protecting stache vs inflation for few years - VTIP?

[frugalbob]

Friends,
I'm a longtime forum lurker and dyed-in-the-wool mustachian (walk to work, bag lunches, etc etc).  A few years ago I started a business and it's done well; these days I'm working gruelling hours under great stress but am saving $200-300K/year; desperately looking forward to selling the business and FIREing in three to at most five years.  My FIRE plan is to get invested in commercial real estate: I worked in property management for a few years during college so it's a a somewhat familiar and comfortable business; the stock market, on the other hand, is a mystery to me and would cause me no end of angst with every market fluctuation so I'll probably never sleep well as an index investor. 

For the moment, though, I'm working insane hours and don't have a spare minute to search out property deals.  That will have to wait 3-5 yrs till FIRE.  In the meantime I'm sitting on increasingly too much cash.  I've paid off all debt and am building a large balance in money market accounts which is already at negative real yield, and I'm afraid could suffer greater losses if inflation heats up as seems possible.  I'm not necessarily looking for large returns or even modest ones; just need a way to protect against inflation losses for three to five years while I finish saving a 'stache, and then will sink almost everything into a few commercial properties and manage them myself.

Would moving everything out of these slowly-eroding money market funds and into Vanguard VTIP or a similar TIPs fund for the next 3-5 years be a sensible move given the above?  Again, I don't need really positive returns as I'll be able to FIRE soon on pure savings - just don't want to lose very hard-earned savings to inflation.  Or is there a better way to hedge until I can get invested in real estate?  Thanks much for your insight!
Bob

[cool7hand]

Take a look at the portfolios at https://portfoliocharts.com/. My recollection is that Golden Butterfly and All Seasons are designed to perform well in times of high inflation.

[ChpBstrd]

There are tons of good ways to hedge the risk of inflation, but if the stock market is a mystery to you then these ways would be a level of abstraction well beyond that mystery. We're talking options contracts and stuff...

It doesn't sound like you have a lot of time to read classics like A Random Walk Down Wall Street or The Millionaire Next Door, or even JL Collins' stock series: https://jlcollinsnh.com/stock-series/ so it seems there is no way out of the money market account. This is a big problem.

Could the key be to hire an employee or two who could help with the gruelling hours and stress? Yes, it's an upfront investment, but look at it this way:

1) It'll free up some time for you to do diligence and make an investment decision you can be comfortable with.
2) Hire the right people and they might take over much of the day-to-day running of the business. Tim Ferris has some things to say in The Four-Hour Workweek. If this worked out, it could negate the need to sell the business, give you more time to get the best possible price for the business, and give you a much better quality of life for the next few years. The outcomes to avoid are liquidating the business at no value or having a heart attack.
3) Hiring help is probably the key to the continued growth of your business, which is key to its valuation, which is key to you retiring. How much better does 1-3 years sound compared to 3-5?
4) In the much-feared scenario where an employee does not work out for whatever reason, you get to write off the expense and save on taxes.

Next item... If I was saving 200-300k/year and living a mustachian lifestyle, I would not worry about inflation. E.g. if your expenses are $50k/year and inflation goes up to 4%, how does that extra $2k compare to what you can save in a month? Cross that bridge when your NW exceeds 25X expenses.

Last... a small portfolio of commercial properties probably has a much lumpier and unreliable cash flow than, say, a more diversified portfolio of stocks, bonds, REITs, preferreds, etc.. Water line breaks, multi-year vacancies, and lawsuits can wipe out massive amounts of wealth as surely as market corrections, and waiting them out or re-balancing is not an option like it is with market corrections. Meanwhile Amazon and the WFH trend are decimating demand for retail and office properties - which are looking increasingly obsolete.

TL;DR - To me this sounds like a much riskier plan than just retiring at a 3.5% to 4% withdraw rate and an 80/20 portfolio.

[frugalbob]

Just wanted to follow up to say THANK YOU for the advice!  It took me a few evenings, but on your recommendation I read through JL Collin's stock series and followed that up with a couple basic investing books... life changing, it's safe to say. 

Realized I'd been laboring under a couple key misconceptions for many years:

1. I had failed to internalize the basic truth that buying stock index is literally OWNING A SHARE OF AMERICAN BUSINESS, not just a paper maneuver or a speculative game like bitcoin (which is how I'd always thought of stocks).  When you own stocks, you do in fact own a slice of one or more productive enterprises, something that's just as real as a commercial apartment building.  Stocks have inherent value, not just the hope of selling out to an even bigger sucker.  Somehow that had previously eluded me.

2. I had failed to comprehend that the month-to-month or even year-to-year fluctuations of stock valuations (which I had always feared) JUST DON'T MATTER when your time horizon for needing to liquidate your holdings is decades.  And that over decades, stocks are HIGHLY LIKELY to appreciate for as long as the social fabric holds, because they're shares in productive businesses.

I also realized that while being responsible and hands-on with the management of my business, I have been increasingly IRRESPONSIBLE with savings by allowing an increasingly  large amount of cash to sit idle.... as you pointed out, that is a problem.  So: I opened a Vanguard account, and am in the process of getting almost 100% invested: as a concession to fear I did put a small slice of money into TIPS (enough to get by on for a couple years early in FIRE in case of a down market period) but am putting everything else I have (and 100% of future savings) into equity indexes.

***Thank You*** again for a post that opened my eyes.  Wish it hadn't taken me this long to see the point of equities.

[frugalbob]

PS.  plan to hold onto the office building my business occupies and lease it to the buyer(s) when I sell the business, so will wind up with a portfolio that's about 20% commercial real estate, 70% equity index funds (eventually to include some non-US market), and remaining 10% in TIPS/individual stocks/cash/etc.

[ChpBstrd]

Just wanted to follow up to say THANK YOU for the advice!  It took me a few evenings, but on your recommendation I read through JL Collin's stock series and followed that up with a couple basic investing books... life changing, it's safe to say. 

Realized I'd been laboring under a couple key misconceptions for many years:

1. I had failed to internalize the basic truth that buying stock index is literally OWNING A SHARE OF AMERICAN BUSINESS, not just a paper maneuver or a speculative game like bitcoin (which is how I'd always thought of stocks).  When you own stocks, you do in fact own a slice of one or more productive enterprises, something that's just as real as a commercial apartment building.  Stocks have inherent value, not just the hope of selling out to an even bigger sucker.  Somehow that had previously eluded me.

2. I had failed to comprehend that the month-to-month or even year-to-year fluctuations of stock valuations (which I had always feared) JUST DON'T MATTER when your time horizon for needing to liquidate your holdings is decades.  And that over decades, stocks are HIGHLY LIKELY to appreciate for as long as the social fabric holds, because they're shares in productive businesses.

I also realized that while being responsible and hands-on with the management of my business, I have been increasingly IRRESPONSIBLE with savings by allowing an increasingly  large amount of cash to sit idle.... as you pointed out, that is a problem.  So: I opened a Vanguard account, and am in the process of getting almost 100% invested: as a concession to fear I did put a small slice of money into TIPS (enough to get by on for a couple years early in FIRE in case of a down market period) but am putting everything else I have (and 100% of future savings) into equity indexes.

***Thank You*** again for a post that opened my eyes.  Wish it hadn't taken me this long to see the point of equities.

Great news @frugalbob ! Glad to hear you get it and therefore won't hunt me down if the market does one of its typical 10-20% corrections this year, haha! The long game is the only way to win. The more zig zags you can stand to watch on your cell phone screen, the more money you'll make each decade.

Here are more observations I just thought of:

1) Audiobooks are awesome tools for busy people. If you commute or can manage a few minutes of free time in the evenings it can be helpful to plug in to learn more about investing. With audio, you can continue your book seamlessly across small blocks of time when you are otherwise occupied with mindless chores like driving, cooking, showering, cleaning, etc. Your local library probably has some titles. Note that investing books vary a lot in terms of quality and the amount of knowledge required to understand them. There is a lot of pure refined garbage out there aimed at the type of people who comment on Yahoo Finance articles and who are looking for get-rich-quick schemes. Some such garbage is fear-mongering doom porn. Every year for the past many decades, writers have earned a living on "next great crash" or "how to become a millionaire with technical analysis" books.

2) Your proposed AA sounds very reasonable to me as long as you can live without income from the commercial building during retirement. E.g. If you have a 3 or 4 year vacancy, can you stay comfortably retired? I've seen buildings go 5 years without a tenant. That negative cash flow must come out of the portfolio. At least if your stocks go down they don't cost you money to hold.

3) As a counterpoint to what I said in #1, and if you have an analytical personality, check out earlyretirementnow.com . This blogger recommends a withdraw rate slightly lower than 4% and makes a very solid actuarial case. Every post is top quality, although definitely in the "advanced" category (author is a PhD).

4) I'm fascinated about how you previously thought about stocks as a zero-sum trading game comparable to Bitcoin. Now that I think about it, this is not an uncommon attitude. I've heard it from relatives and friends. Perhaps the culprit is the financial media - which emphasizes short-termism - and our ability to get real-time quotes. In our grandparents' era, when the previous day's quotes arrived via newspaper, and executing trades took a week and $1500 in commissions, I'm sure buying stocks felt more like buying a business. Now, young investors "play" stocks on their phones alongside Candy Crush, Roblox, and crypto trading on Robinhood. This won't turn out well. It could be that the golden age of middle class people retiring on stock returns has passed, but only because we cannot stop ourselves from misusing our new tools.   

5) Don't forget to hire an employee. Get on LinkedIn to see if you can poach a former acquaintance.

[bwall]

As less4success said, nice work @frugalbob and @ChpBstrd !

It's nice to see what the key insight for you was, frugalbob; the realization that you're buying a piece of a company, not just chits that are not connected to the economy in any way.

One key insight for me was learning that since 1929 US-listed companies tend to provide superior returns to companies listed on other stock markets.

Also, as Chpbstrd mentioned, stocks don't charge you money if they sit empty or fail to pay the rent. Individual stocks can go to zero, but an index fund guards against that type of failure.