Q. Recently, a financial adviser held a seminar to introduce two real estate investment trusts. One invests globally. The other is more dividend-oriented. They both sound good. The yields are set to be 6 to 7 percent a year and there is a four-year surrender time with a $10 per share guarantee. Since many people think REIT shares will go up, this investment is very attractive. Could you give some suggestions? —D.S., by email
A. You did not mention what the ticker symbol for this REIT is. You also mentioned a “surrender time,” so I have to assume that it is a private REIT. That means your investment will have little or no liquidity— you won’t be able to access your money for four years. That’s a long time.
These products generally carry hefty commissions— around 8 percent— so it is likely that your “adviser” is simply a salesman who uses “free” dinner seminars as a tool for finding buyers. Your “free” dinner is likely to cost you an $800 upfront commission on a $10,000 investment that will likely pay the 6 percent “dividend” out of your principal.
If you check the yields of the public REITs, you'll find they are much lower, around 4 percent. Equity Residential (ticker: EQR), for instance, is the largest of the REITs that own apartments. Recently, it was yielding 3.9 percent. Avalon Bay (ticker: AVB), another major apartment REIT, is yielding 2.7 percent.
So what magic potion will this non-traded REIT use to produce a 6 or 7 percent dividend in a 4 percent market? Millions of people are going to take sucker deals because they want to believe that investments provide the income yield they need. They will lose money, not make it.
This is not just me, your paranoid columnist, worrying about your likely disappointment. FINRA, the Financial Industry Regulatory Authority, issued a warning on non-traded REITs last October. Sadly, the federal government’s war on savers has driven yields on secure and liquid investments so low that millions of people are taking more risks and accepting more costs than they should.
Q. I have had an IRA account managed by Fidelity for the last five years. This money has returned about 1 percent a year over that time. There is about $887,000 in this account. I am 65 years old and don't expect to need the money for at least 20 years. They charge a fee of 0.731 percent for a portfolio that is 70 percent stocks, 30 percent bonds.
My question is twofold: Is my 70/30 allocation too aggressive? Are the fees too high?
I'm thinking of switching to another fund with different management. —D.L., San Antonio, Texas
A. If the 0.731 percent is the grand total that you pay in fees— adviser fee and underlying funds expenses— then you have an expense structure most investors would envy. You could reduce the fees further, of course, simply by investing in a low-cost balanced mutual fund— but then you would lose the benefit of having an adviser.
Your 70/30 equity/fixed-income allocation isn't too aggressive for someone who doesn't plan to access the money for 20 years. But think about that. In 20 years you will be 85, and you will have to start taking required minimum distributions at age 70 1/2.
This raises a question about why you're not using at least some of the money today. Remember, you've got about a 50 percent chance of being dead in 20 years. I’m not suggesting that you become the world’s greatest party animal. I’m just saying there is something to be said for not being 100 percent efficient in gratification deferral.
Studies of portfolios in distribution (portfolios that make regular payments) have shown that an allocation between 50 percent and 75 percent equities is optimal for long-term portfolio survival. Since you don't appear to depend on this portfolio for regular income payments, it's pretty safe for you to have 70 percent in equities. If you were making regular distributions to pay your ongoing bills, most financial planners would suggest a reduction to a more conservative allocation. In any case, you could take 2 or 3 percent a year until you reach RMD age with little risk to portfolio survival.