2023 investment strategy: Index funds with high tax bill or real estate?

[SeattleCPA]

I don't have a whitebeard. But I have lots of gray hair. And partly because one of my roles is to unravel the financial complexity active investors create and their heirs later deal with.

There is much to be said for simplicity. Simplicity scales.

I believe (and observe) one can earn a higher return with some active investing in alternative asset classes. But gosh it can come with a cost. Maybe one the wealth creator avoids but then leaves for surviving spouse or kids.

[taxstra]

Tend to agree with the others on here. If you have more money than you think you’ll need, I’d just go the index route. If you enjoy the game of real estate, not going to argue with it.

[Anne]

Many thanks to those who replied. It helps to consider different perspectives and to think things through. When I was younger and had fewer choices, it was easy to just get up and go to work. With more choices comes more options.


Why do I want to increase our net worth? I tend to think about the many risks out there. High inflation with a long retirement horizon. Economic effects of massive national debt. Dysfunctional government and the possibility of a congress that will tank the economy, just to prove a point of how red or how blue they are. How do I insulate myself and my family from the potential chaos around us?

Will continuing to optimize change our life? Probably not, but yes, optimizing could turn out to be important if some of the very bad things that I mentioned above come to pass.

What is the psychology of my relationship to money? Having enough money means having security. It means I am taking care of my family. It means I can enjoy a nice home, nice travel, and I can help provide security and education for my extended family. It means I can eventually relax when I retire. But relaxing and sitting still is not in my DNA. I continue to enjoy working hard and playing hard. I am sure that will change, just not sure when.

Unless you have previously overstated things regarding your investments, you are financially secure unless things happen that would devastate all Americans (or even worse, all humans) in which case nothing you do now will make a difference. There are people wealthier than you who have a vested interest in making sure the economy’s house of cards doesn’t collapse, let them do the heavy lifting aka worrying.

I don’t think there is anything wrong with trying to optimize throughout your life especially if you have a goal greater than yourself/your family but it seems like your stated goal is security for you and your family which you already have but you don’t seem to believe you have. So I think you should set some goals for 2023 on how to improve your mental security. Your retirement horizon is not that long—not saying you are old, but that’s true for all of us. It’s later than you think.

[White.Beard.Doc]

Many thanks to those who replied. It helps to consider different perspectives and to think things through. When I was younger and had fewer choices, it was easy to just get up and go to work. With more choices comes more options.


Why do I want to increase our net worth? I tend to think about the many risks out there. High inflation with a long retirement horizon. Economic effects of massive national debt. Dysfunctional government and the possibility of a congress that will tank the economy, just to prove a point of how red or how blue they are. How do I insulate myself and my family from the potential chaos around us?

Will continuing to optimize change our life? Probably not, but yes, optimizing could turn out to be important if some of the very bad things that I mentioned above come to pass.

What is the psychology of my relationship to money? Having enough money means having security. It means I am taking care of my family. It means I can enjoy a nice home, nice travel, and I can help provide security and education for my extended family. It means I can eventually relax when I retire. But relaxing and sitting still is not in my DNA. I continue to enjoy working hard and playing hard. I am sure that will change, just not sure when.

[dennis]

Dennis, it sounds like you have a great RE investing plan. How widely diversified are you beyond these NNN leases?

We are also invested in a couple of local syndications, one is with a company whose niche is self storage facilities and two others are ground up developments of multifamily complexes. I have a line on a syndication that will purchase some local retail space. They had one under contract but it fell out during due diligence so they still are looking. The rest is directly owned multifamily and single family. We did have one investment in a syndicated office building that was hurt with COVID and sold last year at a 14% loss.

[Tim]

I continue to consider increased net worth equals increased financial security, but there comes a point.....

We currently spend on the things we want and do not deprive ourselves of anything, the grandkids education is taken care of, and the travel plans are taken care of. Still, this inflationary environment could get more ugly, and if there is a long horizon ahead, what then?

Not always logical, but personal finance is very much a psychological game.

Ahh, that last sentence is so revealing. Not sure if you will ever get your head straight. I doubt you really get much satisfaction or ego boost playing the tax game or playing the CRE game. Been there, done that.

Riding that bike, travel, a little work seems to come too easy. Life is challenging, what’s your challenge?
I have no clue. Mine is babysitting contractors on some minor remodeling stuff for my daughter. Oh well. Gives me satisfaction when I see her eyes and it’s an unspoken “thank you”. Boy those guys can pretend a ton and try to bait and switch even on simple crap.

Find your niche. Easier said than done.

[Tangler]

And personal finance is personal so I’m not sure if anyone here will change your mind regarding what YOU want to do. I’d put it in a taxable account and keep enjoying life but that’s me and real estate is also not a big part of my current life.

Yes, I am not smart or dedicated enough to compete in realestate so i would personally do option 1, but I am not you.

[CordMcNally]

I continue to consider increased net worth equals increased financial security, but there comes a point.....

We currently spend on the things we want and do not deprive ourselves of anything, the grandkids education is taken care of, and the travel plans are taken care of. Still, this inflationary environment could get more ugly, and if there is a long horizon ahead, what then?

Not always logical, but personal finance is very much a psychological game.

And personal finance is personal so I’m not sure if anyone here will change your mind regarding what YOU want to do. I’d put it in a taxable account and keep enjoying life but that’s me and real estate is also not a big part of my current life.

[White.Beard.Doc]

I've previously mentioned NNN commercial properties and these are NOT labor intensive. The only thing you have to do is pay the mortgage, which I don't anyway as it is ACHed by the bank. You can still do a cost seg bonus depreciation study. I note the current Dollar Generals on offer have had a raise in the CAP rate offered so things are moving in a positive direction for buyers. You also don't have to worry about having a target on your back like residential landlords do now. We currently have 6 anti-landlord bills in committee in our legislature and I intend to testify against them when the public comments are scheduled by the committee.

Dennis, it sounds like you have a great RE investing plan. How widely diversified are you beyond these NNN leases?

[White.Beard.Doc]

From your posts, I thought you were already heavily invested in real estate?
And that you were already taking advantage of the tax savings?

The questions would be Are you perhaps too exposed to this asset class?
Do you want to expand the business you are currently running, or would you prefer to put more of your assets in something truly passive, like index funds?

Or are you asking whether the current economic climate is conducive to buying more real estate now? For that, I assume the answer is that it is more risky, has a wide spread of possible returns, positive or negative, and has the potential for a high payoff if you can buy at a low price.

Yes, we have a lot of RE investments, but we also have a lot of stock investments and we own 3 companies that I founded. We could purchase more RE and remain well diversified. RE, even passive RE, requires more effort than a stock index fund, but there are professional managers that can take care of most of it.

[White.Beard.Doc]

Old RLP*/FA’s POV here - what is the purpose of increasing your NW by > 10%, in a “labor insensitive” manner? That may already be obvious to you and your wife or you may want to discuss before you make a decision. I once saw a chart online that you hang on the wall with squares representing your estimated life span. You mark off all the squares up to your age then continuing blacking/x-ing out the squares in real time. The visual representation of the time you have left was interesting and arresting.

Where are you on the chart and how do you want to spend your remaining time left? The answer is not OSFA and requires some reflection, as in going through The 3 Questions that George Kinder drilled into our skulls one week during training. All the best with hopes you get more input on this thread.

*Registered Life Planner

Yes, it is good to ask those life goal questions, and ask them again. This is a good start to a discussion with my spouse.

[White.Beard.Doc]

Honest question but does it matter? You've already spoken about you have more money than you'll ever spend.

I continue to consider increased net worth equals increased financial security, but there comes a point.....

We currently spend on the things we want and do not deprive ourselves of anything, the grandkids education is taken care of, and the travel plans are taken care of. Still, this inflationary environment could get more ugly, and if there is a long horizon ahead, what then?

Not always logical, but personal finance is very much a psychological game.

[abds]

You're probably approaching 9-figure net worth at some point in the near future... you have said you don't need more money... you said or implied on some thread that you've never flown private... so does more money make your life better in any way?

If you actually enjoy the real estate beyond making money in it, option 2. If you want to get to a certain NW before you buy a fractional share of a jet (or some other expensive lifestyle-enhancing thing), option 2. If you want to relax and have enough money, option 1.

[Zaphod]

Maybe hold in short duration bonds for now, earning a nice coupon and wait to see if a truly great commercial real estate environment becomes available, could be more than 5% then. No need to rush, wait and pick a great spot, if not, move on and index.

[The White Coat Investor]

I am working on our overall investment strategy for 2023. I am debating between an easy index fund investment path, versus a more labor intensive, but far more lucrative, real estate investment path.

Option 1: Go the simple route and invest all the excess income in the taxable accounts, in index funds. The income tax bill for the year will be around 46% combined effective state and local income tax. What is left after paying all those taxes goes into the taxable investment accounts.

Option 2: Invest heavily in real estate, do cost segregation and bonus depreciation. Perhaps I can reduce the income tax to around 14% effective for the year if the plans are effective, saving and investing an extra 1/3 of annual income.

I am somewhat attracted to option 2. There are problems there though. The commercial RE market is in the midst of a repricing freeze. Sellers want the old cap rates that were achievable prior to interest rates going up. Buyers want discounts based on the new financing reality. A significant minority of commercial RE owners are heading into a squeeze and will likely be forced to sell at discounted prices as the year progresses (due to variable rate financing on their investments). Executing option 2 may or may not pan out. Right now I am sitting on a large pile of cash. I put it into high yield stable investments while waiting things out. Option 2 would potentially allow me to add an extra 5% to our net worth in the form of tax savings due to high business income this year. If you exclude the value of the business I started, option 2 could increase our invested asset net worth by more than an additional 10%.

How does more money change your life?