Today’s question comes from Tuta. He asks:
I have my 401k at 15% (pseudo-max). I have a few hundred dollars going into a savings account at a credit union. I just started investing in stocks about a month ago. I’m totally clueless, but I read something somewhere that said invest in companies you know; so I bought Marriott, United Airlines, Visa, Papa John’s Pizza, Costco, Under Armour, Chase, and Novartis (no clue but read an article about them about a month ago).
I’m a very small investor — I started my account with $2,000 and I’ve been adding $200 every couple of weeks. So now I have $2,600 (cash) invested. I don’t know if I have smart investments. I don’t have the desire to learn all of the complicated jargon and read earnings reports, so I fear I have/will make uninformed decision.
I’m 43 years old and married. We own our home and have a little more than $100,000 equity in it. We’re planning on relocating in a couple of years. Do we keep the house and rent it out or do we sell it? Combined my wife and I have about $60,000 in student loans. If we decide to sell the house do we save/invest the money in advance of buying another property or do we pay off student loans?
My brother read some book or talked to some person that basically said having retirement savings is a waste. Liquidate your money and put it in real estate. It doesn’t make sense to me on the surface, but the more I thought about it, it kinda made more sense. The house we currently own has appreciated almost 100% from the time we bought it. Of course that is a gross figure and doesn’t account for updates, repairs, and other expenditures. I don’t know if I’m comfortable tying up (and risking) all of my savings like that though.
My retirement savings is at about $350,000. Not the best, but apparently I’m in good company since most Americans don’t have that amount. I often wonder though — how much is enough? Like most people I’m tired of my job. My last child will be entering college next year, so my wife and I will be empty-nesters. I really don’t have the need for money like I did when all of my children were at home.
You need to get clear on your approach.
First of all, there’s nothing wrong investing in individual stocks, but you need to be someone who’d rather spend time investing than say, watching TV.
Stocks aren’t about looking at a chart, buying prices. It’s about owning part of a business. That’s what your shares are, and why Peter Lynch recommended investing in what you know.
The very best stock pickers I know read quarterly reports, listen to earnings calls, calculate valuations. They’re successful because they enjoy it, because they fulfill the minimum requirements:
1. Have an interest in business
2. Number skills
3. Knowledge of history, human behavior, and psychology
4. Emotional discipline
If you can check those boxes, or you’re willing to learn, I’d say picking stocks might be for you. You don’t pass the very first test.
That’s fine, most people don’t have the time or interest. It’s why Charlie Munger says 95% of people have almost no chance of beating the stock market over time.
But wait, there’s good news.
You don’t need to know much about investing if you invest in broad market index funds with low fees. Some examples?
FZROX: Fidelity Zero Total Market Index with 0% fee
SWTSX: Schwab Total Stock Market Index with 0.03% fee
VTSAX: Vanguard Total Stock Market Index with 0.04% fee
These index funds hold, or track, the individual stock of some 3,000 or so American businesses. Rather than pick 10 to 20 stocks you simply pick everything, the entire market.
And because the market always goes up more than it goes down this is a simple way to invest for the very long term. It’d be shocking if the value of American business wasn’t considerably higher 30 years from today.
Can you say the same for real estate?
Let’s look at Robert Shiller’s housing data. To figure out the rate of return for the past 30 years, 1988 through 2017, takes some math:
[(170.321504472944 / 126.86172841169)^(1 / 30)] – 1
= (1.3426 ^ 0.0333) – 1
= 1.0099 – 1
= 0.0099, or 0.99%
Yeah, property returned about 1%.
Slice and dice the data however you want and you’ll find the long-term inflation adjusted return of real estate is close to zero whereas the market is about 7%.
Sure, if you’re buying property in a hot market, a desirable neighborhood, you can luck out on appreciation, but generally speaking if you’re investing for appreciation — not rental income — stocks trump real estate.
If that makes sense, how much you spend determines how much you need. If you’ve read anything about retirement planning you’ve read about the 4% safe withdrawal rate.
This rule means you can withdraw 4% from your investment accounts each year, adjust the withdrawal for inflation, and never run out of money.
There’s been a lot of research to back this up. Bill Bengen’s 1994 and 1996 papers, and studies by professors at Trinity University in 1998 and 2011.
The 4% rule originally applied to traditional 30-year retirements but now it works for longer time horizons. Bengen recently said, “If you plan to live forever, 4% should do it.”
So the back-of-the-napkin answer to “how much” is to take spending multiplied by 25 (1 / 0.04):
- Spend $40,000 means $1 million ($40,000 x 25)
- Spend $80,000 means $2 million ($80,000 x 25)
- Spend $200,000 means $5 million ($200,000 x 25)
Some people say the 4% rule doesn’t work anymore.
One research paper said 3% is the new 4%, but in the fine print it assumed you were being skimmed by an adviser for 1% in fees. Another paper said 1.7%. Again, it assumed 1% for an adviser and 0.6% for funds.
This is why it makes sense to keep investment fees as low as possible, and most people accomplish that by investing in low-cost index funds, according to their asset allocation.
Of course, there’s no guarantees in any of this, but I think you need to make hard choices now about what you’re investing in, stocks or real estate, and then move forward in the way that’s best for you.
If you’d like to get my help personally you can book a 1:1 coaching session.