Advice on investment for panic sellers

[bacchi]

SO's parents have done very well in rental real-estate but they're not good buy and hold (equity) investors. The last time they put some in the market, in mid-2018, they panic sold in December. They're from the "buy high, sell low" school of investing.

Now that they're getting older, they're looking to lighten the real estate load. In total, after selling a few units, they'll have about $1.5M in cash. They would like to use that money for living expenses, travel, etc.

What are the options, given the conflicting goals of safety vs income?

1) A target date fund. For example, Vanguard 2020 fund which is 30/70 stocks/bonds. The 2020 fund had a 6% drop in 12/2018. Might still be too scary. :)
2) Government and municipal bonds, which almost ensures that the principal will decrease vs inflation.
3) Construct the 2020 fund with individual ETFs, so that they can see some go up while others go down. In other words, instead of seeing only a 6% drop, they'd see the equity portion drop by 20% but the bond portions hold steady or even increase.
4) Let SO control the funds and we'll make sure they get paid each month. This will allow a more aggressive allocation.
5) Annuity?
6) Move to their city and take over managing their rentals?

Any suggestions or recommendations on handling this?


Edit: They have asked us for advice.

[Kem]

As they are known to panic sell – they will likely do so again based on the recommendation of the media, their friends (doing the same), or ‘shudder’ their adviser.  As such, option 1-3 are out.

Option 4 is awesome IF VERY CLEAR objectives and rules are outlined & revisited on schedule.  This does have some potential for feelings of resentment of control to creep in.

This may be one of the very few cases where an Annuity is not 100% evil.

6 I like.  Particularly if you and your SO show interest in it.  Particularity if a binding contract is put in place for you folks to have a controlling interest and method of transfer established.  I would hate to sell that as they're going to loose out (about 8 %) on each sell, plus have to recapture the deprecation, plus loss of cash-flow.  What an expensive and unnecessary liquidation.  If instead they can have a majority portion of their cash-flow cemented and you folks have the ability to eventually inherit the assets via a willed TOD--- well --- that means when the day comes the cost basis of ALL of the properties will be moved forward at transfer and the depreciation recapture nulled.  And, unlike an annuity, if the need for a lump sum comes about (bad sickness for example), the option to sell some of the properties remains. 

[YttriumNitrate]

Now that they're getting older, they're looking to lighten the real estate load. In total, after selling a few units, they'll have about $1.5M in cash. They would like to use that money for living expenses, travel, etc.

How about switching to properties with triple net leases?

[bacchi]

How about switching to properties with triple net leases?

They are selling at least one property by carrying the note, which is effectively a triple net. Most of the properties are in a very small market and, personally, I'd encourage them to sell anyway for diversification purposes.

Option 4 is awesome IF VERY CLEAR objectives and rules are outlined & revisited on schedule.  This does have some potential for feelings of resentment of control to creep in.

Yeah, agreed. The broker can cut a check each month but it'll be still be awkward asking them to not login when they catch of glimpse of CNBC.

This may be one of the very few cases where an Annuity is not 100% evil.

Sadly, I'm leaning that way. Maybe a split between an annuity and a target fund.

6 I like.  Particularly if you and your SO show interest in it.  Particularity if a binding contract is put in place for you folks to have a controlling interest and method of transfer established.  I would hate to sell that as they're going to loose out (about 8 %) on each sell, plus have to recapture the deprecation, plus loss of cash-flow.  What an expensive and unnecessary liquidation.  If instead they can have a majority portion of their cash-flow cemented and you folks have the ability to eventually inherit the assets via a willed TOD--- well --- that means when the day comes the cost basis of ALL of the properties will be moved forward at transfer and the depreciation recapture nulled.  And, unlike an annuity, if the need for a lump sum comes about (bad sickness for example), the option to sell some of the properties remains. 

Financially, this one makes sense. We could even get free rent in their house while they're being snowbirds.

But, while it is a resort town, driving 30 minutes for a good grocery store will get old. They could find a property manager. Even with a 10% haircut, the properties would still be cash flow positive.

[BECABECA]

How about they buy an annuity from your SO? And basically, they give her their money, she guarantees them annual annuity of 4% paid in monthly installments, and she invests it in index funds and everybody wins?

[Kem]

Becabeca - I love this idea

[wienerdog]

Maybe look at Vanguard's LifeStrategy Conservative Growth or LifeStrategy Income?

[MustacheAndaHalf]

I could see how 2018 would convince people to sell, but when you hint at their past behavior being the same, it does sound dangerous to leave them exposed to equities.

Vanguard LifeStrategy Income Fund (VASIX) has an 0.11% expense ratio, and only 20% stocks.
Maybe the can retire with their assets in that fund, plus social security?

Does your SO have siblings, or does their money ultimately go to her?  If there's nobody else to sue your SO, maybe they can take over the finances - or least put a "living will" in place to state under what conditions the parents relinquish control.  Placing a trusted obstacle between those parents and their money might be one way of smoothing out the market corrections (which will also be much lower with a 20% stock allocation).

[bacchi]

Thanks for the replies, everyone. We have some suggestions for them now.

SO is the only heir so holding a virtual annuity would work as would taking control of the finances.

[Mighty-Dollar]

If they are always panicing then they probably have too much in stocks (versus bonds).
All of the research and experts say that market timing is a fools game. The market always reflects all news, so nobody will ever get advance notice of a stock market crash. Tell them to stop reading doom and gloom headlines.
They should pick a total stock market index fund and a total bond market index fund. Done.
Avoid annuities like the plague. They are smoke and mirrors. A super low-risk 30% stock / 70% bond portfolio will consistently beat any annuity if that's how low they want to stoop risk-wise.

[BlueHouse]

#1.  But maybe consider VASIX instead.  It's really conservative. 

And then try to keep you nose out of their business.  If they are panic sellers, how do you think they'll feel if you steer them into something and then they see losses?  Nope.  I'd say "if I were you, I'd choose this", then I'd stay away from the finances.  They're doing fine.  They're clearly not stupid if they've built up such a nice nest egg.  So don't try to be a savior to make them do "better". 

For them, better is safe. 

[ChpBstrd]

7) Have SO hedge their equities positions with put options. This does 2 things: (1) Relieves the fear of losing an additional 40-50% if the correction continues and not getting it back for over a decade (as happened for the nasdaq in 2000) and (2) converting the losses experienced in a market panic to losses experienced over a long period of time as the options usually decay. Like paying for insurance instead of living in the fear of getting hit with an unforeseen massive loss. Only put options can put a firm floor on losses.

8) An REIT and MLP portfolio may help them better visualize the difference between market fluctuations and yield. As former landlords who must have lives through some price swings, they might be able to better appreciate Benjamin Graham’s allegory about Mr. Market’s offers. Second, if they can think of their spending money as coming from dividends instead of the sale of assets, they might be more willing to wait out a correction. (The benefits of dividends being purely psychological, of course).

In either case, of course, their IPS should state exactly what the investment manager should do in the event of an X% correction, and ideally this involves dropping the hedges and pivoting to stock indexes, but if not then that’s better than nothing.

[trollwithamustache]

how old are they and how much more real estate is there?  most people on this board are one extreme, they need the market returns to make retirement income. But, on the other end of the spectrum, if they are 70+ and can drop out of another property, you are looking at enough cash to get them through their life without investing.

so the latter is super not optimal, but cash is always better than loosing money in an investment.

[bacchi]

#1.  But maybe consider VASIX instead.  It's really conservative. 

Yeah, I like those LifeStrategy funds for them.

And then try to keep you nose out of their business.  If they are panic sellers, how do you think they'll feel if you steer them into something and then they see losses?  Nope.  I'd say "if I were you, I'd choose this", then I'd stay away from the finances.  They're doing fine.  They're clearly not stupid if they've built up such a nice nest egg.  So don't try to be a savior to make them do "better". 

For them, better is safe. 

There's no "savior" about it. You're correct -- they're not stupid and they know their own strengths and weaknesses. This is why they've asked for advice:

Edit: They have asked us for advice.

I understand your point, though. We need to be explicit that the portfolio will decline even with a 30/70 allocation. It will also decline with a 100% bond portfolio.

[bacchi]

7) Have SO hedge their equities positions with put options. This does 2 things: (1) Relieves the fear of losing an additional 40-50% if the correction continues and not getting it back for over a decade (as happened for the nasdaq in 2000) and (2) converting the losses experienced in a market panic to losses experienced over a long period of time as the options usually decay. Like paying for insurance instead of living in the fear of getting hit with an unforeseen massive loss. Only put options can put a firm floor on losses.

Nice. The returns will be muted but the losses are capped. May be too exotic for them if they're passively watching, even if they're not the ones buying the puts, but something to consider.

8) An REIT and MLP portfolio may help them better visualize the difference between market fluctuations and yield. As former landlords who must have lives through some price swings, they might be able to better appreciate Benjamin Graham’s allegory about Mr. Market’s offers. Second, if they can think of their spending money as coming from dividends instead of the sale of assets, they might be more willing to wait out a correction. (The benefits of dividends being purely psychological, of course).

VNQ pays out ~3%. 100% in VNQ won't cut it for their unmustachian spending, without selling principal. A mix of VNQ and VNQI would probably work.

In either case, of course, their IPS should state exactly what the investment manager should do in the event of an X% correction, and ideally this involves dropping the hedges and pivoting to stock indexes, but if not then that’s better than nothing.

Yes, drawing up an IPS is a must, whatever they finally decide.

how old are they and how much more real estate is there?  most people on this board are one extreme, they need the market returns to make retirement income. But, on the other end of the spectrum, if they are 70+ and can drop out of another property, you are looking at enough cash to get them through their life without investing.

so the latter is super not optimal, but cash is always better than loosing money in an investment.

Early 70s and about $2M equity in rental real estate and another $1M in personal real estate. Their spend is pretty high -- about $100k/yr -- so it's possible all cash would work. But they want to leave an inheritance, hence the requested advice.

[Lucky13]

#1 is similar to what I'm doing, not b/c of panic selling but eliminating the need to rebalance (since the fund manager does it) so it's truly "set it and forget it" and no temptation to sell and/or change asset allocations if the market drops.

Another thing to consider, if they've done well on Real Estate is there any way to "double down" on that, maybe buy another property that will generate cash flow? Eliminates the "panic sell" option too since property transactions take time, not just clicking "sell" button.

[BlueHouse]

There's no "savior" about it. You're correct -- they're not stupid and they know their own strengths and weaknesses. This is why they've asked for advice:

Edit: They have asked us for advice.

I understand your point, though. We need to be explicit that the portfolio will decline even with a 30/70 allocation. It will also decline with a 100% bond portfolio.

Sorry, bacchi.  I have read your posts for years and you always have well formed opinions and advice.  I shouldn't have implied the whole "savior" syndrome thing, as that has never been your M.O. 

[trollwithamustache]

Early 70s and about $2M equity in rental real estate and another $1M in personal real estate. Their spend is pretty high -- about $100k/yr -- so it's possible all cash would work. But they want to leave an inheritance, hence the requested advice.

They probably want to have at least 3-5 years in cash anyways... maybe this makes it easier not to look at the stock money stashed away for 10 years from now?