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If you’re lucky enough to be at a point in your life, where you are searching for passive investments that generate income at a rate that will outpace inflation, you are likely in a quandary.
Let’s break it down to the simplest of terms… Treasuries, Preferred Stock, Corporate Bonds or Municipal (Munis) Bonds.
Treasuries: For absolute guarantees and peace of mind that will yield you 2-2.5%.
Preferred Stock: This is where you tell yourself, “I don’t care what happens to the share price so long as my fixed dividend is guaranteed”. Although preferred shares give a dividend, which is usually guaranteed, the payment can be cut if there are not enough earnings to accommodate a distribution. This risk of a cut payment needs to be accounted for. This risk increases as the payout ratio (dividend payment compared to earnings) gets higher. I’m sure I’m stating the obvious when I say this is not exactly “low risk” retirement. Not to mention the minor detail of the market hitting new highs and where this is about the point where the cab driver is giving their customers stock advice. Is now the right time to jump in the market because you’re starving for yield?
Lastly, we have Corporate Bonds or Muni Bonds. Yeah, this makes sense. Let’s see, I’m a financial planner and I’m speaking with my dad. I’m sure the most cogent advice I can offer is “Go ahead and throw your money into tax free “munis”. It makes sense to lock your money up for 30 years at the lowest interest rate environment in US history. I implore you to do this because, hey… you’re going to make 3-4% tax free and this is likely going to be a satisfactory yield as rates begin to climb over the next 30 years. Don’t worry dad, when you die, I promise to hold the bonds to maturity because I value your dollar as much as you did.” Clearly you’re not having this conversation with your kids or your advisor but the reality is, this is what many Americans, entering or nearing retirement do every day.
Please understand that I am not saying to dump your bonds all at once, but let’s look at it logically. You buy a 30 year tax free muni bond today to yield 4% and rates begin to rise. What happens to the face value of that bond? It drops right? As a matter of fact, if rates jump 1%, you can expect the value of the bond to go down almost 7%. Now that’s not a big deal if you feel that the 10 yr T-bill will stay at or below 3% over the next 30 years but let’s not kid ourselves. “Yeah that’s great Jarred but where else can I generate enough income to support my standard of living in retirement”. The fact is, most Americans choose the lessor of the 3 evils I just mentioned. The purpose of my rants is to educate. To be the pit-bull of financial consulting. The fact is, you’re better off buying a Walgreens ground lease with 17 years remaining on the lease in an area that you know fairly well at a 6% capitalization rate. In terms of tax treatment, CPI increases, safety, flexibility and overall yield, this makes more sense.
Now I’m not telling everyone out there to jump into the real estate game with no knowledge or education, though, that seems to be standard dogma that most money managers subscribe to. They seem to have no qualms in placing investor money into companies and corporate debt without educating their clients. Happens every day doesn’t it? It may be happening to you right now.
We educate first, and then we show you where we would put your money to work as if it were our money. As a matter of fact, we actually put our money where we ask you to put yours. We practice what we preach. But not before you thoroughly understand why we like a market, an asset, a tenant and so on. The truth is, evaluating a piece of commercial real estate, is far easier than evaluating the balance sheet or P&L of a publicly traded company.
Now is the time to change with the “new economy”. It only takes a little direction, a little navigating before you truly become the captain of your financial ship. Sign up for our Weekly newsletter to learn how you can invest like a seasoned CFO of your own portfolio. We will show you how, where and most importantly, why!