February 24, 2024 | Commercial Real Estate, Should You Buy Nvidia Now, Chinese Car Makers and Investment Return of Annuities

Commercial Real Estate

We hear that commercial real estate properties are having problems, but how bad are those problems? After the 2008/2009 financial crisis, by the second quarter of 2010 commercial property had a record $194.8 billion properties in distress. Compare that to the end of 2023, when commercial properties in distress totaled $86 billion. Also, think about how much commercial real estate has appreciated since 2010. Another point to consider, after the financial crisis there were not many funds on the sidelines and today real estate private equity firms are sitting on $544 billion in cash, which is a record level up from $457 billion in cash at the end of 2022. With that much cash, they will be interested in doing some deals and give a floor to many commercial properties across the country.

Should You Buy Nvidia Now?

We all know that Nvidia has done very well, and after the most recent report the stock is at a new high. I heard the dumbest thing from a money manager on CNBC, who didn’t own Nvidia and said you need to buy one percent of the stock in your portfolio. The reason I say it is dumb is because even if the stock doubles from here that would only increase your investment return by one percent. In other words, if your return was 10% over the next year, with the addition of Nvidia your return would be 11% if the stock doubles from here. This also assumes that had you invested one percent somewhere else it would’ve made no return at all. When it comes to investing, discipline is very important and yes, we all want to invest in investments that will increase in value, but an investor must understand their objective and their discipline, stay the course, and realize that one will not always own all the hot stocks and should not chase returns.

Chinese Car Makers

A Chinese electric auto maker, BYD, is sending chills across the auto makers in the US. Elon Musk said “If there are not trade barriers established, they will pretty much demolish most other car companies in the world. “In a memo from executives at Toyota, they stated Chinese companies have a 25 to 30% advantage over global competitors when manufacturing EVs. If not protected against, Chinese EV companies could storm the US market. In 2018, the Trump administration applied an additional 25% tariff on Chinese cars on top of the regular 2.5% tariff on all cars coming to the US. To get around this, BYD is looking at building a factory right across the border in Mexico. They have not purchased any land yet and this is a few years down the road, but it could be devastating to all car makers 3 to 5 years from now. I looked to see what the BYD cars look like and some of them are not that bad looking. Whoever becomes president in November 2024, I hope they look seriously at this situation to prevent BYD or any other Chinese carmaker from flooding our car market.

Financial Planning: Investment Return of Annuities

An annuity is exchanging your assets for income, you’re essentially buying a pension. It’s funny that pensions have such a positive connotation but annuities aren’t as popular, even though they’re pretty much the same thing. We don’t sell annuities and we don’t ever recommend annuities because when you look at the numbers, they aren’t that appealing for an investor. To illustrate this, I got a quote for a 65-year-old purchasing a $500k immediate annuity. In exchange for the $500k, they will receive monthly income of $3,000 for the rest of their life, which is a 7.2% yield. Keep in mind, the $500k is now gone, so they can’t decide down the road to do something else with their money. Statistically someone who is 65 has a life expectancy of about 83, or more 18 years. With this information we can calculate the expected return of the $500k investment and it comes out to 2.88% per year. In other words, if you were to invest $500k and then withdraw $3,000 per month for the next 18 years, you would need that $500k to return 2.88% per year to last the full 18 years. From an investment standpoint, most people wouldn’t be happy with an annualized return of less than 3% over almost 2 decades, but that’s what people agree to when they purchase an annuity. Don’t get confused by the 7.2% yield, which is misleading since those payments stop when you die. Instead, calculate the actual return to see if it still seems like a good idea. Keep in mind, the insurance company and the agent selling the annuity will not break down the actual return for you.