Funding Your Retirement: 

How Safe Should You Be?

Mr. Money Mustache is someone I read now and then. His thing is retiring early. He himself retired when he was very young. I think he was in his late 20s, with a modest net worth. And he’s been writing about his experiences and his philosophy of early retirement ever since.

I don’t subscribe to his particular version of how little one needs to quit one’s day job. But I do believe that many of his insights, including the irrational fear many people (including yours truly) have about how much you need to retire are very solid.

In his latest newsletter, he talks about that. Click here. 

A Change of Plans 

Two years ago, I got clearance from my town to tear down my current office space in Delray Beach, an 11,000-square-foot storage building, and replace it with a 40,000-square-foot Class-A office building. The plan was to rent it to one or several of my businesses. That has been a very good investing strategy since I started building businesses 40 years ago.

Then the pandemic hit. Which brought on remote working. Which felt like it was going to be at least partially permanent. Which sated my appetite for acquiring more office space since I wouldn’t be needing more, even if the businesses continued to grow. So, I put the project on hold.

The same thing happened with the office buildings my partners and I have in Baltimore and London and Paris and other cities. The pandemic made us realize that the old model of centralized office locations, and the bedroom suburbs they spawned, may continue to exist, but as fractions of their former selves.

Notwithstanding the recent uptick from the bottoms hit early last year, I’m not bullish on office space right now. In Delray Beach or elsewhere.

By some metrics, this has been the worst year in the stock market since the Great Depression.

The larger indexes are down around 20%, and many tech stocks have lost 50% to 80% of their start-of-the year values.

What to do?

You can sell your stocks, take the loss, and put your money in cash. And then try to figure out when to get back into equities. The problem with cash, of course, is that it is currently losing 0.75% of its value every month – and that will increase if inflation pressures continue.

You could put your money in gold. The value of gold (and most other precious metals) historically keeps pace with inflation. In fact, gold is trading today at about $1,840 an ounce, which is about 8% higher than it was in January.

If you already have gold and enough cash to cover emergencies, you might want to look at what sort of stocks you are holding. If your portfolio includes what I call Legacy stocks (e.g., Nestles, Coca Cola, IBM), you can expect that their prices will, like gold, keep up with inflation. That’s because companies like these have the ability to gradually increase their prices as their costs go up.

If you have lots of tech stocks, you might want to ask yourself if you think the companies they represent will still be around if we enter into a recession. Most of the tech stocks I own (Apple, Amazon, Google, Meta) are big enough to recover from their currently discounted prices. So I may be buying more of them. If the tech stocks you own are smaller and less certain to survive a recession, you may want to think about dumping them.

If your portfolio is made up of, say, 10% smaller tech stocks, 50% to 60% Legacy stocks, and 30% to 40% of those world-dominating tech companies, you might want to consider doing what I’m doing: absolutely nothing.

In any case, keep these two facts in mind:

* About once a decade, the stock market experiences a downturn of 20% to 30%. That’s what we are seeing now.

* Since the stock market was created over 100 years ago, its overall value has been a one-way ride. Up about 8% to 10% a year, depending on how you measure it.

Have the FAANG Stocks Lost Their Bite?

FAANG used to be a convenient and memorable term to describe the biggest tech giants on Wall Street: Facebook, Amazon, Apple, Netflix, and Google. But Google has changed its name to Alphabet and Facebook to Meta. So, the acronym doesn’t work anymore. NAAMA? No. ANAMA? Maybe. MAANA? Like MAANA from heaven?

FAANG is not working well now in more important ways. After dominating the high-tech markets over the last 10 years, recent earnings on all five companies are looking shaky.

* Facebook lost about 500,000 daily users in Q4 2021, and suggested it could have its first year-over-year revenue drop next quarter.

* Apple recently warned it could lose $8 billion due to supply chain constraints this quarter.

* Amazon reported its first quarterly loss in seven years, resulting in the stock tumbling about 14%.

* Netflix announced it lost subscribers for the first time in over a decade, leading its stock to drop 35% the next day and wiping $50 billion from its valuation.

* Google showed slower growth than last year and missed revenue projections for Q1, thanks in part to a weak quarter for YouTube.

So far this year, all five stocks are down, with Apple being the only one outperforming the S&P 500 index.

 What is an NFT really worth? 

The tweet above was Jack Dorsey’s first NFT. In March 2021, during the early days of the NFT boom, it sold for $2.9 million.

Early this month, the owner, Sina Estavi, listed it for $48 million, promising to give half of that to charity. “Why not give 99% of it,” Dorsey quipped.

Two weeks later, the highest bid was for $280. It now stands at $12,000. If sold at that price, it would be a 99% loss in value.

Jonathan Perkins, cofounder of the NFT platform SuperRare, commented: “There has been a lot of experimentation in the space, and I think we’re running up against the boundaries of speculation.”

Greg Isenberg, CEO of the web3 design firm Late Checkout, had a different take. “This wasn’t a real sale,” he said. “There are only several buyers for something as big as this, and the listing price was unrealistic. Serious buyers wouldn’t bid on this. I didn’t.”

My take: Both comments are true.

The tweet above was Jack Dorsey’s first NFT. In March 2021, during the early days of the NFT boom, it sold for $2.9 million.

Early this month, the owner, Sina Estavi, listed it for $48 million, promising to give half of that to charity. “Why not give 99% of it,” Dorsey quipped.

Two weeks later, the highest bid was for $280. It now stands at $12,000. If sold at that price, it would be a 99% loss in value.

Jonathan Perkins, cofounder of the NFT platform SuperRare, commented: “There has been a lot of experimentation in the space, and I think we’re running up against the boundaries of speculation.”

Greg Isenberg, CEO of the web3 design firm Late Checkout, had a different take. “This wasn’t a real sale,” he said. “There are only several buyers for something as big as this, and the listing price was unrealistic. Serious buyers wouldn’t bid on this. I didn’t.”

My take: Both comments are true.

Rental Real Estate 101: What Does “Buying Right” Mean? 

I wrote a course on rental real estate investing 10 years ago when I was writing a blog called “Creating Wealth.” Recently, I decided to turn it into a book that recounts my personal experiences and what I’ve learned. But to make the book stronger, I asked my brother Justin to co-author it with me, since his experience is longer and stronger than mine. The following is an excerpt from an early chapter that explains a very useful trick we use to determine how much any rental property is worth. [italics]

One of the most important lessons I ever learned about investing in real estate was taught to me by my brother Justin. It is a very simple formula for estimating the value of almost any sort of rental property in a matter of seconds. It is brilliant. It is extremely useful. And it is incredibly reliable. (As most brilliant formulas are.)

I wish I had known about this formula when I made my first real estate investment. It would have saved me tens of thousands of dollars and four years of real estate hell. It gave me the confidence to invest strongly for several years, buying up dozens of single-family houses and two small apartment complexes that have given me millions of dollars in appreciated value and millions of dollars in cash flow since then.

Perhaps more importantly, it pushed me out of the market by 2006, when property values were unreasonably high, and thus kept me safe when the real estate bubble burst in the fall of 2008.

This is the formula:

If you can buy a piece of property and have it fixed up and ready to rent for less than 100 times the monthly rental income, consider buying it. If you can’t, walk away.

Example: You are looking to make your first investment. On the advice of a friend (me, perhaps), you are looking at three-bedroom, two-bath, single-family homes in working class neighborhoods in or near where you live. You find two houses that you can comfortably afford. One has a rental income of $1,500 and is priced at $145,000. Another has a rental income of $1,600 and is priced at $170,000. Which should you buy?

Using our simple formula, you multiply each rent by 100 to get your “limit.” The limit for the one renting at $1,500 is $150,000. The limit for the one renting at $1,600 is $160,000. The former meets the standard, as you can buy it for less than $150,000. The latter does not, since it’s priced above $160,000.

It’s as simple as that.

Justin calls this calculation the gross rent multiplier (GRM).

The GRM is simple. It is also a rule of thumb. In my experience, it has been reliable every time I’ve used it, without exception. But my brother warns me that there are times when you have to do more arithmetic than just the GRM. This is especially true for larger properties – apartments and complexes of 50-plus units. Hotels and motels. And the like.

But for anyone who is a novice investor, like I was when I began buying rental properties, it is a very good and trustworthy protocol to follow. It will save you loads of time and a fair bit of money considering questionable properties. It will also make you immune to seductive sales pitches because you won’t be listening to the claims and promises of owners, agents, and/or brokers. You will do the calculation mentally in a few seconds. And then you will know whether it’s worth your time to investigate the investment further.

“Save like a pessimist. Invest like an optimist.” 

I read that somewhere recently. It stuck because it is so simply true. (Sorry, you who said it. I didn’t make note of your name.)

Until I began writing about wealth building, I don’t think I ever considered that there is a distinction between saving and investing. But sometime during the intervening years, I came to believe that there is a significant difference.

The purpose of saving is to put away money for a particular need at a particular time. Like buying a car in the future. Or paying for college tuition. Or retiring at a certain age. The purpose of investing is more ambitious and more nebulous. The goal is to put some portion of one’s savings into specific assets in order to see them grow.

Thus, the number one rule of saving is: Take little or zero risk. Investing, however, mandates risk. The challenge is to determine how much risk you are willing to take.

We all have different assets and resources available to us. And different economic needs and aspirations. Thus, we must set our own goals and devise our own wealth-building schemes.

I put my “saving” money into debt instruments, rental real estate, gold, and museum-grade art.

I put my “investing” money into stocks, options, REITs, certain speculative investments, and – most of all – privately owned businesses.