Q. How do you feel about investing in real estate in addition to the stock market? I am fortunate to have a decent nest egg. I have a 401(k) account and a taxable account that I invest in stocks. I have a $300,000 low-interest rate mortgage on my house, but I am able to meet expenses with salary and dividends. I may be getting some additional money, and a friend has encouraged me to invest in a rental house to decrease taxes.
I live in the Seattle area where real estate prices have gained over 10 percent in the past year. My house has appreciated 55 percent in the past 8 years. If I get a rental I would have to have someone manage renters as well as take care of repairs. I fear these costs will eliminate any potential gain I could be receiving in the stock market. ---E.E., by email
A. The first thing to remember is that you already have a significant investment in real estate: your house. For most people, it’s the biggest single part of their net worth. Keep this in mind.
You’re wise to be concerned about management costs and repairs. You should also add vacancies to that list. The worst way to invest in real estate is to focus on possible appreciation while forgetting month-to-month cash flow. Investors in single-family-home real estate are more likely to be successful if they are “hands-on” kinds of people, doing most of the necessary repairs and upkeep themselves or with a small, trusted crew.
Another pitfall is not having enough in cash reserves to carry the property through an extended vacancy or recovery from the tenant who stiffs you for rent while trashing the property. If the rent from a property can’t cover the financing and operating costs comfortably, it’s easy to get into trouble.
Q. I have been doing my own investing for many years--- but not well. I have become a full-time caregiver for my wife, who has Alzheimer's. So I’m looking for a simple way to manage investments.
I liked a recent column about putting half of your investments in a total domestic stock market fund and the other half in a total domestic bond market fund. My thoughts are with Vanguard or Fidelity. Also, does Schwab have them as well? Would like the stock symbols for these funds. ---B.S., Austin, TX
A. When I first introduced the most basic Couch Potato portfolio more than 20 years ago it had to be done with Vanguard mutual funds and the most efficient way to do it was at Vanguard. Today it is possible to build a basic Couch Potato portfolio at any brokerage firm using exchange-traded funds.
The original Couch Potato portfolio was invested in the Vanguard Total Stock Market Index fund and the Vanguard Total Bond Market Index fund. Basically it was a commitment to domestic equities and bonds.
Later, it was possible to substitute an inflation-protected treasury securities fund. As a practical matter, the performance difference is small. Based on returns for the asset class (not the funds), a Couch Potato that used the total bond market index would have earned at a compound annual rate of 9.27 percent over the last 30 years while one that used inflation-protected bonds would have earned at a compound rate of 9.24 percent. (Figures from portfoliovisualizer.com)
- You can build the basic Couch Potato portfolio at Vanguard using their ETFs: VTI and BND.
- You can do the same thing at Fidelity using iShares ETFs: ITOT and AGG.
- You can do it at Schwab using their ETFs: SCHB and SCHZ.
Build with these and you will pay nothing in commissions--- and the annual expenses of your portfolio will be under 0.06 percent. The only action you will need to take, once established, is to rebalance once a year. Take from the bond fund in down years, from the stock fund in good years.
Will you earn 9 percent a year going forward? Probably not. But you’ll be conservatively invested and every alternative would need to earn somewhere between one and two percent more, just to compensate for higher fees.