Q. I am trying to follow a Couch Potato portfolio approach in my IRA. About 65 percent (about $500,000) of the IRA has been invested in a Four Square portfolio, the one that is evenly divided between domestic stocks, international stocks, domestic bonds and international bonds. The remaining 35 percent (about $250,000) is invested in two duplexes, which return about 11 percent after expenses. Since you treat REIT investments as "equity" when describing how aggressive a portfolio is, I'm not sure how to regard the rental property. Is my IRA made more or less aggressive when the rental property is factored in? —R.M., Austin, Texas
A. That’s an interesting, but complicated, question. The most common measure of risk is the volatility of the price of the security in question. But your real estate investments aren’t securities so you don’t have any volatility to measure. You also have no liquidity to speak of since you can’t sell by making a phone call or going online. But risk as measured by statistical people and risk as measured by other people is not the same thing.
The real people risk in your investments is determined by how easily your investments can produce the income needed to meet your expenses. That’s why adding the high initial payment rates from a life annuity works to increase long term portfolio survival. Your 11 percent return after expenses from your real estate is a major reduction in portfolio survival risk. Why? You’ll be able to take much less from your other investments— provided you don’t increase your spending to match your investment income.
The income flow also explains why the number of reader letters about direct investing in real estate has increased throughout the year.
Q. Can you recommend a retirement calculator that will calculate compound interest on $1 million over 25 years with how much can be withdrawn each year, providing a balance of zero at the end of the 25-year period? I can do it on my own with spreadsheet, but a calculator would be easier. —P.D., by email
A. The calculation you are seeking isn’t necessarily a retirement calculation. It is a loan calculation. Enter a sum, an expected yield or interest rate, and a time period and it will tell you the monthly payment. You can find such a calculator on the Bankrate.com website by clicking on “mortgages” and then clicking on “calculators.” Also, click on “retirement,” then click on “calculators” and you will find additional calculators, including a tool for calculating required minimum distributions.
If you’d like to see a very well organized listing of retirement calculators, visit Darrow Kirkpatrick’s website, canIretireyet.com.
Q. I own a few preferred stocks in big, solid U.S. companies. Most of these stocks were purchased at about $25 per share, with dividends of about 6 per cent a year. What does history indicate is likely to happen to these as the Fed raises interest rates? What would likely happen to them if the overall market has a big correction?? —C.W., Kirkland, WA
A. Preferred shares react to interest rate changes very much like bonds. When interest rates go up, preferred shares go down in value. When interest rates go down, preferred shares go up in value. Because they have long maturities— sometimes forever— the yields on preferred shares tend to be high and interest rate changes make big changes in preferred share prices.
Here’s an example: The current yield on the iShares U.S. Preferred Stock fund ( ticker PFF) is 6.68 percent. That’s higher than junk bonds these days.
You can get some idea of how sensitive preferred share are to interest rates by considering the annual returns on PFF. In 2013 the total return for the fund was minus 0.99 percent— in other words the market value fell by more than the income earned. The fund also lost 2 percent in 2011, another year of interest nervousness. Like junk bonds, this is an asset class where broad diversification is a really good thing.
The good news: You don’t have to ponder that yield very long to know that a small commitment will bring a nice increase in the overall yield of your portfolio.