (when student loans were larger than bank account $) so we do appreciate what we have today. Thanks for sharing your story. Great problem to have indeed.

 

[ERD50]

" ....
Individual stocks can go down really really bad (to zero) while stock funds (like total stock market) can drop by 50% as they did in 2008/2009. Bond funds don't drop by such large % ....

Thanks pn3069. There is wisdom in your words. ....

Hold on. There is a huge flaw in pn3069's comment.

While it is true we have seen 50% drops in stocks, and far less drops in bonds, that comment lacks essential context. Stocks drop 50% after rising - a rise that bonds don't participate in. A long term stock investor would often still have more money than the bond investor after that 50% drop (because it dropped from a much higher level).

-ERD50