Tangible Assets

checkthebudget · #1 (**permalink**) 05-23-2008, 07:06 AM

It often seems the stock market is a house of cards that could collapse with the loss of one key card... (Enron, credit crunch, etc for example) It doesn't seem there are other options for my 401k.. Is there any way to put a 401k into something more tangible like land or rental property?

sweeps · #2 (**permalink**) 05-23-2008, 07:12 AM

Your 401k? Probably not. Your employer chooses the investments, and the most you'll probably get in the way of real estate is a REIT.

You can, however, invest in real estate through a self-directed IRA. You'll have to find a company that offers them, and there are lots of rules to follow.

(Note: Not recommending this. Just providing information.)

checkthebudget · #3 (**permalink**) 05-23-2008, 07:26 AM

I think I have heard of that type of IRA. I've recently started a new job, so it is now an option to roll my previous 401k into something like that. With all the doom and gloom out there, it would be nice to have something I could put my hands on in a worse-case-scenario... I will research that option further.

noppenbd · #4 (**permalink**) 05-23-2008, 07:44 AM

When you own stocks or stock mutual funds, you do own something tangible. You own a piece of that particular company or companies. That has an inherent value based on the ability of that company to generate future earnings (plus any existing assets that the company owns). True it is possible for individual companies to be mismanaged or for stocks to fall out of favor temporarily. But likewise, the value of a real estate investment is no more fixed than a stock price (as we have recently seen!). There is no such thing as a sure thing. The best strategy is to diversify your investments. You can own some real estate through a REIT fund, but make it 10% of your portfolio or less. Owning investment properties inside of your IRA doesn't allow you to take full advantage of the tax benefits of real estate.

Eventually stocks will come back into favor and the money that is sitting on the sidelines will come pouring back in. In order to make a return, you want to be in the market before that happens, not after.

Broken Arrow · #5 (**permalink**) 05-23-2008, 08:14 AM

Ah, well said, noppenbd.

I must respectfully disagree that the stock market is not a fragile house of cards. It can be, that's more of a matter of how you "build" your house, and not the stock market per se.

To me, the stock market is more like my ex mother-in-law. Sometimes, she's very sweet. Others, she's cruel and ruthless. But almost without any doubt, she's just another woman I can't quite figure out.

But don't let any one of her volatile ups and downs set your entire outlook for the rest of your life. Or if you do, you'll also see that, in the end, she's still a woman who will be more good to you than harm in the end....

Did I just say that about my ex mother-in-law?

checkthebudget · #6 (**permalink**) 05-23-2008, 08:19 AM

Well, my mother-in-law is pretty good to me. I fix her computer and she fixes me supper all the time.

Seems to me the stock market is a lot harder to figure out.

The value of stocks and the value of real estate can both rapidly fall. However, when the stock value collapses, what do you have? A piece of paper? If land value collapses, at least I could grow a garden or have a place to live...

Broken Arrow · #7 (**permalink**) 05-23-2008, 08:33 AM

Quote:

Originally Posted by checkthebudget

However, when the stock value collapses, what do you have? A piece of paper? If land value collapses, at least I could grow a garden or have a place to live...

That could happen if you buy into something that's extremely risky, but not all stocks are like that.

In fact, some are so huge and stable that the only way they can entice investors is by paying dividends.

With stocks, it's also much easier to diversify than with brick and mortar type real estate. With a house, you're all-in. Just like buying only one stock.

Diversification is a very important safety fundamental in investing.

That said, I don't disagree about buying real estate either. In the end, we should all do a little bit of both. Easiest way is to invest in stocks is with low cost mutual funds.

noppenbd · #8 (**permalink**) 05-23-2008, 09:11 AM

Quote:

Originally Posted by checkthebudget

Well, my mother-in-law is pretty good to me. I fix her computer and she fixes me supper all the time.

Seems to me the stock market is a lot harder to figure out.

The value of stocks and the value of real estate can both rapidly fall. However, when the stock value collapses, what do you have? A piece of paper? If land value collapses, at least I could grow a garden or have a place to live...

Unless the foundation is cracked, or termites get into it, or your well runs dry, or gets contaminated with MTBE, etc... I guess you see what I am saying. Every investment has risk. With most investments, the long term return is commensurate with that risk. That is why home values could not appreciate at the rate they had been the last few years, and had to fall.

Now if you are talking about buying a home to live in, that does provide a tangible asset (shelter) that is above and beyond the appreciation in value of the property. But I would not consider your primary home an investment in the same way that buying stocks or rental properties is an investment.

sweeps · #9 (**permalink**) 05-23-2008, 10:48 AM

Quote:

Originally Posted by noppenbd

When you own stocks or stock mutual funds, you do own something tangible. You own a piece of that particular company or companies.

I may be the biggest stock bull on the forum, but I have to respectfully disagree.

Stocks are quite intangible. As you point out you're staking a claim on a company's expected future earnings. That is all. Yes theoretically you're staking a claim on the company's assets, but in reality that's not the case. There are a lot of people in line to claim those assets before stockholders can get their hands on them. Practically speaking, if a company fails, a stockholder is left with absolutely nothing. (Not even a certificate anymore since everything is electronic.

)

Even if the perceived value of real estate drops to 0, you still have something left over. Land, building materials, etc.

Broken Arrow · #10 (**permalink**) 05-23-2008, 10:57 AM

Pragmatically, you are correct sweeps.

Although, just to add, I do try to look at stocks as buying a small piece of the company. It gives me a better perspective when valuating the company than to simply see numbers on the screen.

While our stake in it may be intangible, the company we invest into-- and more importantly, how it will make money-- is often very real.

noppenbd · #11 (**permalink**) 05-23-2008, 11:01 AM

Quote:

Originally Posted by sweeps

Even if the perceived value of real estate drops to 0, you still have something left over. Land, building materials, etc.

That is true that your real estate investment will never zero out, so in that sense there is less risk. However, a total stock index fund is probably not going to zero out either. Single companies can go bankrupt and be mismanaged and be worth nothing, but diversified portfolios are not just going to be worth nothing one day.

maat55 · #12 (**permalink**) 05-23-2008, 11:04 AM

Quote:

Originally Posted by checkthebudget

I think I have heard of that type of IRA. I've recently started a new job, so it is now an option to roll my previous 401k into something like that. With all the doom and gloom out there, it would be nice to have something I could put my hands on in a worse-case-scenario... I will research that option further.

Remember, the stock market fluctuates and is a longterm investment. Down turns like the one we are in is an opportunity to buy funds at a bargain. If your 401k is for retirement,(which it should be) you should not worry about its performance in the short term.

LivingAlmostLarge · #13 (**permalink**) 05-23-2008, 11:08 AM

Unless your house was bombed with nuclear weapon and the whole area contaminated. Then it would suck to own a home.

sweeps · #14 (**permalink**) 05-23-2008, 11:11 AM

Redirect, Your Honor....

I didn't say intangible was a bad thing. The best things in life are intangible.

checkthebudget · #15 (**permalink**) 05-23-2008, 11:16 AM

OK, so it appears that it is certainly "debatable" if stocks are tangible or not...

So far, the only non-stock option we have is the self-directed IRA. It is odd to me that here in the "land of opportunity" we only have 2 options.

Maybe this belongs in another thread, but a concern I have with pre-tax dollars in my 401k is what will my taxes be 30 years from now. The federal debt is now up to 10 trillion I think, and growing about a trillion a year... 30 years from now I may be paying 70% income tax... Well, you can't beat that 100% return via a company match so I hate to just put it all in a roth.

So, I feel doubly trapped. Have to invest in Stocks, and might pay a ton of taxes upon withdrawel...

Maybe this is why rental property is appealing to me. Just a little easier to grasp. I used to rent a garage apartment from a retired lady. She had 4 other 1br "cottages" on her property that she rented out. She was near a college, so there was a steady stream of renters. It seemed she had a good stable income from us renters for her retirement.

sweeps · #16 (**permalink**) 05-23-2008, 11:19 AM

ctb, you always have the option of buying real estate outside of a retirement plan. In fact that is often the preferred way to do it because real estate comes with its own tax benefits.

tripods68 · #17 (**permalink**) 05-23-2008, 11:37 AM

Quote:

Originally Posted by sweeps

I may be the biggest stock bull on the forum, but I have to respectfully disagree.
Practically speaking, if a company fails, a stockholder is left with absolutely nothing. (Not even a certificate anymore since everything is electronic.

)

I believe you can still electrornically request a stock certificate mail to your address for a fee. Isn't that tangible asset?

checkthebudget · #18 (**permalink**) 05-23-2008, 11:40 AM

Not to be crude..., but a certificate would be about as tangible as toilet paper...

Dirt and lumber would be much more appealing.

LuxLiving · #19 (**permalink**) 05-23-2008, 01:46 PM

But then there are those nasty sink-holes, earthquakes, plate shifts, tornadoes, hurricanes, not to mention termites, fires, etc.

Maybe you should look at precious metals?? But then again, there are those gun-toting criminals out there who want your goodies.

If real estate twists your nobbies, then go for it.

Most things in life carry some inherent risk. You've just got to decide what you think the risk ratio is in comparison to your tolerance for it.

Although this post was composed somewhat with my tongue in cheek, IMHO, I don't think assessing your risk tolerance is a comical matter. Asset allocation is very important and your 'pucker-factor' is rightly to be consulted BEFORE you invest in anything.

sweeps · #20 (**permalink**) 05-23-2008, 07:48 PM

Another thing that isn't discussed much is the true cost of ownership. If you buy an index fund from Vanguard within an IRA account, you pay $2.50 or less per year on a $1,000 investment. That's it. To sell it or buy it, you simply click a button on a web site. Piece of cake.

Real estate is a different matter. You incur a cost to buy it, you incur a cost to sell it, and you incur a cost to hold it (insurance, taxes, maintenance and upkeep, etc.). These costs can be substantial.

Other hard assets are similar -- if you like gold, for example, you incur a cost to store it, and someone often gets a cut whenever you buy and sell it.