It has been way too long since I wrote my last blog, but I feel I have a good excuse. As I sit here in Bottineau, North Dakota; I’m on day 38 of a cross-country road trip in my 2003 Z06 Corvette, which has taken me from Seattle to as far south as Atlanta and many places in between. It has been a good test drive (pun intended) of the life I have tried to design for myself, one in which I have complete control of my schedule and no worries about money. I’m pleased to report, IT’S WORKING! Don’t get me wrong, there’s nothing wrong with working. I think, however, we should all be striving for a situation in which the way we choose to spend each day is driven by what makes us happy and not by what pays the bills – and sometimes makes us unhappy. If you’re not at this point yet, I hope you will find something useful from my experience.
For the past twelve years, I’ve been collecting cash-flowing assets. These include things like apartment buildings, automated teller machines, annuities, and notes. From these investments, I receive a steady flow of income regardless of whether I’m at home, sleeping, or driving across the country. This is very different from the Conventional Wisdom that most of us have been taught by financial planners, read about, or simply picked up from our parents, friends, or coworkers. The conventional wisdom would have us build a large, diversified portfolio of stocks, bonds, and mutual funds. So, what’s wrong with this strategy? It doesn’t produce cash flow! In order to generate the cash to pay your bills, you have to sell some of that portfolio every month, quarter, or year. And you hope that the value of your portfolio increases faster than your rate of withdrawal, and you don’t run out of money before you die.
Keep in mind that the value of your portfolio not only fluctuates for sound business reasons; but more disturbingly, it fluctuates based upon investors’ FEELINGS and EMOTIONS about:
- The U.S. economy
- The world economy
- Wars
- Politics
- Natural disasters
- Who tweets about who knows what
- And let’s not forget about computerized, high-frequency trading
Since my cash-flowing assets can’t be easily bought and sold, their value and performance are significantly less affected by the business cycle and mostly immune from investors’ feelings and emotions. Let’s look at a real-life example. In the financial crisis in the fall of 2008, the major financial markets lost more than 30% of their value. If you were following the conventional wisdom, your portfolio of stocks, bonds, and mutual funds could have also lost 30% of their value. And if you were selling shares of your portfolio every month to generate $5,000/month of cash flow, you would now need to sell more shares at their lower values to generate the same $5,000/month of cash flow, thus depleting your portfolio much faster during the duration of the financial crisis. Depending on where you are in retirement (the beginning, middle, or end) when this downturn occurs, your portfolio might never recover, and you could run out of money before you die (sequence of returns or sequence risk).
I owned mutual funds during the fall of 2008, and my portfolio took a big hit, but I also owned rental properties. Here’s the difference; while my rental properties declined in value, they continued to produce increasing levels of cashflow! Yes, the value of the buildings went down significantly, but I didn’t need to sell the buildings. I continued to collect the monthly cash flow and sold the properties later when their values had recovered.
Are you collecting cash-flowing assets that produce cash flow while you’re sleeping? If not, why not? Even if you’re singularly in the conventional-wisdom camp of building a diversified portfolio of stocks, bonds, and mutual funds; why not diversify? Currently, you’re only diversified in paper assets (aka the stock market). Why not diversify into one of the other three asset classes: real assets (aka real estate), commodities, or businesses? What have you got to lose?