Written by
Ruzanna Queenan, CFA
June 12, 2020
Realtor Success

A Realtor’s Guide To Stock and Bond Investing

My realtor clients are savvy investors who know how to analyze, price and purchase investments andhow to manage them to earn good returns. Most of this expertise is typically focused on the type ofasset they know best – real estate. As savvy investors, my clients know that in order to build truefinancial security and real wealth, they need to diversify and have some of their money in stocks andbonds. The question I get asked the most often is, “I know a lot about real estate, but not a ton aboutthe stock market. How do I invest?”

Since the majority of realtors are independent contractors without a regular salary or a company 401(K),there are several important decisions they need to make as their business and income grow. In thisguide, I summarize the answers I give to my clients to their most common questions about investing.

How much should I invest?

A portion of each commission should be allocated to investment accounts before it gets spent on business or household expenses. There are 3 types of investment accounts I recommend every realtor have:

  1. Safety account to serve as your rainy day, emergency reserve that you can access at any time
  2. Big goal account where you invest for future bills such as college tuition, property, vacation, etc.
  3. Retirement plan to start plotting your eventual well-deserved freedom

The amount to be allocated into each account can be decided three ways:

  1. What you need
  2. What you can afford
  3. What you decide to put away

The first step is to do the all-essential budgeting and know how much you need for your living and business expenses. Once you know your monthly budget, the next step is to determine how much money to put into each investment account from EVERY commission.

The best way is to figure out how much money you need and when and then determine the monthly investment amount to reach your goal. For example, if you child is going to college in 10 years, there are pretty good calculators out there that will tell you how much to invest each month to cover the tuition. You can take the same approach with your retirement plan, with the only caveat that the further away you are from retirement, the harder it is to estimate how much you will need.

The next best way is to look at your commission income, subtract taxes and expenses and invest what is left over. This assumes that you will stick to your budget and will have the funds to invest and not get into debt.

Lastly, you can decide to allocate a fixed percent from every commission no matter what. An example of this approach would be:

Safety account – 5%

Big goal account – 5%

Retirement account – 10%

Whichever method you choose, the key is to create these accounts and start putting money away. Later in this post, I describe how to invest each account.

When should I start investing

Ideally, you want to invest as soon as you get your first paycheck. The biggest factor in investment success is TIME so you want to give your investments as much time to grow as possible. There are several reasons why that’s the case:

  1. Markets can be up or down in a given year but they always grow over time
  2. The more time you have in the markets, the more dividends and income you earn which you can reinvest and take advantage of the compounding
  3. The earlier you start, the less you need to invest in every given year to reach your goals. For example, if you start investing for retirement in your 20s, you can put away hundreds a year vs catching up in your 50s and having to put away thousands of dollars each month to be able to retire

The biggest hurdle that keeps my clients from investing is typically debt. If you have student, personal or credit card debt, there is a trade-off in investing vs paying down your loans. How you evaluate the pros and cons depends on your situation, including loan amounts, interest rates, your analysis of your income potential, your comfort with debt, your personality, your habits etc. The rule of thumb I use is - get rid of your credit card debt because it typically carries high interest rate and it is hard to earn the same returns in the markets year after year. If you have student loans, you can still invest and start building your nest egg if you make right decisions about the right amounts.

Where should I put my money?

While there is no simple answer that is right for everyone, there are some guidelines that I can share without giving specific investment advice. There are three decisions that every investor has to make as they build their portfolio:

1. How to split your dollars between buckets of cash, stocks, bonds, and a few other types

The first decision is driven by your goal, time horizon and risk tolerance. More risk and return=more stocks, less risk=more bonds. More time = more stocks, less time=more bonds. Cash is always good to have available in case you need it. I recommend keeping at least 1-2 years’ worth of living expenses in cash if you can. A common portfolio is 60% stocks, 40% bonds split and is a suitable starting point for many of my clients.

2. What to buy in each bucket

When it comes to the actual investments, options are seemingly endless. Most investors will make choices in the following areas:

Strategy: Active or Passive

Region: Domestic, International or Global

Products: Individual stocks, mutual funds or Exchange-Traded Funds (ETFs)

Stock Choices

Size: Small, Medium and Large

Potential: Growth and Value

Concentration: Individual, Industry, or Market

Bond Choices

Sector: Government or Corporate

Maturity: Short, Intermediate or Long-Term

Quality: Highest to “Junk”

3. How much of each investment to buy in each bucket

There are a few approaches to this decision that range from complicated simulations to simple, straightforward choices such as equal percentage or equal dollar amount. If you are making this decision on your own, I would recommend a simple, straightforward way to divide your money across investments and buy your securities. A good approach would be to buy more large stock mutual funds and less of small stock funds and buy equal amounts of different bond maturities in the portfolio.

The 4 Mutual Fund Portfolio

It is entirely possible to invest in just four mutual funds and create a high-quality, highly diversified portfolio spanning local and international markets and delivering very respectable returns. This portfolio is a good starting place for nearly anyone and will consist of the following investments:

  1. A total U.S. stock market index fund
  2. A total international stock market index fund
  3. A total U.S. bond index fund
  4. A total international bond index fund

Will investing save me on taxes?

There are two basic account types that most of us have. One is a brokerage account for general investments and the other one is retirement accounts. The brokerage account is used for safety and goal investments and the gains are taxed as they are incurred. The advantage of the brokerage account is immediate access to your money and flexibility and almost endless choices. Most retirement plans – except for the Roth plans, are tax-deferred and you pay taxes when you take your money out. These accounts are designed to encourage people to put money away and KEEP it there until retirement and there are hefty penalties for early withdrawals.

Small business owners have an amazing array of choices for retirement plans that go beyond traditional IRAs and allow the business owners to build real retirement security. Plans such as SEP IRAs and Solo 401(k)s are inexpensive, have very high contribution limits and are very easy to setup and maintain for independent contractors. For 2020, realtors can put away up to $56,000 in high-quality, reasonably- priced investments and reap all the tax and investment benefits at the same time. Additionally, the plans are flexible and do not require contributions when you don’t have the money. Every realtor should setup a retirement plan the second they get into the business and use it as an essential part of their business and wealth planning.

Will I lose all my money?

The biggest fear stopping people from investing is a fear of loss. When you invest in real estate, you acquire land or a building that you can see and touch and it is easier to feel that it is safe and sound. The nature of the capital markets is such that they feel intangible and therefore less sound. To novices, markets seem random and handing over your money to an investment professional amounts to loss of control. When the volatility spikes up, it feels even more unsettling and uncertain causing distrust and dislike.

There is, however, a big difference between volatility and loss. Most of us experience volatility which while unpleasant, doesn’t cause losses. The loss that we fear is one of permanent loss as when a company goes out of business or we must sell our investments when the markets are down. That is not dissimilar from real estate when the current market conditions determine how much you would get for your property.

The best way to overcome our fear of the markets is to think about them as the money behind everything that we use every day. Without capital, no innovation would be possible and we’d be stuck in stone-ages. Investing is the process of supplying ideas with the fuel they need to become reality and improve our lives. Investing is one of the most powerful forces pushing our civilization forward and being part of it is a privilege.

In summary, incorporating stocks and bonds into your overall investment strategy is a great way to make your money work harder for you and provide you the life style that you want. Invest early and often, learn as you go and grow your security, prosperity and wealth one smart decision at a time.

Ruzanna Queenan, CFA

I am Ruzanna, the President of Queenvest. Like many women, I wasn’t always good with money, but I learned through many years of work in the financial industry how to use money well. I am fortunate to have the opportunity to help strong, ambitious business owners and executives take control of their money and ultimately, their personal success.