Today we answer your questions about asset allocation. We start off with some basic principles that everyone should understand and then dive into more specific questions. Then we discuss what glide path allocation is and how your asset allocation needs to change as you age. Finally, we talk about asset allocation when using a defined benefit plan and also cover some pros and cons of treating your mortgage as a negative bond and how that affects your asset allocation. Our guest was Jilliene Helman of Realty Mogul who has been working with WCI in some capacity or another for almost a decade.
Listen to Episode #240 here.
In This Show:
- Basic Principles of Asset Allocation
- Glide Path Asset Allocation
- Asset Allocation as You Age
- Asset Allocation and a Defined Benefit Plan
- Do REITs Belong on the Stock or Bond Side?
- Asset Allocation with Extra Mortgage Payments
- Fixed Income Portion of an Asset Allocation
- Jilliene Helman of Realty Mogul
- Help WCI Give Away $50,000
- Sponsor
- WCI Newsletter and WCI Network
- Milestones to Millionaire Podcast
- Quote of the Day
- Full Transcript
Basic Principles of Asset Allocation
First of all, your taxable accounts should generally be filled with the most tax-efficient investments. Bonds are generally put into tax-protected accounts when it doesn't really matter or may even be reversed in times of lower interest rates. If you are placing bonds in taxable, be sure to compare the after-tax yields to decide if municipal bonds are appropriate for your portfolio. They are for most people in higher tax brackets most of the time.
Of course, make sure you're rebalancing only in tax-protected accounts to avoid capital gains taxes. And take advantage of the best, which are usually the lowest cost, investments in your employer's retirement plans. And then build the rest of your portfolio around those.
Keep in mind the effects of Roth vs. deferred placements. When you put assets with an expected higher return preferentially into Roth accounts, that increases the risk of the portfolio on an after-tax basis, and vice versa. It also increases the expected return, of course. It's not a free lunch. It is higher risk because more of the after-tax assets are actually in the riskier asset.
Of course, keep in mind the future growth of the various accounts as you place assets into your various accounts. It's helpful to have at least one account with more than one asset in it to aid in rebalancing. The basic process here is to come up with a specific asset allocation plan and then figure out what you have in each of your accounts. How much money you have in your 401(k), how much in Roth IRA, how much in your spouse’s 403(b) and 457, and how much in your taxable account and to write all that down. Put it in a spreadsheet, put it on a piece of paper, whatever, and then you can decide what goes where.
First you get an asset allocation, then you figure out where your money's at in each type of account. And then you decide how to implement that asset allocation across the various accounts.
More information here:
Best Investment Portfolios – 150 Portfolios Better Than Yours
Glide Path Asset Allocation
“Hi, I have a question about glide path asset allocation for different accounts. For example, if someone wants to retire when they're 50 and they have a taxable account, a tax deferred account, and a tax-free account, should each of those three accounts have a different glide path when it comes to asset allocation?
Because, for example, you may not be accessing the tax deferred accounts until you're say 60 or 65, while the taxable accounts, you'll be using perhaps immediately at the age of 50 if you're retired at 50. And then the tax-free accounts like the Roth, you might not dig into those until you're 80. Should they have different glide paths for each account? Thank you very much.”
First, let's talk about what a glide path is. If you look at target retirement accounts in particular, you can understand a little more what we're talking about with a glide path. Traditionally, investors decrease the risk of their portfolio as they approach a retirement date and go off into retirement. It turns out the riskiest years for your portfolio is when it's the biggest. And particularly when you're about done converting your lifetime earnings, your work capital, into actual capital. That's when you have a lot of portfolio risk. The idea is to decrease that risk at that time. This is called sequence of returns risk. The idea is if a 25-year-old has a terrible market, they've got time to recover from it. They've still got most of their lifetime earnings ahead of them. But if you're 65, you don't have most of your lifetime earnings still ahead of you, and you can't tolerate a loss nearly as much. You should simply be investing less aggressively when you're 65 than when you're 25. If you are 100% stocks at 25, maybe you're 60% stocks at 65. That's the idea of a glide path, that you gradually make it less aggressive as you go.
The question is do you need different glide paths in each of your different types of accounts because you might touch them at different times in your life. While that's generally true, you're usually better off tapping the taxable account first, before you get into your tax-protected accounts like tax-deferred and tax-free, although you don't necessarily want to spend all your tax-deferred before your tax-free. That's pretty highly variable.
You don't need different glide paths for each of those. And the reason why is because all you care about is the overall glide path. Let's say, for instance, you have a particularly aggressive asset allocation in your taxable account because stocks tend to be very tax efficient. So, your taxable account is maybe 100% stocks. And that's OK, even if you're spending it first.
The reason why is because you can rebalance in the other accounts when you sell money out of that taxable account. Even if you sell a bunch of stock to spend in that taxable account, you can then buy stock inside the tax-protected account. Whether it's tax-deferred or tax-free, it's a tax-protected account. You can adjust that as you go. You don't need separate glide paths for each of those just like you don't have to have the same asset allocation in each of those accounts. You just have to look at the overall portfolio. And that's why it's basically an exercise in spreadsheet use. The most useful skill you can have, if you want to be a do-it-yourself investor, if you want to manage your own portfolio is simply to know how to use Excel or Google Sheets or whatever your spreadsheet of choice is.
Asset Allocation as You Age
“Hey Jim. This is Joel from Tampa. I was curious how you think about changing your asset allocation as you get older. I'm currently 29, and my partner is 27. Our investment portfolio has an asset allocation that's pretty close to what you say that you and Katie have done with the exception being that we have less in real estate and more in stock.
Right now, we have 75% in stock, 5% in REITs, and 20% in bonds, half of which are TIPS. I've always seen different rules of thumb for how to determine how much you have in stocks vs. bonds as you get older. But I'm curious how you specifically think about this and at what ages you might plan to make your investment portfolio a little bit heavier in bonds and less heavy in stocks and real estate. Thanks for your help. Bye.”
I wish there was some way I could dictate a specific answer on this, that there is only one way to do it. But there isn’t. People do all kinds of things with their asset allocation as they age. The bottom line is, it has to fit your desire to take risk, your ability to take risk, and your need to take risk.
Bill Bernstein is famous for saying “When you win the game, stop playing.” The idea there is once you're at your goal or you're surely going to reach your goal, dial back the risk a little bit. Maybe even take the money that's going to pay for your liabilities, for your future lifestyle off the table, and put it in very safe assets like treasury inflation-protected securities, or even buy a single premium annuity to meet those needs. Just really de-risk that portion of the portfolio and take risk with whatever is left.
There's lots of ways to do this. There's even data suggesting you can have a higher withdrawal rate from your portfolio if you actually increase your asset allocation throughout your retirement. The idea is to decrease it right around the time of retirement. Both a few years before, and a few years after. They call that a bond tent. And then increase your stock-to-bond ratio throughout retirement.
There are all kinds of different ideas out there about what you should do with your asset allocation as you age. And all of them have pretty good arguments for them. Some people just kind of fix it, “This is what we're going to do. We're going to be 75% stocks and 25% bonds. And we're going to do that when we're 29, we're going to do that when we're 59, we're going to do that when we're 79.” And that's fine too.
You just have to decide what's right for you and write it down as part of your investing plan. If you think you're going to work until 50, maybe you dial back the risk when you're 47. That way you're taking a little less risk the last few years there before your retirement age. If you expect you're going to work until 65, well, maybe you don't need to dial it back at 47 or 48. Maybe you could still be taking just as much risk as you were taking at 29.
Remember, it's not like you need all that money you save for retirement on the eve of your retirement. You don't spend it all in the first 10 minutes of retirement. Some of you are not going to spend it for 30 years. So, in reality, you're still investing with a very long-time horizon. You usually need to keep some money in risky assets, even as you move into your retirement years.
I wish I had a rule of thumb for you. There really is none that's perfect out there. I guess the only one I've really heard is your age in bonds. That as you get older, you put more and more into bonds. So, when you're 25, you got 25% in bonds. When you're 45, you got 45% in bonds. When you're 65, you got 65% in bonds. Some people make that a little more aggressive age minus 20 in bonds or age minus 10 in bonds. And you can just decide on that as you go, or you can set it up to decrease your risk every 10 years that you're taking. There's no right answer.
If you want to know what the professionals think, look at the target retirement funds and look at how they gradually decrease your stock-to-bond ratio as you go. But they tend to start at about 90% stocks and they tend to level off at about 40% stocks. Their target retirement income funds tend to be about 40% stocks. You have to realize that maybe there is a limit on either side of how much you're going to have in stocks there. Sorry, I couldn't give you a more specific answer on that one. That's kind of just the way that question is.
Asset Allocation and a Defined Benefit Plan
“Hi, Dr. Dahle. This is Tom. Thanks so much for all that you do for us through The White Coat Investor. I have a question today about my defined benefit plan. My organization, which had a 403(b), froze the plan in 2012 and switched to a defined contribution plan. The value for me, I'm age 58, works out to be $6,000 per month at the time of retirement.
My question is how should I value that defined benefit plan in terms of my asset allocation and my overall retirement planning? Should I consider it as part of my fixed income bond portfolio? I currently have a 60% stock, 30% bond and 10% real estate. I would appreciate any thoughts you have in this regard. Thanks so much.”
I think the big question when it comes to a defined benefit plan is what you're going to do with it. If this is going to be a pension for you, I think you treat it differently than you would a defined benefit cash balance plan. For example, I have a defined benefit cash balance plan. I'm just going to roll it into a 401(k) when we close the plan in a few years, and it'll be part of my 401(k). It's not really ever going to be pensionized. It's not going to be annuitized. I'm never going to live off the income from it like you would a classic pension.
Yes, there are two types of retirement accounts. There are defined benefit accounts, and there are defined contribution accounts. That's your classic 401(k). The classic defined benefit plan is a pension. But those two do get mixed a little bit together when we start talking about cash balance plans. Any sort of guaranteed income you have, whether it's Social Security income, whether it's a single premium immediate annuity that you bought, whether it is a true pension, I don't include those in an asset allocation. I don't think it's wise to do so. Try to assign a value to them and call them bonds or something like that.
I think there's a much better way to deal with that as you think about your portfolio. The way you deal with it is you subtract it from the amount of income that you need. So, if you figure you need $150,000 a year in retirement, and you figure this pension is going to provide you $75,000 a year, then you basically need your portfolio to provide the other $75,000 a year. I just leave the pension completely out of it the same way I leave Social Security completely out of it. If you're getting $75,000 from the pension and you're getting another $40,000 from Social Security, well, now your portfolio only needs to provide $35,000 a year to maintain your lifestyle. That's obviously a smaller portfolio than one that would provide an income of $150,000 a year. I hope that answers that question of how to think about it.
A different scenario is if it's a cash balance plan that you're just going to roll into a 401(k) or IRA when you're done. I would think about that a little bit differently. If it's small relative to the rest of your portfolio, I'd just ignore it. I ignore my cash balance plan, because it's well less than 1% of my overall portfolio. It's not something that I really feel a need to assign an asset allocation to. If it's a big part of your portfolio, if it's 20% or 50% or 60% of your portfolio, I think you can't ignore it at that point. Then, just figure out what the asset allocation is in the defined benefit plan. You can do that from the plan providers. They're usually not that aggressive. The one I have is one of the more aggressive ones I've seen. I think it's 60% stocks, but lots of these are only 20% or 40% stocks.
If you see there's a big chunk of your portfolio and you want to include it and you see that it's only 20% stocks, well, most of your bond allocation is going to be in that cash balance plan. The rest of your portfolio, whether it's a taxable account or 403(b) or Roth IRA or whatever, is probably going to be more stocks than bonds to overall provide the asset allocation that you are looking for.
Do REITs Belong on the Stock or Bond Side?
“Hi, Dr. Dahle. This is Tom from California. I currently own the VNQ Vanguard real estate index as part of my diversifying efforts for my overall portfolio. My intention is to have about a 60/40 split of stocks to bonds. Should I consider the real estate index as part of the equity sleeve, or would that be part of my fixed income investments? I'd appreciate your thought in that regard, in terms of treating overall volatility. Thank you.”
VNQ is the Vanguard real estate investment trust index ETF. There is a corresponding fund. I've invested in it for many years. I’m still invested in this particular fund. It's a good fund. It buys publicly traded real estate investment trusts and provides you the index return. Low cost, not terribly tax-efficient, but if you want exposure to publicly traded real estate, it's a great method to get it.
Let's talk about what a REIT is, though. Real estate investment trust is a stock that is traded on the stock market. It is not fixed income. It's not even close to fixed income. Anybody who tells you it acts like fixed income is lying. In 2008, this fund—and I know this because I owned it—lost 78% of its value. That is not a bond-like return. That is a stock-like return. So, if you divide your portfolio into just stocks and bonds, REITs are stocks. They should come out of the stocks side. If, on the other hand, you have a real estate allocation in your portfolio so now it's stocks, bonds, and real estate, I would put the REITs into the real estate allocation. That is what I do with our portfolio. We're 60% stocks, 20% bonds, 20% real estate.
That's where our portfolio lives right now. It goes into our real estate allocation. Our real estate allocation is made up of 10% in equity real estate, 5% in publicly traded REITs, that's basically VNQ, and then 5% into debt real estate. You sound like you're just calling either stocks or bonds. So, REITs would go on the stock side. They are not bonds. I assure you. They will not perform like bonds. While they have lower correlation with the overall market, it's not nearly as low a correlation as bonds have. And their volatility is far higher than bonds. In some respects, it's even higher than stocks because you're just looking at basically one sector of the stock market.
Asset Allocation with Extra Mortgage Payments
“Hey, Dr. Dahle. This is Jared from the Northeast. I have a question regarding asset allocation. My current financial plan has my allocation at 90% stocks and 10% bonds. I'm recently transitioning into using my mortgage as a negative bond and putting extra payments every month into the mortgage and the principle.
Now, my concern on this is that I lose the ability to rebalance my portfolio, which would force me to buy low and sell high. What are your thoughts on this? Are the extra payments toward the principal worth it? Or is the ability to rebalance in a stock to bond index fund portfolio more important than paying off the mortgage early and maybe spending extra money toward the mortgage, but not including that in my bond percentage? I would love to get your thoughts. Thanks.”
This is an interesting question that you naturally arrive at once you buy into the concept that a debt is a negative bond. And truthfully, when you look at it, that's how it works out, right? When you pay off a debt, you earn a fixed rate of return on that money. Basically, the interest you're saving by not having to pay interest on that debt anymore. If you pay off a mortgage with a rate of 3% after tax, you're getting a 3% after-tax return on that. And given that bonds right now are paying 1% or 2%, well, 3% looks pretty good compared to that. So, you can understand why someone would rather pay down debt, especially high-interest debt, than invest in bonds or CDs or whatever fixed-income options are available to them.
If you actually buy into this and go, “Well, I'm not going to carry any bonds at all until my debts are paid off,” I think that's a reasonable thing to do. But basically, what that is going to mean on the asset allocation side is that you're 100% stock and you better be comfortable with that. Because when the market goes down, when the market drops 30%, 40%, 50%, 60%, you're going to lose 60% of your portfolio. And that is the time to remind yourself that you put a whole bunch of money into paying down your mortgage and you didn't lose any of that. You have to be able to reassure yourself so you don't panic-sell and sell all those stocks low. Because that's one of the points of having bonds in your portfolio. It’s to moderate the volatility of the portfolio, allow you to rebalance when you're low.
Now it's very hard to rebalance when you're doing this. You're not going to be able to now borrow out more student loans in order to pay it off. You could do that with a mortgage. You could take out a HELOC, you could refinance and pull some money out and buy stocks with it. But by the time you get all the paperwork done, the market may have recovered already. It's just hard to do. You're basically saying, “I'm not going to rebalance until later. Later I'll have bonds in my portfolio, after my debts are gone and I'm just not going to worry about rebalancing.” Now, is that OK? Yeah, it's probably OK. At least in the first half of your working career.
Rebalancing is not that important. People make it sound like if you don't rebalance, your whole world's going to end. But when you actually read the studies, they show you really only need to rebalance every one to three years. That's the optimal time period to rebalance, because if you are rebalancing sooner than that, you lose out on the effects of momentum. Rebalancing is not a guaranteed thing. It's a relatively low priority as investing goes. If you've decided, “You know what? I'm going to pay down the mortgage, because the rate is way better than what I can get in bonds,” you're basically just going to have a 100% stock portfolio and you need to quit worrying about rebalancing until after that mortgage is paid off.
Yes, you are kind of conflating two different goals. A goal to pay off your mortgage and a goal to arrive at a nest egg to support your retirement. I tend to separate out those two goals in my mind, but if you want to blend them together in order to get a little better return on your fixed income, I think that's totally reasonable. Just don't expect to rebalance until you've accomplished one of those goals.
Fixed Income Portion of an Asset Allocation
“Hi, Dr. Dahle. This is Tom from California. I'm interested in your advice regarding the composition of a fixed income portion of my portfolio. I'm currently split within my tax-deferred accounts between the U.S. Total Bond Market Index and the International Total Bond Market Index, both by Vanguard.
My question is given the low rates of interest currently, should I consider adding in a portion of utilities index ETF or an equity income ETF into the fixed income portion of my portfolio? Or does that introduce an unacceptable level of additional volatility? That's my question. Thanks. Bye.”
Listen, I get it. Interest rates are low. Inflation's now a little higher. Inflation's over 5% and you're still only making 1% or 2% on bonds and CDs and savings accounts. It really sucks to be losing money on a real basis from the fixed income portion of your portfolio.But you have to ask yourself, “Why do I have a fixed income portion of my portfolio? Am I trying to get high returns out of this portion of the portfolio?” And chances are the answer is no.
The old saying is that more money has been lost chasing yields than has been lost at the point of a gun. And that's true, right? Because we all wish we could make more without taking on more risk. But the truth is if you want to make more, you have to take on more risk. So, you're talking about adding utilities. Utilities are stocks, they are not bonds. If you add utilities to your portfolio and replace bonds with it, you are taking on more risk. You have a more aggressive portfolio. Now, I get why people do that. We've had a few downturns in the last decade, but for the most part, the market has been rising like crazy over the last decade.
You have to ask yourself, “Do I really want to be taking more risk in that sort of scenario?” Maybe in March 2009, that was a good idea, but guess what? Nobody was interested in taking on a more aggressive asset allocation in March 2009. They were all trying to decide whether they could justify plan B and having more of their money in fixed income and not actually rebalancing from their bonds into stocks, right? That's what people were interested in at the depths of that bear market.
Here, we are probably closer to the top than the bottom of a market. The crystal ball is cloudy as always, of course. And people are asking, “Should I take on more risk? Should I borrow money to invest? Should I use leveraged ETFs to invest? Should I put more money into speculative assets like cryptocurrencies to invest to get even higher returns?” At a certain point, you have to say, “This doesn't make sense. We're ramping up the risk as the risk of loss increases.”
You own bonds in your portfolio for a reason. Hopefully, your written investment plan recorded that reason. And you can go back and read it at times like these, when you are tempted to change your plan. Staying the course is good advice, both at market bottoms and at market tops. I recommend if your plan was 20% in bonds or whatever it is, you keep your 20% in bonds. That's what I'm doing. In fact, just before I recorded this episode, I just put a whole bunch of money into bonds because stocks have done great this year. And so, a whole bunch of this month's investment went into bonds. I'm still buying them. Yes, I know I'm only going to make 1% or 2% or 3% on them. And I'm OK with that. That's why I have them in my portfolio. It’s for those times like 2008, when I'm really glad I had them in my portfolio. I hope that's helpful.
More information here:
The Benefits of a Fixed Asset Allocation Portfolio
Jilliene Helman of Realty Mogul
Jilliene Helman is the CEO and founder of Realty Mogul and somebody I met very early in the White Coat Investor journey. We met at an event in 2013 and have been partnering with Realty Mogul on some level ever since then.
Briefly tell the audience about why you started Realty Mogul and how it's grown over the years.
“I started Realty Mogul because I grew up in a real estate family. My grandfather was a real estate developer. He developed a property in Los Angeles. My mom was in luxury residential real estate. And I went to work after business school in wealth management. Our wealthiest clients in the wealth management group were real estate investors. And I kept thinking to myself, there's got to be a better way to get an investment in real estate.I saw this gap in the market. To have access to commercial real estate opportunities, you had to have a ton of money and a ton of connections, and I wanted to find a way to give more people access to those opportunities. And that's what we do today at Realty Mogul.”
Tell us what do you see as the primary value proposition of Realty Mogul? What do investors get from your platform in exchange for the fees they pay?
“First and foremost, it's access. We have teams around the country that are scouring through tons and tons and tons of real estate deals and also meeting with a lot of real estate operating partners to try and source what we believe are risk adjusted return transactions in real estate. Strong risk adjusted return transactions. Number one, it's access. Number two, it's speed and just ease that crowdfunding platforms like Realty Mogul can provide. If you are a busy doctor, if you are a busy dentist and you've got a day job, you probably don't have enough time to be scouring the country for great real estate opportunities. And the goal of Realty Mogul is to come to one place, be able to see a variety of different investment opportunities, and either pick specific investments that you're interested in investing in or invest into one of our real estate investment trusts that are a combination of many properties.”
Let's talk about those two different types of investments. You've got the individual syndications where you go in with a bunch of other investors and buy one property. Whether it's a large apartment complex or whatever, that's available to accredited investors. And then of course the real estate investment trust, which are more diversified investments available to all investors. Can you tell us about what types of investors should opt for which type of investment?
“It's really interesting. We actually have investors who are investing in both the individual offerings. As you mentioned, you can invest in a specific apartment building, a specific office building, a specific self-storage facility, a specific retail shopping center. Or you can invest into one of the non-traded REITs, which are pools of these assets. But we have investors that are investing in both. The individual assets are limited to accredited investors. The REITs are open to accredited and non-accredited investors. It depends if you're accredited or not. But they serve two different purposes, and we have some investors that are investors in both. We have some investors who prefer to make their own decisions and pick their own properties. And we have other investors who prefer to defer that decision to us and invest in one of the REITs to get exposure to a broader scope of properties.”
Why should people interested in syndications go through Realty Mogul instead of trying to find syndications directly or going directly to syndicators?
“Because we add value. My philosophy on business is you should get paid if you add value and you shouldn't get paid if you don't add value. And there is an expense of going through Realty Mogul and we try to add value for that expense. First of all, it's our people, it's our values. This is some of the crunchy stuff, but we really deeply care about sleeping well at night. We really deeply care about being accountable and owning it and paying attention to the details. We do due diligence on every single property and every single real estate company that uses the Realty Mogul platform.
See Also2017 Midyear Investment Rebalancing - Retire by 40Where should I put the money I save?Where should I put the money I save?7 Principles of Withdrawing Money in Retirement | White Coat InvestorWe have minimum qualifications, we run reference checks. We actually fly out to the property and we step foot on the property. We're actually walking the neighborhoods. We're walking to comparable properties. A lot of busy professionals don't have the time to do that. It's rare that I talk to a Realty Mogul investor who says, ‘I flew from Florida to Texas and I went and walked the property.' But if you ask us at Realty Mogul, ‘Did we go do that?' We're going to say yes. That's part of our fundamental philosophy on investing in real estate.
The other thing is that we have white glove service. That's one of the things that we think separates us from other real estate crowdfund companies is every accredited investor gets their own dedicated investor relations person. And that individual is meant to help them answer any questions that they have about the platform.We believe in picking up the phones, we believe in responding to emails. We believe in doing the due diligence, being very detail oriented. And now it's really interesting because we've got almost 10 years of data.
Next year will be our 10th year in business, which is remarkable and super, super exciting for the company. But we've captured 10 years of data. A lot of times we'll look at a property that's a couple of miles away from another property that we've either historically underwritten or there's actually been an investment made through the Realty Mogul platform.Real estate is one of those unique asset classes where not all data is public. If you're investing in the public stock market, there's public data, there's public filings. Everyone should be on a relatively level playing field. That's not true in real estate. Real estate is a private market. People go to great lengths to keep their information private and hidden.
As an example, in Texas, it's a non-disclosure state. So you don't actually have to tell anybody what you paid for the property. If you don't know what other people are paying for the property, how do you know if you're getting a good deal? How do you know if you're overpaying for the property? How do you know if you're right in that sweet spot? For us, Dallas is our largest market. Twenty-two properties in Dallas through the Realty Mogul platform have been invested in, and we have data on all of those properties. So, if another property comes up in Dallas, we're probably going to have some proprietary private information that your average individual investor just wouldn't have.”
What's a typical syndication deal look like? What's on the platform? What's the minimum investment there? What are the Realty Mogul level fees?
“Typically, if you're going to invest in one of the REITs, the minimum investment is $5,000. It's meant to be very approachable for people to get invested in real estate and just try us out and give it a shot. On the individual assets, it's $35,000 minimum typically. They range a little bit, but more often than not, it's a $35,000 minimum. Realty Mogul charges a 1% fee on an annual basis. We stay involved for the life of the transaction as the administrative services provider. What that means is that if you have a question, you call us, we're going to pick up the phone, we're going to be able to help you.
What that means is that you come to your Realty Mogul platform. You're going to get quarterly reporting. You're going to get your annual K-1. And you're going to have a dedicated person who you can go to if you have questions about things. Obviously, we can't give legal advice, we can't give tax advice, but we can point you in the right direction. And we try to be very helpful to these investors. Those are the minimums.”
What's the difference between Mogul REIT 1 and Mogul REIT 2? How should an investor choose between them?
“We actually just renamed the REITs, which is really, really exciting. And you've heard it here first, honestly. It'll be rolled out in short order. But we renamed the first REIT, The Income REIT. And we renamed the second REIT, The Apartment Growth REIT, to really better help investors identify what those REITs actually do.
The first REIT invests in different asset classes: apartment buildings, office buildings, self-storage. It has a mandate to invest across asset classes. And we're really focused on looking to generate income out of that REIT. Since the inception of that REIT, I think we're at 56 consecutive distributions in that REIT, and we've paid at 6% annualized or greater. So, every distribution has been at least 6%. Sometimes it's been higher than that, but at least 6%. And we're really focused on print transactions that can generate income back to the investor.
The second REIT, which is the Apartment Growth REIT, is only multifamily. Only apartment buildings. There's no office, there's no self-storage, there's no retail. Only multifamily. And we're more focused on creating longer term value. So, that REIT is also doing a distribution. It's currently distributed at 4.5%. And it's been distributing every quarter since inception at 4.5%. But we're also looking to create value there.
Our hope is that that underlying return is going to be a lot higher than 4.5% by creating value. And what we mean by that is, let's say that we invest in an apartment building and rents are $1,000 a unit. We invest $5,000 into that unit. We redo the paint, we redo the carpet, we redo the cabinets. We redo the lighting. We add a washer and dryer as an example of what a renovation might look like. And we take rents from $1,000 a unit to $1,200 a unit. That's an example of a value-add strategy. And that's what the apartment growth REIT focuses on.”
Tell us about the liquidity of the REITs. How do you get your money out and how long do you have to wait and how quickly can you take it out, etc?
“I’ll start this with the caveat that if you're an investor who's looking for liquidity, it's probably not the right vehicle for you. You can find that in the public stock market. These are not liquid assets or liquid vehicles. They're not liquid vehicles because they're not liquid assets. We actually have to go sell a property and we don't ever want to be forced to sell a property. We want to be able to sell properties when we think it's the right time in the market to sell the property.
That being said, we do have a redemption program. There are no redemptions for the first year. So, there's a lockup for the first 12 months. And then there's a discount for the first three years. So, you get 97%, 98% and 99% of the net asset value of the REIT for your one-year, two-year, three-year. But again, the liquidity is dependent on ensuring we have capital, ensuring we can sell an asset or we've chosen to sell an asset. They're really meant to be vehicles for the long term. One of the key lessons that I learned coming out of the wealth management industry—which is where I spent my career, the majority of my career prior to starting Realty Mogul—is real estate is a game best played long. And what I mean by that is real estate can be a great way to stabilize your portfolio if you're willing to invest for the long term. So, we are long-term thinkers in the REITs.”
You mentioned publicly-traded REITs. Obviously, they have a little bit more liquidity. What do you see as the advantage of a smaller private REIT instead of a large publicly traded REIT?
“Two things. One, because you don't have the same liquidity that you have in the public markets, you should be getting a liquidity premium. You should be getting paid more for that illiquidity. But number two, which is probably more important, is a lot of these large public REITs, they have a lot of capital and so they have to chase much larger deals. They won't invest in a deal less than 50 or 60 or 70 or 80 or some hundred million dollars. Like the Blackstone REITs. They're off doing 3, 4 billion transactions, and it can be hard to find a mismatch in pricing when you start to compete in that sort of true private equity world.
And so, we still believe in this concept of ‘Go big by going small.' I still believe that there's more mispricing in the smaller middle tier assets than there are in the $100 million assets. And that'll take time to prove out, but it's something that we believe for a long time and something that gets us excited about the size of transaction that we invest in out of both REIT 1 and REIT 2.”
Who do you see as your primary competitors and why should an investor choose Realty Mogul over your competitors?
“It depends. If you're interested in investing in individual properties, there's certain companies that do that. If you're interested in investing in REITs, there's obviously the public companies and there's also some private companies like our company. It's going to be a corny answer. I'll just caveat with that.
But for us, it comes down to the people and it comes down to the culture. We deeply, deeply care about our investors. We deeply care about our employees at Realty Mogul because they're the ones who are empowered to take care of our investors. And it comes down to our values. Things like sleeping well at night. Things like details matter. Things like being accountable.
One of the tracking items that I have as the CEO is what percentage of phone calls are we picking up within two rings? We want to be there for investors. It’s a digital platform, but there are other companies who have said, ‘We're going to truly be a digital platform. We're not going to have individual reps that are available for people to talk to.' And I don't think that's the right approach.
I think the right approach is if you're going to go to a website and invest $100,000 or $200,000—and we have many, many clients who have invested millions of dollars with us—there needs to be a human being on the other side of that call. There needs to be the confidence that someone has actually flown to that property and stepped foot on that property and done that due diligence. And some of our competitors don't do that. They never see the property. They don't pick up the phones. And that's just never been the company that we want to build.
I think that our white glove service really sets us apart from other competitors in this space. In addition to just our culture of we don't have to be the biggest. One of the things, if you sit in on an internal meeting with me, I'll say to our team, we don't have to be the biggest. Our job is not to be the biggest platform out there. Our job is to source what we believe are the best risk-adjusted returns in real estate at that period of time. And that's really what has been driving our mission and driving our day-to-day activities, which is different from some of our competitors. We're in this for the long haul. Real estate is a game best played long.”
You can get more information about Realty Mogul here.I've known them for a long time. In fact, this is one of the few syndications I've been involved with that has gone completely round trip. It was an apartment building in Indianapolis. I think it went round trip a year or two ago after owning it for five or six or seven years.
That's one of the interesting things about these long-term real estate investments is you really don't know how they're going to turn out until you get to the end of them. And so, it's nice to have companies that have been around for a while and you can actually see a track record of roundtrip investments and how they've done. I appreciate that.
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Quote of the Day
Our quote comes from Phil DeMuth, who said,
“Even if risk tolerance existed and could be measured accurately, why would it be an important factor to consult when considering how to invest? You should invest in the way that has the greatest prospect to fulfill your investment goals. That might mean taking more or less risk than you would prefer. If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest ‘safely’ if that locks in running out of money when you are old.”
Full Transcript
Transcription – WCI – 240
Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 240 – Asset Allocation Q&A.
Dr. Jim Dahle:
If you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to www.whitecoatinvestor.com/reopportunities to sign up today.You can do this and The White Coat Investor can help.
Dr. Jim Dahle:
You may not know it, but we have a newsletter that we send out. It goes out to like 60,000 people. It's totally free. You can sign up for it at whitecoatinvestor.com/free-monthly-newsletter.
Dr. Jim Dahle:
It's got news about what's going on at the White Coat Investor. It's got a market report about the returns of various asset classes in the previous month. It's got the best of the blog what has been going on on the White Coat Investor blog and podcast and the forums.
Dr. Jim Dahle:
It's got the best of the web section, where it includes stuff that I've curated from all over the internet that I think you'll find interesting. And it also has a special tip. It's basically a blog post that never shows up on the blog. If you want it, you got to sign up to the newsletter. You can sign up for that at whitecoatinvestor.com/free-monthly-newsletter.
Dr. Jim Dahle:
You can also sign up there if you just want a weekly summary of the blog posts. You can even sign up to get every blog post we publish on the blog delivered to your email box and we have a special newsletter there if you check the box, it's also free, but it's for those interested in real estate opportunities and real estate resources you can sign up for.
Dr. Jim Dahle:
I just want to make sure you know about the other blogs in the white coat investor network. In fact, one of them, Passive Income MD has a podcast. If you like podcasts, check out the Passive Income MD podcast. It's available wherever you download your podcast.
Dr. Jim Dahle:
But both Passive Income MD and the Physician on FIRE have blogs and websites. Physician on FIRE is aimed at people who want to retire early. Leif Dahleen is the brain behind the operation.
Dr. Jim Dahle:
He has been retired now for several years and is back to slow traveling with his now getting into junior high age sons. I think they've got three or six destinations around the world they're going to be doing slow traveling in the next year. Now the pandemic's winding down a bit and the kids are getting vaccinated. So, lots of interesting stuff coming out of there for those interested in early retirement.
Dr. Jim Dahle:
Passive Income MD of course, is about boosting your passive income, having a higher income, maybe being able to have a little more freedom by cutting back on your earned income, lots of real estate specific content there. But be sure to check both of those out.
Dr. Jim Dahle:
Well, let's not get into your questions first. I want to talk for a minute about some principles of asset allocation because we got a lot of asset allocation questions we're going to be dealing with today.
Dr. Jim Dahle:
Let's go over a few principles to start with. First of all, your taxable accounts should generally be filled with the most tax efficient investments. Bonds are generally put into tax protected accounts when it doesn't really matter or may even be reversed in times of lower interest rates.
Dr. Jim Dahle:
If you are placing bonds in taxable, be sure to compare the after-tax yields to decide if municipal bonds are appropriate for your portfolio. They are for most people in higher tax brackets most of the time.
Dr. Jim Dahle:
Of course, make sure you're rebalancing only in tax protected accounts to avoid capital gains taxes. And take advantage of the best, which are usually the lowest cost investments in your employer's retirement plans. And then build the rest of your portfolio around those.
Dr. Jim Dahle:
Keep in mind the effects of Roth versus deferred placements. When you put assets with an expected higher return preferentially into Roth accounts, that increases the risk of the portfolio on an after-tax basis, and vice versa, it also increases the expected return of course. It's not a free lunch. Expected return, higher risk because more of the after-tax assets are actually in the riskier asset.
Dr. Jim Dahle:
And of course, keep in mind the future growth of the various accounts as you place assets into your various accounts. It's helpful to have at least one account with more than one asset in it to aid in rebalancing. Generally, you want at least one asset in each out to be found in at least one other of your accounts. If you're trying to rebalance between 401(k)s and Roth IRAs and taxable accounts and that sort of thing.
Dr. Jim Dahle:
But the basic process here is to come up with a specific asset allocation plan and then figure out what you have in each of your accounts. How much money you have in your 401(k), how much in Roth IRA, how much in your spouse’s 403(b) and 457 and how much in your taxable account and to write all that down. Put it in a spreadsheet, put it on a piece of paper, whatever, and then you can decide what goes where.
Dr. Jim Dahle:
First you get an asset allocation, then you figure out where your money's at in each type of account. And then you decide how to implement that asset allocation across the various accounts.
Dr. Jim Dahle:
If you're not sure what asset allocation to use in the first place, I recommend a blog post I did, called “150 Portfolios Better Than Yours”. It's not just 150 portfolios anymore. I think it's over 200. But each of them is better than a lot of the asset allocations or a lot of the investing plans or portfolios that a lot of people are around with, which are just nonsensical. Check that out just to get an idea of what a reasonable asset allocation looks like and what things you ought to be thinking about when you look at an asset allocation.
Dr. Jim Dahle:
All right. I hope that's helpful. Let's get into some questions now. This one's about glide path asset allocations.
Speaker:
Hi, I have a question about glide path asset allocation for different accounts. For example, if someone wants to retire when they're 50 and they have a taxable account, a tax deferred account, and a tax-free account, should each of those three accounts have a different glide path when it comes to asset allocation?
Speaker:
Because for example, you may not be accessing the tax deferred accounts until you're say 60 or 65, while the taxable accounts, you'll be using perhaps immediately at the age of 50 if you're retired at 50. And then the tax-free accounts like the Roth, you might not dig into those until you're 80. Should they have different glide paths for each account? Thank you very much.
Dr. Jim Dahle:
First let's talk about what a glide path is. If you look at target retirement accounts in particular, you can kind of understand a little more what we're talking about with a glide path.
Dr. Jim Dahle:
Traditionally investors decrease the risk of their portfolio as they approach retirement date and go off into retirement. It turns out the riskiest years for your portfolio is when it's the biggest. And particularly when you're about done converting your lifetime earnings, your work capital into actual capital. That's when you have a lot of portfolio risk.
Dr. Jim Dahle:
And so, the idea is to decrease that risk at that time. This is called sequence of returns risk. The idea is if a 25-year-old has a terrible market, they've got time to recover from it. They've still got most of their lifetime earnings ahead of them. But if you're 65, you don't have most of your lifetime earnings still ahead of you and you can't tolerate a loss nearly as much.
Dr. Jim Dahle:
You should simply be investing less aggressively when you're 65 than when you're 25. If you are 100% stocks at 25, maybe you're 60% stocks at 65. That's the idea of a glide path, is that you gradually make it less aggressive as you go.
Dr. Jim Dahle:
The question is do you need different glide paths in each of your different types of accounts because you might touch them at different times in your life. And while that's generally true, you're usually better off tapping the taxable account first, before you get into your tax protected accounts like tax deferred and tax free, although you don't necessarily want to spend all your tax deferred before your tax free, that's pretty highly variable.
Dr. Jim Dahle:
You don't need different glide paths for each of those. And the reason why is because all you care about is the overall glide path. Let's say for instance you have a particularly aggressive asset allocation in your taxable account because stocks tend to be very tax efficient. And so, your taxable account is maybe 100% stocks. And that's okay, even if you're spending it first.
Dr. Jim Dahle:
The reason why is because you can rebalance in the other accounts when you sell money out of that taxable account. Even if you sell a bunch of stock to spend in that taxable account, you can then buy stock inside the tax protected account, whether it's tax deferred or tax free, it's a tax protected account. And so, you can adjust that as you go. You don't need separate glide paths for each of those just like you don't have to have the same asset allocation in each of those accounts. You just have to look at the overall portfolio.
Dr. Jim Dahle:
And that's why it's basically an exercise in spreadsheet use. The most useful skill you can have, if you want to be a do-it-yourself investor, if you want to manage your own portfolio is simply how to use Excel or Google Sheets or whatever your spreadsheet of choice is. Apple Number I think it's called, whatever it is.
Dr. Jim Dahle:
Those are very useful skills. And I just don't see how you can manage your own portfolio without at least being able to create a basic spreadsheet. I guess it could be done with paper and pencil. That's what the original spreadsheets were, but it seems far easier to use software to assist you with that.
Dr. Jim Dahle:
This reminds me of the quote of the day today, which is from Phil DeMuth who said “Even if risk tolerance existed and could be measured accurately, why would it be an important factor to consult when considering how to invest? You should invest in the way that has the greatest prospect to fulfill your investment goals. That might mean taking more or less risk than you would prefer. If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest ‘safely’ if that locks in running out of money when you are old.”
Dr. Jim Dahle:
And I like his point with that. His point is the asset application has to meet your goals and maybe you need to be a little more tolerant of risk. And one way you can become more tolerant of risk is understanding historically what has happened with various asset classes.
Dr. Jim Dahle:
When you realize that, I don't want to say the stock market always goes up, but in the past it's always recovered. And so long as the future does not look different than the past, that's probably the way you ought to bet. Rather than being paranoid about having your stocks drop 30%, you should realize that's more of a buying opportunity and chances are in two or three or five or 10 years, they're going to be worth more than they were a few weeks ago when they started dropping in value. So, keep that in mind.
Dr. Jim Dahle:
All right. Here's another question, somewhat related to the first one. This one comes from Joel about asset allocation as you age.
Joel:
Hey Jim. This is Joel from Tampa. I was curious how you think about changing your asset allocation as you get older. I'm currently 29 and my partner is 27. Our investment portfolio has an asset allocation that's pretty close to what you say that you and Katie have done with the exception being that we have less in real estate and more in stock.
Joel:
Right now, we have 75% in stock, 5% in REITs and 20% in bonds, half of which are TIPS. I've always seen different rules of thumb for how to determine how much you have in stocks versus bonds as you get older. But I'm curious how you specifically think about this and at what ages you might plan to make your investment portfolio a little bit heavier in bonds and less heavy in stocks and real estate. Thanks for your help. Bye.
Dr. Jim Dahle:
All right, Joel, that's a great question. I wish there was some way I could dictate a specific answer on this, that there is only one way to do it. But there isn’t. People do all kinds of things with their asset allocation as they age. The bottom line is, it has to fit your desire to take risk, your ability to take risk and your need to take risk.
Dr. Jim Dahle:
Bill Bernstein is famous for saying “When you win the game, stop playing”. And the idea there is once you're at your goal, or you're surely going to reach your goal to dial back the risk a little bit and maybe even take the money that's going to pay for your liabilities for your future lifestyle off the table and put it in very safe assets like treasury inflation protected securities, that sort of a thing, or even buy a single premium annuity to meet those needs. And just really de-risk that portion of the portfolio and take risk with whatever is left.
Dr. Jim Dahle:
There's lots of ways to do this. There's even data suggesting you can have a higher withdrawal rate from your portfolio if you actually increase your asset allocation throughout your retirement. And so, the idea is to decrease it right around the time of retirement a few years before, and a few years after. They call that a bond tent. And then increase your stock to bond ratio throughout retirement.
Dr. Jim Dahle:
There are all kinds of different ideas out there about what you should do with your asset allocation as you age. And all of them have pretty good arguments for them. Some people just kind of fix it, “This is what we're going to do. We're going to be 75% stocks and 25% bonds. And we're going to do that when we're 29, we're going to do that when we're 59, we're going to do that when we're 79”. And that's fine too.
Dr. Jim Dahle:
I think you just have to decide what's right for you and write it down as part of your investing plan. If you think you're going to work until 50, maybe you dial back the risk when you're 47. That way you're taking a little less risk the last few years there before your retirement age. If you expect you're going to work until 65, well, maybe you don't need to dial it back at 47 or 48. Maybe you could still be taking just as much risk as you were taking at 29.
Dr. Jim Dahle:
Remember, it's not like you need all that money you save for retirement on the eve of your retirement. You don't spend it all in the first 10 minutes of retirement. Some of you are not going to spend it for 30 years. So, in reality, some of that stash, you're still investing with a very long-time horizon. And so, you usually need to keep some money in risky assets, even as you move into your retirement years.
Dr. Jim Dahle:
I wish I had a rule of thumb for you. There really is none that's perfect out there. I guess the only one I've really heard is your age in bonds. That as you get older, you put more and more into bonds. So, when you're 25, you got 25% in bonds. When you're 45, you got 45% in bonds. When you're 65, you got 65% in bonds. Some people make that a little more aggressive age minus 20 in bonds or age minus 10 in bonds. And you can just decide on that as you go, or you can set it up to decrease your risk every 10 years that you're taking. There's no right answer.
Dr. Jim Dahle:
If you want to know what the professionals think, look at the target retirement funds and look at how they gradually decrease your stock to bond ratio as you go. But they tend to start at about 90% stocks and they tend to level off at about 40% stocks. Their target retirement income funds tend to be about 40% stocks. And so, you got to realize that maybe there is a limit on either side of how much you're going to have in stocks there. Sorry, I couldn't give you a more specific answer on that one. That's kind of just the way that question is.
Dr. Jim Dahle:
All right. Let's take a question from Tom. This one's about asset allocation and a defined benefit plan.
Tom:
Hi, Dr. Dahle. This is Tom. Thanks so much for all that you do for us through the White Coat Investor. I have a question today about my defined benefit plan. My organization, which is a 403(b), froze the plan in 2012 and switched to a defined contribution plan. The value for me, I'm age 58, works out to be $6,000 per month at the time of retirement.
Tom:
My question is how should I value that defined benefit plan in terms of my asset allocation and my overall retirement planning? Should I consider it as part of my fixed income bond portfolio? I currently have a 60% stock, 30% bond and 10% real estate. I would appreciate any thoughts you have in this regard. Thanks so much.
Dr. Jim Dahle:
All right. Great question, Tom. I think the big question when it comes to a defined benefit plan is what you're going to do with it. If this is going to be a pension for you, I think you treat it differently than you would a defined benefit cash balance plan.
Dr. Jim Dahle:
For example, I have a defined benefit cash balance plan. I'm just going to roll it into a 401(k) when we close the plan in a few years. And it'll be part of my 401(k). It's not really ever going to be pensionized. It's not going to be annuitized. I'm never going to live off the income from it like you would a classic pension.
Dr. Jim Dahle:
Yes, there's two types of retirement accounts. There are defined benefit accounts, there are defined contribution accounts. That's your classic 401(k). The classic defined benefit plan is a pension. But those two do get mixed a little bit together when we start talking about cash balance plans.
Dr. Jim Dahle:
Any sort of guaranteed income you have, whether it's social security income, whether it's a single premium immediate annuity that you bought, whether it is a true pension, I don't include those in an asset allocation. I don't think it's wise to do so. Try to assign a value to them and call them bonds or something like that.
Dr. Jim Dahle:
I think there's a much better way to deal with that as you think about your portfolio. The way you deal with it is you subtract it from the amount of income that you need. So, if you figure you need $150,000 a year in retirement, and you figure this pension is going to provide you $75,000 a year, then you basically need your portfolio to provide the other $75,000 a year.
Dr. Jim Dahle:
I just leave the pension completely out of it. Same way I leave social security completely out of it. If you're getting $75,000 from the pension and you're getting another $40,000 from social security, well, now your portfolio only needs to provide $35,000 a year to maintain your lifestyle. And that's obviously a smaller portfolio then one that would provide an income of $150,000 a year. I hope that answers that question of how to think about it.
Dr. Jim Dahle:
Different scenario, if it's a cash balance plan that you're just going to roll into a 401(k) or IRA when you're done. I would think about that a little bit differently. If it's small relative to the rest of your portfolio, I'd just ignore it. I ignore my cash balance plan, because it's well less than 1% of my overall portfolio. And so, it's not something that I really feel a need to assign an asset allocation to.
Dr. Jim Dahle:
If it's a big part of your portfolio, if it's 20% or 50% or 60% of your portfolio, well, I think you can't ignore it at that point. Then just figure out what the asset allocation is in the defined benefit plan. And you can do that from the plan providers. They're usually not that aggressive. The one I have is one of the more aggressive ones I've seen. I think it's 60% stocks, but lots of these are only 20% or 40% stocks.
Dr. Jim Dahle:
If you see there's a big chunk of your portfolio and you want to include it and you see that it's only 20% stocks, well, most of your bond allocation is going to be in that cash balance plan. And so, the rest of your portfolio, whether it's a taxable account or 403(b) or Roth IRA, or whatever, is probably going to be more stocks than bonds to overall provide the asset allocation that you are looking for.
Dr. Jim Dahle:
All right, let's take our next question. This one's from Tom and is asking about REITs, where they belong in the stock side or the bond side.
Tom:
Hi, Dr. Dahle. This is Tom from California. I currently own the VNQ Vanguard real estate index as part of my diversifying efforts for my overall portfolio. My intention is to have about a 60/40 split of stocks to bonds. Should I consider the real estate index as part of the equity sleeve, or would that be part of my fixed income investments? I'd appreciate your thought in that regard, in terms of treating overall volatility. Thank you.
Dr. Jim Dahle:
All right. Great question, Tom. VNQ is the Vanguard real estate investment trust index ETF. There is a corresponding fund. I've invested in it for many years. I’m still invested in this particular fund. It's a good fund. It buys publicly traded real estate investment trusts, buys them all, and provides you the index return. Low cost, not terribly tax efficient, but if you want exposure to publicly traded real estate, it's a great method to get it.
Dr. Jim Dahle:
Let's talk about what a REIT is though. Real estate investment trust is a stock that is traded on the stock market. It is not fixed income. It's not even close to fixed income. Anybody who tells you it acts like fixed income is lying. In 2008, this fund, and I know this because I owned it, lost 78% of its value. That is not a bond like return. That is a stock-like return.
Dr. Jim Dahle:
So, if you divide your portfolio into just stocks and bonds, REITs are stocks. They should come out of the stocks side. If on the other hand, you have a real estate allocation in your portfolio. So now it's stocks, bonds, and real estate. I would put the REITs into the real estate allocation, and that's what I do with our portfolio. We're 60% stocks, 20% bonds, 20% REITs.
Dr. Jim Dahle:
That's where our portfolio lives right now. And so, that's where that particular asset class goes. It goes into our real estate allocation. Our real estate allocation is made up of 10% in equity real estate, 5% in publicly traded REITs. That's basically VNQ and then 5% into debt real estate.
Dr. Jim Dahle:
That's where it fits in my portfolio. You sound like you're just calling either stocks or bonds. So, REITs would go on the stock side. They are not bonds. I assure you. They will not perform like bonds. While they have lower correlation with the overall market, it's not nearly as lower correlation as bonds have. And their volatility is far higher than bonds. In some respects, it's even higher than stocks because you're just looking at basically one sector of the stock market.
Dr. Jim Dahle:
Thanks to those of you out there who have difficult jobs, which is pretty much all of you, because you are highly paid professionals. You're docs, dentists, lawyers, whatever. What you do is not easy. So, I want to thank you for it. We met recently with the estate planning attorneys and it's not easy what they do either. It took a lot of training and you have to build a practice and there's a lot of risk there as well.
Dr. Jim Dahle:
Thanks for the risk you've taken. Thanks for the dedication you've had in your life and thanks for making the lives of those around you better. If no one said thank you today, let me be the first.
Dr. Jim Dahle:
I think we got time for one more question before we bring our guest onto this podcast. Let's talk about asset allocation with extra mortgage payments, a question from Jared.
Jared:
Hey, Dr. Dahle. This is Jared from the Northeast. I have a question regarding asset allocation. My current financial plan has my allocation at 90% stocks and 10% bonds. Now I'm recently transitioning into using my mortgage as a negative bond and putting extra payments every month into the mortgage and the principle.
Jared:
Now, my concern on this is that I lose the ability to rebalance my portfolio, which would force me to buy low and sell high. What are your thoughts on this? Are the extra payments towards the principal worth it? Or is the ability to rebalance in a stock to bond index fund portfolio more important than paying off the mortgage early and maybe spending extra money towards the mortgage, but not including that in my bond percentage? I would love to get your thoughts. Thanks.
Dr. Jim Dahle:
This is an interesting question that you naturally arrive at once you buy into the concept that a debt is a negative bond. And truthfully, when you look at it, that's how it works out, right? When you pay off a debt, you earn a fixed rate of return on that money. Basically, the interest you're saving by not having to pay interest on that debt anymore.
Dr. Jim Dahle:
If you pay off a mortgage with a rate of 3% after tax, you're getting a 3% after tax return on that. And given the bonds right now are paying 1% or 2%, well, 3% looks pretty good compared to that. So, you can understand why someone would rather pay down debt, especially high interest debt, than invest in bonds or CDs or whatever fixed income options are available to them.
Dr. Jim Dahle:
If you actually buy into this and go, “Well, I'm not going to carry any bonds at all until my debts are paid off”, I think that's a reasonable thing to do. But basically, what that is going to mean on the asset allocation side is that you're 100% stock and you better be comfortable with that. Because when the market goes down, when the market drops 30%, 40%, 50%, 60%, you're going to lose 60% of your portfolio.
Dr. Jim Dahle:
And that is the time to remind yourself that you put a whole bunch of money into paying down your mortgage and you didn't lose any of that. And so, you got to be able to reassure yourself so you don't panic sell, and sell all those stocks low. Because that's one of the points of having bonds in your portfolio. It’s to moderate the volatility of the portfolio, allow you to rebalance when you're low, et cetera.
Dr. Jim Dahle:
Now it's very hard to rebalance when you're doing this. You're not going to be able to now borrow out more student loans in order to pay it off. You could do that with a mortgage. You could take out a HELOC, you could refinance and pull some money out and buy stocks with it. But by the time you get all the paperwork done, the market may have recovered already.
Dr. Jim Dahle:
So, it's just hard to do. You're basically saying “I'm not going to rebalance until later. Later I'll have bonds in my portfolio, after my debts are gone. and I'm just not going to worry about rebalancing.” Now, is that okay? Yeah, it's probably okay. At least in the first half of your working career. I wouldn't worry too much about that.
Dr. Jim Dahle:
Rebalancing is not that important. People make it sound like if you don't rebalance your whole world's going to end. But when you actually do studies, they show you really only need to rebalance every one to three years. That's the optimal time period to rebalance, because if you are rebalancing sooner than that, you lose out on the effects of momentum.
Dr. Jim Dahle:
And so, rebalancing is not any sort of a guaranteed thing. It's a relatively low priority as investing goes. If you've decided, “You know what? I'm going to pay down the mortgage, because the rate is way better than what I can get in bonds”, you're basically just going to have a 100% stock portfolio and you need to quit worrying about rebalancing until after that mortgage is paid off.
Dr. Jim Dahle:
Yes, you are kind of conflating two different goals. A goal to pay off your mortgage and a goal to arrive at a nest egg to support your retirement. I tend to separate out those two goals in my mind, but if you want to blend them together in order to get a little better return on your fixed income, I think that's totally reasonable. Just don't expect to rebalance until you've accomplished one of those goals.
Dr. Jim Dahle:
Let's bring our guest onto the podcast here. We have a special guest. Somebody I've known actually for a long time. Let's get her on the podcast.
Dr. Jim Dahle:
Our guest today is Jilliene Helman. She is the CEO and founder of Realty Mogul and somebody I met very early in the White Coat Investor journey. We actually walked back together to the conference hotel from a FinCon ignite event in 2013. That's when I met her. And we've actually been partnering with Realty Mogul on some level ever since then. So about eight years, I suppose we've been working together.
Dr. Jim Dahle:
I'm not sure I've ever had her on the podcast. And I don't think that we've necessarily talked a lot about Realty Mogul on the podcast. So, I want to introduce both her and the company to you here for the next few minutes. Jilliene, welcome to the White Coat Investor podcast.
Jilliene Helman:
Thanks so much for having me. It's an honor to do it and shocking that we met almost a decade ago. So here we are now.
Dr. Jim Dahle:
It's pretty crazy. Briefly tell the audience about why you started Realty Mogul and how it's grown over the years.
Jilliene Helman:
Yeah, absolutely. I started Realty Mogul because I grew up in a real estate family. My grandfather was a real estate developer. He developed a property in Los Angeles. My mom was in luxury residential real estate. And I went to work after business school in wealth management. Our wealthiest clients in the wealth management group were real estate investors. And I kept thinking to myself, there's got to be a better way to get an investment in real estate.
Jilliene Helman:
I saw this gap in the market. To have access to commercial real estate opportunities, you had to have a ton of money and a ton of connections, and I wanted to find a way to give more people access to those opportunities. And that's what we do today now at Realty Mogul.
Dr. Jim Dahle:
Okay. Tell us what do you see as the primary value proposition of Realty Mogul? What do investors get from your platform in exchange for the fees they pay?
Jilliene Helman:
Yeah. First and foremost, it's access. We have teams around the country that are scouring through tons and tons and tons of real estate deals and also meeting with a lot of real estate operating partners to try and source what we believe are risk adjusted return transactions in real estate. Strong risk adjusted return transactions.
Jilliene Helman:
Number one, it's access. Number two, it's speed and just ease that crowdfunding platforms like Realty Mogul can provide. If you are a busy doctor, if you are a busy dentist and you've got a day job, you probably don't have enough time to be scouring the country for great real estate opportunities.
Jilliene Helman:
And the goal of Realty Mogul is to come to one place, be able to see a variety of different investment opportunities and either pick specific investments that you're interested in investing in or invest into one of our real estate investment trusts that are a combination of many properties.
Dr. Jim Dahle:
Well, let's talk about those two different types of investments. You've got the individual syndications where you go in with a bunch of other investors and buy one property. Whether it's a large apartment complex or whatever, that's available to accredited investors. And then of course the real estate investment trust, which are more diversified investments available to all investors. Can you tell us about what types of investors should opt for which type of investment?
Jilliene Helman:
Yeah. It's really interesting. We actually have investors who are investing in both the individual offerings. As you mentioned, you can invest in a specific apartment building, a specific office building, a specific self-storage facility, a specific retail shopping center, or you can invest into one of the non-traded REITs, which are pools of these assets.
Jilliene Helman:
But we have investors that are investing in both. The individual assets are limited to accredited investors. The REITs are open to accredited and non-accredited investors. It depends if you're accredited or not. But they serve two different purposes and we have some investors that are investors in both. We have some investors who prefer to make their own decisions and pick their own properties. And we have other investors who prefer to defer that decision to us and invest in one of the REITs to get exposure to a broader scope of properties.
Dr. Jim Dahle:
The accredited investors have the choice. They can do either one. If you're not accredited, I suppose, you're limited to the REITs.
Jilliene Helman:
Exactly.
Dr. Jim Dahle:
All right. Why should people interested in syndications go through Realty Mogul instead of trying to find syndicators directly or going directly to syndicators?
Jilliene Helman:
Because we add value. My philosophy on business is you should get paid if you add value and you shouldn't get paid if you don't add value. And there is an expense of going through Realty Mogul and we try to add value for that expense.
Jilliene Helman:
First of all, it's our people, it's our values. This is some of the crunchy stuff, but we really deeply care about sleeping well at night. We really deeply care about being accountable and owning it and paying attention to the details. We do due diligence on every single property and every single real estate company that uses the Realty Mogul platform.
Jilliene Helman:
We have minimum qualifications, we run reference checks. We actually fly out to the property and we step foot on the property. We're actually walking the neighborhoods. We're walking to comparable properties. A lot of busy professionals don't have the time to do that.
Jilliene Helman:
It's rare that I talked to a Realty Mogul investor who says “I flew from Florida to Texas and I went and walked the property”. But if you ask us at Realty Mogul “Did we go do that?” We're going to say yes. That's part of our fundamental philosophy on investing in real estate.
Jilliene Helman:
The other thing is that we have white glove service. That's one of the things that we think separates us from other real estate crowdfund companies is every accredited investor gets their own dedicated investor relations person. And that individual is meant to help them answer any questions that they have about the platform.
Jilliene Helman:
We believe in picking up the phones, we believe in responding to emails. We believe in doing the due diligence, being very detail oriented. And now it's really interesting because we've got almost 10 years of data.
Jilliene Helman:
Next year will be our 10th year in business, which is remarkable and super, super exciting for the company. But we've captured 10 years of data. A lot of times we'll look at a property that's a couple of miles away from another property that we've either historically underwritten or there's actually been an investment made through the Realty Mogul platform.
Jilliene Helman:
Real estate is one of those unique asset classes where not all data is public. If you're investing in the public stock market, there's public data, there's public filings. Everyone should be on a relatively level playing field. That's not true in real estate. Real estate is a private market. People go to great lengths to keep their information private and hidden.
Jilliene Helman:
As an example, in Texas, it's a non-disclosure state. So you don't actually have to tell anybody what you paid for the property. If you don't know what other people are paying for the property, how do you know if you're getting a good deal? How do you know if you're overpaying for the property? How do you know if you're right in that sweet spot?
Jilliene Helman:
For us, Dallas is our largest market. 22 properties in Dallas through the Realty Mogul platform have been invested in, and we have data on all of those properties. So, if another property comes up in Dallas, we're probably going to have some proprietary private information that your average individual investor just wouldn't have.
Dr. Jim Dahle:
What's a typical syndication deal look like? What's on the platform? What's the minimum investment there? What are the Realty Mogul level fees?
Jilliene Helman:
Yeah. Typically, if you're going to invest in one of the REITs, the minimum investment is $5,000. It's meant to be very approachable for people to get invested in real estate and just try us out and give it a shot. On the individual assets, it's $35,000 minimum typically. They range a little bit but more often than not, it's a $35,000 minimum.
Jilliene Helman:
Realty mobile charges a 1% fee on an annual basis. We stay involved for the life of the transaction as the administrative services provider. What that means is that if you have a question, you call us, we're going to pick up the phone, we're going to be able to help you.
Jilliene Helman:
What that means is that you come to your Realty Mogul platform. You're going to get quarterly reporting. You're going to get your annual K-1. And you're going to have a dedicated person who you can go to if you have questions about things.
Jilliene Helman:
Obviously, we can't give legal advice, we can't give tax advice, but we can point you in the right direction. And we try to be very helpful to these investors. Those are the minimums.
Dr. Jim Dahle:
And what's the difference between Mogul REIT 1 and Mogul REIT 2? How should an investor choose between them?
Jilliene Helman:
Yeah. We actually just renamed the REITs, which is really, really exciting. And you've heard it here first, honestly, it'll be rolled out in short order. But we renamed the first REIT, The Income REIT. And we renamed the second REIT, The Apartment Growth REIT to really better help investors identify what those REITs actually do.
Jilliene Helman:
The first REIT invest in different asset classes. Apartment buildings, office buildings, self-storage. It has a mandate to invest across asset classes. And we're really focused on looking to generate income out of that REIT.
Jilliene Helman:
Since the inception of that REIT, we've done over, I think we're at 56 consecutive distributions in that REIT, and we've paid at 6% annualized or greater. So, every distribution has been at least 6%. Sometimes it's been higher than that, but at least 6%.
And we're really focused on print transactions that can generate income back to the investor.
Jilliene Helman:
The second REIT, which is the Apartment Growth REIT, is only multifamily. Only apartment buildings. There's no office, there's no self-storage, there's no retail. Only multifamily.
Jilliene Helman:
And we're more focused on creating longer term value. So that REIT is also doing a distribution. It's currently distributed at 4.5%. And it's been distributing every quarter since inception at 4.5%. But we're also looking to create value there.
Jilliene Helman:
Our hope is that that underlying return is going to be a lot higher than 4.5% by creating value. And what we mean by that is let's say that we invest in an apartment building and rents are $1,000 a unit. We invest $5,000 into that unit. We redo the paint, we redo the carpet, we redo the cabinets. We redo the lighting. We add a washer and dryer as an example of what a renovation might look like. And we take rents from $1,000 a unit to $1,200 a unit. That's an example of a value-add strategy. And that's what the apartment growth REIT focuses on.
Dr. Jim Dahle:
Tell us about the liquidity of the REITs. How do you get your money out and how long do you got to wait and how quickly can you take it out, et cetera?
Jilliene Helman:
Yeah. I’ll start this with the caveat that if you're an investor who's looking for liquidity, it's probably not the right vehicle for you. You can find that in the public stock market. These are not liquid assets or liquid vehicles. They're not liquid vehicles because they're not liquid assets. We actually have to go sell a property and we don't ever want to be forced to sell a property. We want to be able to sell properties when we think it's the right time in the market to sell the property.
Jilliene Helman:
That being said, we do have a redemption program. There are no redemptions for the first year. So, there's a lockup for the first 12 months. And then there's a discount for the first three years. So, you get 97%, 98% and 99% of the net asset value of the REIT for your one-year, two-year, three-year.
Jilliene Helman:
But again, the liquidity is dependent on ensuring we have capital, ensuring we can sell an asset or we've chosen to sell an asset. They're really meant to be vehicles for the long term.
Jilliene Helman:
One of the key lessons that I learned coming out of the wealth management industry, which is where I spent my career, the majority of my career prior to starting Realty Mogul is real estate is a game best played long. And what I mean by that is real estate can be a great way to stabilize your portfolio if you're willing to invest for the long term. So, we are long-term thinkers in the REITs.
Dr. Jim Dahle:
You mentioned publicly traded REITs. Obviously, they have a little bit more liquidity. What do you see as the advantage of a smaller private REIT instead of a large publicly traded REIT?
Jilliene Helman:
Two things. One, because you don't have the same liquidity that you have in the public markets, you should be getting a liquidity premium. You should be getting paid more for that illiquidity.
Jilliene Helman:
But number two, which is probably more important, is a lot of these large public REITs, they have a lot of capital and so they have to chase much larger deals. They won't invest in a deal less than 50 or 60 or 70 or 80 or some hundred million dollars. Like the Blackstone REITs. They're off doing 3, 4 billion transactions, and it can be hard to find a mismatch in pricing when you start to compete in that sort of true private equity world.
Jilliene Helman:
And so, we still believe in this concept of “Go big by going small”. I still believe that there's more mispricing in the smaller middle tier assets than there are in the hundred-million-dollar assets. And that'll take time to prove out, but it's something that we believe for a long time and something that gets us excited about the size of transaction that we invest in out of both REIT 1 and REIT 2.
Dr. Jim Dahle:
Who do you see as your primary competitors and why should an investor choose Realty Mogul over your competitors?
Jilliene Helman:
It depends. If you're interested in investing in individual properties, there's certain companies that do that. If you're interested in investing in REITs, there's obviously the public companies and there's also some private companies like our company. It's going to be a corny answer. I'll just caveat with that.
Jilliene Helman:
But for us, it comes down to the people and it comes down to the culture. We deeply, deeply care about our investors. We deeply care about our employees at Realty Mogul because they're the ones who are empowered to take care of our investors. And it comes down to our values. Things like sleeping well at night. Things like details matter. Things like being accountable.
Jilliene Helman:
One of the tracking items that I have as the CEO is what percentage of phone calls are we picking up within two rings? We want to be there for investors. It’s a digital platform, but there are other companies who have said, “We're going to truly be a digital platform. We're not going to have individual reps that are available for people to talk to”. And I don't think that's the right approach.
Jilliene Helman:
I think the right approach is if you're going to go to a website and invest $100,000 or $200,000, we have many, many clients who have invested millions of dollars with us. There needs to be a human being on the other side of that call. There needs to be the confidence that someone has actually flown to that property and put step foot on that property and done that due diligence. And some of our competitors don't do that. They never see the property. They don't pick up the phones. And that's just never been the company that we want to build.
Jilliene Helman:
I think that our white glove service really sets us apart from other competitors in this space. In addition to just our culture of we don't have to be the biggest. One of the things, if you sit in on an internal meeting with me, I'll say to our team, we don't have to be the biggest.
Jilliene Helman:
Our job is not to be the biggest platform out there. Our job is to source what we believe are the best risk adjusted returns in real estate at that period of time. And that's really what has been driving our mission and driving our day-to-day activities, which is different from some of our competitors. We're in this for the long haul. Real estate is a game best played long.
Dr. Jim Dahle:
Yeah, I absolutely agree with that. We've been talking with Jilliene Helman, the CEO and founder of Realty Mogul. You can get more information about Realty Mogul at whitecoatinvestor.com/realtymogul.
Dr. Jim Dahle:
I've known them for a long time. In fact, this is one of the few syndications I've been involved with that has gone completely round trip. It was an apartment building in Indianapolis, I believe. I think it went round trip a year or two ago after owning it for five or six or seven years.
Dr. Jim Dahle:
That's one of the interesting things about these long-term real estate investments is you really don't know how they're going to turn out until you get to the end of them. And so, it's nice to have companies that have been around for a while and you can actually see a track record of roundtrip investments and how they've done. I appreciate that. I appreciate you coming on the White Coat Investor podcast.
Jilliene Helman:
Thanks for having me.
Dr. Jim Dahle:
All right. It was great to chat with Julliene again. whitecoatinvestor.com/realtymogul if you want more information about that. Let's get into our next question. This one's from Tom. It's about the fixed income portion of an asset allocation.
Tom:
Hi, Dr. Dahle. This is Tom from California. I'm interested in your advice regarding the composition of a fixed income portion of my portfolio. I'm currently split within my tax deferred accounts between the US total bond market index and the international total bond market index, both by Vanguard.
Tom:
My question is given the low rates of interest currently, should I consider adding in a portion of utilities index ETF or an equity income ETF into the fixed income portion of my portfolio? Or does that introduce an unacceptable level of additional volatility? That's my question. Thanks. Bye.
Dr. Jim Dahle:
All right. Good question, Tom. Listen, I get it. Interest rates are low. Inflation's now a little higher. Inflation's over 5% and you're still only making 1% or 2% on bonds and CDs and savings accounts. It really sucks to be losing money on a real basis from the fixed income portion of your portfolio.
Dr. Jim Dahle:
But you got to ask yourself, “Why do I have a fixed income portion of my portfolio? Am I trying to get high returns out of this portion of the portfolio?” And chances are the answer is no.
Dr. Jim Dahle:
The old saying is that more money has been lost chasing yields than has been lost at the point of a gun. And that's true, right? Because we all wish we could make more without taking on more risk. But the truth is if you want to make more, you got to take on more risk.
Dr. Jim Dahle:
So, you're talking about adding utilities. Utilities are stocks, they are not bonds. If you add utilities to your portfolio and replace bonds with it, you are taking on more risk. You have a more aggressive portfolio. Now I get why people do that. We've had a few downturns in the last decade, but for the most part, the market has been rising like crazy over the last decade.
Dr. Jim Dahle:
You got to ask yourself, “Do I really want to be taking more risk in that sort of scenario?” Maybe in March, 2009 that was a good idea, but guess what? Nobody was interested in taking on a more aggressive asset allocation in March of 2009. They were all trying to decide whether they could justify plan B and having more of their money in fixed income and not actually rebalancing from their bonds into stocks, right? That's what people were interested in at the depths of that bear market.
Dr. Jim Dahle:
And so, here we are probably closer to the top than the bottom of a market. Crystal ball is cloudy as always, of course. And people are asking, “Should I take on more risk? Should I take on more risks? Should I borrow money to invest? Should I use leveraged ETFs to invest? Should I put more money into speculative assets like cryptocurrencies to invest to get even higher returns?” At a certain point, you got to go, “This doesn't make sense. We're ramping up the risk as the risk of loss increases”.
Dr. Jim Dahle:
You own bonds in your portfolio for a reason. Hopefully your written investment plan recorded that reason. And you can go back and read it at times like these, when you are tempted to change your plan. Staying the course is good advice, both at market bottoms and at market tops.
Dr. Jim Dahle:
I recommend if your plan was 20% in bonds or whatever it is, you keep your 20% in bonds. That's what I'm doing. In fact, just before I recorded this episode, I just put a whole bunch of money into bonds because stocks have done great this year.
Dr. Jim Dahle:
And so, a whole bunch of this month's investment went into bonds. I'm still buying them. Yes, I know I'm only going to make 1% or 2% or 3% on them. And I'm okay with that. That's why I have them in my portfolio. It’s for those times like 2008, when I'm really glad I had them in my portfolio. I hope that's helpful.
Dr. Jim Dahle:
If you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to www.whitecoatinvestor.com/reopportunities to sign up today.You can do this and The White Coat Investor can help.
Dr. Jim Dahle:
Don't forget about the free monthly newsletter, whitecoatinvestor.com/free-monthly-newsletter. You can also get the real estate investing opportunities there.
Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review and told your friends about the podcast. The most recent one comes in from Megan who called it a great resource, five stars. “Dr. Dahle does such a good job covering a variety of topics. The guests offer valuable insight as well. I would recommend this podcast to anyone looking to be inspired and informed”.
Dr. Jim Dahle:
I also recommend it. Thanks for telling your friends about it and thanks for what you do.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. See you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
