Anyone else primarily in stock index funds and 20% or less in RE?

[Sean Tracey]

Hi all,

A little background - (skip to the tldr at the bottom if you get bored) I'm mainly a buy and hold index fund investor. While I'm certainly no finance major, everything I've read about investing has led me to keep stock index funds as my primary investment vehicle. I don't see much of a point in active stock trading because over the long haul it's damn near impossible to beat the market. I max out my tax-advantaged space (401k, IRA etc.) and plow the rest into a taxable brokerage account. I can do all this with a few taps on my smartphone within minutes. By my estimates (6% real return on average compounded annually) I may have a million dollars in about 10 years. I could also have 500k if the markets tank like they've been known to do, and here is where Real Estate investing comes into play for me.

The major weakness of my current investment plan is sequence of returns risk. I plan to retire early, and withdraw 3-4% of my total portfolio value (the value at the time I retire) annually. While the S&P 500 may average 9-10% before inflation over the long haul, it will be extremely volatile, and I want to avoid having to withdraw as much during market downturns. I'm looking at Real Estate investing (buy and hold rentals) as a way to reduce that volatility. Many people would recommend 30-50% bonds to reduce the volatility, but I am retiring in my 40s and need my money to last. That requires assets with more potential for growth to sustain a 40-50+ year retirement. Buy and hold rentals seem like they offer a great ROI (maybe even better than stocks) with the added benefit of not being as vulnerable to temporary 30%+ drops in value. They'll require more work, though, at least initially.

With that being said, my current plan is to wait until I hit 200k net worth in a little less than a year, and then allocate 10-15% of my total portfolio to a rental property or two. I want it to be passive cash flow, so I will be looking for a property manager. I just want to sit back and collect a steady check. 10-15% will allow me to sleep at night without fear of delaying my early retirement by a decade or more if things go wrong, and help me get my feet wet with my first property or two. If things go very right, I can continue to use leverage and boost my total return while still investing the lion's share of my capital into index funds. 

Tldr - anyone else here primarily stock index fund investors that are looking to ease into RE? Do you see any flaws in my plans, or have suggestions to improve them? This post may seem a bit odd on a Real Estate forum, but I love to talk shop about early retirement and the many ways once can achieve those things. I figured I'd try and spark some related convo, so please feel free to ask questions if I wasn't clear on some points, or chime in if your interests are piqued. 

[Michael Boyer]

Enjoyed your thoughts.. I am sure there are quite a few Bogleheads here.. Hard to beat the index funds (as so many studies and active investors have shown).... 

On your early retirement date (40's), where real estate may help you is if you are (like me) keeping the bulk of your index fund wealth in a tax deferred (401K, 403B) account not accessible (without penalty or hardship, etc) until 59 and a1/2. So it is looks amazing on paper and will make you feel 6, 7 (maybe 8) figures great, but you can't do much with it feasibly for a decade or more if you retire in your 40's (not even buy a cup of coffee). 

Sounds like you'll have some accessible accounts, too. But with the employer match and automatic monthly purchase, dollars to donuts that one is probably the biggest kid in your portfolio class in a decade or two...Contrast real estate--it can give you real green money you can fold and put in your pocket every month at all stages of life. Rents will rise, ideally you keep fixed costs in check, and cash flow increases... Aside from dividends (even at a couple percent yield) you don't get much cash from index funds (unless you sell, which brings up timing issues). So I like real estate as a cash flow generator ( the "steady check" you mention) for you, say, at ages 40-59.5, but I would also encourage you to look at self managing if feasible (and you are willing and able) as it really helps you keep costs in check and boost cash flow, but there are lots of great PM's out there, many active on this site. Best of luck!