Hey Quint and Daniel,
My name is Gregg and I’m from Houston, TX. Lately I have been contemplating my investment strategies as I have come to the realization that most of my investments are related to the stock market, ie, 401k, Roth IRA, and a personal brokerage account. My question to you is if you recommend diversifying my investment bucket into other investment vehicles like Real estate, precious metals, etc. If so, do you have a percentage allocation that you recommend? Thanks guys!
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Gregg, thanks for the note. Diversification is key and there are quite a few ways to tackle this question. Many people believe stocks to be one asset class when in reality there are countless sectors within stocks that represent a multitude of different businesses. For example, while technology companies may at times do extremely well and the corresponding stocks that represent these businesses follow suit, real estate or utilities may stink and the stocks that represent these businesses may fall out of favor. I think there is a lot to be said for simply diversifying the stocks among your different accounts in the companies whose stock you hold. While owning a basic index will do this for you, there is some merit to the idea that a rising tide lifts all boats or conversely sinks them as well, so you’re right in that there will certainly be correlation among all stocks, regardless of their sector affiliation.
I do think however that exposure to international and emerging markets can be valuable, while exploring gold as yet another diversifier can also be helpful. Presently, we have around a 10% position in our gold exposure for clients, risk adjusted for each individual.
Now, with all that said, should it stop there? Probably not. One of the biggest investments most folks have that they seem to forget about is their home. While I’m not a fan of buying with the idea that ‘someday this will go up and we’ll make money’ it can’t be completely discounted from the portfolio. If you own a home you do have real estate in your portfolio and if you’re paying down a mortgage, each time you sock a dollar towards principal you’re at least returning what you’re saving in interest.
From here, it’s a matter of what your interest level is and where your expertise lies. I can only speak from my personal experiences so let me share some history.
Before marriage, I wanted to have a well-diversified portfolio of rental properties and stock investments in my retirement accounts. You know, the whole ‘passive income’ thing. We live in a college town so finding consistent renters is not hard. Since I had already owned a town home in a desirable location, it made perfect sense to pick up some others since the math worked out well. I did just that and slowly added another and then another until I had a total of 4 townhomes. The cash flow was solid, but boy oh boy did I hate being a landlord. Not a month went by that I didn’t have to deal with some nonsense like a broken toilet, light fixture or whatever. My portfolio was too small to have a management company, so it was yours truly either fixing the issue or trying to hire it out. Oh brother was that a nightmare. Then there was the rent collection. If it wasn’t one thing it was another. Sob story here, sob story there and couple that with an eviction or two, which set me back a few months of cash flow since I had to pay court fees and try to collect what was owed. I realized very quickly this was NOT something I had a desire to pursue. The final straw was Super Bowl night during a cold February. I remember it like it was yesterday, having just settled down, opening a beer and preparing to watch the game when my phone rang. Any landlord will tell you that a Sunday night call from a tenant is never good. My heart sank as I learned that my tenant had been gone all weekend and returned to a broken pipe and a first floor that was completely flooded. I spent the next 5 hours with a shop-vac sucking up water. I vowed right then and there I was done with the residential real estate game. I sold all of the properties over the next few months and never looked back.
A few years ago, I decided to start looking for a commercial office space for our business. I found a nice little building in an up-and-coming location in Lexington and bought the property for us to move into. As the owner and tenant, it was wonderful. I never had to worry about rent being late or getting calls with nonsense maintenance issues. If there was a property issue, our entire team decided who to call and we got it taken care of.
A few years later I found a bigger property and decided to buy it for our business to move into as we continued to grow. Since the previous property was a commercial spot, we hired a company to seek a new tenant and we quickly filled the space with a fantastic, specialized medicine practice under a triple net lease. Basically, they take care of any maintenance issue and since it’s their business, they obviously have a significant desire to be prompt with rent. It has been a great experience.
I am on the lookout for more properties like the two I have, but they’re nearly impossible to find. Every once in a while, I come across something interesting and run the numbers. By the time I factor in all expenses that I’ve learned first-hand go along with property ownership, my net return ends up being slightly more than inflation. Basically, not enough to even bother.
Which leads me to my summary. While you may have talent with a specific area and desire to diversify, it still comes down to what you pay for that asset. Never ever forget ‘The money is made on the buy!’
Long ago I learned the rule of 1% when it comes to investment property. Assume your rental income and divide by .01. The amount you come up with is your max purchase price. When you do the math on a few properties, you’ll realize we’re far from an ideal buying environment. The 1% rule allows you to factor in maintenance, taxes, insurance and still have the possibility of cash flow. Any rent amount under that and you may find yourself in trouble.
At this moment, it seems like everything is elevated and there are few if any good deals in almost every area you look. In my opinion, right now is a time for patience and prudence. Sock that money away, build up that capital, pay down that debt and wait for the next round of opportunities. They will come at some point, and when they do, you’ll want to be ready.
I’m all for diversifying a portfolio, but do it wisely and have patience.
Good luck Gregg!