Episode 4: Stocks or Properties, Which Should You Be Investing In?

Max Keeling

There are 2 common investment options among many investors – investing in the stock market and investing in rental properties. In this episode, I will outline the features and caveats for each of the options so that you can make an informed decision on which route should you take to achieve your life goals.

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Hello and welcome to episode 4 of the Expat Wealth Blueprint show. I am Max Keeling. And this is the podcast for expats based in Asia that have or aspire to have SGD $2 to $20 million and are looking for simple approaches to managing their money to achieve the lifestyle they want. I think there’s a real lack of information for this group of people. And that can make you vulnerable by being taken advantage of by certain banks and some financial advisers. So I hope you find this podcast helpful to educate you on what are some of the core frameworks and blueprints that are available to you, regardless of your financial or investing knowledge. And hopefully, this gets you on a path to reaching your life goals. At the end of the day, this is why we invest. Which is why your money has to have a purpose.

So I hope you’re enjoying this podcast series. This is only episode 4, but if you are enjoying it, please email me or send me some comments around what you would like to hear in the future. Any reviews that you do on Apple would be great because that boost the ratings and hopefully we can get more people getting to hear about educating themselves on their money.

So, what am I going to talk about today? So I’m going to talk about what should you be investing in. And we’re going to keep this high-level. So don’t worry if you are not an investment expert. This is exactly what today is going to be about.

So in the previous podcast episode 2, I talked about the 4% rule and how it’s a really good rule of thumb to work out what your potential target asset accumulation needs to be. What’s the amount of money you need to get to. Or if you’ve already accumulated that amount of money, what kind of lifestyle can those assets sensibly support? And a caveat I’ve said over the last few episodes is you need your assets to be invested. And you need to be getting I think about 0.5% to 1% above your withdrawal rate. So if you are withdrawing 4%. Let’s say you’ve got USD $1 million and you taking $40,000 a year out, that’s 4% withdrawal rate. Therefore, that $1 million needs to be invested at a rate of 4.5% to 5%.

So again, caveat, don’t go and rush and build your whole plan around this. Definitely use this to get a good idea of your own finances. But go and do some further reading. I will put some information in the show notes. Or reach out if you want more information. But hopefully, this will give you some ideas that you can apply to your own situation and give you a better feel for what might be possible.

So let’s look at 2 common investment options. One is using the stock market to invest your money and the second is using rental properties. And let’s see what that looks like.

So the MSCI World Index is the index that we tend to use at Providend. So when we talk about invest in the stock market, a good benchmark to look at is the MSCI World Index. So what is that? So it’s basically the index of all the largest companies on every single stock market in every single country. And if you purchase that, that will give you a very broad exposure to the stock market. So when you read in the FT, or the Straits Times, and it says the market has gone up 2% today, usually, they’re referring to the MSCI World Index. And the MSCI World Index, since 1973, has returned about 8.8%. So an average annualised return of 8.8%. But you are unlikely to get a 100% of that return because it’s unlikely you’re going to be invested in 100% equities. Just because it’s very volatile.

So I want to assume that you are at the point of retirement. And you got this pot of money that you want to start taking money out. What should you invest it in? So a good rough rule of thumb is that you’d be invested in 60% equities, 40% bonds. Which I look at the latest data, which I’ll put in the show notes, that it returns an average of 8.3% per year since 1983. Again, sounds really high, 8.3%. And they are because in the past, we had high inflation. And if you have high inflation, you have high bond returns. And if we have low inflation, like we’ve got now, then it tends to lower the returns of the portfolio. So if we look at the last 10 years as a gauge, then a 60/40 portfolio has returned about 7%. So it sounds a little bit more like it. So 100% equities has returned about 9.9%. 60% equity, 40% bonds has returned just over 7%.

So this is still way above the 4.5% to 5% that we assumed for a 4% withdrawal strategy. So we said we’re going to get 4.5% to 5% and I am saying that a potential portfolio is returning 7%. Awesome. However, before you go off and invest, let’s go through the major caveats.

So these returns are before fees that I’ve mentioned. So they’re just the index returns. This is what the Index returns. To implement this, you’re going to have to have some kind of investment accounts and they’re going to probably charge 0.1% to 0.2% per year. Then you’ve got to pick the right investment products to invest in. And if you’re using low-cost tracker funds that track the MSCI World Index, that’s why they call it tracker funds, they will cost you about 0.2% to 0.4%.

So the cheapest option, if you decide to do this yourself, your total cost is going to be about 0.3% to 0.5%, 0.6%. If you were to use an adviser, like myself, then I would charge you 1% per year of your investable assets, up to first 2 million. Above 2 million, it drops down. If that’s of interest to you, contact me, but that’s not what this is about. So let’s assume you’re being charged 1% by an adviser. So the cheapest adviser approach that you could find in Singapore and around the region is about 1.3% to 1.55%. So if we go back to a 60/40 portfolio and let’s say your costs are 1.5%. And let’s say a 60/40 portfolio has been returning 7%. 7% minus 1.5% is 5.5%. So that still looks feasible. So that still looks like if you need to get 4.5% to 5%, you got 0.5%, 1% buffer in there.

However, if you start to use actively managed funds instead of a cheap tracker fund and they will tend to charge 1.5% to 2% per year. Not 0.2% to 0.4% per year. And if you use an adviser that is on commissions, then usually the platform costs that they use are a lot higher. And they can easily rise to say 1% per year. So it’s common when people come to me at Providend, and they’ve already got an adviser and they’re already invested, that their costs can easily be 3.5%. And I’ve seen people paying 5%. So let’s say you’re at the lower end of that, at 3.5%. So if your investment returns are 7% and your costs are 3.5%, then the return that you take home every year is only 3.5%. That is not going to work with a 4% withdrawal strategy.

So either you’ve got to increase the amount of risk that the adviser takes because if we can get a higher return than 7%, then maybe it will still work with 4% to 5%. So they’re going to have to take higher risks. So instead of using a 60% equity 40%, maybe it’s going to have to be an 80% equity, 100% equity. Or you’re going to have to reduce the amount that you spend on an annual basis. So if you want to use a high-cost adviser, instead of taking 4% per year, maybe you’re going to have to withdraw 2.5% or 3%. Because your portfolio returns just do not support it. So that’s why fees are really, really important.

So the other consideration is I’m using the global stock market as a benchmark. I’m assuming that you get the full return that you’re entitled to, which is the MSCI World Index. Which means you have to construct a portfolio to achieve those returns. Now if you are a stock picker and you like to pick individual stocks or you use active funds, you are not going to get the market returns. You could get better. You could get much better. But loads of studies have shown that people that tend to pick their own stocks or people that use actively managed funds, tend to significantly underperform the benchmark when they start moving away from a pure index approach.

So equities can be a really good approach in retirement. Definitely. You know, if you got a pot of money and you want to take money out and not worry too much about whether you’re ever going to run out of money, then using the stock market can be great. And you don’t necessarily have to take lots of risk. And historical returns, whether it’s over the last 10 years, 20, 30, 40, 50 years, show that the historical return is higher than what we need. Which is great. Because that gives you some buffer for when returns are going to be lower. We’ll definitely have 3, 5, 10 years periods where they’re lower.

However, you got to keep costs low and it got to be constructed correctly. So what does constructed correctly mean? I’ll do a separate episode on that. So for people who do want to go down the equity route, either themselves or they’re going to use an adviser, it really pays to know some basics about what is a well-constructed portfolio and how it looks like.

So what about rental properties? Could you retire on a portfolio of rental properties? Let’s say you don’t want to use the stock market. You want to go and buy lots of different rental properties. And let’s say you’re starting from scratch. So you had a corporate career, you now got your pot of money. So the key metric for you is going to be your annual rental income after the costs on that initial capital outlay.

So to be comparable to equities, you’re going to need to get 3% to 4% to 5% rental yield after costs. Because let’s say you got your GBP $1 million pot and you want to be able to spend GBP $40,000 a year in retirement. If you got a GBP $1 million to go and spend on properties, you need the rent that comes to you to be at least 3% to 4% of that GBP $1 million. Makes sense? Hopefully it does. So if your rental yield is lower than that, then you’re going to need more capital to get the same return.

So I’m not a property expert. And maybe I’ll try and get somebody that’s a rental property expert come on the podcast to talk about, “How are you going to buy rental properties?” But I’ve definitely seen people getting at least 3% to 4% rental yields. So definitely it’s an option.

So some considerations if you’re going to go down this route is getting a mortgage in retirement might be difficult. So if you are retiring in Asia, or whether you’re going back to the UK or Australia, and you’re not earning anymore, it might be hard for you to get a mortgage. Or you would have to put down a bigger deposit because often they are going to want you to take out a Buy to Let mortgage. So don’t always assume that you can put down 10% or 20% deposit and get a mortgage for the rest. Don’t always assume you can get a mortgage. If you’re going down this route, you might need to start building up to it whilst you’re still in full-time employment.

Secondly, don’t get seduced into thinking that property always goes up. It’s irrelevant whether the property price goes up because you are looking for an income in retirement. And if you sell that home, then you lose your income. So if you’re going to retire, you need an income for next 20-30 years. You can’t sell that house. You need to keep it. Unless you get far enough down the line that in your 80s, let’s say, you sell the house and you are going to use any capital gains in there.

Thirdly, you need to treat it like a business. Don’t buy rental properties lightly. Do your research on the subject. Monitor your costs. Make sure you’re increasing rent every year in line with inflation. I would say 70% of the rental properties that I’ve seen that people have, are yielded in 1% or 2% because they’re just not monitored properly. So what tends to happen is people accumulate cash, they don’t know what to do or invest in. They’re worried about getting ripped off by somebody so they read about a property to buy in another country, they don’t even go and look at it. It solves the short-term problem for them because they can spend 2, 3, 4, $500,000 on a property overseas and they think, “Great! I’ve got a rental property!”

What they don’t do is work out what is the actual rental yield on it to start with. How much is this rent actually going to give me? And then once they’re 5 years down the line, they’ve not been monitoring the cost, maintaining it, trying to increase rent over time. So rental properties require an active approach. As you get older, most people want to reduce their financial complexity. So if you’ve got a $20 million rental portfolio to manage, that might not fit the bill.

Whereas other people, they love the management side of it and they see it as a way to stay mentally active. So let’s say you are from Stoke-on-Trent, which is where I’m from, and I want to retire back in Stoke. Unlikely, but that’s a separate conversation. But let’s say I am. And all of my rental properties are in Stoke. And I might really enjoy in my 50s, 60s, 70s, being the go-to person that helps manage 5 to 10 properties. Some people really like that. Some people hate it. So think about the practicalities of— Whilst you can get an agency to do some of the main monthly type stuff like collecting rent, you’re always going to get hassled with fridge is broken, bath is leaking. So think about that.

The next point is unwinding property is much more complex than a stock market portfolio. So for example, as you get older and you’re perharps spending less money, an option might be selling properties so you can release capital. Or it needs to be sold for inheritance purposes. If you wait until you die and then somebody got to come in and unwind the properties then it’s going to be a lot more complicated. Because you might need to get a specialist’s help to now help sell the properties but also work out what taxes you’ve got to pay in that jurisdiction. So again, it’s common for people wanting to buy properties in UK, Australia, and then places like Malaysia. There might be capital gain taxes you got to pay in the country that you’re at. So it is a lot more complicated.

I had somebody recently come to me. This is the strategy that his father had followed. He had about 8 rental properties and he died suddenly. His mother wasn’t that actively involved in that side of it. He was based in Singapore. And so he ended up having to fly back to the UK, pre-Covid times, and help sort out the unwind. And it took 5 years to realise all of the money and get his mum on a better financial footing. And then think about how that wealth was going to get passed on to the next generation.

So rental properties can be a good approach in retirement. So absolute yes. Like equities, there are caveats that apply. So can you earn 3%, 4%, 5% post cost rental yields? Yes, but you’ve got to keep your costs as low as possible. You’ve got to put the effort into buying the right properties. You got to treat it as a business. And you’ve got to make sure you got a good team around you. So the thing that I’ve seen successful landlords do is they build a team around them. They have good rental agents. They have good maintenance people. They have property accountants, properties listers and lawyers. And if you got a good team, then it could work really well.

So using the 4% rule that we did in episode 2 about what’s the target now you’ve got to get to and/or if you got a pot of money, how much can you take out. You now know that you need a return of 4.5% to 5% a year. And we know that the stock market or rental properties can achieve this. No one approach is better than the other but in both cases, you’ve got to keep your cost low and you’ve got to put your research in. So which one is best for you? So remember what we’re trying to do here is build your desired lifestyle. We’re not just investing for the sake of it.

So if you want a hands-off approach then go down the equity’s route. The stock market tracker is never going to phone you up to say, “The bath is leaking”. But if you like the idea of being more active then maybe consider investing in rental properties. Or have a mix. Either route, know your numbers and know what you’re getting into. Run the numbers for yourself. And hopefully, even if you’re not interested in investing in the stock market yourself, you can get somebody else to do it. Knowing some of the things that we’ve talked about in the last few episodes, you now know, you can sit opposite a private banker or financial adviser. And if you’ve got an idea of what your withdrawal rate is roughly going to be, let’s say it’s 4%, then you know what kind of returns you need to be getting. And therefore, you can feel a lot more comfortable saying to them, “What are your costs?”

So if they’re using actively managed funds and they’re charging you 1%. Or a bank. What they tend to do is charge you 1% to 5% every time they change your portfolio. You’re easily going to be paying 5% per year. So if you need a 5% a year return, that returns need to be 10%. And so you can be a lot more critical of looking at what they’ve got even though you’re not the one doing the investing.

I hope that’s helpful. Send me any comments or queries on this. Think about what is right for you. Go and own your own situation. Go and do some numbers. And I will cover how to invest in equities in future podcasts.

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