If you hold a stock long term till recovery, while earning a 2% dividend cash-flow [1] you may hit a bankruptcy.
Nortel and Lehman went bankrupt, but XR pointed out this risk is real yet very low.
[1] For 6k invested, $120/Y dividend is 2%, though current dividend yield could be 4% if the 6K is currently worth 3k.
Buying an individual property provides much higher return than buying a comparable REIT. The key — bargain!
Say you have 300k to invest, either in a property or in a simple property-holding REIT without any value enhancement.
In fact, this is similar to Macquarie MIRA fund (or AsiaProperties or a hedge fund) spotting bargains and passing on a small part of the profit to investors. A decent hedge fund typically passes on a good portion to investors to make 6% return in a reasonable year. Clearly the fund itself makes a lot more profit.
Bargain picking is high-risk-high-return game These fund managers risk OPM (optionally with some house money at, say, 22% of the total) but cut a disproportionate share of the return, much higher than the 22%. In other words, investors take on all the risk, but receive part of the return.
Debt — is another Fundamental difference. Debt is frequently used by REIT operators, as a double-edge sword. Though it can enhance return (possibly the dividend yield), I generally avoid debts in my own property investments because the mortgage interest can erode my rental income.
The above probably describes the Singapore REITs. Now let’s look at the more advanced REITs, highly “visible” in the U.S. I can see this process in Energy12, AsiaProperties and MIRA (Macqurie Infrastructure and Real Asset). These deal makers can create huge value on the real estate bargain assets they buy. They enhance the assets and generate large profits, but again, the few individuals (deal makers) involved invariably keep a disproportionate share of the profit.
— In all REITs, the apportionment of profit includes “sweat equity”.
Say deal makers put in $12M, and REIT investors put in $88M. Out of the gross profit, deal maker first takes 50% as compensation. The remaining “net profit” is split 12:88 based on investment amount or outstanding shares. Effectively, the sweat equity is equivalent to $100M of capital.
REIT investors receive 88% of the net profits i.e. 44% of gross profit, which could translate to a 10.3% annualized return, beating the benchmark.
Suppose you as a REIT investor complains about the 50/50 split. Deal maker could say “If investors don’t rely on my bargain hunting skill, then they get none of this return. Investors could choose not to invest with me. It was investors’ choice .. take it or leave it. If you think you can get bargains yourself, then you can run your own REIT.”
https://money.stackexchange.com/questions/12706/help-me-understand-the-oddity-of-percentage-gains-and-losses is a good discussion
If you have two percent change values for adjacent time intervals, they compound rather than adding up. So 50% loss then 50% gain is base amount times 0.5 times 1.5. Which is NOT base amount minus 50 plus 50
real example — The TRBCX fund actually experienced 43% loss in 2008 then 43% gain in 2009, resulting in a 20% loss over 2 years.
See the post on value of top school district. Throughout the analysis, I try to separate the academic benchmark element from the conducive environment, because these are two separate benefits we pay for.
It takes a brave parent to recognize the limitations in a widely held conventional wisdom. The Europeans used to believe gravitational acceleration is proportional to mass.
Actually I’m not a super smart, super brave parent. I’m just a parent with limited budget, so I can’t afford to follow the convention wisdom among the richer friends and colleagues. But too much peer pressure. If I were to buy a home in an average school district, just about every concerned friend would question my decision.
[7/20/2017 10:27 AM] Tan, Victor:
I’m a careful risk taker. I once asked myself what’s “bad influence” to me. I believe it’s more about conducive/positive learning environment than academic benchmarks. If an average school is free of bad influence, it would be OK for my kids, even though the academic rating could be average
[7/20/2017 10:29 AM] Tan, Victor:
Long story — my sister and I went to 2 middle schools of very different academic standards. Mine is top 1%, hers above average. She basically didn’t get into college, but did she “suffer in a bad school”? Absolutely not. Her school was just fine and just not competitive academically.
[7/20/2017 10:33 AM] Meduna, Paul:
Each person has different standards.
[7/20/2017 10:39 AM] Tan, Victor:
agreed. I don’t like to see my kids’ academic performance dropping below average (since they are not low intelligence). So I want conducive environment + serious effort by 1) we parents + 2) my kids + 3) teachers on their grades. If that results in below-average benchmark performance, I would have to accept, even though I know jolly well (from my sister’s experience) that moving to a more competitive school might boost grades. It would be a short-term sacrifice I make for my kids. I would rely on my conviction as a once-top-student that they can catch up later academically. I have seen it many times, including in my sister.
One of our Fundamental motivation is diversification. (Risk reduction is just one of the benefits of diversification.) I guess those who put all the eggs in one basket (such as a 2nd property) could hit higher return than I do, but it’s not without risk. I think the risk in property investment is less understood than public securities, and underestimated.
With multiple small investments, I could sell one of them. I think this flexibility would be appreciated when the time comes.
My first buy of anything is often an experiment, which gives me insight. I am sure to gain huge insights about what specific things are important to me as opposed to what are popular on the market. After that, I would make bigger commitments on the back of /conviction/.
A practical factor — bank loan restrictions. You may have difficulty getting mortgage on a 2nd home. You may need to pay off the first mortgage, which is harder if the first price tag is big.
When you read any serious writing, or watch a movie, you will realize that for a parent, “good job” is NEVER about how much money we provide for our kids, though it is still part of the “job”.
The more casual (occasionally careless) a conversation is, the more likely we would notice hints
“amount of money parents provide” is correlated to “QUALITY-of-parenting”.
(Similarly, a good job as a child is never about how much money we provide our aging parents, or the qualifications or the financial success we earn for our parents.)
Here are what I have done so far: I have spent a lot of time with my kids, and I carefully plan for their future, not only financially. I would say that effort to guide them on life skills, survival skills, recovery skills, good habits, self discipline, self motivation etc is more important than an ambitious university education fund.
I work hard to earn more money to support myself, my wife, the safety and well-being of my family. In contrast, funding my kids’ university education isn’t my most important financial duty.
k_X_car_dependency
This is a fresh new look. Even if it offers nothing new, it is useful as a re-fresh and re-interpretation (reinterpret_cast:)
old folks don’t live in isolation. I can see many (me included) need company and human interaction. Unlike some old folks, I don’t prefer to retire in a rural area.
Some common complaints against SG as a retirement destination:
* small economy, not “strong” enough, but I feel China and U.S. are actually more unstable
* small space
* too hot
* age-friendly jobs are mostly for doctors or manual laborers
See also my post on passive income generators
I don’t have a lot of wealth, but what I have, I want to preserve. Education is the superior/correct way to leave a heritage to the next generation, but here I’m talking about “preservation” till my twilight days and beyond. For that purpose, passive income is one of the key factors. Insurance is another key factor, esp. to cover debts that would otherwise threaten liquidations.
Even before retirement, we would need vehicles to preserve wealth against inflation, economic upheavals, natural disaster, or global asset devaluation etc. OK no 100% waterproof, airtight preservation, but relatively speaking, some investments provide relatively higher security than others. My #1 favorite is ….
Liquidity — is presumably poor for many of them, though some are slightly better.
Market risk and macro economic risk — the insurance products (including CPF Life) are safer, but over long term suffers from inflation and FX risk. If you think about them, these risks are higher the more we depend on the asset for a longer period.
Capital appreciation — (possibly significant) only comes with market risk. No risk no appreciation.
For properties, are we sure that established leading cities like Shanghai, NY, Sydney … better than developing countries for wealth preservation? I feel there are too many factors (for and) against them:
The PR (Prime/Retirement) chart is now my starting point. My desired retirement age is 65 from finance or IT profession and 75 in a later, 2nd-tier profession, perhaps teaching or a lower-level IT job. I really like working till an old age but IT professionals are not like doctors who can work till 70. I will work in IT for as long as I could, and then switch to lower gear
The relationship between leverage, Pr(disaster hit) and Pr(payout) is central to my thinking. We could assume
probability of disaster is roughly == probability of payout [1].
Insurance companies give you high leverage when Pr(payout) is low, i.e. premium is cheap.
* If Pr(hit) is too low, then I’m paying for a non-issue. (This is my view of late stage till 65)
* If Pr(payout) is too high then too expensive
My goal is to address high Pr(hit) at reasonable cost. IMO,
Pr(payout Early stage CI till 65) > Pr(payout Late stage CI till 75) but not sure about Prudential… I guess with Prudential, for the same SA,
P(payout early stage CI till 65) == P(payout Late stage CI till 80)
So I should buy less of the expensive.
[1] Watch out for the trap of high Pr(hit) but low Pr(payout) in the Critical illness plans. Too much fine prints to read…:( Eg: You may have a diagnosis by age 65 but not qualified for payout:(
Probably should get a 35Y late stage CI — Hopefully (but not by Pru!) Cheaper than early stage CI and cheaper than whole-life late stage CI. I think it’s about $1600/yr for $150k payout
My total budget for my insurance? Up to $2000/yr.
My other medical protections (all reimbursement types) include:
+ company hospitalization insurance? Will lapse when I have to quit
+ Aviva Myshield + riders? Will cover major hospital bills 100%
+ in the US I will buy some standard reimbursement insurance that covers hospital, outpatient etc
See also
— Living in the U.S. requires significantly higher contingency reserve as the government offers very limited support. Also wood houses and driving create more emergencies. See
39%Americans have enough savings4 $1k emergency endorses a Mr Tim with USD 25k emergency fund.