Sample Article 1

Experience Counts

Your Life Experience Adds Value

Chapters 2, 4, and 10 of How to Retire Early and Live Well With Less Than a Million Dollars set out the principals of asset allocation for retirees. Many other sections of How to Retire Early explain further aspects of this crucial topic. To order a copy of How to Retire Early click here .

You realize that the asset allocation you were sold by your stock broker, financial planner, or cousin Jeff is not the best. They have never lived off their assets. Though honest, they can only sell you what they know.

How to Retire Early and Live Well With Less Than a Million Dollars advocates owning 3 to 5 non-correlated asset classes. It then discusses thirteen major asset classes and many other unusual asset classes and points out the correlations of returns between these different asset classes. Obviously there are many, many combinations of 3 to 5 non-correlated asset classes. How do you determine which asset classes best suit you?

Play with different combinations of non-correlated asset classes that meet your target investment return. For example, a combination of real estate, large cap U.S. stocks, and inflation indexed treasury bonds may produce the return you are looking for. But so might a combination of emerging market stocks, money market funds, and an oil and gas partnership. Be aware of what combinations of non-correlated asset classes meet your total return goals.

Then use all your personal experience and background to pick asset classes that you can understand. If you have investment experience, use it. If you have been retired 10 years and know what works and what does not, use that knowledge. But also use all of your other life experience.

I began living off investments in 1981. I had been sold an asset allocation of municipal bonds, money market funds, and large cap U.S. stocks. The advisors I hired had never lived off their investments and it did not occur to me to look for advisors who had. My experience as a tax attorney soon paid off. Within a few years, I was able to figure out how to lower my taxes and increase my returns without municipal bonds. By never selling U.S. stocks except for living expenses, I found my after tax return on a large U.S. stock portfolio was much higher than the after tax return on a mixed U.S. stocks, municipal bond portfolio.

As a tax attorney, I had also set up a number of real estate limited partnerships. I had seen many clients make a fortune on real estate and I knew where all the hidden fees were in limited partnership deals. This experience allowed me to understand many aspects of real estate investing. It lead to several great real estate investments, many which I still own today. I was able to eliminate all my money market funds yet retain a stable return from my portfolio. It also lead me to one bad real estate tax shelter that costs me $20,000 but provided $20,000 worth of knowledge.

But you were not a tax attorney prior to retirement. You may not think any experience you had can help determine your asset allocation. You believe you can only rely on these sales people who have never lived off their investments. That is wrong. You simply need to look at your experience from the right angle.

If you have purchased two or three homes in a life time, you have valuable real estate experience. You may not think it applies to your retirement portfolio but it does. The same process you used to find your home, you can use to invest in commercial real estate or REITs.

You probably started by looking at neighborhoods. You set up criteria like safety, schools, proximity to freeways, shopping, clubs, and friends. All of this you compared to price and future price appreciation. Then you looked at individual homes. You set up criteria like size, style, age, condition, maintenance costs, and so on. You compared homes to homes and each home to the asking price. Then you made offers, negotiated, arranged financing, closed the deal, moved in, and learned from your process.

Commercial real estate is purchased the same way. If you can estimate whether or not a home is worth the asking price you can estimate whether or not a strip shopping center is worth the asking price. There are more numbers involved but the sense of value is the same. After you have gathered all your information, looked at all the prospects, talked to everybody, the final decision comes down to experience. If you remember that track house you first lived in and how ten years later the neighborhood had deteriorated, you will not buy a seemingly cheap building in an iffy commercial area. You also draw on your shopping experience, your experience in different office complexes, all the years you have spent looking for parking, finding addresses, riding elevators, interacting in anyway with real estate.

Trust your experience. If you look at REITs, find out what type of real estate they own and why. Compare their reasoning with your home purchase reasoning. Does it make sense? Trust your judgment. You do not need to pay a 6.5% load to buy a REIT mutual fund that charges 2% a year to select REITs based on no better reasoning than you used to buy houses over the years.

Maybe you did not buy any houses. You may believe that you have no experience that can be useful investing. Investing is a much bigger topic than you realize. A high school English teacher for 30 years knows a lot about education. There are many companies in the education business. Some have good prospects. Others do not. An experienced teacher will be able to estimate which companies have a good product and which do not She does not have to succumb to sales pressure to buy an annuity with a big hidden commission when her teaching experience leads to higher long term returns.

A travel agent, an international business person, or a travel addict has valuable knowledge of foreign and emerging markets. They know which countries are building better hotels, improving transportation to tourist destinations, upgrading airports, lowering barriers to trade. They know in which countries to invest. It would be silly for them to be sold municipal bond funds as an appropriate retirement investment. A half hour studying an annual report of a no load, low fee international fund would lead to decades of enormous returns.

A doctor knows who makes the best medical equipment at the best price and which HMOs are profitable and which are falling apart. He would be foolish to let a stock broker sell him shares in a hot high tech company with no earnings that no one understands including the stock broker. How would the doctor ever know when to sell shares for living expenses and when to hold on and sell something else?

A banker can evaluate corporate bonds as well as any bond analyst. It would be foolish for a banker to pay hidden fees to a bond fund manager or to buy a biotech, huge load, mutual fund.

A salesperson has a unique perspective on sales dominated businesses. She may be able to pick out which companies can sell over the internet and which cannot; whereas the convertible bond fund that is being pitched to her as just right for a retired investor has a big load and a bad manager.

Now some part of your portfolio will need to be in investments that are, at first, difficult for you to understand. If you only understand real estate you still cannot afford to have everything in real estate. Many U.S. real estate fortunes were destroyed from 1986-1993. A similar crash has erased the real estate fortunes of many Asians in the last few years. There have been many suicides. You need 3 to 5 non-correlated asset classes. But keep at least half of your money in asset classes you understand. With the rest, find advisors you can trust and get advice.

Before you act on any advice, study the advice and compare it to what other advisors say, and to what you find on this site, in books, and anywhere you wander.

Remember, you are a retired investor. Nearly all the advice out there is for employed savers. It is rarely appropriate for you. Always look at fees, expenses, costs, and taxes. Read through the sections in How To Retire Early that describe how to find and work with money managers, property managers, accountants, and other advisors. Take your time. Go slow. It is your money. If you are not ready to make a move, tell your advisors to stop calling you. The best long-term allocation is the one that lets you sleep at night, not the one that lets your advisors sleep at night. A year or two with half your money in a money market fund is fine while you learn what you are doing.

Consider the case of Dr. Dee, D.D.S. When he retired he had $300,000 stuffed into a Keogh and $700,000 in mutual funds in a brokerage account. He never spent more than an hour a week looking at his investments. Everything he owned in both accounts was picked by his stock broker. He did not know if he ever paid a load on a purchase or if he outperformed or underperformed any bench marks. He was not even sure if he made any money from his investments as he never kept accurate records of how much he added and withdrew from his account each year. He did not know what his asset allocation was and what would suit him better. He believed that he had no experience that could help him establish a better asset allocation. However, it turns out he has extensive, valuable experience.

In thirty years of dental practice Dr. Dee rented six different offices. He was practically an expert on medical office rentals. In 1983 he and two other dentist invested heavily in a medical building development. In 1989 they gave the building back to the bank after each paid $100,000 to be released from a $3 million mortgage. He learned all about personal liability, excessive leverage, and overbuilt markets. He had all the experience necessary to buy and structure a successful long-term medical building. He knew more about dental supply companies than a Wall Street analyst. He and his wife had traveled to every major city and destination in the world over the last 30 years. They could easily distinguish between the prospects for an investment in Indonesia from the prospects in Ireland. And he had extensive experience working with a stock broker. He could clearly see that his former broker had no ability to determine the best asset allocation for him in retirement and had never provided him with any useful information on his returns or the fees he paid or the effect those fees had on his returns.

Once Dr. Dee figured out he had half his money in loaded bond funds and half in loaded U.S. stock funds he realized he only had two asset classes and they were correlated. Over a period of years he sold all the bond funds and half the stock funds paying attention to back-end sales charges, taxes, and future fund prospects. A third of his money he invested in three low leverage, income producing medical buildings; two locally and one out of state. Another third of his money he invested in three no-load overseas stock funds. The final 1/12 he invested in 10 dental supply companies he knew well. Now, when he needs to sell any shares or make a real estate transaction to fund his living expense account, he knows exactly what to sell and how much. He does not need to pay any commissions or reinvest in something he does not understand.

Everyone has valuable experience that can help shape a comfortable asset allocation. When you have determined what your valuable experience is, make your purchases, and follow closely for a few years everything that happens. You will learn a lot and make a lot of money. Whatever you learn, pass it on to us and we will publish it in our Subscribers Speak section.

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