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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Got $2,000,000. You're gonna grow for ten years. How do you wanna grow it? There's more risk, but there's more growth potential. Welcome to the Retire On Time podcast, a show all about your retirement questions.
Mike:Say goodbye to the oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty. Now that said, remember, it's just a show. It's not financial advice. It's your research.
Mike:As always, you can text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. When would private equity play a role in your retirement portfolio?
Mike:Generally speaking, I think from a liquidity issue standpoint, private equity is more of a long term play. So if you have a legacy intention and or you know you don't need to touch a part of your portfolio for at least ten to fifteen years, then private equity may make sense.
David:And so tell us what is private equity exactly? What are you investing in?
Mike:So most of the equities markets, as in you're buying a share of a company Okay. Is private. The American stock market is private. It's not public. So the stuff that you're trading on Robinhood or or Schwab or whatever on your phone, those are publicly traded companies.
Mike:Mhmm. And though they are massive, there are more privately traded companies. Oh. Okay. They just they can't be bothered by public opinion and the public stock market and how the public can really do a number on your your company.
Mike:So when you think of a private company, what basically is going on is that you you'd have to go in or be invited to or have access to shares that are sold to you through a broker or some sort of mechanism, and I'm being kind of general on that. But you're you're basically accredited and you can buy into a share that's illiquid, so you can't just sell it whenever you want. No. They want sophisticated long term investors that aren't gonna say, oh, well, you know, so and so happened and I'm out. They wanna kind of restrict you so they're not as subject to the volatility of the whims of the public.
David:Okay. And so, yeah, that's a major differentiator then between public companies and private.
Mike:Yeah. Private is well, private companies might have a delay on valuing their positions correctly versus public. It's pretty quick. Uh-huh. It's it's pretty aggressive.
Mike:So that's the private there's in my mind, there's really three categories when we look at private placement.
David:Okay.
Mike:You've got private equity buying shares of a company. So if you wanted to buy shares into x AI or shares of SpaceX. K? There are shares out there.
David:Mhmm.
Mike:But you can't buy on the public market. It's pre IPO. It's the public offering. That's when it becomes a publicly traded company like Tesla's a publicly traded company. K?
Mike:So if you want to buy them, you'd have to go through a fund, like an interval fund, that has already acquired shares of those companies. Think of like Cathie Wood's Ark. Not the Ark ETF that's publicly traded, but the private placement version of it. So you can get exposure to these companies, but you you have more hoops to jump through to get access to
David:it. Okay.
Mike:Private equity is a wonderful thing. There's higher risk and less liquidity. Uh-huh. Then you've got private credit. So think of private placements on bonds.
Mike:Okay. So this is how I like to think about it. All of the money that couldn't get or all the money that people needed, they they couldn't get from a bank. They could just go to private equity or private credit Mhmm. And say, hey, I need some money, and I'll pay it back this rate.
Mike:And is everyone okay with that? And then you got private credit.
David:Okay. Okay.
Mike:I think they're riskier than your typical bond funds that would be investment grade, but, you know, every everyone's different and I shouldn't gloss over it all. There are some good ones, there are some bad ones, but I you just have to ask yourself, why do they go this route? And why are they paying that rate? The higher the coupon rate, the higher the risk.
David:To to sort of incentivize or reward people for taking that risk, they get a higher rate.
Mike:Yeah. Yeah. But there's and there's liquidity issues, so you're supposed to be a more sophisticated investor. You're taking on more risk, but you ought to know what you're getting into. Mhmm.
Mike:And then one of the problems with, I think, private placement is some people are sophisticated and understand what they're getting into, and some people just inherited a lot of money. Now they qualify, and they wanna be fancy and smart, so they buy things they don't understand. Oh. Right. You can do just fine in the public markets.
Mike:And then you've got the last category, which is the real estate private placement. So these are like think of think of like a real estate fund. You have your common stock and you might buy like a preferred stock. That's private placements in some sense. You have to go through a financial adviser to get, but you're getting the payouts first before the common stock stockholders.
David:Okay.
Mike:If there's bankruptcy or anything were to happen, you are above the priority list for the common stockholders. So you have a more advantageous position to be in. There's a contract on what you're supposed to get in some situations, not all. Mhmm. So read the prospectus, understand the details, but it it because there's liquidity issues, understand what you're getting, what you expect to get back, What are the odds?
Mike:And the odds are gonna be kind of your your expectation. Not your immaculate perception of what you just want to believe, but what does your analysis suggest you should get out of this.
David:Okay.
Mike:And then you can get access to it. But you gotta go through a financial professional to get to this stuff. You can't get it on your own, which is problematic. Here's a fun tip.
David:Okay.
Mike:I mean, buy it through a financial adviser and then transfer it out and leave the financial adviser. If you have the position, what are they gonna do?
David:Oh, right. So you would yeah. You would go through your your financial adviser and then you could just transfer it to your other brokerage account somewhere else that's
Mike:I mean, I I people don't wanna pay up 1% on something that's just gonna sit there for four years.
David:Mhmm.
Mike:So people will give like, you know, 100,000, 200,000 to a financial adviser, say grow it, and they've got their $3,000,000 that they're managing. And they're just copying the trades that the financial adviser does if they feel like it. I see that stuff all the time. And frankly, I don't blame them. This idea that you're charged based on the percentage of assets you've saved.
Mike:Well, how about you ask the question, how much does it cost to to do the job? Mhmm. Maybe that ought to be a better baseline, but that's beside the point. Love private equity. I'm okay with private credit, though I think it's too risky right now.
Mike:Generally speaking, there's always exceptions to the opinion. And then private real estate placement, I think, is a very wonderful way to diversify out of the stock market and the bond market in just an alternative market. And through I think private placement's a more advantageous way than publicly traded stuff.
David:Mhmm. And so when would you recommend people have this in their portfolio then?
Mike:When you have legacy intention and or you don't need to touch the funds for at least ten years.
David:So that so the reason you wouldn't need it to touch it is because you already have other, what, buckets or you already have your income needs solved over here, and so I got this extra stuff that can just stay over here for
Mike:Yeah. So let's let's assume you've got a $3,000,000 portfolio.
David:Okay.
Mike:K? And you only need a million dollars to sustain your lifestyle. You've got Social Security, maybe you've some rental income, And then let's say you've got I don't know. You just need 40,000 left over.
David:Okay.
Mike:So you're taking roughly as as, you know, 4% or so out of that million dollars each year. That's this kind of all works for you. You've got $2,000,000 that you may never touch.
David:Alright. Okay.
Mike:That's where private equity would have a good place Mhmm. In my opinion. Not financial advice. Yeah. I'm not saying just because I would do it.
Mike:I really I rarely would entertain private equity personally.
David:Okay.
Mike:I like the liquidity of the public markets personally.
David:Uh-huh.
Mike:But there are clients where private equity makes all the sense in the world. So everyone's different. But that's you see how it's like you don't need to touch it. It's for legacy purposes or maybe you've laddered out your income. So you've taken your $3,000,000 portfolio and you've laddered out, you took a million dollars and you laddered out your income for the next ten years in this other example.
David:Okay.
Mike:So you got $2,000,000, you're gonna grow for ten years. How do you wanna grow it?
David:Well, you could grow it this way. Yeah. Because it's potentially a better, bigger reward or or what?
Mike:Yeah. That that's a fair way to say it. There's more risk Mhmm. But there's more growth potential. So you just have to balance it out, find a portfolio that blends it nicely, that you're okay with the overall risk.
Mike:And something that I think is interesting is and we get humans get caught up in this. We want every one of our positions to be winners. Yeah. Not gonna happen. So what you wanna do is have this spectrum of, okay, here's the more tried and true tested, and then here's a few outliers that if they if they win, my goodness, it's gonna be a huge payday.
Mike:But if they lose, I'm still fine.
David:Mhmm. Mhmm.
Mike:And you're going to have, of all of your assets, some losers and some winners in different periods of time. I mean, how many people invested in Toys R Us? That was a winner for a while Yeah. And then it wasn't. How many people invested in Cisco?
Mike:That was a winner until it dropped in 2000, and then it took twenty five years to recover. Microsoft, that's a big company. Did great in the nineties, did nothing for a long period of time, and then shortly after 2012 or so, it started to recover again.
David:Right.
Mike:So things change. I I would have hated to have been in a private placement with Microsoft in the February because it didn't grow.
David:And you wouldn't have you would have had liquidity issues. Is that right?
Mike:Or If it were a private equity placement. It's not it was it's a public company.
David:Okay. Yeah. Yeah.
Mike:But just by way of example
David:Okay.
Mike:Because I think people generally easily could look up Microsoft Yeah. And watch it grow till 2000, and then basically go down and do nothing for a long term period of time. And then eventually, like, over a decade later, it starts to Uh-huh. Imagine if that was all illiquid. It'd be very frustrating to watch.
Mike:So have to be okay with that.
David:Yeah. Alright. So it's maybe it's not for everybody, but a good option for some. Yeah. Should be aware of it.
David:Exercise all your options.
Mike:It's it's about understanding the tools and the appropriate placement of those tools and the willingness to say, I don't need the tool. I'm sleeping fine without this tool, so let's just leave it out. You don't need to buy a little bit of everything. Sometimes simplicity isn't oversimplified from a strategy standpoint. Simplicity is just you've got less to to worry about, less to oversee, less to manage.
Mike:That's all the time we've got for today's show. If you enjoy the show, tell a friend, leave a rating, and subscribe to us wherever you get your podcast and or on YouTube. Just hit that button. As always, go to retireontime.com for resources, the book, workbook, and even you can attend one of the workshops where I build a retirement plan live. Watch me Thursday nights as I do it and answering your questions along the way.
Mike:Just go to retireontime.com for that and more. Thank you for spending your time, your most precious asset with us today. We'll see you in the next show.