Trading back office wants to know, my compensation and employment are directly tied to the performance of the stock market. Should my investments be diversified into other areas, such as real estate? I picked this one because I think you guys are uniquely qualified to speak on that, since you work in a profession where a lot of your compensation is tied to the stock market, and also you’re invested in real estate. So when should they think about that?
Yeah, I think a lot of people give us a bad rap, Brian. They think, ‘Okay, well, you guys are financial advisors and you invest in the market and talk about the market and stuff, so you must not like real estate.’ And that couldn’t be further from the truth; that’s not the case. Trading said, ‘Okay, my comp and my employment are tied to the financial markets. Does that mean that I should not have other types of wealth built up in the markets?’ I don’t think so. I don’t think that’s what that means at all. I do think that it makes sense that when you think about your overall risk tolerance and your overall risk capacity, when it comes to how you allocate your portfolio, when it comes to how you think about how much to keep in emergency reserves, when it comes to those kinds of things, by all means, your employment and where your human capital is tied should factor into the conversation. But I don’t think there’s anything wrong with building wealth inside of the financial markets—using Roth IRAs, using 401ks, using HSAs. And I also don’t think there’s anything wrong with, after you’ve built that foundation, also diversifying into other asset classes and asset types. Maybe that’s residential real estate; maybe it’s commercial real estate. There’s nothing wrong with doing that, but you’ve got to make sure you do it at the right place at the right time.
Yeah, I mean, it’s so foundational. Once again, back to the free resource Financial Order of Operations. Go to moneyguy.com/resources. This is exactly why we created this type of system so you can think about what’s the best way to maximize my next dial. And one of the things, I wrote down three quick words: asset allocation, tax location, and of course, glide path. So what typically happens if you think about the Financial Order of Operations? Once you get past one and four, which is your cash, your liquidity to keep your life out of the ditch, the rest of these—like two is getting that free money from your employer, five is where the investment process kind of starts. And it is one of those things where the easy path here is probably going to be just buy the economy instead of trying to beat the market. Why not just be the market? Because with constant innovation, the law of accelerating returns, there’s so much innovation and other things going on. If you can just buy indexes like the S&P 500, total market indexes, as well as index target retirement funds, you’re just getting so much of that innovation without having to waste a lot of calories or mental horsepower on figuring it out. So that’s why that’s the easy part for us to do. And you’ll see that as you continue on into step six with max out your retirement. Because on our 401K here, we have real estate as one of the asset diversifiers. That’s why it’s part of your asset location. But then, so there’s nothing wrong with having asset allocation that goes beyond just the stock market. We love the index funds because they are capturing what’s going on in the economy and the growing. We know eight out of ten years markets are typically going up because us as humans keep growing, innovating, and making more stuff that you can kind of expand your financial security off of. But that doesn’t mean that a 20-year-old version of yourself is going to be completely different on how you invest from a 65-year-old version of yourself because behaviorally, we just don’t need to be taking that much risk once we’ve won the game. So you’re going to have a glide path, meaning you’re super aggressive while you’re young. You get more conservative once you’ve won the game as you’re getting older because it’s get wealthy at behavior and then there’s stay wealthy behavior. You have to know that there is a process that you have to walk through, and that’s the glide path that will work through that asset allocation changing from aggressive to being more conservative as part of that glide path. The tax location that comes up, and you’ll change all that around. But at the end of the day, we are again—we actually, any way that you, that is proven to create success and wealth, we’re pro that. And that’s why I love investing in the financial markets. I love investing in diversifiers like the fixed income as well as real estate. It’s just that a lot of people do things in the wrong order. They usually get their risk spectrum all messed up, and that bleeds into the behavioral problems because they financially can’t handle it. Because a lot of people, we love real estate, but we love if you go actually buy real estate. Not invest in REITs or real estate mutual funds or index funds. We’re talking about actually getting into active ownership of real estate. I do think that that’s a step eight of the financial order of operations because it just requires you to have much more of a financial foundation. Because we know financial markets, I mean real estate specifically, is typically levered money, meaning you have to go take borrow money. You put down a small down payment; you go borrow money. So whenever you lever anything, you better have deep enough pockets or the foundation so that if somebody’s not paying you money for the access to your real estate, that you can still make your monthly payments. I think that’s a lot of people get excited about leveraged real estate when it’s making money and it’s appreciating because you’re getting a double whammy. You’re getting every time every loan payment you make, you own a little bit more of the house. But you’re also super excited because when it goes up, especially in a high inflationary period like we just came through, you’re like, ‘Whoa, I’m making so much money on this real estate.’ Nobody ever tells you what’s on the other side of the mountain when we come down or when things adjust. And we are in a period right now where real estate is actually going down in value in a good large portion of the United States right now. And what if somebody doesn’t want to rent your property? What if you bought at this point but now it’s worth less? So you can’t go borrow as easily. You can see how very quickly the dream, the mirage, the hope, and the prayer that that levered return that you’re going to get can turn into a nightmare for you. That’s why when we bought our first commercial building, one of the people we really look up to here in the downtown Franklin area, because they own a lot of the prominent real estate, he goes, ‘Boys, congratulations, but I just hope you can cover that note when it gets ugly.’ And he meant it because there are periods where maybe somebody doesn’t want to rent from you or that you know, or somebody’s tearing up your property while also the economy and the financial markets are getting crushed. You’ve got to have the money to pay the bills even in the dark times. I love it. For more information, check out our free resources.
