Re: bond vs. bond funds
Only if you hold to maturity. But if interest rates are higher and you need to sell the bond on the secondary market, you may not get face value.
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For folks interested, a good source with lots of information about investments is bogleheads.org. It has a lot of experienced investors and a lot of resources. I highly recommend the site.
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This is correct - and you know what you do with bonds - you hold them to call or maturity.
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It might be good take a step back and clarify what the OP’s goals are for the investment? Rental, bond / bond fund, and mutual funds are completely different investments, with completely different potential benefits and different potential risks. All could be good options for certain investors in certain situations. And all could be bad options for certain investors in certain situations. A mixture may be a better option than having all of any one type. There is not a simple one size fits all solution.
Things to consider include what is your expected time horizon on the investment, and is that time horizon uncertain? How do you prioritize having an expected average return far above inflation vs having a low risk of a short-term loss? Are there any particular scenarios you want the investment to protect against, such as stock market crash or high inflation? Are there any tax situations you would like to improve or avoid? Are you okay with the potential time commitment of a rental and taking the time to learn more about becoming a successful landlord? What does the rest of your portfolio besides this investment look like?
The paper at https://www.frbsf.org/wp-content/uploads/wp2017-25.pdf compares historical risk-return profile all 3 types of investments. It found that rentals had an excellent historical risk-return profile compared to alternative investments, but that is far from the only relevant criteria.
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It’s common for wealthy persons to own both individual bonds and bond funds. Best option depends on their goals for the bonds (duration risk, interest risk, diversity, liquidity vs hold to maturity, time horizon, …), as well as type of bonds. I agree that municipal bonds often lend themselves to choosing individual bonds, and many wealthy persons favor municipal bonds for tax benefits, with high income.
However, bonds typically only compose a small minority of portfolio among wealthy persons. For example, the chart below shows an analysis of average portfolio composition of high net worth investors, by stated investment objective. For all investment objectives, the largest portion of portfolio was equities, followed by real estate. I expect prioritizing high expected average return investments contributes to how they became high net worth investors.
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It’s true - I bought two stocks in 1998 that have returned - 50 and 30 fold - so they are a large portion of my portfolio. And I have significant 401Ks that are in equities.
So of course, people will have more of what they had - but in this case, the OP is talking about investing money for income - and that’s what they wealthy buy - the Donald recently, that slime Bernie Madoff, the Walton Family, Buffet. I remember as a kid growing up in San Diego, Ray Kroc (owner of the Padres, founder of Mickey Ds was espousing the benefits of bonds).
Anyway, if OP wants a near risk free way, this is it in regards to risk/rate.
Now, in my IRA (not 401K), I do have bonds but not munis. I buy federal agency bonds - why - a much higher rate and I’m not paying taxes.
But I digress.
I’ve send the OP some info - hopefully it makes sense and if it’s good for them, great. And if not, great too.
Thanks
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This has all been so helpful - thanks again!
I’ve been very slowly educating myself on retirement investment issues over the past four years and we talked briefly to a planner two years ago.
But this sudden removal of my husband from the work force has pushed the need for thorough understanding into uber high gear!
I will need to do a deep dive on all of this so I am prepared when we (soon) talk to another planner (seeking a flat fee person with specific expertise in retirement).
I clearly have a ways to go - this info + the bogleheads suggestion are great starting points! (four years ago the bogleheads site was absolutely overwhelming with the acronyms and inside baseball talk…think I’m better prepared now!).
Again - appreciate the perspectives!
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My husband wants to retire like today and I keep telling him he could make a decent income doing this. He knows how to do everything (no choice as our house is almost 300 years old) and we live in an area where no one knows how nor wants to do any of this type of work.
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You are very lucky to have a handyman. We count our blessings too that we have one (he just installed our new built in once/microwave yesterday and touched up the cabinets). YES if he would do it he could make a lot of $!
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Neither does owning real estate. Ask anyone who went underwater in 2008.
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The best cash flow we ever had on a rental was when our property was under water during that era.
Like with securities, if there is a chance you would have to sell RE in a down market, you should definitely choose other investment vehicles.
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We have discussed a lot of income options with our CFP, including real estate, and munis.
I would suggest that anyone thinking about taking their savings and investing in anything consult with a CFP to get their read on this. My opinion.
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Was just talking with relatives the other day who made the mistake of giving one of their siblings investment advice. He told his sister to put the $ in something (I don’t recall what) and HOLD it. But, unfortunately, it was a few mos before 9/11. And then things tanked. And she got scared and sold at the bottom. We also have a relative who likes to invest in riskier stocks, thinking he is going to make $. He has a talent for buying high and selling low b/c he really doesn’t have the knowledge or the cash to be doing any of this kind of investing. But no one can tell him what to do and he makes bad financial decisions. So it goes.
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Yes, but only if it is a fee based, rather than a commission based CFP. Our former financial planner discouraged us from continuing to own rentals. He parroted that re only has a 4% average return. That number comes from the average annual appreciation, but of course does not take into account that someone else is buying your property, that the appreciation is on a value that is (assuming a 25% down payment) 4 x your investment, and that your principle and interest payment will stay the same for the life of the loan while the average market rents will increase. He also could not explain why his VERY detailed financial calculators projected our financial outlook was far better when we kept the properties as opposed to selling them and investing the equity, despite the fact we used extremely conservative assumptions for appreciation, rent increases and tax rates.
At that point, I asked him how many rental properties he owned. His answer? Nine. 
We had a fee based CFP a month later.
Investing in RE is DEFINITELY not for the faint of heart. The learning curve alone can be a major obstacle, but for us the upsides have absolutely been worth the hassle.
In addition to a CFP, anyone considering investing in RE should definitely also consult with a CPA, even if you will do your own taxes.
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Ehhh - financial planners have their “preferences” like everyone else.
And everyone knows - over time, very few can pick stocks - that includes the’ ‘pros’. And most who chase the hot name end up with a lower priced security. I’m the king of buying high and not selling - and then it goes lower and lower. Planners choose funds, class of funds, etc. Sometimes they are right. Sometimes they aren’t. Sometimes they can better answer questions. Sometimes their answers are incorrect or will lead to underperformance.
There are certain things that are obvious - a planner isn’t needed. A planner has their proclivities and will turn you away, even from the obvious, for reasons of volatility or diversification..
My friend who died in 9/11 - his daughter has a trust, which I’m co trustee. She had enough money 20+ years ago - blood money from the government unfortunately, but if it was invested purely in munis, she’d never have to work a day in her life. Yes, crazy to put a 1 year old in munis but at $100000, 20 years later, she’d have been golden.
But alas, there’s a money management firm involved (.8%) - and yes, she’s diversified as they do with their algorithms, in every type of stock, bond, and other fund known to man etc. and a few hundred thousand has been pulled out over the years but the account has generally stayed flat the entire 20+ years.
Did they have lower volatility, etc. I don’t know how to manage that but all the reports show so.
But now she’ll have to work…..of course, as a now 25 year old, she’s going to work…but wouldn’t it have been nice if she had double the money or more - and it consistently generated income.
Their advice - frankly - I don’t think was good. M opinion. The mom trusts them implicitly and that’s what matters.
They are a sounding board, they may be knowledgeable about things more than most, but just because you earned a certification doesn’t mean they are the be all and end all.
Everyone is different.
My goal is to have enough income to continue to grow my principal. Others have a growth desire.
It’s not brain surgery - and CFPs can’t assure that with all their modeling - that btw - you can easily find online as well.
So I’ll disagree with the statement as an absolute - but everyone, of course, is entitled to do as they want.
CFPs or any advisor can be a safety blanket for those who don’t want to learn…or aren’t secure in their decision making and want a validation or further ideas.
But getting a CFP read is not necessary (it’s optional) and one won’t necessarily get the most optimal advice.
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Nobody has a crystal ball and nobody can predict the future- but there is a reason that these certifications exist. There is a reason that someone with 5K in savings can’t buy pork futures or invest in a Private Equity deal. The industry is highly regulated to protect people who are NOT financial experts from shady advice and just plain ignorant advice.
I don’t know why you’d discourage someone who is planning for retirement from getting advice from someone who has training, and has oversight from their firm’s compliance officer and general counsel (which you do not). Nobody can force you to take their advice, but at a minimum, they aren’t going to tell you to invest like Ray Kroc or the Walton family (which is super dumb advice- the founders of Walmart have over 50 full time people in their various family offices; experts in foreign exchange, experts in tax, experts in cash management, experts in insurance, etc. Investing like the mega wealthy is terrible advice for the typical retiree who will likely have a tax preparer spend 10 hours a year worrying about their financial situation, not an entire team, supervised by a Chief Investment Officer, who spend 45 hours a week doing the same.
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I didn’t say not to. I noted that people are entitled to do as they want - but saying to see a CFP because that’s the right thing or that will help you - is frankly - not always the best thing.
For those who want advice/guidance, then yes, go talk to someone - CFP or otherwise.
I didn’t say anything different.
But those saying it’s an absolute, I’m simply saying it’s not.
What amazes me is that - someone buying a television - will learn everything about it - a $1,000 investment - why this one is better than that one, etc….back in the day it was Plasma vs. LCD.
But they had $1 million in the 401k, and couldn’t tell you the difference between a stock and bond.
I would learn.
I noted - if someone wants to see a CFP, then they should. You do you.
But seeing a CFP doesn’t mean you’re getting great guidance - it’s not a panacea.
It’s all I said.
Thank you
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We had a Dean Witter stockbroker for awhile back in the 1980s but didn’t do very well following his investment suggestions. I moved us over to Schwab and have done much better following Bogleheads.
At one point, I had an employer who offered a benefit of some sort of counseling. I selected financial counseling and employer paid the fee only counselor. We talked a bit and she ran some simulations and made some recommendations. She said we were on track to be OK—20 years ago
To plan for retirement (a few years before H retired as breadwinner), I backtested our spending for last few years via tax returns, checkbooks & CC statements. I then projected our budget forward based on categories which would remain and those which would disappear and new ones that may expand. It convinced us we would be financially comfortable in retirement and we definitely have been for a decade & counting now.
We have not paid for any CFP—if you hire any, be sure they are a fiduciary and even then you have to do due diligence.
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I have owned several rental properties over the years. Two were properties that had no buyers when I wanted to sell, and as fate had it, I had great tenants both times. We all understood where each other stood - both why I was renting and why they were renting. The others were vacation homes which we didn’t use for the full season and which we rented by the week to help cover costs. We had lots of wonderful renters, but a couple of real duds – to the point that we would now rather have the property sit vacant for a month of peak season than rent.
The people I know who are happiest as landlords can do much of their own maintenance (like you) and live nearby. They often have more than one leased property (ie, a building with a few units). Some have bought fixer-uppers.
You do need to know the local laws. Many good laws – preventing discrimination, protecting against slumlord conditions – can also make it difficult to get rid of or avoid a bad tenant.
With that said, it really depends on your motives. There are certainly easier ways of investing. But if you think you might want real estate in a certain locale in the future that you or your family aren’t ready to occupy, it can be a good way to “hold your ground” for now.
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I agree that a bad tenant or more can erase a lot of the benefits of the good tenants. The bad tenants we had definitely made our property less attractive to buyers, but in the end, the neighborhood had also changed in the decades since H had lived there as well. Real estate is also not very liquid and not as easy to switch to another investment if you tire of it without a lot of considerations. I’d suggest you do your due diligence if you are thinking of wading into real estate.
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