My Cousin Irving’s End of the World Investment Strategy

I got a call recently from my cousin Irving (not his real name, of course), and he was quite perturbed. I asked him what was wrong, and he wanted to know if the insurance company that managed his 401(k) is safe. I said, “What the heck are you talking about, Irv?  It’s a huge company, and as far as I know, it’s solid.”  Irv then asked, “If I put all my money into the guaranteed account, is it safe?”  I told him that his money is as safe as the company is, and since the company’s always advertising on TV with celebrities singing catchy jingles, I think it’s in good shape.  “But,” I said, “if you’re that concerned, do your research and check out the company’s finances.”

I asked him why he was so anxious, and he started ranting.  He believed that the United States was going to be in a nuclear war with North Korea.  He went on to say that it’s actually Russia that is backing North Korea, and they will enter the war, too.  I told Irv that he was being a little reactionary, but he persisted and wanted to know where his money would be safe. “Well,” I suggested, “U.S. bonds may be a safe–but not guaranteed–place to be during an economic or political crisis.”  Irv immediately shot back, “Bonds suck, and they aren’t getting any return, so I sold all my bonds several months ago.  Now I’m invested 100% in stocks.”

I tried to explain to Irv that combining stocks and bonds is a good thing because each will have its day in the sun, and historically, when stocks go down, bonds usually go up. But Irv wasn’t buying any of it. He told me that he also sold his Euro-Pacific fund (which, by the way, has been doing quite well in the last year) because of a nuclear war risk.  I said, “Irv, if there’s a nuclear Armageddon, your money won’t be worth much anyway.”

Nonetheless, Irv persisted with his Magical Thinking argument that he could time the market, pick the best funds and get a great return with no risk. I told Irv his reasoning goes against the research of many economists who have won Nobel prizes for their studies of market behavior.

Our disagreement was rapidly devolving, but I tried one more tactic.  I reminded Irv that he was going to retire soon, and he should be more concerned with income rather than trying to get the best return. Irv yelled back, “Dude, all you do is stick to your orthodoxy–your discipline of not trying to pick the winners and not trying to outguess the markets. What kind of advisor are you, anyway? I retorted, “Irv, I think you just answered your own question.”

Like I always say, investing should be boring.  If you want excitement, try hang gliding.  If you want to gamble with your money, go to Vegas.

Real Estate vs. Stocks: What Trump Can Teach Us about Investing

Is real estate or the stock market a better investment? Of course, this is an apples-to-oranges comparison, but the argument never ceases.

Many pure real estate investors will rarely, if ever, touch a stock or even a bond because they prefer tangible investments and the steady income that real estate can produce. Investors like myself who favor the stock market — and never want to be awakened in the middle of the night over a leaky roof — stay away from owning rental property. Both sides argue that theirs is the better way to invest.

Let’s look at one of the best-known businessmen of our time, Donald Trump, to see how his wealth grew with real estate. As columnist Joe Nocera wrote in The New York Times last week, Trump’s record is mixed. The son of a wealthy real estate developer, Trump was often bailed out by his family, and there were several times when Trump properties declared or came close to declaring bankruptcy. These setbacks demonstrate how challenging real estate investing can be, even for those very experienced in the field.

It’s also risky. As Trump grew older (and wiser), he became more risk averse. Instead of building new properties, he managed them, licensed his name and became a reality TV star.

Today Trump claims to be worth $8 billion, a lot of money. But what if he had put his money in the stock market rather than real estate. Nocera looked back at Trump’s net worth in 1988 and calculated that if Trump had invested that money in the S&P 500, he would be worth $13 billion now. So, he suggests that Trump’s real estate investmentscost him $5 billion.

But who are we kidding? If you had $8 billion, would you really care about having $5 billion more? I certainly wouldn’t. And you don’t become “The Donald” by investing in the boring old stock market.

So whether real estate or the stock market is a better investment is still not easy to answer. Perhaps the biggest distinction between these two investments is that stocks are more volatile, which is a key reason for their superior returns. On the other hand, real estate is costly to maintain, as one of my client’s found out recently when the rental property she inherited needed nearly $10,000 in repairs.

Some of my smartest clients own real estate, stocks and bonds. They know that each investment will rise and fall, but they are confident that they will do well in the long term. And for a person like me, who doesn’t want to own physical properties, there are ways to invest in real estate through the stock market, an attractive alternative. You can own shares of office parks, retail shopping centers and health care facilities — and never lift a hammer.

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Financial Porn Strikes Again

It was a beautiful spring Monday morning in Ohio. The sun was actually shining, the birds were singing and the tulips were starting to bloom. My day started as usual with coffee, a smoothie and my morning meditation. Afterwards, I hopped into the shower, shaved and primped for the day. As I got dressed, I turned on my favorite morning news show “Morning Joe.” (Don’t you love when Joe says something outrageous and Mika elbows him in the ribs)? It was the normal news cycle, and Mika said, “Now for the stock market report.”

A beautiful talking head came on, and she started talking about how bad the new job creation numbers were during March. The economy had created only x number of jobs, but the expectation was for y number of jobs. Of course, “y” was a much larger number than “x”. She went on saying, “And the markets aren’t happy as the futures are down, and it looks like a bad day for the markets.” Not wanting to be influenced by negative news, I switched to the Fox business channel, and an even prettier and better dressed business babe echoed the same sentiment. I was about to shut off the TV, and my wife yelled, “Don’t change that channel; I want to see what she’s wearing.”

Even though I know better, I went to work a little worried thinking doom and gloom. But once I got to work, I was too distracted with client meetings and other tasks. I was so busy, in fact, that I didn’t have time to watch the market and drive myself crazy. At the closing bell, I finally got to look at the market, and to my astonishment, it was up over 100 points!

As my mentor once told me, markets are nutty and unpredictable; so don’t try to outguess them. Trying to predict the daily gyrations of markets is akin to fortune telling and soothsaying. Dr. Eugene Fama is a Noble laureate for his research in stock markets. His first job after graduate school was writing research articles for a market timing newsletter. Well, Dr. Fama discovered that market timing did indeed work; that is, if one were able to look backwards. Subsequently, Dr. Fama was fired from his first job.

So absence of a crystal ball, stick to what you can control. Am I saving enough for my kid’s education and my retirement? Am I taking too much or too little risk? If I retire, will my money last me for the rest of my life? In other words, ignore financial pornography and the Chicken Littles of the media.