Zero growth options

[nun]

Just had a few beers with two old friends; one is a risk manager for a major bank and just left the Boston Fed and the other is a CFA and a partner in an insurance consultancy. They are both middle aged with kids, big mortgages on nice homes and stressing that they see very little upside in equities. They don't see much chance of growth on the West, bubbles in the East and systemic issues like aging populations for most economies. Their solution is to sell all stocks and bonds and buy rental real estate........I suggested investing something in Africa, or just maintaining a diversified portfolio just in case.....don't put it all in one sector ........your thoughts?

 

[brewer12345]

I think you should have spent the time critiquing the flavor characteristics and style accuracy of the beers you were drinking.

 

[braumeister]

Are you sure it was just "a few" beers?

 

[Telly]

So they plan on bailing out 100% from the two giant asset classes? And go 100% into rental real estate instead?

Huh... guess they missed learning from the TX oil patch disaster of the 80s, for one. We bought this house from a guy who was up to his kazoo in rental real estate (wish we knew that at the time!). He was living in this house, and administering his... empire, besides his day job. All those "rent houses" (a local term) did indeed reverse and go up his kazoo, and they moved to a small condo after they got some cash selling this house to us.

And I sure don't remember any apartment construction then, either. It was d-e-a-d. Some people left the area. Too much available real estate, too few workers, downward pressure on rental rates!

Up went the RTC billboards. Took many years to slowly work out of it.

Naaaah, it can't happen... this times different, that was the "old' days

I'll stay diversified. This house, and a REIT index will do for my real estate allocation. Not saying one couldn't make gobs of money sometimes in rental real estate, but to put all the eggs in that one basket...

 

[jebmke]

Stay diversified. Save more - expected returns may be lower.

 

[nun]

So they plan on bailing out 100% from the two giant asset classes? And go 100% into rental real estate instead?

Huh... guess they missed learning from the TX oil patch disaster of the 80s, for one. We bought this house from a guy who was up to his kazoo in rental real estate (wish we knew that at the time!). He was living in this house, and administering his... empire, besides his day job. All those "rent houses" (a local term) did indeed reverse and go up his kazoo, and they moved to a small condo after they got some cash selling this house to us.

And I sure don't remember any apartment construction then, either. It was d-e-a-d. Some people left the area. Too much available real estate, too few workers, downward pressure on rental rates!

Up went the RTC billboards. Took many years to slowly work out of it.

Naaaah, it can't happen... this times different, that was the "old' days

I'll stay diversified. This house, and a REIT index will do for my real estate allocation. Not saying one couldn't make gobs of money sometimes in rental real estate, but to put all the eggs in that one basket...

Both of my beer buddies are financial professionals and regular readers of Barrons, so they tend to think they can out smart the markets or buy alpha by investing in active funds. Gold was the mantra a couple of years ago. My Africa suggestion was a bit tongue in cheek to see how excited they'd get. They look at my single rental property and couch potato 4 fund portfolio with pity for it's lack of sophistication.

 

[Walt34]

They look at my single rental property and couch potato 4 fund portfolio with pity for it's lack of sophistication.

And twenty years from now they will be envious of your lack of sophistication.

 

[marko]

These are financial guys??!

 

[eta2020]

Markets are same as they always were. It is not "different" today.

When I hear it is different now I become suspicious.

And all that means equities will do quite fine over a long period of time.

 

[MikeWillRetire]

I need to know what beer they were drinking.

 

[CaliforniaMan]

"financial professionals and regular readers of Barrons?" Now if they were dart throwing monkeys then I would be impressed.

 

[Closet_Gamer]

You lost me at "big mortgages on nice homes"…I prefer my zero mortgage on a modest home…but then again, I'm not smart enough to work at the Boston Fed…

Personally, I think they're projecting their concerns about their own financial situations onto the world at large. "I can't see an investment plan that gets me out of my big mortgage, sends my kids to college and let's me retire before I'm 80…ergo, the investing world is going to hell in a hand cart and everyone should bet it all on Russian Ruble derivatives…"

Drink beer with these people but DO NOT let them talk you out of your couch potato portfolio!

 

[Ronstar]

I remember having a similar conversation with my bosses in 2004. Fast forward 10 years and I'm part owner of rental real estate that we're trying to sell for 75% of our purchase price. I suggest a few more beer meetings and discuss this further in detail. Specific properties - pro formas, etc. Do your buddies know anything about rental real estate? It can be tough to make a go at it without experience.


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[nun]

DO NOT let them talk you out of your couch potato portfolio!

There's no chance of that......I have a bigger ego than both of those guys because I'm a PhD physicist and can run rings around their business school mathematics.

 

[nun]

I remember having a similar conversation with my bosses in 2004. Fast forward 10 years and I'm part owner of rental real estate that we're trying to sell for 75% of our purchase price. I suggest a few more beer meetings and discuss this further in detail. Specific properties - pro formas, etc. Do your buddies know anything about rental real estate? It can be tough to make a go at it without experience.


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Owning some rental real estate is quite common where I live. They've seen me and another couple of friends do well from owning two family houses that we bought in the 1990s. The rental market is strong and houses have kept their values well, even through the downturn........still putting everything in one basket is just plain dumb.

 

[Ronstar]

Another thing to consider is your ages. My partners and I started in rental real estate in 1996, and now they are 70 years old and want out. But it sounds like you and your buddies are young enough, experienced enough, and in an area where you can make it work. But like you said- don't put all of your eggs in one basket


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[nun]

Another thing to consider is your ages. My partners and I started in rental real estate in 1996, and now they are 70 years old and want out. But it sounds like you and your buddies are young enough, experienced enough, and in an area where you can make it work. But like you said- don't put all of your eggs in one basket


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My buddies are late 40s and I'm early 50s. I bought my two family in 1997 and paid it off a couple of years ago. Now the rental income is nice to have in ER, but I would not like it to be my only source of income.

 

[brewer12345]

Your drinking buddies may be smart and well-educated, but they are risk managers rather than front office risk-takers. Risk managers tend to be conservative and see risk lurking in every shadow. When I worked for a regulatory agency I was astonished to see that 80% of the 401k assets for all the employees were in the stable value fund.

 

[calmloki]

C'mon - the big boys got it right. Rental real estate. It's the only way. If they ask nice I might be persuaded to let them have a taste of our rental holdings if they mention your name, Nun....

Reality: we've made seven hard money loans in the last two months, and at least a couple of those will be held (and refinanced) as rentals. Somebody thinks real estate is worth rolling the dice.

 

[growing_older]

Yes, people can make money, a lot of money, in rental real estate. They can also lose a lot of money, sometimes all of it.

Both of my beer buddies are financial professionals and regular readers of Barrons, so they tend to think they can out smart the markets or buy alpha by investing in active funds.

Congratulations to them on their ego. Explain again why if they are so smart at this that they are not already independently wealthy.

 

[Senator]

I have a solid real estate portfolio, and a decent ($1M) stock portfolio. I am not sure where growth will be, but I know over the last 100+ years, both have been great over a 20 year period.

If we have deflation, which we could very well have, it will be like the 1930s. If we have inflation, it will be like the 1970s. Stagflation, like the 1980s.

So, who knows, but diversification, staying the course, and hoping for the best is the only way out.

I would not invest in any country in Africa, as the governments are too unstable. Even a country like South Africa, one of the richest nations on the planet at one time, is no longer a place to invest. There was a time you would think that was the most stable country on that continent, and your investments would have been wiped out if you invested there.

 

[travelover]

........... Explain again why if they are so smart at this that they are not already independently wealthy.

+1 This is my reality check for anyone with an investment scheme of any kind.

 

[nun]

Yes, people can make money, a lot of money, in rental real estate. They can also lose a lot of money, sometimes all of it.



Congratulations to them on their ego. Explain again why if they are so smart at this that they are not already independently wealthy.

They are independently wealthy....probably net worths in the +$5M range....but with major outgoings on mortgages and families and the fear that comes with having money to loose. They are right in the middle of the rat race....middle aged men in search of a heart attack.......They took a beating in gold and are always looking to gain the system.

 

[nun]

I have a solid real estate portfolio, and a decent ($1M) stock portfolio. I am not sure where growth will be, but I know over the last 100+ years, both have been great over a 20 year period.

We sound pretty similar in our investment mix...I have a paid off two family house and rent out the downstairs apartment. I plan for my retirement income to come from various small pensions, rental income and social security. I don't plan on needing to take income from my stock portfolio other than for tax planning purposes.

 

[growing_older]

They are independently wealthy.... ... ....but with major outgoings on mortgages and families and the fear that comes with having money to loose. They are right in the middle of the rat race....middle aged men in search of a heart attack...

If I were independently wealthy, this lifestyle would be far far from anything I would ever choose. It's hard to imagine someone who actually has the means choosing to live like this. Maybe that's my ER bent, but I'm very suspicious of people who claim to be financially very well off, then run themselves into the ground while making risky moves that endanger that supposed financial security.