David John Marotta loves educating both investors and other financial advisors on all aspects of financial planning. He is a regular contributor to our Marotta On Money articles and is featured and quoted in several publications both across the country and around the world. He has been a guest speaker for the American Association of Independent Investors (AAII) as well as the National Association of Personal Financial Advisors’ (NAPFA’s) Consumer Education Foundation. He also enjoys being a guest on various radio shows and podcasts around the country.

On November 16, 2019, David John Marotta appeared on “Real Estate Matters” with Michael Guthrie. They discussed 50 years of financial planning, the value of professional advice, interest rates, and the markets.

Listen here:

Here is a transcript of the first half of the show:

Michael: About this time every year, I get the pleasure and privilege of having David Marotta come on the show with me. David is a guy that really keeps a finger on the pulse because of his business as it relates to all things financial. All things financial ultimately do trickle down or even be pushed forward by real estate. David is a friend, but also has a really good pulse on things going on so I like to have him come in towards the end of the year and talk about what the rest of the year might look like and just his initial thoughts about 2020. David, thank you so much for being here again this morning. We’re really grateful to have you.

David: Thank you so much for having me.

Michael: Just talk a little bit about your background. I love the story about how you guys got into the business, you and Krisan. You do a lot of really cool things outside your work. I listen to Krisan’s podcast that she does, “Wednesday in the Word” is the name of it, and I really enjoy her teaching. Talk a little bit about how you guys got involved in this financial management, wealth management type of business because you’ve been doing it for quite some time now.

David: This is a historic year for financial planning in general. It turns out that financial planning as a profession is turning fifty years old this year. On December 12, 1969 a group of men gathered together and said, “There’s got to be a better way of delivering good financial planning advice to clients than just selling products.” That was the beginning of everything from the CFP®, the fee-only movement, the NAPFA movement, the comprehensive wealth management, comprehensive financial planning and not just investment advice. That’s really what we do. We try to handle everything about a client’s finances to get their finances in order and there is so much. Comprehensive financial planning is a bottomless pit. It just really doesn’t end. Investments is certainly at the root of that. It’s certainly the engine of wealth growth and asset allocation is a piece of that. One of the things that we do is we try to look at not only different investments and which ones will do well, but how they fit together in a comprehensive portfolio. And real estate, either with publicly traded real estate or privately held real estate, is an important part of that for several reasons. One of which is it doesn’t really move in sync with the rest of the markets.

Michael: It’s crazy that’s the case. You would think it does, but it doesn’t at all.

David: Yeah, and how real estate movements is really independent from how the rest of the market moves. The correlation is how they measure that and the correlation between the U.S. real estate market and the U.S. S&P 500 is below 0.7. It bounces between 0.58 and 0.68.

Michael: For us novice people, tell us what that means.

David: If two things move perfectly in sync they would be 1.0 and we consider anything that moves 0.7 or less really a different asset class. A lot of the U.S. markets move together and they move in sync with one another, but real estate really doesn’t. And those are publicly traded real estate investments. Privately held real estate investments have less volatility because they’re not publicly priced and traded every day.

Michael: When you talk about public you’re talking about like the REITs, the real estate investment trusts.

David: Yes, real estate investment trusts and we tend to use Vanguard real estate investment trusts. VNQ is the symbol. It has an incredibly low expense ratio and a great diversity. VNQ has had a phenomenal run. It has a 10-year return that has been averaging 12.88% which is ridiculous. It’s better than the S&P 500. Year to date it’s up 28.31% which is also ridiculous. Actually as a consequence of that we’re now underweighting it because we think the forward price-to-earnings is higher than the historical average. The historical average is around 15 and it’s all the way up at 45.

Michael: For folks to get more information on that I’m guessing folks can go to MarottaOnMoney.com and get that stuff.

David: Yeah, we have no secret sauce. We publish thousands of articles on our website and we try to just give that information away for free because smarter investors just make better investors. We have a lot of people who follow our blog that aren’t our clients simply to try to better their own financial situation.

Michael: It’s interesting when you say that about no secret sauce and that kind of thing. I talk all the time on this show about getting the right information so you can be educated to make the right decisions.

David: Making those right decisions is important and they make the difference between whether you’re going to be thriving or languishing in what you’re invested in.

Michael: The similarity from my standpoint is that whole education so you make the right decisions. So many folks could go to MarottaOnMoney.com or go to any place on the web and read all sorts of stuff, get all the information they need to be educated, but at the end of the day you need somebody you can trust to sift through it and help you plan your strategy based on your situation versus just reading it. It’s the same thing with real estate. It used to be that the only way you got the information was through the MLS system. You had to go through an agent. Now you can go out there and find the properties. You think, “Ok great. Then I can do this on my own.” But then once you get into it you really need someone to come in and help you decide is this the geographic area you want to be in, is this a good investment strategy or whatever, and that’s where you need a professional, someone you can really trust to have your best interest in mind to help you make those decisions.

David: I’ve bought four different pieces of real estate in Charlottesville and I don’t think I would have bought any of them without the help of a real estate agent. Just working through the process and the inspections and trying to do all of that has been a great process. You take a real estate agent out and you ask them to see a piece of property and then they tell you, “I don’t think that’s a great piece of property for you.” But now we’ve learned something so I’ve found just actually going out with real estate agents, I learn as much as they do about me. I learn about their area of expertise and I very much value the professional aspects of other financial professionals, real estate agents, estate planning attorneys, CPAs. We’re kind of a niche or a family practice doctor, but we need help in all those other areas. We do have clients who do some of that themselves and I always think, “Yeah, but you’re not quite getting everything you could be getting if you had a really good financial professional.” There are bad financial professionals out there as there are in every career. We keep a list of people we recommend and it’s really just based on the past experience of dozens of clients as to whether or not they’re the right person or not.

Michael: The other interesting thing you were talking about is there are so many times when I’m giving people information and sharing things with them and whatever, and they end up not working with our firm for different reasons. I just had that happen over the weekend. I was helping some people look for a property and a piece of property came along and somebody else told them about it and they bought it which was good for them. Then this weekend I got an email saying, “Sorry, but we’re going to go a different direction in regards to listing our property and here are the reasons why.” It was an old friend, a college friend, and I think he was worried. I said, “Look, this is your decision to make. Obviously I’m disappointed. We would have loved to be involved in it, but the person you chose is a really good realtor and I know she’ll do a great job.” I think he was just extremely relieved that there was no hard feelings and it’s not going to do anything to our friendship. I think that’s because you kind of do the business with the open handed and you want to give and you know enough will come your way.

David: My impression is that the best financial professionals don’t actually care who signs up as a client. They’re just trying to give away free information. If you focus on helping people then I think the right people will come to you as clients.

Michael: It’s a whole aspect of being relational versus transactional. It’s true in both of our situations. Explain to people why when there’s bad news in the economy there’s a very good chance that mortgage rates will stay the same or maybe even go down a little bit even though it’s bad news.

David: The interest rates were very very low during the entire Obama years. They were just flatlined at the bottom. After Trump was elected they began raising it up and that’s really one of the reasons why Trump said, “Hey, why are you raising under my administration?” Because low interest rates help all financial transactions. It just makes it easier to move money around and easier to borrow and invest. They raised it up and we had an inverted yield curve because the short-term interest rates became better than the long-term interest rates. Really a lot of people said, “Well that must mean we have a recession coming.” But an inverted yield curve can be produced by the government simply by raising short-term interest rates. What it meant was that investors thought, “Sure, you’re giving that for the short term, but that’s not going to be long term. You’re going to lower them.” And the long-term interest rates therefore were lower. Sure enough the Fed came back and has been lowering interest rates recently so it has once again made it a good market. I felt like 2018 was probably the best year to be a seller. It was an incredible market. We had three or four properties come for sale in our neighborhood. Three of them sold in the first weekend for higher than they were asking which was ridiculous. The fourth one didn’t even come on the market. It sold prior to even coming on the market and so I don’t even know what they were going to be asking for it. This year has been much harder. We’ve had two properties for sale and they both kind of sat there. One is now a rental and one finally sold, but I don’t think it sold for as much as they thought it was going to sell for, so I think it was much harder in 2019 to be selling properties. I think partly everyone thought, “Oh, well it’s going to just keep going up.” so they just added 10% onto whatever last year was. One of the difficulties with individual real estate is that there’s no publicly pricing every single day. If your house was publicly priced every single day for what someone would offer you for it, it would bounce around wildly, but it doesn’t bounce around wildly because it sits on the market for months and months. With the interest rates lowering we might be getting another opportunity. With lower interest rates people can pay more and still have the same monthly payment. That’s one of the things as you suggested that really drives a lot of the real estate pricing. So with lower prices this might again be a seller’s market coming up in 2020. On the other hand there’s enough on the market that it might be a buyer’s market and it might be a good time to lock in a lower interest rate for the next 30 years. I do think we’re at a tipping point where in the future it’s not going to be as easy to sell a property and it’s going to be hard to buy it because of interest rates.

Photo by Maria Ziegler on Unsplash