Thornburg Investment Management recently released an annual report analyzing real returns. It is always interesting reading. Thornburg reviews returns for several types of investments and then subtracts expenses, taxes and inflation to determine which investments allow investors to keep the most return.
For example, if you invested $100 in the S&P 500 Index on December 31, 1979 and held it over 30 years to Dec. 31, 2009, the nominal return would have been 11.24% per year. This increased your $100 investment to $2,440. However, after subtracting taxes paid on dividends and capital gains and adjusting for inflation, the real return was 5.21% per year, turning $100 into $459.
So, how does this compare to other investment options? Over the 30-year period, the S&P 500 (representing large U.S. companies) provided the highest real return. The runner-up was U.S. small companies (4.81% average annual real return) and international stocks (4.55% real return). Municipal bonds, which are in most cases not taxed, outpaced other fixed income assets over this 30-year period.
Some other interesting points:
- Over the 5, 10, 15 and 20-year periods ending Dec. 31, 2009, municipal bonds were the real return leader.
- The 10-year real return of the large-cap S&P 500 Index was -4.21%, the worst of any asset category measured over 10 years.
- Single-family homes are not a good investment. Over 30 years, their real return averaged 0.36%. Over the five years ending Dec. 31, 2009, they had a -4.19% real return.
- Commodities have become a popular addition to globally balanced portfolios. There is expectation that commodities of all types including energy, agricultural and livestock will grow in demand as the world population grows. But historically, commodities have not added anything to wealth creation. The 30-year real return was -3.50 – 20 years (-1.84%), 15 years (-0.82%), 10 years (0.51%) and 5 years (-3.85%). The benefit of commodities comes in risk reduction. Since their returns do not typically move in the same direction as stocks and bonds, they can help reduce overall fluctuation in the balance of a diversified portfolio.
- U.S. Treasury bills, often the preferred “risk-free” investment, are actually plenty risky. They exhibited negative real returns in each time period measured.
For a copy of the full report, including how these return patterns impact the sustainability of portfolios and income in retirement, please contact us at info@bhjadvisors.com or 253-534-8888.
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP®
Forward to a friend
Six Rules for Including Rental Real Estate in Your Investment Portfolio
For many people, investment real estate makes up a large percentage of their net worth. Rental property has been a more consistent part of the financial picture for our clients than we ever assumed would be the case.
From a financial planning perspective, investment real estate provides nice benefits:
There are downsides, however, to having too much real estate in your investment portfolio. Some of them include:
Our recommendations
We believe owners of investment real estate should consider these guidelines.
1. Keep real estate holdings under 50% of your investable assets. Having a combination of property and securities investments gives you the liquidity that you need to pay estate or other taxes that could become due if you die while still owning the rental real estate. It also allows you to sell when it is most advantageous.
2. Make sure you have the time and skills to manage the property. This helps reduce the risk of ownership and allows you to feel comfortable making decisions about upgrades.
3. Know who can help you. If you no longer want to climb on roofs or unclog toilets at 2 a.m., find a reputable property manager who can take over the day-to-day tasks of managing your investment.
4. Have an exit timeline. If you don’t want to work on your rental houses in retirement, then build a timeline with the steps that you will take to prepare it for sale and then give yourself a few years to sell it. This will allow you to maximize the price that you will receive for the property.
5. Know who’s next. If you are planning to gift the real estate to a son or daughter, make sure that they want this gift and that they are able and willing to keep the house up.
6. Pay yourself first. If you put significant time into the property, consider that an expense that needs to be compensated. What’s a reasonable wage for the work you do to maintain your rental properties? Only after including this consideration in your rent are you truly profiting from the experience. This is especially true when market appreciation is minimal. If you don’t receive an exceptional reward via price appreciation at the sale of the property, all your sweat equity may go uncompensated.
What is your exit strategy? Do you have a long-term plan for the role rentals play in your retirement income?
What challenges or rewards have rental properties brought to your financial picture?
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP® — Tacoma, WA
→ Leave a comment
Posted in Commentary, Estate planning, Financial planning, Retirement, Taxes
Tagged financial planning, income, investments, landlord, property, real estate, rental, retirement