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The Dark Side of Student Loans
Issue #528, June 25, 2018

The Cost of Out-sourcing Convenience
Issue #527, June 18, 2018

Social Security: 66 or 70?
Issue #526, June 11, 2018

Student Loans: There’s (Unfortunately) a Lot More!
Issue #525, June 04, 2018

Co-signing a Note
Issue #524A, May 31, 2018

The Knight Frank Luxury Index and Collectables
Issue #524, May 28, 2018

The Importance of Diversification: The Myth of Diversification
Issue #523, May 21, 2018

How to Save Thousands on Your Food Bill
Issue #522, May 14, 2018

MoviePass and Other Things
Issue #521A, May 10, 2018

Degree Inflation, Long Training Periods, and “Certification”  Part III
Issue #521, May 07, 2018

Degree Inflation, Long Training Periods, and Certification” Part II of III
Issue #520, April 30, 2018

Follow-up on Several Things
Issue #519A, April 25, 2018

Degree Inflation, Long Training Periods, and “Certification”: Part I of II
Issue #519, April 23, 2018

The Kids Birthday Party Hustle
Issue #518A, April 18, 2018

A Pension Question: Part II of II
Issue #518, April 16, 2018

A Physician is an Executive
Issue #517A, April 11, 2018

A Pension Question: Part I of II
Issue #517, April 09, 2018

Is the Correction Over?
Issue #516A, April 05, 2018

Used Car Dealers, Student Loans, the Chinese, and Uncle George’s Rule
Issue #516, April 02, 2018

Starter Homes
Issue #515, March 26, 2018

Redecorating: Beware!
Issue #514, March 19, 2018

NASDAQ Closes at Record High
Issue #513, March 12, 2018

A 40% Chance
Issue #512, March 05, 2018

Several Things
Issue #511, February 27, 2018

Human Capital, Education and Wealth
Issue #510, February 19, 2018

Another Stock Market Update
Issue #509A, February 18, 2018

Some Thoughts on Savings
Issue #509, February 12, 2018

A Stock Market Upfate
Issue #508S, February 10, 2018

Who Can You Trust? Part II of II
Issue #508, February 05, 2018

The Christmas Decoration Pre-worn Jeans Hustle
Issue #Interim Bulletin #507A, February 03, 2018

2018 Outlook for Financial Markets
Issue #507, January 29, 2018

Who Can You Trust? Part I of II
Issue #506, January 22, 2018

Life Insurance Settlements
Issue #505, January 15, 2018

Commodities and Buying the Breakout
Issue #504, January 08, 2018

Buffett Wins His Bet
Issue #503A, January 04, 2018

Practice Real Estate and Free Agency
Issue #503, January 01, 2018

Outlook for 2018: Part III: Stocks and Bonds
Issue #502, December 25, 2017

My Outlook for 2018: Part Ii: Precious Metals
Issue #501A, December 21, 2017

Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017


By Robert M. Doroghazi, M.D., F.A.C.C.

Stocks vs Real Estate: Asset Allocation: Part II of II

Issue #498, November 27, 2017

    The most important points of last week’s Newsletter were 1) think of real estate as a bond with inflation protection, and 2) only stocks generate true growth.
    A classical asset allocation used by many endowments and foundations is 60% stocks and 40% fixed income. The reasoning is that stocks provided growth and bonds provide a dependable income stream and protection during stock bear markets. The #1 point of this newsletter is:
I don’t think you should own any bonds.
    In the (now distant) past, when there was no inflation and central banks didn’t manipulate the market, bonds generated a “real” return of 3-4%. You just sat back, clipped your coupons (see below), and waited for the money to roll in. Now the 30-year US Treasury pays about 2.9 %. You will receive exactly $290 per year (bonds are sold in multiples of $10,000) for the next 3 decades. Our Federal Reserve has a stated goal of 2% inflation per year. In year #1, after taxes, you may or may not have any return at all. Every year thereafter the $290 is worth less—and less—and when your principal is returned in 30 years, it has only a fraction of the purchasing power. Warren Buffett calls Treasuries “Certificates of Confiscation”. Jim Grant of Grant’s Interest Rate Observer calls sovereign bonds “return free risk”. 
    For someone not near retirement, this is what you might consider as an asset allocation without bonds. This does not include personal, non-income producing real estate: your home and second home, which I will discuss in next week’s newsletter.
                  Stocks                                           65%
                  Real Estate                                       15%
                  Cash and fixed-income (CDs at local bank)    10%
                  Portable Wealth (Gold, Jewelry and Art)        10%
    Let’s go in reverse order. I have always recommended you have a 5% position in the precious metals, with the core being gold, preferably 1 oz. US Gold Eagles, in your personal possession. This is not an investment: it is your insurance policy should stuff happen.
    Earlier this year I discussed buying art (Issue #480, 7/24/17, and #481, 7/31/17) and jewelry (Issue #468, 5/1/17 and #469, 5/8/17). It’s OK to own some of the finer things in life (if you can afford them), and to have a little bling. But as it relates to this discussion, Baron Mayer Rothschild suggested you keep 1/3 of your wealth in stocks, 1/3 in real estate, and 1/3 in art. Gold, jewelry and art are portable wealth.
    Prudence suggests everyone keep at least 6 months of living expenses in risk-free accounts, such as checking, money market and CDs at your local bank. You or your spouse could lose your job, and if you are injured, disability insurance usually doesn’t kick in for 6 months. As discussed recently, people who are retired should keep 3 years of living expenses in cash, so you don’t have to sell stocks or other assets when the market is low, just to meet expenses. The older you are, the more cash you should have, because you don’t have as much time to recoup losses from a bear market in stocks.
    I highly recommend CDs at your local bank over bonds for your fixed-income investment. 1) The yield curve is flattening: short-term rates are rising relative to long-term rates, so the income difference between CDs and bonds is not that great. 2) The longest maturity is usually 5 years, so if (when) interest rates finally rise, your money is not tied up for long. 3) In the near future I will devote a newsletter to the importance of having influence with your local bankers, and the way to do that is deposits at their bank.
    When looking at the asset allocation to real estate, remember that your personal residence and your second home/recreational property are not income-producing. So, they count but they don’t count. Last week I discussed the direct ownership of rental/commercial property. A convenient way to invest in real estate is through the stock market via REITs (Real Estate Investment Trusts), or REIT mutual funds or ETFs.
    There are builders and real estate agents that specialize in building, selling and managing properties of chain stores, such as Dollar General (see Issue #403 “Tips on Commercial Real Estate”, 2/1/16). The higher quality and credit worthy the company, the lower the rent. Say the property costs $1M, and the chain takes a 15-year lease, with a cap rate (capitalization rate, basically the return) of 6.5%. You could pay cash and realize the $65,000 annual income at once. Or say you are 50 and wish to retire at 60. You pay it off in 8 years, so starting at age 58 you have a yearly income of $65,000 (indexed to inflation).
    The most important point of this discussion: invest in what you know, what you are most comfortable with. If you have a good eye for art, or are a knowledgeable collector of coins or comics or books, devote more to that area. Four or 5 years ago, a local businessman subscriber had a good chuck of cash to invest, and asked my opinion. He thought about the stock market, but had some reservations. He already owned a lot of real estate, but I suggested he buy more, because that is what he knew and had served him so well in the past. It worked out fine (he still subscribes).
    Next week I’ll discuss whether you should buy a home or rent.
    The term “coupon” is a vestige of bygone times. Bonds came with a strip of coupons on the side which had to be clipped off and redeemed to get your money.
    Tesla (TSLA) CEO Elon Musk announced that in 2020 the company will make the world’s fastest production car, going from zero to 60 mph in 1.9 seconds. To reserve one of the first 1,000 of the $250,000 cars requires the entire amount to be paid now, up front.
    RMD comment: If you want to pay $250K for a car, that’s up to you. But Tesla is having problems meeting their current production schedule. They are also burning cash, and will have to float a bond issue or sell stock in the near future to keep going.  Putting up the entire purchase price of $250K for something you hope to receive 3 years in the future is a big leap of faith.
    To quote J. Wellington Wimpy of Popeye: “I’ll gladly pay you Tuesday for a hamburger today”. Musk is a great salesman: he wants his hamburger today and (hopefully) will pay you on Tuesday. Consider this: how many people you have never met would you trust with $250,000? Remember the DeLorean?
    I think the big story of the week was weakness in the US Dollar. Actually, this was more Euro strength than dollar weakness (the Euro is 57% on the Dollar Index). Last month the Dollar Index broke out above 94 and looked off to the races. Of course, gold dropped. But last week the Index fell from 93.66 to 92.76 (a drop of 1% in one week is a lot), and gold stabilized at about $1,290. Was this a “false” breakout? We’ll just have to wait and see. I believe Mr. Trump wants a weak dollar.     


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