Author Topic: help with medium term investment  (Read 669 times)

bigern

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help with medium term investment
« on: June 14, 2018, 10:18:11 AM »
i tried posting this over at bogleheads, but they weren't much help. i probably didn't describe the situation well enough, so i'll paste original post then add postscript:

i'm offering up my situation for review. i've searched the site and just can't seem to find specific, actionable info. here's my status:

married, early 40s, no kids
80k annual income

debt
small student loan [5k]. low interest rate and it should qualify for forgiveness soon, so not paying it off
small auto loans, but interest is less than 1%. not paying those off. if that money can make more than 1% elsewhere i'm coming out ahead.
own our home. small mortgage [about 75k], low interest 3.5%. we absolutely stole it during the down market. fair market rent is probably three or four times what we're paying for mortgage/insurance/taxes. house is worth at least 200k right now.
$40k heloc available, if needed, but we've never taken a dime from it

retirement
we max out iras every year, i max out an hsa, i also have a simple ira with match at work that i take advantage of. i know where we need to be each year for our target retirement date [20 years from now]. we are several years ahead of schedule.
wife will receive 50% of her salary as pension when she retires

savings
12 months emergency fund in cash sitting in a high interest savings account.
taxable account has almost 100k. about 60% is in VTI. 40% is cash
we sold a rental house last year, which i started legging into existing vti position. my cost basis is around $120.

here's my dilemma... i hate the idea of that cash sitting in the taxable acct. and want to put it to work. we'd also like to eventually sell our house and buy our "final" home. we are in absolutely no hurry, and frankly, at these prices i'm not a buyer. we are happy and comfortable with the possibility of being in our current place for twenty years or more but the ideal would be to wait for the next down turn [whenever that may be] and take advantage. this could be anywhere from 1, 3, 5, or 10 years from now.

i've thought about a couple scenarios:
go all in on vti. at today's price that would put my cost basis roughly at $136. more than a 5% draw down and i'm under water. if i'm looking for the type of event that will cool housing market down the market's going to see it first. not the end of the world, but maybe not ideal.

keep legging into vti. might be six of one/half dozen the other

bond exposure. i have no idea how bonds work, let alone how they will perform in a rising rate environment. if you're going to suggest this please offer some fund names and why. bnd? bsv? etc..

vwinx seems like a decent blend. could i, however, achieve it with a bond etf or mutual fund along with my existing vti position?

i know there will be a lot of calls for savings, cds, money market, etc. but i'm not interested in those. like i said, we're not looking to beat the market or make some out of line return, but we don't mind a little conservative risk [i know that's an oxymoron]. we're in a position where we don't HAVE to liquidate shares or buy a house. whenever a down turn comes, though, we'd like to be able to take advantage. we'd also like our cash working in the mean time. any help is appreciated!

here's the postscript:
just to reiterate, we are perfectly ok if we're in our current house for 20 more years. we are looking to hold this money and take advantage of any screaming opportunities that come up, be it one year from now, five years from now, ten, or twenty. at some point, the stock market and/or the housing market is going to go to shit and when it does i want to be in a position to act. no one knows when that will happen, but it will happen. in the mean time, i'm looking for the money to work for me. if we don't get the timing/opportunity i am ok with that. the earmarked money puts us that much closer to retirement, but only if it's working for us.

i'm not shooting for unrealistic gains. that is not the purpose of this money. i am, however, looking for better than savings acct. return and am willing to take more than savings account risk, but not day trading bitcoin risk. i'm trying to find the best vehicle for "more than savings acct" risk to "100% vti" risk. i was hoping someone could offer actionable ideas and why they think they are good ideas. i gave a few of my own examples with the pros and cons. i'm not married to anything. open my eyes to your best ideas and why.

thanks for the help!

dougules

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Re: help with medium term investment
« Reply #1 on: June 14, 2018, 10:47:59 AM »
This sounds a bit market-timing-y to me.  I'd go all in and quit missing returns.

Also, if I had to guess, your "final" house is probably more fancy/expensive than your current one.  Am I right?  Keep in mind that a more expensive house for personal residence is an expense not an investment.  Every dollar that you put into the place you live is a dollar that doesn't buy actual investments that make an actual return.  If that's the case, you're better to put off that lifestyle inflation as long as you can and let those resources make money until you do. 

bigern

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Re: help with medium term investment
« Reply #2 on: June 14, 2018, 11:22:22 AM »
Quote
Also, if I had to guess, your "final" house is probably more fancy/expensive than your current one

not necessarily. remember, we have a pretty good amount of equity in current home. i realize that will go down with the rest of the market when that time comes, but we have a pretty good buffer and i think in a downmarket our place wouldn't lose as much as some of the others in our area [lot of big fancy second/vacation homes]. during the great recession, the lower/higher ends of our market did much better than mid market [lot of people downsized and ultra rich were relatively unfazed]. we have knowledge/skills to do majority of work needed. would probably be a lateral move sq/ft wise. basically, just want to a: get out of subdivision with hoa, b: go from multi level house to single story [might come in handy when older] and c: dial in the layout to our suiting. for example, i'd love to find a pos foreclosure that is structurally sound, and go in and remodel the whole thing exactly how i want it. i remodel houses for a living, so my labor is cheap and i get a discount at lowes. i'm not kidding myself that our mortgage will be as cheap as it now, but i don't see it being outrageous, especially factoring in hoa dues.

Quote
I'd go all in and quit missing returns

all in on what, exactly? vti? bonds? something else? sell me on the position you'd take and why.

Financial.Velociraptor

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Re: help with medium term investment
« Reply #3 on: June 14, 2018, 01:04:08 PM »
Lizard King's thinking on bonds:

Bonds and bond like instruments are critical to my ongoing FIRE.  The passive income that comes from my 60/40 equity/income allocation covers 112.62% of my current budget.  For all five years of my FIRE, I've come in under budget and am on track to do so again this year so coverage is probably closer to 120%.  To me, this income security is worth every bit of lost upside from equities.

I do not like traditional bond funds like BND in the current environment.  Since these funds create and liquidate shares with demand, falling bond prices and falling demand result in forced selling of the underlying bonds at exactly the wrong time which locks in losses that did not need to be realized otherwise.  I have most of my 40% allocation in closed end funds invested in bonds and bond like instruments.  These funds traditionally hold their bonds to maturity.  Thus, duration risk expires over time.  These funds also usually employ modest leverage so yields are in the 10% range.  The NAV might get savaged by rising interest rates but the coupons will be nearly fixed.  If you buy these as "never sell" investments, you are immune to interest rate and duration risk.  In case you missed the math, 40% of your portfolio yielding 10% covers you for the 4% rule while leaving 60% of the portfolio to do the heavy lifting of outpacing inflation.  I'm on a 4.69% withdrawal rate as of yesterday's close and I sleep like the dead.

If you must invest in a bond fund that is an ETF/mutual/open ended, pick something that is focused on short duration holdings.  It will be worth it for insurance against rising interest rates.

Distressed bonds can be a superb investment any time the credit cycle rolls over.  Average long term default rate on "B" rate high yield bonds runs about 4%.  For the deeply distressed "C" notes, the default rate runs about 27%.  In both cases, the historical average recovery in bankruptcy for senior note holders is about 40%.  So the expected var of a "B" is about 97% of par and 84% percent for "C"'s.  You can buy these bonds for much less than that.  I've bought bonds as low as 30 cents on the dollar and walked away with full recovery with 5 years time.  You earn 10% or more on your money while you wait and then triple the principal at the end.  As long as you are well diversified, you can expect to beat the yield on equity by buying up distressed bonds during a panic. 

Also worth considering as bond alternatives are: Preferreds, REITs, BDCs, and MLPs.

Radagast

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Re: help with medium term investment
« Reply #4 on: June 14, 2018, 01:20:28 PM »
Its a common question with no easy answer. Here is a recent one https://forum.mrmoneymustache.com/investor-alley/5-year-timeframe-investing/

Some funds that came up there:
Vanguard has a tax-managed balanced fund:  VTMFX.  I believe it is 50% large and mid cap stock index, and 50% muni bond fund.
Pete recommended VBINX (60/40 stock/bond).
VWAHX (High yield tax exempt) is similar to the above but lower risk lower return

Personally, I favor more of a 50-70% stock allocation for this purpose where there is not a clear time frame. My wife similarly wants too much house in the next 2-10 years. I use an equal weight between VWO, VEA, VIOV, IUSV, VGIT, VWAHX with the stock-bond split in practice varying with expected need for money.

bigern

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Re: help with medium term investment
« Reply #5 on: June 14, 2018, 01:26:09 PM »
thank you FV and Radagast, that is some fantastic info to digest and the most actionable advice i've seen after posting this on a couple different forums. may or may not end up being what i do, but it's exactly the kind of help i'm looking for. thanks again...

Radagast

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Re: help with medium term investment
« Reply #6 on: June 14, 2018, 01:45:00 PM »
I do not like traditional bond funds like BND in the current environment.  Since these funds create and liquidate shares with demand, falling bond prices and falling demand result in forced selling of the underlying bonds at exactly the wrong time which locks in losses that did not need to be realized otherwise.  I have most of my 40% allocation in closed end funds invested in bonds and bond like instruments.  These funds traditionally hold their bonds to maturity.  Thus, duration risk expires over time.  These funds also usually employ modest leverage so yields are in the 10% range.  The NAV might get savaged by rising interest rates but the coupons will be nearly fixed.  If you buy these as "never sell" investments, you are immune to interest rate and duration risk.  In case you missed the math, 40% of your portfolio yielding 10% covers you for the 4% rule while leaving 60% of the portfolio to do the heavy lifting of outpacing inflation.  I'm on a 4.69% withdrawal rate as of yesterday's close and I sleep like the dead.
What funds are these? Do pretty much all bond CEFs hold to maturity? I looked into some of these, I can't remember the exact funds, but they did not beat my rebalanced stock-bond portfolio since ~2000 in backtesting in any allocation which included bond CEFs, so I gave up on them. As I recall you are also buying them only at a steep discount to NAV, but that is more trouble than I want.

Financial.Velociraptor

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Re: help with medium term investment
« Reply #7 on: June 14, 2018, 02:03:55 PM »
What funds are these? Do pretty much all bond CEFs hold to maturity? I looked into some of these, I can't remember the exact funds, but they did not beat my rebalanced stock-bond portfolio since ~2000 in backtesting in any allocation which included bond CEFs, so I gave up on them. As I recall you are also buying them only at a steep discount to NAV, but that is more trouble than I want.

The funds I like vary from moment to moment, based on discount to NAV.  You can screen for CEFs easily here: https://www.cefconnect.com/closed-end-funds-screener.  In my experience, I've never seen a CEF sell a significant portion of their bond holdings prior to maturity.  They will never need to raise the cash and the commission drag eats into their profits.

I think the two of us might have a disconnect in goal with bonds.  The conventional wisdom is to hold them for low Beta and low correlation to equity holdings.  My intent is to collect the coupons and to hell with the nominal value versus par.

Dicey

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Re: help with medium term investment
« Reply #8 on: June 14, 2018, 10:16:02 PM »
We sat on a shitpile of cash for two years while we searched for our next flip project. When it finally happened, it was lightning fast. We are so glad we resisted the temptation to do anything but let it sit.

However, we were crystal clear on our purpose for the money, and we've blown well past our FI number.

It was really hard to wait patiently, but we're glad we did.

Radagast

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Re: help with medium term investment
« Reply #9 on: June 15, 2018, 12:21:36 AM »
What funds are these? Do pretty much all bond CEFs hold to maturity? I looked into some of these, I can't remember the exact funds, but they did not beat my rebalanced stock-bond portfolio since ~2000 in backtesting in any allocation which included bond CEFs, so I gave up on them. As I recall you are also buying them only at a steep discount to NAV, but that is more trouble than I want.

The funds I like vary from moment to moment, based on discount to NAV.  You can screen for CEFs easily here: https://www.cefconnect.com/closed-end-funds-screener.  In my experience, I've never seen a CEF sell a significant portion of their bond holdings prior to maturity.  They will never need to raise the cash and the commission drag eats into their profits.

I think the two of us might have a disconnect in goal with bonds.  The conventional wisdom is to hold them for low Beta and low correlation to equity holdings.  My intent is to collect the coupons and to hell with the nominal value versus par.
My only real goal is likelihood of having the money I need at the time I need it, low beta and even low correlation are not necessarily goals. I guess I am a total return investor then. My method was crude, but plugging in various CEFs into portfoliovisualizer the results were good in a balanced allocation but never as good as if it had been VWAHX instead. I expect the expense ratio, credit risk at the wrong time, and poor returns on leverage during flat yield curves hurt CEFs. But I think buying at steeper than normal discounts instead of naively buying would make up the difference, its just that I'd have to spend time on that consistently for it to work.

bigern

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Re: help with medium term investment
« Reply #10 on: June 15, 2018, 07:48:49 AM »
Quote
We sat on a shitpile of cash for two years while we searched for our next flip project. When it finally happened, it was lightning fast. We are so glad we resisted the temptation to do anything but let it sit.

i suppose the good thing about our situation is that we're perfectly happy to stay in our current place long term, which is why i'm willing to assume a little more risk. if, for some reason, the money was tied up and we missed a house it's not the end of the world. i look at it as we use it for a house [or any other screaming opportunity that pops up at an undetermined amount of time], or it's invested and working towards getting us to retirement that much quicker. i just don't like the idea of it sitting there doing nothing since it's not 100% earmarked for another house or anything else. at the same time, i like being in a position to capitalize on weakness, whether it's real estate, the market, etc.

at this point, i'm leaning towards adding another 100 shares of VTI, which will keep my cost basis over 10% below current price, then starting a position in BND and VWINX with the rest. i like how BND and VWINX hold up during corrections, so my theory is collect the dividends [and/or cap appreciation for VWINX] and if the market corrects i can either sell some and add to VTI, hold tight, or start looking for deals elsewhere [housing, etc.], depending on how the positions sit. i may start adding today and i have a put i sold on VTI that expires end of today that will free up cash for the other purchases monday.