11% No-Risk Real Estate? Let’s Break It Down

Paul Winkler: All right, back here on “The Investor Coaching Show.” I am Paul Winkler, talking about the world of money investing.

Read the Fine Print

So there was something I was checking out on TV this week. I was watching this program, and up comes this commercial. And I figured I’m going to have to make sure that people hear this commercial and I just need to walk through some of the details of what you need to hear when you hear stuff like this. But check this commercial out that came on TV.

Clip: Hi, I’m Troy Aikman. I’ve always loved football and music, and that’s what led me to VENU — one of the fastest-growing publicly traded entertainment companies.

Now they’re offering fire suites, absolute triple net real estate delivering an 11% annual return paid monthly. Simple, predictable, passive income. Visit investvenu.com to learn more.

PW: Simple, predictable, 11% return triple net lease. And you watch the commercial, you think, Wow, this looks really pretty cool. I mean, it looks like a stadium kind of a setup where you have all these seats set up in stadium style and then there’s little fireplaces at every single area and people are having a good time watching the concert and it looks beautiful. I mean, it really looks pretty cool.

And you think, Wow, that sounds great. Eleven percent return. And it’s simple and it’s predictable.

Now, when you watch a commercial like this, you think, Well, okay, that sounds great. I think I’ll check that out. And you have these spokespeople making it sound like it’s almost like a guarantee, like you can’t miss on this one, right?

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At the bottom of the commercial, you will always have fine print. And the problem is that most people don’t read that fine print.

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As I always like to say, we read the fine print, but most people don’t. They don’t pay attention to that stuff. So let me just read the fine print on this thing, shall we?

“Any offering of securities made by a subsidiary, a VENU holding corporation, ‘the company,’ is for accredited investors only.” Okay, so here we go.

Again, we have to have the accredited investor. You have to have enough money that the government deems you able to sustain losses without any problems, right? Okay.

“Any projections or potential returns in this advertisement are estimated predictions.” Well, it didn’t sound like that at all. They said 11% return. Predictable.

That didn’t sound like an estimate. It sounded like it was predictable. It was a foregone conclusion. “This is what you’re going to get.”

So they’re “estimated predictions of performance only and are not based on actual results and are not guarantees of future results.” It’s not based on actual results. So where’d the number come from?

“Estimated projections do not represent or guarantee actual results of any transaction. And no representation is made that any interest in fire suite will or is likely to achieve results or profits similar to those shown.”

Is It Really Guaranteed?

Now, how many people are going to look at this and say, “This is a celebrity. I trust this person. I like this. When he played football, I liked watching him.”

And what we do is we have this halo effect in psychology, it’s called. It’s the idea that if something looks good, it looks pretty, looks great, we actually look at that person and we give them more credibility than they necessarily deserve or that they’ve earned. And that’s exactly what we see happening here.

It’s not a whole lot different than the whole thing that I talked about before with Yrefy. Yrefy was coming out of these commercials. They have all this wonderful stuff, how great their things are, and how great this investment is going to be, with double-digit returns.

“You can get your money out anytime you want. You can pull it out. You can do whatever you want. You can go in there, if you need to grab money out of your investment, it’s going to be something you have.”

“Liquidity” is the word, of course, that is used. But then you read the disclosures on it.

It says, “There’s no secondary trading market for securities, nor will a trading market develop in the future.” That doesn’t sound like it’s guaranteed or you have liquidity.

Liquidity options are available, limited, and are not guaranteed. Wait a minute. In the commercial, it said that it was liquid, you get your money out.

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“These notes are intended solely for credit investors.” Again, people that are deemed worthy of losing their money.

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“A company may approve, decline, or delay future early withdrawal requests.” So if you say, “Hey, I need to pull my money back out,” they can deny it.

This reminds me of real estate investment trusts. There are investment firms all over Nashville, pushing these things like crazy. We would see them.

They run advertisements all over the place, on radio stations, and you go out there and then they put you in this thing and say, “Hey, this investment’s real estate. It’s investing in real estate. And these companies have to pay rent to rent when they’re using the real estate. So they pay the rent and you’re the owner of it and you get that rent and it’s guaranteed.”

Or they may not even say “guaranteed,” but they imply that it is a safe, reliable source of income because they have to pay rent on these properties. I remember back when I was a broker, we would have these things, they would be fast food restaurants — these fast food restaurants had been around forever — and they’re leasing these spaces and you get to be the owner of it.

And I remember sitting in the presentations where they were trying to get us to sell this stuff and I’m thinking, Wow, this sounds like it makes a lot of sense.

Now, I guess fortunate for my clients, I never sold any of them because I just didn’t really feel like I understood it well enough to get behind it. But in essence, that was the idea, is that’s where you’re going to get income.

Drawing Income From an Investment Portfolio

Now, if you know, if you’ve listened to the show, you know that that’s not the way I like to draw income from an investment portfolio. Will I have things that pay out dividends in an investment portfolio? Of course.

Will I have things that pay out interest, which is going to be something where interest payments are being made on a regular basis? Yeah, no question.

Will there be real estate? Not directly. Will I own companies that own real estate? Obviously, yes.

You might have companies like McDonald’s. People think of it as a burger company or someplace you get shakes and ice cream and coffee and all that stuff. But in reality, it is a real estate company.

They actually lease these pieces of property, which are prime pieces of property in most small towns and large towns in America, and they have to pay these lease payments to the corporation. And of course, you own that corporation when you own their stock.

So in effect, when we look at an investment portfolio, we’ll have all of these things. We’ll have small companies that don’t pay any dividends. They just typically reinvest their profits back in the companies. But I want to own all of these different areas.

And in any given year, when we go back through history, we say 1970, we say, “Well, what did well in 1970?” It would be long-term intermediate government bonds did best in 1970. In 1971, it would be small international stocks, would have been one of the top areas of the market that year. In 1972, it’d be small international.

And then 1973 it’d be Treasury bills and 1974 it would be Treasury bills. And then 1975, it would be small U.S. stocks. And what we find is going back through history, in any given year, there’s something that is doing well when we look at markets.

When I own all of these different things, I can take income from whatever happens to be doing well in that particular year. And that gives me the ability to have my income come from something that I’m not selling it low. I’m selling it from a strong standpoint where it’s an area that’s up in the portfolio.

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The research on taking income from a portfolio shows that the way we do that is a process. It’s not a product. 

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But so often, what happens is in these commercials, we are driven to products. That’s how they sell the idea of income in retirement. Annuities, products.

“Hey, you just need this annuity right here and we get a guaranteed income you can’t outlive.” And it sounds really good on the surface until you start to dig in.

No COLA

I had a situation, matter of fact, this week. It was a couple I was talking to, and they had a pension, and it was interesting because it was a government pension and they had no COLA — no cost of living allowance — on it.

I was looking at it, going, “Seriously?” Because usually we find that in regular corporate pensions and annuities, that you have no cost of living increase. You don’t have it in a government program.

She goes, “No, not where I am. Our particular area, they won’t have a COLA, they won’t have a cost of living increase in it. Too expensive.”

And I said, “Well, that’s exactly the problem that you run into with annuity products and typical pensions. You don’t normally have cost of living increases because it’s too expensive to provide it.”

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Annuities, the concept behind them is you’re handing money over to an insurance company and saying, “Pay me an income that I can’t outlive.” 

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So if I have a 10-year life expectancy, let’s say that there’s a 0% interest rate, that you’ll pay me 10% of my money every year and at the end of 10 years, I would have run out of money because that’s 10% times 10 years would be 100% of the money. And if I live only two years, you pay me 20% of my money, 10% for two years.

And oh, well, I’m gone. It doesn’t really matter to me. But if I live 20 years, you’ve paid me 200%, 10% times 20, you have paid me double what I gave you, and I win.

And that’s the concept behind an annuity. You’re actually having an insurance company ensure that if you live longer than your life expectancy, that you won’t run out of money.

And it sounds really good at the surface, except for when people retire, they might have a 20- to 30-year life expectancy. And when you look at that long of a period of time, the payout is a lot lower, number one, from the insurance company, but it doesn’t have a cost-of-living increase.

Variable Annuities

Now you have a couple of variables. I’ve never seen a variable annuity, which is it can invest in the stock market. I’ve never even seen one annuitized. I’ve never even, in my 37 years of doing this for a living, I’ve never seen one annuitized ever.

And I think, Wow, you would think I would have seen one, but I just never see that. But I see a lot of regular fixed annuities, and you don’t see a lot of them annuitized because most people won’t do that because they don’t like losing control of their money.

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But I have never seen an annuity where it has a cost of living increase in it. 

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Now, I’ve seen them illustrated where you have an annuity, then they say, “Here, I’ll give you $200,000 and you pay me an income for the rest of my life and make sure it goes up with inflation.” The ones I’ve seen will cap the inflation rate, number one, is the first thing they do.

They might cap it at 3%. So if you have 6% inflation, your inflation increase is only going to be 3%. But what happens is that you look at it and go, “Well, why have I never seen one of those sold?”

In my entire history being in this industry, why have I never seen one? The reason is the payout’s awful. On the ones I’ve actually run illustrations on, because I thought, Hey, this would be a great idea for somebody.

And I would run an illustration and go, “There’s no way. I can’t recommend this to somebody. The payout’s awful and much lower than what I would get from a diversified portfolio and taking an increase in income from a diversified portfolio based and using all of the academic research on how you take an income.”

So hence what I find is so often the product approach to investing and taking a retirement income just isn’t that great. And that’s why I put together a book on that. I have a little retirement income book that I put together on that.

I think it’s still available if you go to paulwinkler.com/income. I think it’s still out there on the internet. You can check that out. I think it’s certainly, if you go to the website, paulwinkler.com.

But I walk through all the different things that people think of as great ways to take income in retirement, and I walk through why they’re not so great, taking dividend-paying stocks and using that interest or target date funds. I walk through real estate.

I walk through these different things that people think of, and annuities, and I go, “Well, this is why this isn’t so great,” and, “What does the academic research say?” So you can check that out on the website at paulwinkler.com.

Target Date Funds Are a Flawed Tool

Oh, isn’t this funny? I was just talking about the income guide that we have, and I was talking about how a lot of people use typically things like real estate and dividend-paying stocks and interest-bearing accounts and annuities and those types of things for income and retirement. And then one of the things I named was target date funds, right?

Article in Market Watch: “Target Date Funds Are ‘a Flawed Tool.’” Where have you heard that before? Where have you heard that before? Right here in “The Investor Coaching Show.”

“Here’s how you can do better.” So it said: “Target date funds provide a simple hands-off approach to investing for retirement. What people should avoid, according to one advisor, is putting money into a target date fund at age 22 and not thinking about it for the next 40 years.”

Now number one, this is what the default is for most 401(k)s. You go into the 401(k), they say, “Hey, we’ve got a 401(k) here. You can contribute to it and you can get a match, your employer match, and you can put money in this thing and you choose your investments.”

And most people look at the person doing the presentation and go, “I don’t know what to choose. I don’t know anything about this investing thing.” And so, if you don’t know anything about investing, then just put your money in the target date fund.

So if you’re going to retire in the year 2050, then you just put it all in 2050 fund. If you’re going to retire in 2060, 2060 fund. If you’re going to retire in 2040, put it all in the 2040 fund, and then you don’t have to think about it.

And the issue here, it says, is what they do is they automatically rebalance your portfolio; it becomes more conservative as you get older, and the target date approaches, and then as they’re saying in this article, they’re saying they’re well-meaning, but it’s a flawed tool for the growing number of investors that are using them. And that’s most.

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I mean, some of the research out there shows that you’ve got something like 80% plus people that are investing in 401(k)s are using these vehicles. 

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So this isn’t just isolated. This is the norm.

“If you have to park your money for a period of time in low-cost, passively managed target-date fund while you get more confident and learn about how to invest, to me, that is a great outcome.” So they’re saying you can do that for a short period of time.

Fixed Income Investments

The reality is most people aren’t going to even learn more about investing. Or if they’re going to learn about investing, where are they going to get the information? They’re going to get it from people that are selling investment products, or they’re going to go out there on the internet, God forbid, and get a lot of really bad information about investing out there.

And the way these things are intended to work is a good idea in its general premise is that you’re going to retire in 2040. It might be, for example, that you’re in your 30s and you might want to have most of your money in stocks.

You might have 75 to 95 to 100% of your investments should be in stocks, typically when you’re at those ages, because you’re not worried about volatility, you’re not worried about short-term ups and downs of the stock market. You’re more concerned about outpacing inflation.

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Historically, when we look at stocks versus inflation, large companies have outpaced inflation by about 7% historically per year. 

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If you look at long periods of time, 80, 90 years of academic research on investment markets have shown that returns over just about every 30-year period throughout all of history is right in the neighborhood of about 7% above inflation. So if we look at small companies, it’s about nine.

We look at large value companies, it’s about eight, 9% above inflation. And then small value companies are somewhere in the neighborhood of about 11 above inflation.

So we look at that and we say, okay, so let’s say that it’s seven above inflation. That’s money doubling about every 10 years. If it’s 9%, it’s money doubling about every eight years or so.

So if we look at that and we say, okay, that beats the daylights out of CDs or fixed income investments, like cash type investments that literally pretty much if we look at historical returns of Treasury bills or something like that, you may be talking a couple hundred years before it doubles the first time. It’s really, really a bad idea.

When we look at what the doubling rate is and say, “Well, why is it so low?” It’s because there’s no volatility. When we’re looking at cash type investments, they pay a minuscule amount of interest just so that you keep pace with inflation, not that you outpace inflation.

Now we look at the inflation rate, historically three to 4% per year, and that’s typically what we’re going to see with fixed income investments, three to 4% per year. So they’re not even trying to do that. That’s not what they’re designed to do.

Familiarity Bias

Well, what happens is with these programs, with these target date funds, they typically tend to lean very, very heavy bigger companies, big U.S. companies, and that’s because of familiarity bias. I was actually showing a couple this week, some friends of mine, we were walking through this stuff and they said, “We got this program with the government,” it was a government program, “and surely they wouldn’t be investing this poorly.”

And a lot of people think, Well, yeah, of course the government wouldn’t be doing that poorly. Then you’d think that they would have some pretty good resources to invest the money with their government pension plans and with your 401(k), that they would be doing well.

I said, “Let’s just take a look at it.” So we open up what they had and what their pension was investing in. And by the way, their 401(k) was investing in the same exact thing.

And you think this ought to be good stuff. But 55% of it, 55% of it was in large U.S. companies. And I forgot the percentage, but it was another very high percentage of it, which almost made up for the rest of the money, was investing in large international companies.

And you look at big U.S. companies like Ford, you look at companies like Microsoft and Apple and Nvidia. So all these big companies, U.S. companies, and you think, Well, what’s the difference between that and companies like Nissan or companies that are international big companies?

You don’t think that differently about those two different types of companies. Because they are very similar to each other, historically, they move with each other a lot. So the diversification benefits aren’t there.

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But those are companies that are large enough that they don’t have to pay much to use your money historically. 

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I mean, that’s the reality of things. And that is where they had most of the money. And you go, “Well, wait a minute, why would they do that?”

And I had to explain familiarity bias and the psychological biases that drive investor behavior, but they also affect the investment advisor behavior who is trying to sell the investments. It’s the path of least resistance to get you to buy something that you want to buy. If I’m already familiar with these companies, I like these companies and I’ve heard of them, it’s a lot easier to get me to invest in them than it is to get me to invest in areas that may not be as familiar.

Total Market Index Funds

As a result of it, number one, we’re looking at a younger person concentrating all of their money in areas of the market that have a lower expected return. That’s problem number one.

But problem number two is this: The target date funds tend to lean more into bonds earlier than they probably should for most investors. In other words, they start to make the move from stocks to bonds to fixed income investments too fast, and they go too far for the typical investor.

And I’ll always say, a typical investor, there’s always exceptions to every rule, but for the vast majority of people, we don’t want to move that heavily into fixed income investments. You’re moving too heavily into something that doesn’t have a prayer of getting a return above inflation, and it might have to last you 30 years in retirement.

That doesn’t make a whole lot of sense to do that too fast. And that’s in essence what we find with these things.

Now, number one. Number two, the other thing is they’ll typically, you’ll have Vanguards of the world that will index the whole thing. And the problem: They’ll use total market index funds in their target date funds.

And you’ll look at most of the money, you might have 30% of your money in just 10 stocks, literally a huge amount because of the capitalization weighting. And then you’ll have other fund companies out there that will buy and sell and move things around and you don’t even know that they’re doing it because you’re not monitoring things. You’re letting them do whatever they think they should do.

And you go, “Well, why wouldn’t I want them to do that?” Well, the reason is because the research shows that when they do that, it tends to hurt returns and increase expenses.

Then you have the whole thing that’s new on the horizon here, which is investing these things in private equity and private debt. And well, what’s wrong with that?

Well, the problem is there is so much information that is being withheld from the investor that they really don’t know whether they’re getting a fair shake on what is in the portfolio.

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People don’t know what they’re investing in the first place, but it’s even worse when those companies don’t have to disclose information to the public. 

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So I don’t know if there’s anything else in the article. Let’s see, investing in retirement’s challenge. Oh yeah, 44% full-time jobs. Yeah, remember I said earlier how many people are actually using this stuff?

Eighty-four percent of participants do this, according to Vanguard data. And I just pointed out the problem that I have with their target date funds, and 84% of people are using them.

Lower Returns, More Risk

“Long life isn’t cheap.” This is something that they’re saying in here. Yeah, it isn’t. That’s a problem.

If you look at what happens when you invest most of your money in areas of the market and you may say, “Well, what’s the big deal? What if I have, let’s say, a 2% lower return on my money?”

And just to put that in perspective, let’s say I had $100,000 and I was investing over, let’s just use a 40-year time period, just so you get the idea of how big of a deal this can be. Let’s say that I had a 10% return.

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By the way, the average investor is far underperforming markets historically. So I’m being very, very kind here. 

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So let’s say that that was the rate of return versus an 8% rate of return. So you end up with about 4.5 million. But what if your return drops to 8%? Now you’re looking at less than half, significantly less than half the accumulation over that same period of time.

Now, if we’re talking about after-inflation rates of return, let’s say that we use that 7% after inflation rate of return. Let’s just use that for an example.

What does that grow to? In 40 years, 100,000 grows to about 1.4 million.

But if your rate of return drops just a couple percent, again, less than half. So you end up with a fraction of that.

And you go, “Well, what if you’re living on less than half of your income right now?” Just put that in perspective.

Let’s say I had to tell you that your income was going to be cut in half going forward. What would you do? Probably panic. If you were normal, you would probably panic, right?

And that’s the problem that you run into because of the way these portfolios tend to be managed. They tend to not be necessarily optimizing returns of the portfolio, and then also by not diversifying more completely — because, like I said, they’re trying to appeal to your sense of what you want — it tends to increase risk.

So what’s not to like about that? Lower returns, more risk.

This is great. It’s America. I like it. I’m just glad that the investment industry is starting to catch onto it.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.