Indiscretions And Your Retirement

Do you feel at the mercy of your retirement portfolio sometimes?

I ran into an old neighbor of mine the other day. He was bemoaning that he was planning on retiring at the end of this year but didn’t feel like he could with his 401(k) down more than 12% in value just this year. He is forced to keep working because his retirement portfolio’s value won’t last him. “And we’re not even in a recession yet,” he concluded.  

Theoretically, stock prices should be determined solely by economic fundamentals.

As an owner of a public company, a stockholder is theoretically tied to the earnings and valuation of the company because a stockholder has a claim to those earnings. An owner of common stock has a claim on earnings, and earnings per share (EPS) is the owner’s ROI. When investors buy a stock, they purchase a proportional share of the company’s future stream of earnings. Therefore, the company’s stock price should directly reflect its financial performance.

In an efficient market, the company’s economic fundamentals should be the principal factor in determining its stock price. However, an external factor throws fundamentals out the door – investor sentiment. In the stock market, as with everything else, things can get irrational when human emotions get involved.  

Investor sentiment is the psychology of investors acting alone and as a group. Investor sentiment is usually subjective and biased.

For example, a company’s underlying fundamentals can look stellar with its future prospects looking equally rosy, but along comes a single piece of news that can undermine the stock price for no good economic reason – case in point. I was reading an article on Fortune.com the other day that discussed how executive indiscretions at public companies could damage the stockholders of these companies.  

Why should investors pay for CEO indiscretions?

They shouldn’t, but because of the nature of the markets – one driven by irrational investor sentiment – investors and their portfolios suffer the collateral damage from these scandals.

Investors shouldn’t suffer from factors that have nothing to do with a company’s bottom line.

That’s why smart and affluent investors are drawn to real assets that are insulated from investor sentiment. Do you ever see property values fluctuate wildly because of a property owner’s indiscretions? Not really.  

Smart investors are drawn to real assets because they have an intrinsic value independent of investor sentiment and what investors are willing to pay for an asset in the markets.

While a 401(k) can fluctuate wildly and impact a retiree’s cash flow when cashing out that 401(k), the cash flow from commercial real estate is largely unaffected by non-economic factors. Although widespread investor sentiment may be fearful or nervous and can drive stock prices down, that sentiment won’t affect the rents an investor collects from a commercial property.  

An investor whose retirement is allocated to real estate as opposed to one whose portfolio is allocated to assets driven by investor sentiment can rest more easily in uncertain times, knowing their cash flow will continue to be consistent and reliable as opposed to the investor who sees the value of their 401(k) constantly dwindling.

Smart investors don’t leave their portfolios and retirements to chance.

They want to eliminate emotion from their investing equation to rely on consistent and reliable cash flow and growth insulated from irrational market drivers.  

Wouldn’t the peace of mind from real estate investments be worth it?

No more wondering if a piece of news is going to wreck your retirement. Real estate is where smart investors put their money to insulate their retirement portfolios from CEO indiscretions and every other irrational factor spawned by irrational behavior fueled by the news, internet, and social media that all have nothing to do with an asset’s underlying economic performance.


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Logan Freeman

Building generational wealth with alternative investments