How Much To Invest In Real Estate, Stocks & Bonds?
You probably know the importance of diversifying your investments, and there are various models out there with suggested portfolio breakdowns. Ultimately, I think investment strategies should vary by age so I’m most drawn to those ones – but I haven’t been able to find a model that encompasses all the factors that a real estate investor should consider.
In this video, I’ll talk about two existing models I like. Then, I’ll adapt from those models to show you how a more complete investment strategy by age might look like.
The basic Investopedia concept is this – stocks are higher risk, so they generate higher but more unpredictable returns. Bonds, on the other hand, are lower risk, so this means it generates lower but more reliable returns. They explain that your investment style will vary based on your stage in life and give you a guideline for stock and bond splits based on your age.
- When you’re young, your biggest advantage is time, so you can focus on stocks because you have time to recover from losses.
- As you get older, you have more responsibilities like a growing family and more monthly expenses. This means you’ll want to reduce your risk level and have a more balanced portfolio between stocks and bonds.
- On retirement, your objective will be to use your investments as a stable income source. So they recommend focusing on investing in bonds that can give you stable monthly cash flows.
There’s another model called the Rule of 90 that Canadian author and investment advisor Garth Turner came up with. His model gives a ballpark of how much real estate should be in your total portfolio also based on age.
- Turner understands that real estate will be a big part of your portfolio when you’re young because you don’t have as much money saved up and real estate is expensive.
- As you get older, you’ll want more liquid assets and diversification to reduce your investment risk concentration, so your real estate percentage should decrease.
- To get how much equity you should put into real estate, deduct your age from 90. For example, if you’re 30, you’ll want a 60% in real estate and 40% in something else.
But two questions come to mind: How much stocks and bonds should I allocate in “something else”? If we’re only looking at the equity portion of real estate, does leverage change based on age?
Based on Investopedia’s model, we know it’s a good idea to reduce your risk appetite as you age. So I think you should also reduce your leverage, which makes investments more risky, as you age and here’s a simple chart to illustrate this point.
And now that we have some good models as a basis, here’s a new model that I came up with that takes into account real estate, leverage, stocks, and bonds. The basis of this hybrid model is that your portfolio is split into higher risk and lower risk investments. As you get older, higher risk investments will decrease and lower risk investments will increase.
Real estate without leverage has a similar risk level compared to bonds and real estate with leverage is more like stocks. So in the higher risk portion, you can either invest in stocks or real estate with leverage. In the lower risk portion, it can be either bonds or real estate without leverage. Now, we’re ready to put all the pieces together.
- When you’re younger, real estate can be fully leveraged. This means the higher risk portion will mostly consist of real estate, and the rest in stocks. The lower risk portion are only bonds because real estate is completely leveraged. So for example in your 20s, you can consider 10% in bonds, 70% in real estate with leverage, and 20% in stocks.
- As you get older and gain more assets, you’ll be paying down your mortgage which reduces your leverage, so your real estate investments also become lower risk. At the same time, we’re looking to diversify our assets more, so stocks and bonds will become a bigger part of your portfolio.
- My personal goal is to be debt-free at retirement. So here in this model, you can see that there’s no more leverage, and real estate has moved completely into the low risk section of our portfolio. At this point, we also want to increase liquidity and have a well balanced portfolio of stocks, bonds, and real estate. For example at age 60, you can consider 50% in bonds, 30% in real estate with no leverage, and 20% in stocks.
How We Can Help
By the time we retire, we’re looking for cash flows to give you stable income and that’s why Investopedia has a big allocation to bonds. Also, I think Garth Turner’s Rule Of 90 is more for end users homes.
The good thing about investment properties is that when your mortgage is fully paid down, it provides attractive monthly cash flows similar to bonds. At this point, you can view your property’s appreciation as the cherry on top, so total returns for real estate with no leverage is actually lot better than bonds.
If you’re looking to lower your real estate investment risk, it’s important to choose cash flowing properties and focus on locations with stable appreciation like Toronto. Our team specializes in cash flowing investment properties in Toronto, and we can help you find the best ones on the market.