Do You Want Something You Can Put Your Hands On?

Jun 29, 2020 David Kennon

Should I Buy a Rental Property to Fund My Retired Years? This is definitely a “Top 10” question I hear in my practice. During my 20 year career, I have seen countless clients buy and own rental properties and my conclusion?  Don’t do it.  Don’t do it.  Don’t do it. Now, don’t misunderstand.  I have some clients with 20 properties or more who treat being a landlord as a full-time job.  Normally these kinds of property portfolios consist of very low-end housing.  They can make significant money. I’m talking about the retiring couple who buy a rental, usually a few years before retirement.  Their rationale?  “Once we retire, we can just sit there and let the checks roll in. Not only do we get the rent but we are also building up equity in the house.” I’m going to tell you a story about Billy and Sally. Billy and Sally were good, hard-working people who were responsible savers.  A few years before retirement they watched a show on TV.  In it, the host showed them how easy it was to create income from properties.  “It is a tangible asset,” he proclaimed.  “You can put your hands on it.  It’s not like other investments.  You own a real piece of real estate which has tremendous cash flow and growth potential.” Billy and Sally were immediately sold.  They began to peruse Zillow.  It seemed like there were opportunities everywhere. They didn’t want anything fancy.  Just a basic home for a renter. After a month of researching, they made an offer on a house.  It sold for $200,000.  They used a good portion of their savings for the purchase.  They were thrilled they owned the house without a mortgage.  Of course, Billy had to cash in some of his 401k, but it was worth it to him (don’t do this). The home was in a nice, quiet neighborhood.  Billy and Sally were proud of their purchase.  It was incredibly comforting to know they owned another home, outright.  No matter what happened to them financially, they always had this house. Now, of course, the house was not in perfect shape.  It definitely needed new floors.  The last owner must have owned big dogs.  They continued on to the rest of their to-do list: Paint, inside and out New, small patio off the back entrance. Replace the leaky water heater. New curtains. Some basic landscaping. Replace several fixtures. As Billy and Sally were still working their own full-time jobs, these weekend projects took nearly three months to complete.  But, finally, it was ready to rent. In deciding rent they looked at other rentals in the neighborhood. They wanted to be fair so they asked for $1400 a month (way too low).  Amazingly, the first person who saw the house wanted to rent it.  What great news! The tenant was currently renting another place and he had to stay there one more month according to his lease. Billy and Sally were surprised that the new floors, paint, and patio didn’t really mean much to the renter.  He was just looking for the right amount of space and at least two bedrooms. So, here we are, six months in.  The house is rented and their dream of endless income was becoming a reality.  (Billy suddenly realized he had to cut the grass.) Three weeks in, they got a call from the tenant at 10:00 at night.  “My toilets don’t work,” he complained.  “I need this fixed ASAP.”  They had a plumber out right away  ($500). A week after that, the air conditioner stopped working and Sally had to get a repairman out there.  ($200) Two months after that, the renter was late on his rent.  Billy and Sally felt very uncomfortable threatening the tenant.  They certainly didn’t want to mess with foreclosure.  Luckily, the renter got them the money a week later. Two months later the property tax bill came in:  $3,000.  Insurance: $1000. Two months after the house was rented, they learned that the renter had an emergency back home (in New York) and had to leave immediately.  Billy and Sally had to start looking for a new renter again. A few more minor things needed fixing that filled up their weekends.  “This is a pain,” Billy commented,  “We shouldn’t have gotten a place all the way across town.  Sally’s friend, who has a rental, utilizes a property manager.” It seemed so simple and they were tired of dealing with the headaches. They found a good property manager who requested 10% of the rent for his services. Billy and Sally now really had it made.  They didn’t even have to worry about the stress. Let’s do some quick math. Cost from savings:  $200,000 Monthly rent:  $1400 (minus the 6 months to get it filled-  $8400 total first year.) Upgrade Costs:  $10,000 Taxes/Insurance:  $4000 Landscaping (Billy gave up doing it himself)- $600 a year Random maintenance and repair- $2000 Property Manager:  $1680/yr. Let’s look at their year one profit. $8400 rent -$200,000 that could have been making money in his 401k (-$10,000 conservatively) -$10,000 upgrades -$4000 -$600 -$2000 -$1680 ———– -$18,880 (loss) Now that isn’t entirely fair.  The first year is tough. Let’s look at year two. $16,800 rent  (assuming it’s rented the whole time). -$10,000 opportunity cost (money that could have been invested) -$4000 (taxes/insurance) -$600 -$2000 -$1680 ———– -$1480 (loss) I hope I’ve made my point by now.  Billy and Sally would be lucky to break even. Of course, there are exceptions.  But 90% of the people with whom I meet suddenly realize owning a property isn’t as easy and lucrative (or fun) as they thought. I’ve also found that these landlords never increase their rent.  “Ms. Bowers is such a sweet lady.  She’s been there for 8 years.  We hate to raise her rent.  She started at $800 a month and we never increased it.” Even more often, the rental ends up getting occupied by a down-on-their-luck family member or child, who agree to pay the property tax and insurance (but that’s it). I hope this makes sense.  The alternative to all of this?  Passively invest your money into a diversified portfolio of stocks and bonds. You’ll almost certainly make more money,  and you don’t even need to deal with that darn rat infestation! Be Blessed, Dave

I Got Lucky

Jun 22, 2020 David Kennon

Oftentimes I find myself battling against the concept of “day-trading.” Many people believe I sit behind a computer all day, watching the market minute by minute, making hurried micro-second changes. Many retired investors use these strategies with their retirement savings. It’s heartbreaking. Why would I say that? Here are a few gems I ran across (very easily) on the internet. Our Congressive Day Trading System isn’t about making millions of dollars every day. The goal is to make money consistently every day. It is learning how to be reliant on yourself so you can focus on the actual movement of the market. Dave’s Take: How is it possible to make money consistently every day!? Maybe I should buy their system so I can help YOU make money every day. Do you know who else promoted this slow and steady growth with no downturns? Bernie Madoff. Are you ready to invest smarter with very little effort on your part? Over the past 15-months, Prep2Grow has achieved a 96+% win rate with 117+% return. Dave’s Take: ANY time someone purports specific returns like this your alarms should be going off. Why? It is absolutely illegal for any licensed fiduciary or broker to show past returns. If you thought that online trading is for men only, you are making one huge mistake! Thus, if you are a stay-at-home mom, this is the perfect way to make extra cash – and better yet, you’ll still have time for all your household requires of you!  Dave’s Take: I hope all you ladies do some studying between laundry and vacuuming. I’m kidding about the division of labor, but deadly serious about the risk of trading with no experience. Let’s Have a Quick Reality Check As I have mentioned repeatedly, “super-smart” Wall Street guys cannot make more money in the long term than a traditional long-term diversified investor. I can’t tell you how many times I’ve heard, “Dave, I’ve been day trading for the last ten years or so and I’ve made a killing! I think I’ve really got a knack for this.” My answer (which I usually keep to myself) is, “The stock market has done nothing but go up for ten years. You could have thrown darts at a dartboard and made money.” What’s fascinating is when the stock market has a downturn. Suddenly, day-trading isn’t nearly as fun —  at all. Right now I’m seeing a lot of ex-day traders in my office looking for some sensible guidance. Moving in and out of cash is especially risky in times such as these. If your day-trading system involves moving in and out of the market rapidly based on daily returns, it turns into a mess. Why? While it is easy to sell all your investments and wait until things get better, when is the right time, exactly? Currently, I see this almost every day. It goes something like this: The market has a terrible day, and even though you might know it’s a mistake to sell your portfolio, it just doesn’t seem like it is worth the risk. You sell. You just want to wait until things settle down. Then one of two things happen: The market keeps going down. “I’m a genius,” you think to yourself. “I wonder if it is going to keep on going down? I better hold off until it stops.” OR, the market starts going up. “Hmmm,” you say to yourself, “should I get in now? I know I’m not supposed to ‘buy high.’ I guess I should wait until it has a dip again.” Do you see the problem here? When do you get back in?  When do you get back in? Either way, you lose. It is an emotional roller-coaster. Stay the course. Allow the markets to do what the markets do. Remember that what the markets do this year or next does not matter. Say that with me: What the markets do this year or next does not matter. Day trading is a losing battle, nearly every time. Interesting Story: I have a friend who, in the 1990s, ran an investment portfolio. His returns were through the roof (far beyond the great returns the 90s had anyways). His performance was so incredible that pension systems began to approach him. Large companies like Dillards, Inc. were approaching him to manage all of their assets. We are talking hundreds of millions of dollars. Of course, my friends charged fees which led him to extreme riches. Then other large companies got wind of his stellar returns. He started to experience a bit of fame. He found himself responsible for over a billion dollars. He decided to retire and slow down the pace of his life. He already had more money than he could ever spend. I asked him, “What was your secret? How did you blow all these other managers out of the water?” He looked at me sheepishly, “I had 5% of my portfolio in Yahoo stock the whole time. It went from $1 a share to $110 a share. That’s over a 10,000% increase. I….got lucky.” Be Blessed, Dave

Are You Up to the Challenge?

Jun 15, 2020 David Kennon

Whenever someone says to me, “The stock market is crazy.  It goes up and down.  I have no idea if I’m going to be OK.”  “What happens if this Covid thing tanks the economy and I lose all my money?”  (By the way, the market is down only 5% on the year.  The resiliency of the stock market is incredible.)

I think to myself, “But it doesn’t matter.  It just doesn’t matter.  Investing in a diversified portfolio has never not worked.”

So what exactly do I mean by that?

This week I am going to give you a glimpse into the appendix from my book:  The Retirement Revolution: Spend More, Worry Less. 

This data drives much of my advice and beliefs about investing and spending in retirement.   I believe that this data, if truly understood, could take away all of your fears about investing once retired.  I can’t emphasize this enough.  Please take the time to absorb the table below.

Appendix Explanation

The historical data below simply shows you what would have happened if you had retired in any given year (starting in 1931). Each “retirement” is assumed to last 20 years.

The first row reveals what would have happened if someone retired in 1931 with $100,000. The money is invested in the 500 largest companies in the U.S. (otherwise known as the S&P 500 Index).

Starting with $100,000, the chart shows what would have happened if you started withdrawing $5,000 (or 5%) per year beginning the very first year of retirement. In each example, over 20 years, you would have withdrawn a total of $100,000 ($5000 per year for 20 years).

I know this is technical, hang in there.

So, if you retired in 1931, over the next 20 years your money would have grown to $513,210- even though you withdrew 5% of the original investment each year.

Important Points

1. 100% of the scenarios result in you ending up with more money than you started with.  86 times in a row.
2. The WORST period illustrated is from 1997-2017. Your original $100,000 would have ended with a value of $145,177 (even though you had been withdrawing $5000 per year for 20 years).

1. The BEST period illustrated is from 1979-1999. Your original $100,000 would have ended with a value of $1,840,805 (even though you had been withdrawing $5000 per year for 20 years).

1. The MEDIAN period illustrated is from 1953-1973 where your original investment would have grown to $552,969.

1. This is absolutely amazing news.
2. It is statistically correct to say, “Over the past 86 years, if you started with $100,000 and withdrew $5000 per year for 20 years, every time you would have ended up with more than the original investment.”

Hopefully, this blows your mind as much as it did mine!  It doesn’t matter what the stock market is doing. 

Be Blessed,

Dave

Here is the chart.  For example, pick your birth year, or your kid’s birth year.  Imagine if you retired that year and look at the value 20 years later, even though you had been withdrawing 5%.

Starting Retirement Date	End	Original Investment	Total Withdrawals (5% per year)	Annual Return	Ending Value
12/31/1931	12/31/1951	$100,000	$100,000	11.40%	$513,210
12/31/1932	12/31/1952	$100,000	$100,000	13.27%	$766,022
12/31/1933	12/31/1953	$100,000	$100,000	10.15%	$386,712
12/31/1934	12/31/1954	$100,000	$100,000	12.56%	$660,031
12/31/1935	12/31/1955	$100,000	$100,000	10.63%	$431,282
12/31/1936	12/31/1956	$100,000	$100,000	7.84%	$219,962
12/31/1937	12/31/1957	$100,000	$100,000	12.37%	$633,616
12/31/1938	12/31/1958	$100,000	$100,000	12.03%	$589,235
12/31/1939	12/31/1959	$100,000	$100,000	13.08%	$735,558
12/31/1940	12/31/1960	$100,000	$100,000	14.40%	$966,123
12/31/1941	12/31/1961	$100,000	$100,000	16.91%	$1,585,122
12/31/1942	12/31/1962	$100,000	$100,000	15.46%	$1,194,776
12/31/1943	12/31/1963	$100,000	$100,000	15.13%	$1,118,421
12/31/1944	12/31/1964	$100,000	$100,000	14.89%	$1,066,591
12/31/1945	12/31/1965	$100,000	$100,000	13.39%	$786,149
12/31/1946	12/31/1966	$100,000	$100,000	13.87%	$867,869
12/31/1947	12/31/1967	$100,000	$100,000	14.87%	$1,062,546
12/31/1948	12/31/1968	$100,000	$100,000	15.35%	$1,169,095
12/31/1949	12/31/1969	$100,000	$100,000	14.07%	$903,770
12/31/1950	12/31/1970	$100,000	$100,000	12.70%	$679,685
12/31/1951	12/31/1971	$100,000	$100,000	12.15%	$604,166
12/31/1952	12/31/1972	$100,000	$100,000	12.10%	$597,148
12/31/1953	12/31/1973	$100,000	$100,000	11.74%	$552,969
12/31/1954	12/31/1974	$100,000	$100,000	7.97%	$227,119
12/31/1955	12/31/1975	$100,000	$100,000	7.57%	$204,629
12/31/1956	12/31/1976	$100,000	$100,000	8.21%	$241,785
12/31/1957	12/31/1977	$100,000	$100,000	8.98%	$292,907
12/31/1958	12/31/1978	$100,000	$100,000	6.99%	$174,859
12/31/1959	12/31/1979	$100,000	$100,000	7.03%	$176,891
12/31/1960	12/31/1980	$100,000	$100,000	8.38%	$252,335
12/31/1961	12/31/1981	$100,000	$100,000	6.57%	$155,386
12/31/1962	12/31/1982	$100,000	$100,000	8.37%	$251,568
12/31/1963	12/31/1983	$100,000	$100,000	7.80%	$217,461
12/31/1964	12/31/1984	$100,000	$100,000	7.00%	$175,399
12/31/1965	12/31/1985	$100,000	$100,000	7.25%	$187,660
12/31/1966	12/31/1986	$100,000	$100,000	9.36%	$321,308
12/31/1967	12/31/1987	$100,000	$100,000	7.91%	$223,717
12/31/1968	12/31/1988	$100,000	$100,000	7.85%	$220,163
12/31/1969	12/31/1989	$100,000	$100,000	10.32%	$402,199
12/31/1970	12/31/1990	$100,000	$100,000	10.28%	$398,713
12/31/1971	12/31/1991	$100,000	$100,000	10.60%	$428,851
12/31/1972	12/31/1992	$100,000	$100,000	9.60%	$340,207
12/31/1973	12/31/1993	$100,000	$100,000	11.98%	$583,058
12/31/1974	12/31/1994	$100,000	$100,000	14.84%	$1,055,377
12/31/1975	12/31/1995	$100,000	$100,000	14.36%	$958,459
12/31/1976	12/31/1996	$100,000	$100,000	14.00%	$891,251
12/31/1977	12/31/1997	$100,000	$100,000	16.44%	$1,447,113
12/31/1978	12/31/1998	$100,000	$100,000	17.64%	$1,818,318
12/31/1979	12/31/1999	$100,000	$100,000	17.70%	$1,840,805
12/31/1980	12/31/2000	$100,000	$100,000	15.40%	$1,180,094
12/31/1981	12/31/2001	$100,000	$100,000	15.50%	$1,202,665
12/31/1982	12/31/2002	$100,000	$100,000	13.25%	$763,294
12/31/1983	12/31/2003	$100,000	$100,000	13.34%	$777,933
12/31/1984	12/31/2004	$100,000	$100,000	13.75%	$845,961
12/31/1985	12/31/2005	$100,000	$100,000	12.38%	$634,571
12/31/1986	12/31/2006	$100,000	$100,000	12.15%	$603,834
12/31/1987	12/31/2007	$100,000	$100,000	12.30%	$624,349
12/31/1988	12/31/2008	$100,000	$100,000	9.51%	$332,734
12/31/1989	12/31/2009	$100,000	$100,000	8.92%	$288,562
12/31/1990	12/31/2010	$100,000	$100,000	10.00%	$373,397
12/31/1991	12/31/2011	$100,000	$100,000	8.57%	$264,524
12/31/1992	12/31/2012	$100,000	$100,000	8.95%	$290,416
12/31/1993	12/31/2013	$100,000	$100,000	9.73%	$350,521
12/31/1994	12/31/2014	$100,000	$100,000	10.48%	$417,526
12/31/1995	12/31/2015	$100,000	$100,000	8.58%	$265,008
12/31/1996	12/31/2016	$100,000	$100,000	7.76%	$214,933
12/31/1997	12/31/2017	$100,000	$100,000	6.33%	$145,177

You’re a Sucker

Jun 8, 2020 David Kennon

Stock Picking Systems….

I am often astounded at how many people have “bought in” to the idea that day-trading stocks can work for anyone that has the time and intelligence.

I often hear, “I was doing pretty well picking stocks, but it was just too much work.  I had to constantly stay on top of things.  I just don’t have the time.”

And there are PLENTY of people more than willing to sell you their fool-proof stock-picking system.  Some cost as much as $7,000.

$7000?!  Well, I guess if you want to have a roadmap to being a millionaire, that’s just what it costs.  You have to spend money to make money, right?

Today I am going to review a very common stock picking strategy called “Charting” or “Technical Analysis.”

Technical Analysis consists of looking at patterns in market data to identify trends or make predictions.  If you watch enough CNBC, you will see this strategy being used by many of the “Super Smart Guys” they interview.

Hmmmm….. they look sophisticated.

Anything that looks this complicated HAS to be important, right?!

Another stock picking site shows guys with twelve screens……

Those guys have TWELVE computer screens.  TWELVE!  How could someone with only ONE computer screen possibly compete?!  I only have TWO screens in my office…. 

But there is one teensy-weensy problem with all of these investment theories: a total lack of evidence that they actually work.

“An October 2009 study by New Zealand’s Massey University tested more than 5,000 technical analysis strategies in 49 different countries. The result? Not one strategy generated returns that aren’t predicted by chance.  Let me repeat that. Not one.”

-Anand Chokkavelu, CFA

Or put another way,

“A monkey pointing at random stocks in the Wall St. journal will experience as much stock picking success as someone using technical analysis.”  -David Kennon

Warren Buffett has his own take on it as well:  “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”

Ouch.

“Ok, Dave.  So all this stuff I hear about ‘stock picking systems’ are a bunch of malarkey.  What’s the big deal?”

The big deal is that A LOT of people believe this stuff.

There are too many people across this country pegging their retirement hopes and dreams on stock picking systems that don’t work.

So, if you see something on your computer screen about Free Commodity Market Tips or The Penny Stock Egghead-Retire a Millionaire………

Don’t click on it!

But I have great news!  Utilizing a balanced and diversified portfolio of stocks and bonds, while keeping a long-term, disciplined focus, is an incredibly powerful and time-tested way to keep your money working for you.  Don’t make this more complicated than it is!

Be Blessed,

Dave

This is a Worst Case Scenario

Jun 1, 2020 David Kennon

Social Security is not going broke.
Inflation is not going to bankrupt you.
Medicare covers more than you realize.
Your savings may go further than you think.
You don’t need a million dollars to retire.

Now that we have that out of the way, let’s get pessimistic.

For about 50% of retiring Boomers, as soon as you retire you need to start spending a reasonable amount of savings each year. My rule of thumbs is to “spend the money the money is making.” If your CD is paying 2%, spend the 2%. If you stock and bond portfolio is returning an average of 5%, spend the 5%.

“But Dave,” I keep hearing, “nobody can guarantee the future. While what you say is logical and sensible, you never know what might happen.”

Ok. If that’s the way we want to think, let’s go down that road.

Story #1

Joan Smith retires and starts spending her money in a responsible and reasonable manner, making sure never to spend the principal, but enjoying the interest and dividends her investments paid out.

She uses the money on things she enjoys- things that are important to her. She spends more time with the kids and grandkids. She spoils herself at the spa from time to time. She goes out to dinner with friends. She confidently lives her retired years, knowing that she has a plan in place.

In fact, as she reached her late 70’s she really started to spend some money (“You can’t take it with you”, she always said.). She bought a small condo for her sister who was recently widowed. She organized and financed a large cruise/family reunion with her extended family. Sure she was spending the principal, but she figured, “I’m not going to live forever.”

Then it happens. Early in her 90’s the money starts running out. “I never thought I would live this long,” she quipped. She was reduced to living on her social security, small pension, and the small amount of money left over.

Is she thinking to herself, “What a horrible mistake! I had such a great retirement. I enjoyed my kids and grandkids. I deepened relationships with people I love most. I helped people in need. But now here I am, living on a small fixed income.”?

Do you really think she would have looked upon her retirement spending as a mistake? Do you really think she will look back on her life with regret? Of course not! She’s 92 years old. Her bucket list has been achieved. She might not live high on the hog anymore. But she’s 92 years old.

Story #2

Jane Smith has found herself in financial trouble. After making a few poor decisions (including investing in a new apartment project in Puerto Rico), she found herself with very limited savings in her late 60’s. Her daughter offered to let her Mom move into their home.

“This is my worst nightmare,” Jane thought to herself. “I am a burden to my children. I can’t believe this is actually happening to me.”

But, as Jane settled into her new life living with her daughter, son-in-law, and three grandkids, she discovered something awesome.

Living with her daughter was a joy. Her grandkids desperately needed more attention from their busy parents, and Jane was able to help out.

Her daughter felt blessed for helping out her Mom. Jane’s grandkids will be forever changed by her presence in their life. “Life is funny,” Jane chuckled to herself. “My worst fear ended up being one of the best things that ever happened to me.”

Story #3

John Smith always worried that the economy was going to collapse. Once he retired, his worries got even more intense. “I’m not going to spend a nickel unless I have to. I am going to grow and defer this money as long as possible. Because you just never know….”

Well, in this example, John’s fears came true. The economy faltered. In fact, the country started to experience such economic devastation that the landscape of the U.S. started to look more like the Great Depression than the 21st century.

Banks began to fail. People, desperate for their money, begin rioting and looting. The stock market drops 80%. A majority of Americans begin to default on their mortgages. 30% of the population is homeless. Marauding bandits fill the streets, making a simple trip to the store an exercise in hand to hand combat.

John saw his investments and cash evaporate. The nightmare he had always imagined had arrived.

So my question is: Did it matter that John deferred and grew his savings? No. No, it did not.

If this scenario were to actually happen, we are all in the same boat. 

In fact, if anything, John missed out on the only chance he had to enjoy the money. By the time economic Armageddon arrived, he lost everything anyway.

Story #4

Janice Smith always worried about needing nursing home care. She never spent a penny of her savings. 20 years into her retirement, Janice developed dementia and ended up in a 24/7 nursing care facility.

The nursing home used up all of her money over the next few years. Janice, with the disease progressing, was completely unaware that her life savings were being drained. Looking back, maybe Janice should have used some of the money on things that were important to her while able.

Who do you want using your money?

You.
The government.
A nursing home.
Your good-for-nothing son-in-law. (after your daughter inherits the money)