3748: Alternative Investments for Savvy Retirees by Darrow Kirkpatrick of Can I Retire Yet on Asset Allocation

[00:00:00] You're listening to a quick ad. You know what else is quick? Selling your car on Carvana. Just put in your vehicle information and we'll give you an offer. Done. No hassle, no negotiation, no guy from an online listing lowballing you. Which means by the time I'm done explaining this, you could have basically done it. Still haven't started? Hey, better late than never. Sell your car today on Carvana. Pickup fees may apply.

[00:00:30] This is Optimal Finance Daily, Alternative Investments for Savvy Retirees by Darrow Kirkpatrick of CanIRetireYet.com. And I'm your narrator Justin Malek here reading to you every day to help you save more, earn more, and invest the rest. This article was written in 2017 so his references reflect that time period. But even if some of the info is outdated, it's still worth a listen. So with that, let's get right to it as we optimize your retirement.

[00:01:03] Alternative Investments for Savvy Retirees by Darrow Kirkpatrick of CanIRetireYet.com. The baby boom generation has lived through a uniquely stable period in human history. Yes, we've seen regional wars, terrorism, and economic dislocation. But there hasn't been wholesale destruction of a developed country or its financial system since halfway through the last century.

[00:01:32] It would be nice to think that the major powers understand stability is in their best interest and that the smaller powers will gradually burn out their destructive agendas and settle for negotiation and compromise.

[00:01:49] But given human nature, a happy ending is not a foregone conclusion. There are trends in today's world that, if unchecked, could lead to disruptions like we have not witnessed in our lifetimes. Even without a global conflict or natural disaster, our interconnected world, so dependent on modern technology, is more vulnerable in some ways than ever.

[00:02:14] Such possibilities and the preparations they imply might sound far-fetched to you. The odds of disaster are low, and I'm not trying to scare anyone, but a certain percent of us were born with an eye to the future, inclined to prudence and preparation. It's a quality, nearly forgotten in today's world, that brought our ancestors through hard times. Without it, we, their descendants, wouldn't be here today.

[00:02:44] Dollar diversification. So in this post, I want to explore reasonable ways to diversify some of your wealth out of the U.S. dollar, out of paper assets, or both. And why would you want to do that? Well, many people wouldn't and shouldn't. If you are a new investor or an older one who needs to keep your finances ultra-simple, then you should not be looking for alternative investments.

[00:03:13] By definition, these are usually riskier and more complex than the mainstream alternatives. Simple domestic stock and bond index funds. But other investors, like me, see merit in diversifying out of the conventional financial system. Because ultimately, any wealth you leave parked in that highly leveraged system is at the mercy of the powers that be.

[00:03:37] The value of a paper dollar is a complex function of decisions made by centralized and non-transparent government and commercial entities. By contrast, the values of most of these alternative investments are insulated in some fashion from the various political and financial powers. Let's begin by exploring three of the more conventional alternative investments. Number one, international stocks.

[00:04:05] Let's start with one of the simplest, safest ways for an investor to diversify away from the U.S. dollar economy. Owning assets outside of the country in the form of an international stock index. For Americans, this implies converting dollars to equity in foreign companies. That equity can grow over time and may pay dividends, but because those assets are functioning in different markets and valued in different currencies,

[00:04:32] the timing and size of investment returns will be different than for the U.S. stock market. That's diversification. Just remember that diversification is about safety more than performance. While the U.S. has enjoyed a bull market that continues to set records, international stocks have done relatively poorly in recent years.

[00:04:55] For example, over the last 10 years, Vanguard's total U.S. stock market index returned 7.41% annually, while its total international stock index returned just 2.15%. But eventually, international stocks will have their day in the sun. Digital nomad and millionaire teacher Andrew Hallam says that price-to-earnings ratios

[00:05:23] currently make international stocks a better bet than U.S. shares. He writes, The historical average CAPE level of developed world international stocks is about 20 times earnings. It was about 15 times earnings at the end of September 2016. That means developed world international stocks are like professional wide receivers against a bunch of college players.

[00:05:50] They could still have a tough time scoring, but the odds are with them winning. End quote. Nobody knows the timing of such market cycles in advance, but I have owned various flavors of Vanguard's total international stock index for years. With Vanguard, I know I'm getting low expenses plus efficient diversification among foreign countries, developed and emerging,

[00:06:16] to make my long-term international investing safer and cheaper. Number two, real estate. For many people, real estate is the most practical and accessible alternative investment. Your primary residence could play the role of a real estate investment, but the best payoff comes through owning rental property. That could be in the form of a vacation home,

[00:06:42] though vacation properties, with their high costs and low occupancy rates, don't always offer the best investment return. Personally, I've always kept my vacations separate from my investments. With rental real estate, your money is in a hard asset whose value is not directly tied to the dollar or stock market. That investment can produce steady income, and you may be able to adjust it for inflation if needed by raising rents. If you like working on houses,

[00:07:12] and don't mind interacting with tenants, this is an ideal investment. On the downside, real estate does require management and maintenance. It's actually a small business. Also, understand that real estate is highly illiquid and incurs hefty transaction costs. Don't try selling a house for top dollar over a weekend when you need to raise cash. Additionally, owning real estate ties your wealth to a certain geographical location.

[00:07:42] If global events make that location less desirable, your investment could deteriorate or be lost altogether. Finally, managing real estate becomes less practical as you get older. Fortunately, there are some simpler real estate investing alternatives like real estate mutual funds and real estate investment trusts. These can give your investment dollars access to real estate diversification without all of the management headaches.

[00:08:11] And number three, small business. Both before and after retirement, a small business has been my own most important alternative investment. Though risky and labor-intensive, small businesses offer one of the largest potential payoffs for your investment dollars. A good business is an inflation-adjusted, cash-generating machine. If your business produces an essential product or service,

[00:08:39] then it's insulated somewhat from the financial gyrations of the world around it. And, as the owner, you receive all the profits. The downsides of a small business are not trivial either. The workload can be intense. It's producing, marketing, and delivering your product or service single-handedly at the start. And the risk is real. Many small businesses fail.

[00:09:04] In retirement, you must be doubly cautious not to risk your nest egg or your lifestyle freedom. A small business that takes over your day and eats away at your life savings is a poor choice for a retiree. Franchises are sometimes touted as retirement businesses. But buyer or owner, beware. The steep entry costs are likely to threaten your financial security while demanding a full-time commitment.

[00:09:31] In my first book, I cover seven important business startup lessons. The first lesson is so important, I'll repeat it here. Make sure there's a market. Do some simple, cheap tests to prove there is demand for your idea. A good way to conduct a test is to offer a small or prototype version of your product or service for cheap or free.

[00:09:56] Continue testing different ideas until you find one that will attract customers at a price that allows for a profit. An ideal retirement business is a low-capital, low-commitment service, consulting, blogging, or freelancing, in areas where you already have expertise. Or you might look to partner with a younger entrepreneur, offering them capital and advice while they put in the hours and labor to build a business.

[00:10:29] You just listened to the post titled, Alternative Investments for Savvy Retirees, by Darrow Kirkpatrick of caniretireyet.com. And I'll be right back with my commentary. Many leaders think they know where time goes. But as teams grow and tools multiply, reality can look surprisingly different. So decisions about what to automate and where AI fits can be a gut call. That's the problem today's sponsor, Scribe, is helping solve.

[00:10:58] Scribe is a specialized intelligence platform trusted by 94% of the Fortune 500. And Scribe Optimize is where your AI roadmap starts. It automatically captures how your team works across approved business apps, showing what's happening, how often, and where time is lost without interviews or guesswork. Using that workflow data, Optimize then identifies what's holding teams back

[00:11:23] and pinpoints high-impact opportunities to improve or automate with data-backed ROI projections. Plus, privacy and security are built in. Optimize runs only on apps your admin approves, user-level data is anonymized by default, and sensitive data is redacted. To see Optimize in action, head to scribe.how slash OFD and mention our show for a 30-day risk-free trial.

[00:11:49] That's S-C-R-I-B-E dot H-O-W slash OFD. You're listening to a quick ad. You know what else is quick? Selling your car on Carvana. Just put in your vehicle information and we'll give you an offer. Done. No hassle. No negotiation. No guy from an online listing lowballing you. Which means, by the time I'm done explaining this, you could have basically done it.

[00:12:19] Still haven't started? Hey, better late than never. Sell your car today on Carvana. Pickup fees may apply. Thank you to Darrow. His point about real estate and small businesses requiring your time brings up another question to ask yourself. How would I step back if I stopped enjoying the work? It's easy to picture getting started when you're excited about an idea, but we should probably consider that later decision too.

[00:12:46] For example, you might enjoy managing a rental now, but decide later that you'd rather spend several months away. Or a small consulting business could be going well right when you want fewer appointments. So along with what it would take to get started, I'd want to understand what it would take to hand off the work or leave altogether. Is there someone I could pay to manage it? Would I still want the investment after including that cost?

[00:13:13] Or would I need to sell it to get the time back? Those are questions I'd want to consider while I still had plenty of choices. I'd want the option to change my mind about how I spend my time, even if the investment itself is doing fine. So thank you to Darrow for this one, and thank you for being here every day. It means a lot. Have a great rest of your day, and I'll see you tomorrow, where your optimal life awaits.