David Kennon, Kennon Financial
For 18 years I’ve been faced with the same question. As you are nearing retirement, and move on into retirement, where do you put your money? Once you retire and you are no longer working it is essential for your money to work for you instead. There is a tremendous amount of noise on the subject, and no shortage of opinions. After exhaustive, in-the-trenches experience and research I have a firm understanding of the vast majority of investing options available to Baby Boomers. During my due diligence process, I’ve come across some investments that I feel are poor vehicles to ensure your financial success. So today I’m going to review the five investment opportunities I would suggest against.
1. Purchasing a Single Rental Property.
I hear it all the time: “Dave, I’m going to take my savings and buy a place I can rent out. Rents are pretty high right now and if I buy a property, the rent checks will give a big boost to my retirement income.”
While at first glance this may seem like a logical option, in practice I’ve found it to generally be a bad idea. I have nothing against real estate overall, and I have met many successful real estate investors who have made a wonderful living. But the successful real estate investors have one thing in common: they own several properties and they view it as a full-time job (because it is). In my experience, people who buy one or two properties in retirement almost universally regret it. Why? Owning a rental property is not as simple as letting the checks roll in. There are property taxes, insurance, HOA fees, and maintenance. Need to replace the roof? There goes a couple of years of profit. Toilet stops working at 3:00 AM? There goes $500 to a plumber. Not to mention if you get one bad tenant things go from bad to worse really quickly. Do you really want to go through an eviction process? The cost and aggravation are tremendous.
You can’t watch a financial news channel without seeing lots and lots of ads trying to get you to buy gold. My question is: If gold is such a valuable and wonderful asset to own- why are these companies trying to sell you their gold? Shouldn’t they keep it for themselves? Gold has a very inconsistent track record. The price of gold can be flat for a dozen years and they shoot up and shoot back down. Plus gold doesn’t DO anything. It just sits in a safe somewhere. No dividends, no interest. And once you have your gold, there are storage costs, the danger of theft, and other variables you don’t have to deal with when dealing with other financial instruments. And what happens when you want to sell your gold? What do you do? You can’t just go to a bank and dump your gold coins on the teller’s counter. You have to find someone who will buy it from you and often times you end up at a glorified pawn shop where you may or may not get the market price for the gold.
3. Buying on Margin.
This strategy involves borrowing money in order to buy more investments in order to boost returns. For example, You have $100,000 to invest. You go out and borrow another $100,000 to double the investable amount. The thinking is this: If you have to pay 5 or 6 percent on the money you borrow and then make 10% on the investment, you make 4% on money that isn’t even yours. I think you can quickly see the problem with this strategy. You investment returns need to exceed the interest rate you are paying on the borrowed money. And what happens if your investment goes down in value? Now you may have borrowed $100,000 which is now worth $80,000. How are you going to pay back the money? Probably from the original $100,000 you had to invest. In short, using margin can greatly amplify the ups and downs of your portfolio. Generally speaking, retirement and investing and increased volatility are a bad combination.
4. Hedge Funds.
These vehicles have a certain mystical allure. Most have very high minimums and they are marketed to wealthy and sophisticated investors. So most people don’t even know what a hedge fund is. It is basically a group of investors who pool their money together and invest using high-risk strategies such as borrowing money to boost returns, using complex derivatives, or having highly concentrated positions. One good example is a hedge fund from a couple years back who put all of their money in Greek debt. At the time Greece was in the depths of economic chaos and the possibility that the entire country was going to go bankrupt was very real. So why would someone put all of their money into debt that may never be repaid? Because, in my opinion, most hedge fund managers are basically gambling. The stakes are high. Could you double your money in a year? Sure. Could you lose it all? Yep. But the most damning example? 9 years ago Warren Buffett bet several hedge fund managers that he could make more money by simply investing in the S&P 500 (the 500 largest U.S. companies) than a hedge fund manager could make using all of their fancy strategies. The result? After nine years Warren Buffett is up 85.4% and the hedge fund managers are up an average of 22%. (source)
5. Inverse ETFs.
If you’ve never heard of an inverse exchange-traded fund it is for the best. With this kind of financial vehicle you are basically betting that the market is going to go down. In other words, you are betting against the market. Why is this such a dumb strategy? Because in the past 80 years that the stock market has averaged an annual return of 11%. In the past 40 years, the stock market has gone up 34 years and gone down 6 years. I don’t like those odds. These types of vehicle are often used by day traders and market timers. And there is no academic evidence that day trading or market timing works- so just stay away from the whole thing.
Don’t make this more complicated than it is. A diversified and balanced portfolio of stocks and bonds is a powerful and time-tested method to grow wealth. Why utilize new and untested investment vehicles when the “old” ones have worked so remarkably well for so long?
David Kennon, Kennon Financial
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