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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.
Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we're gonna dive into that nitty gritty. So as always, text your questions to (913) 363-1234 anytime during the week, and we'll feature them on the show. Just remember, not financial advice.
Mike:This is an educational show. David, what do we got today?
David:Hey, Mike. The stock market seems overvalued. Do you think the real estate market is also overvalued?
Mike:Great question.
Mike:Yeah. Yeah. So the biggest assumption here is that there's an inverse correlation between the stock market and other markets. Now to be fair, JPMorgan did an interesting bit of research that found if you take your traditional portfolio of stocks and bond funds, I say bond funds. They're not buying bonds.
Mike:They're buying bond funds. Okay? Okay. Funds that actively trade bonds. They're different.
Mike:But you take your typical portfolio, and then you add in around 30% in alternatives, and their definition of alternatives was real estate or just other things you could invest in, that they showed a potential increase. Historically speaking, there was an increase in returns and a decrease in volatility. So it was a more predictable way to grow your money. What's interesting about that is many people do not invest in the real estate market. It's just the stock market and the bond market.
Mike:The problem, though, with this assumption is that it assumes that the different markets will inversely correlate as in they'll do the opposite. So let's break it down first, the stock bond relationship, and then we'll we'll answer this question. Okay. You need to have context here. The reason why the stock bond fund portfolio sixty forty split won a Nobel Prize and was considered very profound, even though the guy that invented it, Harry Markowitz, never actually used it, is because it was a simplified way that people could invest in the market and hold for a long term period of time.
Mike:A great way to grow your money and emotionally be able to stomach the ups and downs. So why is that the case? When the stock market crashes, usually, the Fed will drop interest rates. If the Fed drops interest rates, that makes money cheaper, which helps the overnight lending or short term loans, short term, you know, the banking system, which makes money cheaper, which can put more money back into the economy. Okay?
Mike:Now this is not connected, but many people will argue that there is a not correlation, but a rhyming scheme that if the Fed drops rates, that the ten year treasury and other longer term bonds will also decrease. If new bond issues, new bonds coming to the market are at a lower rate, then the other long term bonds that you previously held become more valuable.
Mike:Yeah. Because they pay a higher rate.
Mike:You can't get that anymore.
Mike:Okay.
Mike:I mean, imagine imagine you had a card to McDonald's from the nineties, and you could buy Big Macs for 99¢. Oh, yeah. And that was a lifetime deal. For the rest of your life, you could buy a Big Mac for 99¢. Good deal.
Mike:Today, that's pretty good. Or you could buy what is it? $78? Actually, I don't go to McDonald's often. I'm not above McDonald's.
Mike:Right. Right. Love McDonald's. Yeah. Yeah.
Mike:I'm with you.
Mike:It's probably not 99¢.
Mike:No. It's not. But imagine you had that deal. Yeah. Right?
Mike:So the same thing is if you had a bond that was paying four or 5% Mhmm. And now all the new bonds were paying out two or 3%, your bond is worth more. Yeah. So that's why when new bonds decrease in value, your older bonds become more valuable because they're paying at a higher rate. That's a very complicated thing, but this is why it's so important is that's usually what happens.
Mike:However, if you look back at 2223, the markets were going down. They're getting hurt. The Fed was increasing rates. Oh gosh. They're supposed to be inversely correlated.
Mike:The Fed was increasing rates. Bond issues were also increasing in value. The problem was all the other bonds were worthless. The stocks went down, and the bond funds went down at the same time. They weren't inversely correlated.
Mike:Did you say this did happen?
Mike:Yeah. It was recently. People were saying, why are my bonds losing money and the stocks losing money? Yeah. Aren't they supposed to be inversely correlated?
Mike:They're not. They're separate. And if you look back at England over the last couple of months, their version of the Federal Reserve has been decreasing their rates, these short term instruments, while the bonds or their version of the treasury, they haven't done very well. They've stayed high. They haven't gone down, so it hasn't been the normal system, the normal pattern.
Mike:They're not correlated. They just kind of influence each other. And so the stock bond fund mix is a great idea and often works, but it doesn't always work. They both can crash at the same time. They both can grow at the same time.
Mike:They can offset each other as well.
Mike:So almost anything could happen.
Mike:Yeah. Yep. And we're in very interesting times economically speaking. So the reason why I bring that up is the real estate market is a good hedge against inflation. It is an uncorrelated market, but it's not inversely correlated.
Mike:So the stock market in 2008 and the real estate market both crashed at the same time, but bonds did really, really well or bond funds specifically. There are other times, like 02/2001 and o two, for example, the stock market crashed, bond funds did really well, and real estate did really well. So it's not about finding the opposite or the inverse. It's understanding there are different independent markets that will affect the underlying financial economic situation. And when you start to understand how that really works, then you can make more educated decisions on how to put together a portfolio.
Mike:And let me just give you the different markets to consider, and I'll define them just
Mike:for fun.
Mike:That sound good?
Mike:Yeah. Yeah. Yeah. That'll be helpful.
Mike:So the stock market or the equities market. Yep. It's just think businesses. You're buying a share of a company. In my opinion, the intention of that would be to hold it for a longer term period of time.
Mike:Because the equities market can go flat for ten plus years at a time. It did in 2000. It did in 1966. It did in 1929. It did in nineteen o six, and it could happen again.
Mike:It probably will happen again. I would be willing to bet that everyone entering retirement right now, one third of their retirement, if they live thirty years in retirement, will probably be flat in the equities market. That is my bet. Not promising it. This is speculation.
Mike:Yeah. But I'd be willing to bet that that is a very real possibility, and that's challenging. Can you imagine not growing any of your money for the first ten years of your retirement?
Mike:That'd be tough. How do you
Mike:hedge against that? So then you've got the bond market. The bond market is the largest market. Yeah. Okay?
Mike:America was built on debt.
Mike:Yeah. That'd seem bad when you hear it, but then you realize, well, I mean, that's
Mike:Get really get Ramsay out of your head for a second. There's good debt, and there's bad debt.
Mike:Right.
Mike:Right. Ramsay talks about well, Ramsay talks about all debt, but read my Kipling article about good debt, bad debt. They're different. Yeah. Good debt is debt that is tied to something that is appreciating in value.
Mike:You appreciate the debt with your house because your house should be appreciating in value. You don't appreciate debt tied to your car because your car is depreciating in value. Your credit card debt, it's not just depreciating. There is no value. Yeah.
Mike:Which sucks.
Mike:Yeah.
Mike:And there's fees on top of it, so you get hit by double whammy. So understand the difference of debt, and that's an important lesson too as you're going into retirement. Do you pay off your mortgage when you retire or not? Technically, you shouldn't from a financial standpoint as long as the rates are in your favor, but it's okay to pay off your debt anyway if you feel better because you wanna be able to sleep well at night. So that's the bond market.
Mike:The bond market is the biggest market and affects most all other markets. It is the foundation of the American economy, debt.
Mike:K? And so debt for the federal government, what state governments, local governments?
Mike:Yeah. To everyone that thinks the government should be run like a business Uh-huh. I'm here to tell you that is factually not true. Because if that were a case, the government then should try to make a profit off the American people. Yeah.
Mike:Can you imagine the government, the very entity that can tax you, trying to make a profit off of you?
Mike:Seems like a bad deal.
Mike:The purpose of the government is to absorb unnecessary risks and try to stabilize a society. That's why we have, you know, the military to stabilize us from invasion. That's why we have a judicial system to stabilize internal conflict. That's why we have laws to stabilize the society. The purpose of the government is to stabilize the society, and a part of that is stabilizing the financial sides of our economy.
Mike:Treasuries aren't necessarily a good or bad thing. Now hold on. Before you hate on everything I've just said, yes, the debt's got out of hand. I agree the debt is too high, but running a government surplus isn't necessarily the goal. If the government surplus were to happen, that'd be a very nice thing, and then we can lower taxes.
Mike:I'm saying that a government's job is not necessarily intended to be run exactly like a business. It is its own thing. That's like saying Social Security is an investment. It's not. It's an insurance plan that the government imposes on us whether you like it or not, so you might as well make the best of it.
Mike:I'm not supporting big or little government. I'm not supporting more or less taxes. I'm not in favor of high debt, and the debt is very much getting out of hand. And if you look at Ray Dalio's research on governments and when debt spirals out of control, it is the sign of the downfall of that government, not the collapse, but that it loses its global economic power, and then the power shifts to another country. Throughout all of time, the Roman Empire, the British Empire, any empire, debt was the canary in the coal mine.
Mike:So I am in harmony with lowering the debt. I'm okay if the government doesn't have zero debt. I don't think most people are hung up on if there was, like, I don't know, $20,000,000,000 of debt. Yeah. That's like nothing for our GDP.
Mike:You need to make sure you define government different as a business. There are things that are similar, but they're not the same entity, and that's a very important distinction. Uh-huh. Yeah. Stock market, bond
Mike:market. Market, all kinds of debt.
Mike:Then you've got the Federal Reserve driven markets.
Mike:Mhmm.
Mike:So you need to understand the Federal Reserve does not affect the bond market. The Federal Reserve affects your high yield savings. Your short term bond or, like, bills, for example, or short term fixed instruments, CDs
Mike:Mhmm.
Mike:Will be affected by the Federal Reserve. Short term fixed annuities, Federal Reserve, not long term.
Mike:Okay.
Mike:It's five years or greater. It's probably more on the bond market side, not directly correlated with the Federal Reserve, and you need to to know the differences there. Then you've got the commodities market. If you're investing in commodities, you know, soy, oil, gold, and silver, I would put in the commodities market. Some people would say they're alternative.
Mike:I would argue they're more commodities, but that's my opinion. The real estate market is its own market doing its own thing. Then you've also got the currencies market, and I would include cryptocurrencies in that foreign exchange, cryptocurrencies, all of that. You got the alternative market. So collectibles, your cars, art, all of that.
Mike:That's its own market as well. You've got the private market. The private market, its own version of private equities, private debt, or credit.
Mike:It's just it's private, and you have to somehow get in through some kind of accreditation.
Mike:Go through an adviser.
Mike:Yeah. Okay.
Mike:But, yeah, it's the private market. It's just a different way to look at the different instruments within these different markets.
Mike:Is private markets, like, higher risk?
Mike:I would argue it's higher risk. Risk being a very relative term here, but, because you've got less liquidity in the investments that you have.
Mike:Okay.
Mike:You have to be an accredited investor to even qualify, and that that the reason is because if you're an accredited investor, you should know what you're doing. Yeah. Even though many don't. Yeah. That that's not a criticism to accredited investors.
Mike:Sure. It's just saying, like, you know, I might be a healthy person. Doesn't mean I I'm smart with medical knowledge. Yeah. They might have a lot of money.
Mike:Doesn't mean they know how to do a deep dive into the financials of a company. I had one guy that made his money in waste management. Many, many, multiple millions of dollars.
Mike:His name wasn't Tony Soprano,
Mike:was it? No. Okay. It was legitimate.
Mike:Oh, yes. Alright.
Mike:And then you have the contracts market. Now the contracts market's one of the more complicated ones. That's where you've got your insurance products. That's where you've got your buffered ETFs. That's where you got your structured notes.
Mike:That's where you've got your options trading. It's just a different breed. It's really, in my opinion, the underlying price of the option contracts or the various contracts that make these investments or products possible. But you've got many, many different markets. All of them are uncorrelated.
Mike:They might influence one or the other. There might be a flight to safety. So if one's going down, money might go to another market, but it doesn't mean that they're inversely correlated. They're their own thing. Now back to the question, is the real estate market overvalued?
Mike:Yeah. I would argue it is. Okay. I would also argue that doesn't mean you avoid it. Just like you don't avoid the stock market because it's right now overvalued, understand the timeline of the investment.
Mike:Real estate's not a short term investment. So if you wanna get into real estate, you understand how to get into real estate, whether it's a traditional real estate, you're buying a rental, whether it's something more along the lines of, like, a privately traded REIT, for example, a Delaware statutory trust, or whatever mechanism you wanna get into real estate, that's fine. Know what you're invested in, know the risks associated with it, and know the timeline. Real estate's more of a longer term play in my opinion. If you need money in the short term, you don't go into real estate.
Mike:You don't go into stocks. You go into safer investments. If you have a part of your assets that you don't need to touch for ten years, then you might go into these other markets. Does that make sense? Like, risk is more of a time question.
Mike:When do you need the money? So here's the quick review. Stock market, bond market, Federal Reserve driven market. You've got the real estate market, commodities market, the contracts market, the currency market, the private market, and the alternative market. The point being is you can become wealthy in any of those markets.
Mike:You just have to understand which tools are intended to be used in different places. That's the big takeaway. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time.
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