The Real Wealth Expert Panel

Greetings from the metropolis of Cedar Crest, NM!

Today’s post comes from a question from a friend of mine.  It is a detour from real estate, but like most of us, we have investments in different types of vehicles….stocks and mutual funds for example.  So…I thought this may be helpful for some of you…..

Rob, I have a meeting with my financial planner next Tuesday.  I primarily invest in mutual funds and stocks.  My portfolio has dwindled buy 50%.  I would like to know what questions I should ask my financial planner in order to right the ship.

I took the question to my good friends Emily and Steve….you can read both of their replies below….

There is a lot of information here….so feel free to print out…..

Response from Emily:

Hi Rob,

Emily Cressey Real Estate Investor and Coach

I think it’s a great question, and I would be glad to weigh in with some thoughts.

There’s nothing like suffering a down market to make you stop and re-evaluate your investment strategy.

However, a down or volatile market is rarely the best time to sell off mutual funds.  These are the days to stick to your strategy and dollar-cost-average your way into the market while prices are low.  (As I write this, I don’t think the market is particularly low or undervalued, I’m just speaking in general about when the market is “down.”)

Most mutual fund investors invest for the long term with the assumption that the market will go up approximately 11% a year on average.  However, with the current political climate and anticipated changes in increased government spending and government debt, as well as the potential government-takeover of the private medical sector, I think it’s reasonable to question these underlying assumptions, and hedge your bets a bit in case the next 100 years in the stock market don’t perform as well as the prior 80 years have.

One of the biggest things to look at is your asset allocation.

Within the stock market, you may have created some diversity.  Personally I invest in the following funds:

• S&P 500 – 35% of portfolio
• Small and Midcap Index Fund – 35% of Portfolio
• Total International Fund: 25%
• REITS: 5%

I don’t have a larger share of REITS because I have real estate investments outside of my stock investments.

I am more heavily invested internationally now than I have been in the past due to concerns about the future of the US economy.

I hold no bonds because their primary purpose in a securities portfolio is generally to provide stability – at the cost of lower returns.  I am young enough that I don’t seek security in my portfolio at this time.  I am chasing the higher returns.  This may change as I get nearer to the age at which I plan to start pulling money out of the portfolio or living off its returns.

I do have about 5-10% of my investable assests available as liquid cash reserves that are available to invest in various things including real estate or stock should an excellent opportunity present itself. This also lends some stability to the portfolio should something terrible happen.

In addition, I keep a 6-month emergency reserve for my family, separate savings accounts to save up for things like furniture or a new car, and operating capital for my businesses in case a rental property goes vacant or I need to do a repair on a house, pay my accountant, etc.

I think as far as questions to ask your financial planner go, I would focus on evaluating your overall portfolio strategy at this time to see if it still meets your needs.  Do you have the cash reserves, the portfolio-stabilizing bonds and cash, and the life insurance and operating capital you need to meet your needs?  Are you comfortable with the overall risk and return of the assets you are holding?  Do you need to re-balance anything?  And finally are there other asset classes that it makes sense for you to diversify into… real estate you own and operate, businesses, private mortgages, gold, etc.  My parents says their best-performing asset last year was a loan they made to me.  Personally, my cash-flow real estate is doing well, it’s always nice to get checks in the mail!

There are lots of ways to invest – but they are not all “easy” things for your financial planner to sell.  If you are willing to put the time into other types of investments, start with some books at the library (Or this blog, if it’s commercial real estate), and find out what people do who are successful with those investments, and what the risks are, as well as the ramp-up-time.

A lot of people are risk-tolerant on paper, but then when there is a shake-up, they have trouble staying the course.  It’s no fun to lose a million bucks just because the stock market has a bad day.

If you’re not comfortable with the losses you’ve taken, don’t just “Sell” to stabilize things, but look toward starting to buy some different asset classes that will create a more stable base for your net worth.

Also, remember to see what you need to do for your different goals – saving for kids college is a much different time line and should have a different strategy than saving for retirement.

I invest for retirement and my son’s college separately.  Our goal is 20% of our income going into retirement savings.  After we’ve covered that, our extra savings goes into paying down our mortgage.  Currently we’re not putting any more money into real estate at the moment, because it already represents a significant chunk of our assets, and we’re trying to diversify a bit to spread out the risk and return.  The nice thing about paying down debt is that you get an immediate, guaranteed, tax-free return!

Well, that was long-winded, but it hopefully will give you some good things to think about.

The challenge about financial planning in the abstract is that there is so much that is about YOU, and your situation, and not just “What the book says.”  I think you’ll have a great conversation with your financial advisor, and please let us know if you have any further questions!

Response from Steve:

Rob,

Before I give my answer to your friend’s question, I’m going to answer a that wasn’t
asked but that I believe is very relevant …

“How can I optimally work with any advisors”?

I strongly believe in and use advisors myself (attorneys, book-keepers,
CPA’s, physical training, financial mentoring, business mentoring and have
in the past used financial planners for years).

I believe three of the most significant keys to the effectiveness of your
advisors are:

1. Are my advisors really advising me for my best interest?
Are they teaching me HOW to think about things or just saying “do this”?
You of course have to expect and ask for this as often people want to take
the easy way out and just have someone tell them what they need to do.  For
example I really like my Iron-Man triathlon coach … except she doesn’t
really want to explain WHY we’re doing certain things.

2. Is my advisor actually DOING what’s being advised or are they simply
making money from giving the “advice”?
This is especially true in the area of financial planners, many of whom are
doing poor financially themselves.  This is why I’m following my passion of
teaching/coaching others as their “personal CFO” … to teach them HOW to
think financially what’s best for them.

3. And lastly and this is an important one … The quality of my advisor
depends on ME and the questions I ask.
While I greatly appreciate the advisors I use, the quality of the questions
I ask makes a big difference.  For example notice the difference with the
following two questions about the same topic.

“Should I invest in this opportunity”?

“What should I think about before I choose to invest in this opportunity,
and what are the risks I should consider before doing so?  How CAN I
optimally make this investment”?

For example if I was asked the 2nd question I might reply with the following
helping you think through the following.

“It depends” … What upside do you see (is it worth considering assuming
this works out as planned and will you do this type of investment again …
if not why bother looking further?  Let’s review the risks associated with
this type of investment.  (NOTE this may heavily depend upon YOU … for
example since I invest in cash-flow apartment complexes I view them as safe,
while I’m no longer involved with stocks and thus for me they’re more risky.
WHATEVER type of investment you choose you should at least understand the
basics of them (see attachment).  Many people invest in mutual funds which
are very easy but not many know that if you purchase towards the end of the
year you’ll likely be charged taxes as though you’d owned the fund all year.
As you grow as an investor you’ll learn to ask better questions and hence
get better answers.  You do NOT need to know all the details but at least
how the basics work.  ASK your advisor to explain them to you.

Some suggested questions first for YOU (not your advisor):

1. What is the goal of this investment (i.e. have enough money in 10
years for most of my daughters college education)?

2. Do I understand the “basics” of how stock and mutual fund
investing     works?  If not you may want to read “Take on the Street -
What Wall     Street and Corporate America Don’t Want You to Know & What
you Can Do     to Fight Back” – Arther Levitt, former chairman of SEC.  I
am NOT     saying you shouldn’t invest in stocks or mutual funds … I did for
years and others are still doing it successfully.  I have more of a     bias
for real estate as I have advantages there vs. the stock market
where I don’t.  I would recommend you learn about options, puts, and
calls which can protect you if you’re investing in the market vs. the
advice “just invest for the long term” … which by the way mutual     fund
companies don’t do (i.e. their turnover ratio is often greater     than 1 where
they sell every stock in the fund at least once a year).

OK, so I’m a little long winded and as you can see I have an opinion on
this, let’s get back to the “original question”

Questions for your financial planner?

1. How are you compensated from my investments?
* Is it a flat fee (i.e. % of your $’s invested) or commission / loads on
your investments?  For example in the insurance world brokers receive a
larger commission for selling more expensive “whole life” policies vs. term.
It helps to understand any potential biases.
* There are some great financial planners and some really do know about the
stock market, but interestingly enough last I heard about 80% of the index
funds (such as S&P 500 index) outperform the actively managed funds with
much higher fees.  If my portfolio over time isn’t doing better than “the
market” … such as S&P 500) maybe I should just invest myself in low cost
index funds, and then as needed pay an advisor (maybe for services rendered
or by the hour) for advice.  Again, I DO recommend advisors but in the right
context.

2. What changes would you suggest, and why?
KEY follow-up question – “will you guarantee that”?  In most cases the
answer will be “no, of course I can’t guarantee that stocks on average
return 12%”.  The reason I mention this is to learn to recognize someone’s
opinion vs. fact.  You can’t always get facts but often opinions are
presented as fact

Thanks Steve and Emily….

Until next time…..rob

Below, I have some interesting links regarding 1) the impact of the economy on commercial real estate 2) Real Estate investing vs. stocks 3) Job growth or lack of. We are coming up on interesting times…..opportunities abound!

Anyway….

I was going through my email tonight and read an email from my business partner, Emily Cressey. She is giving away a free audio interview with yours truly on building wealth by investing in commercial real estate. I did this interview a few months back for The Real Wealth Company and I have always wondered what happened to it. I was worried she thought I was a crappy interview. That may still be the case but, none-the-less, she is making the interview available for free HERE. The interview spans several topics such as the passive investing, active investing, keys to being successful in commercial real estate, residential investing vs. commercial investing, and other commercial real estate topics.

Hope you enjoy!

Here are some interesting reads:

• Real Estate Market Blog: Commercial real estate buyers, a bit like home shoppers, may have pushed prices up too fast
• Businomics Blog: Banks have calmed, Bonds have worsened
  
• Moolanomy: Real Estate Investing: Return on Investment and Leverage
• The Big Picture Blog: Jobless vs. Unemployed

Until next time……rob

There is so much media and talk about our economy….that it is difficult not to doubt one’s investing strategy…especially as a real estate investor. There are so many opinions out there (….from parents, friends, media, and the party “loud mouth” not to mention the party “know-it-all” (usually one in the same)…) that it is difficult to see straight. BUT, I have to remember one thing….opinions are free. I also have to question where these opinions are coming from. So….I thought I would share with you my strategy in processing advice and or opinions from others.

The process goes like this. When I am talking to someone on the phone or in person who is giving me advice or telling me why things are the way they are (or reading someone’s article), I ask myself (in my mind of course), “What type of person is this? A non-thinker? A blamer? A doer? or a mentor? The I ask myself, “How much experience does this person have?” The last question I ask myself, “Is this person of integrity?

I know this process seems pretty simple but there is a lot of meat in each of the questions.

I will explain below the three questions I ask myself (in my mind) while I am listening or reading someone’s advice/opinion regarding real estate investing (or anything for that matter):

1) What type of person am I listening to?

I categorize people into four types. Yes…..if you and I have had a conversation on the phone or in person, I categorized you (Don’t give me that….you do the same thing….but maybe not as methodical). Now….as a disclaimer, people can change types….so, the label is a current “state of being.” I got the premise of “people types” from Dan Sullivan. Dan calls these types A, B, C and D. I label them a little different:

i) The Non-thinkers: Non-thinkers are people that will choose to not think for themselves. Usually out of fear, most non-thinkers do not have any experience and usually use other people’s experience to form an opinion. We all start out here as kids (adults know more than we do as kids so we rely on our parents for how we think)…but we usually grow out of it (cognitive cycle). Some never do. So, the result of a non-thinker is usually a person full of fear and lives vicariously through others. A good example of this; I recently had a conversation with a relative of mine who told me that he does not invest in real estate because of his father’s experience with real estate. Obviously, he saw his father have bad experiences with real estate. So….when I am listening to a non-thinker, I know I am listening to someone who’s thoughts are the thoughts or experiences of someone else.

ii) The Blamers: Blamers are people that think for themselves but blame everyone they can for the way the world is. Imagine a fifteen year old who thinks they know more than their parents? What happens when the fifteen year old does not grow up? Well….they blame society, parents, and everyone else. You also hear a lot of excuses. As a real estate investment coach, I talk to a lot of blamers. When I hear a person or a student blame another coach, guru, their boss, their spouse, etc…..I know I am talking to a “blamer.” Usually, they are angry and hate their situation. So…when I am talking to someone who does not take responsibility for where they are at and are making excuses and or blaming….I know that the advice or opinion that I am listening to is the advice/opinion of someone with a victim mentality.

iii) The Doer: It is not a coincidence that most entrepreneurs fall into the “Doer Type.” This is not to say that only entrepreneurs can be “Doers.” I know many corporate people that are Doers. Now, Doers are people that take responsibility and do not blame others for their circumstances. More importantly, Doers think differently, develop products, make money within the system. The Blamers criticize and blame others for why they cannot get ahead….while Doers create and maximize their abilities within the confines of what is available to them. Doers are great at workarounds. On my coaching calls, especially with The Ultimate Challenge, I know when I am talking to a doer. There is something special about them because you never hear an excuse and they never blame. They take on full responsibility, they think differently, and they use failure and fear to move forward.

iiii) The Mentor: The mentor is not only a doer….but a teacher. They take their life experiences and help others to move from “the non-thinker” and “the blamer” to the doer. They teach others how to get from point A to point B and they make financial gain from it.

Now, like I said, the “types” are based on “state of being.” For instance, I know a very successful business man who is a “doer” and he sometimes creeps up into the category of being a “mentor” but then also falls into the “blamer” type too.

So….whenever I am listening to someone or even reading an article by a particular person, I try to figure out what “type” of person that they are so I can process their advice/opinion accordingly.

2) How much experience does this person have?

When reading someone’s article or listening to advice, I am always looking for clues on their experience on the topic they are speaking about. I remember listening to a so-called real estate guru on stage talk about how stock investing was as stupid as gambling. So, I was able to talk to the stock hating guru later that evening. I asked him what had happened to him with regards to investing in stocks that drove him to tell the audience that stock investing was almost as stupid as gambling? He said he had a lot of friends lose their life savings in stocks. Is that experience talking? NO! Now…. I do not invest in stocks but I know a lot of people who do well investing in stocks. So, I immediately knew not to take his advice on stock investing. But that happens a lot….and I am guilty of it. I used to say that investing in residential real estate via short-sales was a waste of time and energy based on a few short-sales I had done. Then my friend Phil took the real estate investing arena by storm with his short-sale process and his web-enabled software. I realized how much I did not know.

3) Is the person I am listening to a person of integrity

You may be asking yourself “why would it matter if I am listening to a person of integrity or not when it come to reading or listening to advice or an opinion?” That is a good question! Let me put it another way. If you know a person’s value system, you will have a good perspective of where this person is coming from when he or she is giving out advice. For instance, when I speak at real estate investment events, I like to listen to other speakers to see what other investor mentors are doing. There is always one speaker at these events that will give advice that is down right unethical. So….when I hear someone speak of unethical practices and try to teach others how to do the same, I tend to discredit any advice he or she may give.

Well….I hope this was helpful….until next time….rob

Why Risk Is Important

Entrepreneurs, like ice climbers, are often said to risk their necks. But there are ways to cut danger to sane levels—and good reasons to try

In a recent conversation with my friend and colleague, Roger Martin, dean of the Rotman School of Management at the University of Toronto, he mentioned that a student had asked him: “What is it about entrepreneurs that enables them to live so far on the edge? Do they thrive on the adrenaline of risk-taking?” This made me think of another question that I frequently encounter when people find out that I love ice climbing: “How can you live with the risk? Do you actually enjoy flirting with death?”

I think that these are all the same question, founded on the same implicit but ill-founded assumption: that risk equates to danger. Now, I am not going to try and convince you that there aren’t people who do love the rush of throwing the dice—with their life or their bank account. But just because someone won a multimillion-dollar windfall by buying lottery tickets with their retirement fund, or survived running a treacherous river without any training, the fact is not altered that what they were doing was gambling, not investing. The end result is as unrepeatable as it can be inadvisable.

Calculated Risks

So if it’s not the thrill of gambling, what does distinguish the serial entrepreneur and the ice climber from the population at large? For a start, they understand the very clear distinction between risk and danger. Second, and—perhaps most importantly—they know that there are ways to approach an otherwise dangerous task in such a way that the risk is reduced to an acceptable level.

In fact virtually everyone knows this, at least in some domain. For example, driving in good weather on a 12-lane freeway in a well-maintained car is something that a trained driver would not hesitate to do. Yet it could be near suicide (or murder) for someone who had never been behind the wheel of a car, or who was driving a vehicle without brakes. What is curious about human nature is that we sometimes seem unable to translate knowledge from such everyday examples into our workaday life.

Why do entrepreneurs and ice climbers repeatedly prompt questions of flirting with death and disaster? My best guess is that a lack of familiarity prevents nonpractitioners from seeing what lies behind the surface: the serious and conscientious preparation that such people bring to their respective activities. To illustrate this, let me tell you a bit about ice climbing.

Essential Requirements

Anyone who has ever walked on a frozen lake, gone ice skating or tried curling knows that ice is slippery and that it takes practice to move with any kind of confidence. Now imagine that the ice sheet is vertical rather than horizontal. This should give you some sense of the challenge of ice-climbing. But then remember there are four things that the prepared ice-climber brings to the base of any climb: training, tools, fitness, and partner(s)

The need for training is pretty obvious. One has to know what one is doing. Just as you have to learn the rules of the road in order to drive on the freeway, the ice climber has to be educated about technique, the appropriate use of tools and procedures, reading the ice, and the evaluation of objective hazards.

Tools have improved significantly over the past decades. Strapped to one’s feet, in a manner not unlike roller-skates (but much more secure) are crampons. These have one or more long, sharp, surrogate toes that you can kick into the ice, thereby giving purchase to your feet. In each hand one has a short, curved, ice axe that is designed to enable one to smoothly drive the pick into the frozen water, thereby giving you something to hold onto. In the event that someone above knocks off some ice, one wears a helmet to protect the head. For protection in the event of a fall, one has a rope firmly tied to a harness around the waist. While ascending, the climber regularly sets a hollow titanium screw into the ice. This forms part of a system of running anchors.

read more 

As I am writing this, I am sitting in my comfy couch in my bedroom with one leg propped up on a table with a laptop in hand sipping my favorite beverage watching my favorite show, The Big Idea hosted by Donny Deutsch.

I am a big fan of this show. I love watching the entrepreneurs Johnny
brings on to discuss how they have taken an idea and made it into a
multi-million dollar business. There are tons of “golden nuggets” on this one show that makes it worth watching.

Just by watching the Big Idea, I have received confirmation of several key principles that I think are very common with successful business owners. One of them is passion. Over and over again, I have heard that the foundation of taking a business to the big time is based on “Doing what you love and love what you do.” In other words….find your passion then take action on it. That easy right?

I think it is deeper than that….

I am a big believer that our individual purpose is as unique are our fingerprints. In other words, I believe that every human being has a unique purpose…not everyone’s purpose is the same (of course…my opinion)….can you grasp that…even if you do not believe it? I also believe that our unique purpose is strongly aligned with our passion…if not one in the same. One more thing, I believe that working in one’s true purpose is what separates the 1% from the 99% of the population. The question you should be asking is “what 1% are you talking about, Rob?”

Well…glad you asked. There is a small percentage of the population that is going after a dream that is aligned with their purpose/passion. In other words, they have made a personal discovery that is almost rebellious….they have discovered that there is a life that is meant to be lived. They have discovered “real wealth.” “Real Wealth” has little to do with money and has everything to do with freedom….it is no coincidence that most entrepreneurs and those that are entrepreneurial at heart understand this.

On the other hand…there is the rest of the population (99%). Everyone else, me included at times, is doing what everyone else is doing (Lemmings). We are using most of the God-given time we have to work for money. We become lemmings and listen to what the world says to do….”work hard, save some money, retire with a nice pension, and live in entitlement.”…then, if you are lucky enough…you have a few years to travel and live a self absorbed life before your days become scheduled with doctor appointments…then you die.” No regrets there right?

The 1% live in freedom and never retire from their purpose. The 1% build wealth by pursing their passion. To the 1%, living in their purpose is as natural as breathing. The 1% wake up with gratitude in their heart for the opportunity to live a life meant to be lived. 1% are not waiting for retirement to live….they are living now.

A few questions to ponder:

Do you know what your passion is? Are you living with purpose? Are you the 99% or the 1%? Are you living now….or waiting to live (retirement)? Do you wake up in the morning grateful for the adventure awaiting you? Last one….are you living the life you were meant to live?

Until next time…..rob