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I've searched this board (as well as I could) and this may have been addressed and but I couldn't easily find this information.

In thinking about various asset classes where does fully paid off rental property fall? Would that part of a retirement portfolio be considered in a manner similar to bonds? The property is a significant percentage of our retirement. Should we have more stocks to balance out this relatively stable (in this area of the country) investment?

Thanks for any suggestions,

Dr D.
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That is actually a very tricky question, since there is some risk involved in renting property. Your tenant may not pay, and/or may cause significant damage to the property. In addition, the older you get the more likely it is that if work needs to be done on the property you will have to pay somebody else to do it.

So I do not know of any general way to answer that question.

So far as asset allocation is concerned, I do not believe in holding some fixed % mix of assets. Time the stock market, so that you are out of it in the bad times and in it during the good times. Watch the interest rates to know when to be in bonds or not.

There was this guy at Citibank who had a desk in the lobby of a local branch with a sign that said he could give financial advice. At a time when the Fed was raising interest rates, he put his clients into long term bonds. Obviously, they lost money, and he said he felt really bad about it. If they held those bonds to maturity, they missed some really nice gains in the stock market the next year, and if they sold they lost money.
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drdm asks,

In thinking about various asset classes where does fully paid off rental property fall? Would that part of a retirement portfolio be considered in a manner similar to bonds? The property is aIn thinking about various asset classes where does fully paid off rental property fall? Would that part of a retirement portfolio be considered in a manner similar to bonds? The property is a significant percentage of our retirement. Should we have more stocks to balance out this relatively stable (in this area of the country) investment?. Should we have more stocks to balance out this relatively stable (in this area of the country) investment?

It depends what you mean by "a significant percentage of our retirement".

Most diversified retirement portfolios would include a 5%-10% allocation to REITs (Real Estate Investment Trusts) You could make an argument for replacing the REIT allocation with an individual rental property (though owning one property vs. a piece of hundreds of properties located in multiple areas is more risky.)

If the rental property is more than 10% of the value of your portfolio, I'd consider it more of a dividend-paying stock than a bond and reduce my equity allocation.

intercst
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... Time the stock market, so that you are out of it in the bad times and in it during the good times....

Hi All!

All due respect to the poster, but this sounds so easy....and is SO very hard to do, otherwise, so many folks ("pros" included ) wouldn't have been caught with their pants down in 2008-2009.

It is far better, IMHO, to "time" individual stocks by waiting for your price....and in the context of a long-range financial plan tailored to your specific financial circumstances, goals and risk tolerances.....and if the general market movements aid you in your quest to buy good stocks at great prices, so much the better.

Now, that being said about the stock market, I do agree that the bond market generally has nowhere to go but flat/down ( i.e. interest rates go up, bond prices drop ) in the longer term....the only problem is that I don't know how long it will stay flat.

My approach?

http://boards.fool.com/hi-mattyfatbags-here-is-a-copy-of-a-r...

Rather than continuing to search for the "right way" to invest, try to find the right way to invest...for you. ;-)

Cheers!
Murph
Home Fool
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Most investors think of real estate as an asset class all of its own. It is more like equity than fixed income, however, so I would think that if you feel you are overweighted you should balance with bonds rather than stocks.

Bob
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I am not sure why people think that timing the market is so hard. It is certainly the case that nobody can (and so far as I know nobody claims to) get in at the absolute bottom and out at the absolute top. Nevertheless, the market does tend to trend. Once a trend has been established, one should go with it until it reverses itself. Nobody is right all of the time, just as nobody can buy and sell every stock at the right time for it.

If you look at charts of the major averages, both domestic and foreign, you can see broad trends. Technical analysis, particularly moving average crossovers and individual exponential moving averages, will aid in making decisions. Not all decisions are going to be right, but if you are careful you will do better than buy and hold. Just trading IWM off the (8,55) exponential moving average crossover keeps you out of the market in most of the bad times, and does better than buy and hold, even though there are some losing trades.

Since I trade mechanical systems, I look at the chart of the results of the systems, and buy into the systems only when the trend is up. I also look at the major averages to see how they are doing - that is if they confirm what I am seeing in the mechanical systems.

The people on the Mechanical Investing Board have done a lot of work on market timing, and it is definitely worth looking at what they have done, and are doing.

So far as "the Pros" being "caught with their pants down in 2008-2009", that simple trade on IWM by the (8,55) EMA crossover gained about 15% during those 2 years, whereas IWM was down about the same amount during that period. Those results do not include trading costs, but there are only 11 trades, so on a $20,000 account the total cost is about .5%, depending on what discount broker you use.

I don't know what (or if) "the Pros" were thinking.
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So far as "the Pros" being "caught with their pants down in 2008-2009", that simple trade on IWM by the (8,55) EMA crossover gained about 15% during those 2 years, whereas IWM was down about the same amount during that period. Those results do not include trading costs, but there are only 11 trades, so on a $20,000 account the total cost is about .5%, depending on what discount broker you use.

I don't know what (or if) "the Pros" were thinking.


maybe depends on your def. of 'Pro' ..

i still had an account at a full-serve borker that my Mom had left me.
most of it in managed funds..

if by 'Pro', one means the fund managers ,i don't know what they were thinking .

if 'Pro' is full-on brokers -- they were thinking it was a 'minor correction'.
i think every week it would go down, i call and ask, "should we sell?"
"O no. we've hit bottom"




( i'm less 'mechanical' and more 'seat of the pants' ..but agree with you about Timing )
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I too would not try to fit your rental(s) to some kind of asset class to be rebalanced periodically as the tide on a particular assets comes in and goes out.

Rather, I'd look at net rental income as you look at Social Security or an employee pension...its a source of cash flow. What makes it a bit different is the net cash flow to you could vary, depending on occupancy rates, unexpected maintenance costs, etc. So I would pick a conservative 'average' net monthly income you'd expect from your rental, while keeping a rental 'emergency fund' to cover unexpected expenses...and then replace it if you have to use it.

Lets look at an example, where you and spouse will be drawing, combined, $30,000 from SS and a gross of $35,000 from your rentals, with $10,000 in rental expenses for a net of $25,000:

Required Gross (before tax) househodl income in retirement: $100,000
Social Security:.............................................-30,000
Net Rental Income: ..........................................-25,000
Required from investments: ...................................45,000

Now, asset allocate investments to generate the $45,000/yr you require.

BruceM
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Hi Doc,

In thinking about various asset classes where does fully paid off rental property fall? Would that part of a retirement portfolio be considered in a manner similar to bonds?

Income real estate is indeed its own class... and one most folks fail to fulfill and attempt to replace with alternatives & synthetic analogues. If you feel you are overweighted in real estate as equity, you can rebalance without an all-or-none sales event by simply leveraging the appropriate amount of equity to rebalance the cash value elsewhere. Obviously, long-term real estate leverage (even on investment property) is at lifetime lows, and fairly easy to outperform in returns from similarly safe alternative investments, so this should not be a hurdle to your planning.

As far as a prognosis on the validity of holding rental income assets (regardless leveraged or not,) I suspect we are unlikely to see even up to an additional 10% softening in the less stable of markets... and more likely a flattened future face value appreciation overall for probably 10-20 years plus.

YIELD, on the other hand, is just at the beginning of what is most likely to be a significant bullmarket, both in upward reach and longevity. The longer we go before a non-government subprime mortgage industry is allowed to re-sprout, the longer & stronger the rental demand market will be. Your income property will very likely outperform virtually any & every safe alternative income vehicle you own.

Hope this is helpful.
Dave Donhoff
Leverage Planner
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if by 'Pro', one means the fund managers ,i don't know what they were thinking .

if 'Pro' is full-on brokers -- they were thinking it was a 'minor correction'. i think every week it would go down, i call and ask, "should we sell?" "O no. we've hit bottom"


Well, here is the thing. A mutual fund manager gets a cut of the assets under management. If the market is going down, he would rather have a cut of a declining balance than nothing at all. So he will never tell you to sell. That is really simple. And of course, the broker gets some kind of fee for generously allowing you to hold the fund in your account. So those guys are not likely to tell you to sell either.

If you want good, objective advice, do not ask a mutual fund manager or a broker.

Then there is the question: If you rightly know that one should sell, then why doesn't the mutual fund manager at least take a defensive position by buying some puts? Or in addition, selling some calls? Well, it may not be in the terms and conditions of the fund, but who made those up?
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If you want good, objective advice, do not ask a mutual fund manager or a broker.


NOW you tell me <G>

i finally just said, Move everything to my personal (Schwab) acct and close this one .. when it got moved ,i sold chunks



Then there is the question: If you rightly know that one should sell, then why doesn't the mutual fund manager at least take a defensive position by buying some puts?


i think the broker honestly believed it was just a blip, a short-term minor correction. Mom &/or i had dealt with her nearly 20yrs and she always seemed honest and conservative ..but i could be wrong
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Thanks very much to all for advice about rental property. I still can't see my way to clear to a big investment in bonds at this time, given the economic climate but clearly I need to do some work to calculate my retirement needs and how I plan to meet them.

Dr. D
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Well, here is the thing. A mutual fund manager gets a cut of the assets under management. If the market is going down, he would rather have a cut of a declining balance than nothing at all. So he will never tell you to sell. That is really simple.

Actually, a bit too simple. Managers are generally restricted to investing based on their prospectus.

An equity index fund manager CAN'T simple go to cash because it would be a violation of their prospectus. If the manager was wrong and the equity market continued to grow instead of contract, the manager and the company would be sued.

Most funds can no more go to all cash than all cash funds can simply go all stock.
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In thinking about various asset classes where does fully paid off rental property fall?

I would think of it as a REIT.

JLC
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Managers are generally restricted to investing based on their prospectus.


True enough, but where does the prospectus come from? In the case of an index fund, clearly the fund has to follow the index. However other funds can certainly have a prospectus that allows a lot of cash and also hedging with options. Unfortunately, they do not, for the most part. One exception is "long-short" funds, but these have not performed very well, at least when I last looked at them.
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True enough, but where does the prospectus come from? In the case of an index fund, clearly the fund has to follow the index. However other funds can certainly have a prospectus that allows a lot of cash and also hedging with options. Unfortunately, they do not, for the most part. One exception is "long-short" funds, but these have not performed very well, at least when I last looked at them.


Investors have to know what they are buying and not be subjected to the risk of the whim of the manager. There are absolute return funds that generally have the freedom to go anywhere but if you are buying a fund (or more accurately a fund manager) to manage 25% of your portfolio that you want invested in US large cap growth, you ABSOLUTELY do not want to wake up one morning and find out that the manager has the majority of their holdings in Europe because they decided they wanted to be a contrarian.
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dD

I need to do some work to calculate my retirement needs and how I plan to meet them.

I agree w/ the property is Real Estate - which is an asset class. Also agree w/ Dave on the amount in the portfolio relative to an "asset allocation" can be adjusted. Your statement above is really a key thought.
Until you understand that, what is the point of "what asset class" is it and what percent do you need?

d(Real Estate)/dT
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