Investing, as in life, you should always consider your alternatives. Like many people, I use the Waze traffic app to see which way will get me to my destination the fastest. When you input the destination address, Waze gives you the option of picking different routes. Some will get you their fast but will add a couple extra miles. Some are scenic routes that take a bit longer to drive but may be fewer miles. Waze will tell you what route to absolutely avoid too. It’s a great app.
I wish they had a Waze for investing: an app that could give you some investment alternatives and tell you how long it will take to get to your destination. It would also tell how the traffic is on your investment route and which routes to absolutely avoid. Maybe it could also give you a heads up on pot holes and speed traps (fees). Waze for Investing: Outsmarting Retirement, Together
Waze Investing Alternatives
There are a multitude of investment options, just like there are different routes to take on a trip. They’re all a bit different too. Not everyone follows a simple investing plan that is proven to optimize your returns while allowing you to be properly diversified. Everyone you talk to has a slight variation on how they invest. Some use a broker like Merrill Lynch. Others invest in their 401(k) through work and that’s it. Still others save money and keep it in cash, not willing to “risk” the money in the stock market.
On a high level, Waze for investing would show you each investment path and the time it would take to get your objective. It would look something like this:
|Investment Path||Years Until Retirement||Investment Vehicle|
|Real Estate||20||Rental Properties|
|Source: Estimated Years for Illustrative Purposes|
Saving cash and hoping to retire is difficult. It can be done though. Many folks get by in retirement with a combination of Social Security and cash savings. It’s just not the most efficient way to save money. Cash actually has a negative real return. Here at Optimize Your Retirement, we’re all about finding the most efficient way to invest given your objective and risk profile. Cash doesn’t fit the bill because while it doesn’t seem risky, over the long term it is. If you must be in cash, try to get the highest yield on an online Certificate of Deposit. A lot of online brokers will let you choose from many different bank CDs. Whereas your local bank will only offer their own rates.
Bonds have performed well over the past few decades. It’s hard to say if they’ll continue to perform in the future. I’m of the opinion that investors should steer clear of long term bonds of any kind (Treasury, Corp, etc.). Bonds are okay as long as they have maturities of less than 5 years. Individual investors can buy ultra-safe Treasury securities over at TreasuryDirect.gov.
Stocks have performed better than bonds and cash over almost any long term period. The problem a lot of people face with stocks is volatility. They see the daily ups and downs along with news coverage and get scared. But they shouldn’t: volatility is the price of admission for the better returns that the stock market generates. Stock market downturns are great if you’re a net buyer.
Real estate investing can provide the kind of cash flow that you can live off of in retirement. As far as I can tell, the most profitable way to invest in real estate is to buy rental homes and manage them yourself. There are exceptions to this of course, but investing in rental properties cuts out the middle man. It’s more work and could be riskier too; that’s why you’re getting double digit returns on rental properties.
Return Comparison: Stocks (red) vs. Bonds (blue) vs. Real Estate (orange) over 10-year period
Source: Google Finance
In looking at the asset comparison above, you can plainly see that stocks have outperformed other asset classes over the last 10 years. You can also see the volatility that is associated with the kind of return. You have to consider your alternatives when you own one asset class. Maybe it’s not a great investment choice but it’s the “least-bad” option. If you purchased Vanguard’s Total Stock Market Index Fund (VTSMX) in mid-2007, you would have been crushed over the next 2-year period. But Vanguard’s REIT Index Fund (VGSIX) was even worse and didn’t recover as well as stocks in the following years.
Waze Investing Traffic
I’d like the Waze for Investing app to tell people how the traffic is and what to avoid. Wouldn’t it be nice if it told you to avoid high-fee “investments” that only make the person selling them rich? It would tell you the road hazards associated with the path you’re looking at. A pothole would be analogous to signing a contract for variable annuity. “Look out! Hazard on road ahead.” Most people don’t have the time or inclination to research various investment options. It’s sad. Because what ends up happening is that they’re ripped off by some salesman. A salesman who is not a fiduciary – not a protector of your best interest.
Most people I talk to about investing aren’t sure what constitutes a good investment. Is a good investment a good company stock? At what value should I invest in the company? Waze for Investing would answer these questions for you. A good investment is one that achieves your desired objective. You have to ask yourself what percent return you need as well as what risks you’re willing to take. Waze for Investing would show you exactly what price you should pay for an investment based on your objective.
Maybe they won’t make a Waze for Investing app. Either way, you should always consider your investment alternatives. Don’t get married to a position if you can find better returns and less risk elsewhere. Some asset classes perform better than others. Stocks went absolutely nowhere from the mid-1960’s to the mid-1980’s. Gold has done very little over the last 10 years but did quite well in the prior 10-year period. Bonds have done well over the last 30 years but have currently sputtered out. The key is not to try to foretell the future but rather make an educated capital allocation decision based on facts.