Author Topic: Accredited Investors - Why A 4% SWR?  (Read 75857 times)

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #150 on: June 16, 2015, 07:08:41 AM »
Is this the sort of investment that you would recommend to novice investors?  My concern is the proliferation of these organizations and the inability of marginally knowledgeable folks to determine the viability and profitability of what they are buying.  It's not much different than the guy at church that sells you high commission life insurance.  The potential for abuse is high.

No...I would not recommend them to novice investors.  Novice investors could dip their toe in the water by investing as little as $5k though.  That is one of the great things about the new industry.  It has reduced the price to buy into projects considerably.  If one takes a rational approach to scaling their investments in this type of product as opposed to investing several hundred thousand dollars like the poster in your thread did they will have a greater chance for success IMO.  They can start small and invest more as they learn more about how to do so properly. 

There is certainly the opportunity for abuse.  There is always the opportunity for abuse when money is exchanged. 

Non-accredited investors under Title IV will be limited to investing the greater of 10% or their net worth or income in these types of projects.  Using intrastate exemptions like the ones you described below they can invest more.  Given the regulation around A+ you will see more funds most likely.  Very few syndicates will use this exemption because of timing and cost issues. 

Retire-Canada

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Re: Accredited Investors - Why A 4% SWR?
« Reply #151 on: June 16, 2015, 07:15:24 AM »
However at some point, I argue when your stash is in 100-500K level, your time is better spent learning about other opportunities that trying to save an additional $20 /month by clipping coupons.

Yup. An alternative way to look at it is:

1. examine budget
2. reduce aggressively
3. invest high savings rate into index funds
4. stop thinking about money
5. enjoy life

Spending your spare time devoted to money in the hopes that will result you being free at some point has some drawbacks. It may accelerate your ability to build wealth, but if that comes at a the cost of thinking about money all the time it's not freedom it's just a different job.

The one thing you'll never get back is time. You can make more money, but if you spend a bunch of your precious free time to earn more money you need to appreciate the real opportunity cost. Both in terms of time lost now and the impact of having a life that's heavily money/investment focused.

One of the benefits of the index fund approach is that you can automate the process and it takes a limited amount of time and effort to harvest decent results. That leaves you a lot of time to pursue things other than money.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #152 on: June 16, 2015, 07:44:00 AM »
Spending your spare time devoted to money in the hopes that will result you being free at some point has some drawbacks. It may accelerate your ability to build wealth, but if that comes at a the cost of thinking about money all the time it's not freedom it's just a different job.

This passage above pretty much sums it up to me.  People will all have different opinions about how passive they want to be and what value there is in devoting time to this activity. 

Quote
One of the benefits of the index fund approach is that you can automate the process and it takes a limited amount of time and effort to harvest decent results. That leaves you a lot of time to pursue things other than money.
Agree....just recognize there is a tradeoff here and not everyone chooses the same trade.  The bolded word above is also very accurate IMO. 

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #153 on: June 16, 2015, 08:06:23 AM »
I agree not everybody can, but I think more can than people on this forum assume.  Especially if we focus on those who are smart, lucky, old, or whatever enough to have hit the $1 million level to become an accredited investor.  When I look at the folks in my and Nords Angel investing group it is not made up of people who made their millions of sticking 1/2 their money in total stock market and 1/2 in total bond market.  There are lots of real estate folks, a fair number who owned their own business, good number of doctors and lawyers, CEOs etc, a modest number who did well in the technology world (but nothing like Angel groups in California) and more than few folks who've made money as bankers/money managers.  Precious few of them have anything close to the Mustachian life style.

Those people are outliers, not the common person.

I guess where I disagree with MMM and the common  philosophy of the forum is that everybody can save 25%+ of their income which is necessary to retire in your 40s and or ealy 50s. I truly believe everybody can save 10% in tax deferred saving which will allow them to enjoy a comfortable retirement in their 60s. However, asking somebody making an average salary of say $50K a year to save $10K, much less $15-20K is not something the average person can or more importantly will do.   While I certainly agree that toys, big houses, 1st class travel and are over rated in the pleasure they give.  I also think that many forum people underestimate they value people place on small luxuries like the daily Starbucks.

Maybe not on 40-50k, but at double that, they should be able to.  If someone on 50k can save 10k, someone on 100k should be able to save 40k, as their expenses shouldn't go up that much more.

Without giving up the daily luxuries that are really important to them.

I think it's more likely the average person can cut back on expenses and be just as happy saving 30-50% of their income than that same person can learn enough about investments to manage their own investments (any asset class) and beat a low cost, 70/30 portfolio. 
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theoverlook

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Re: Accredited Investors - Why A 4% SWR?
« Reply #154 on: June 16, 2015, 08:08:06 AM »

I don't agree that investing in methods other than a 50/50 or 75/25 portfolio has to carry higher risk either.  This is a fantasy that the financial industry wants you to believe, but that doesn't make it so. 


The financial industry absolutely does not want you to believe that.  They make almost nothing off of people invested wholly in passive index funds.  They want you to participate in paid higher cost active investing schemes - including hard money crowdfunding sites - because they make way more money off you when you do.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #155 on: June 16, 2015, 08:49:44 AM »
The financial industry absolutely does not want you to believe that.  They make almost nothing off of people invested wholly in passive index funds.  They want you to participate in paid higher cost active investing schemes - including hard money crowdfunding sites - because they make way more money off you when you do.

You're mixing concepts here.  There are two things:

1.  Which carries more risk
2.  Which carries higher fees

People keep claiming that investing in alternatives carries more risk.  This does not have to be the case.  It could be and it could not be.  A private note to a well-heeled borrower is a heck of a lot less risky than the common market for securities in whatever asset mix you select that is in the Trinity range.

Yes, active investing will require either more time or force you to pay fees.  The question is whether or not the additional time and/or fees are worth the upside. 

Scandium

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Re: Accredited Investors - Why A 4% SWR?
« Reply #156 on: June 16, 2015, 10:42:35 AM »
wait, so there are kickstarter for apartment buildings, or whatever? Except you get a return?

So some developer (always a beacon of honesty in best of times..) who's project is so dubious that he can't get a loan from a single bank(!) will "kickstart" his lending, promising 10%+ yield? At a time when gov rates are near zero.. Ehh.. yeah I don't think you could have made up something more sketchy sounding if you tried!

edit; so presumably these sites have only been around a short while so the return numbers are likely meaningless. But how did hard money loans do in 2000/2009?
« Last Edit: June 16, 2015, 10:46:46 AM by Scandium »

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #157 on: June 16, 2015, 10:49:09 AM »
Hard money loans generally are not used for apartment buildings.  They're short-term loans for other project types generally. 

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #158 on: June 16, 2015, 10:57:12 AM »
I don't see how that refuted Scandium's point. In fact, your point makes it even worse--these projects are paying near hard money rates but for longer term projects, even less viable than a short term flip that can afford to pay those rates for a short time period.
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Scandium

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Re: Accredited Investors - Why A 4% SWR?
« Reply #159 on: June 16, 2015, 11:05:56 AM »
Hard money loans generally are not used for apartment buildings.  They're short-term loans for other project types generally.

What kind of projects? Roads? Casinos? Salmon fisheries? Public bathrooms? The crowdfund site I went to wouldn't show me unless I registered, which I can't be bothered with right now. Or what I'd really like to know: how can they afford to pay 10%+?

theoverlook

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Re: Accredited Investors - Why A 4% SWR?
« Reply #160 on: June 16, 2015, 11:11:25 AM »
The financial industry absolutely does not want you to believe that.  They make almost nothing off of people invested wholly in passive index funds.  They want you to participate in paid higher cost active investing schemes - including hard money crowdfunding sites - because they make way more money off you when you do.

You're mixing concepts here.  There are two things:

1.  Which carries more risk
2.  Which carries higher fees

People keep claiming that investing in alternatives carries more risk.  This does not have to be the case.  It could be and it could not be.  A private note to a well-heeled borrower is a heck of a lot less risky than the common market for securities in whatever asset mix you select that is in the Trinity range.

Yes, active investing will require either more time or force you to pay fees.  The question is whether or not the additional time and/or fees are worth the upside.

If you are convinced that index investing carries lower risk and use it then they can not collect their higher fees.  The two go hand in hand.  Your original statement is simply not true.

Psychstache

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Re: Accredited Investors - Why A 4% SWR?
« Reply #161 on: June 16, 2015, 11:17:06 AM »
Yet again we appear to have a person who changes his arguments as they are shown to be untenable!
I am still waiting on you to point out that is untenable or what arguments I have changed. 

Quote
Secondly, this is about RETIREMENT. The 4% SWR assumes you are not going to work again - not in side gigs, not in active investment... If that's what you want to do, then (obviously) you may be safe with a higher withdrawal rate. I am one who didn't want to retire before I could live on what I had and be SAFE. Many years ago my very small car was plowed into by a double-decker express-between-major-cities bus. I am lucky I am alive, and I was very lucky only to have complications for three years afterwards. This severely reduced my earning power. There are a number of curved balls that life can throw at you. I was NEVER going to rely upon being able to earn income after I retired. Some people on the forum do expect to have income during retirement and adjust accordingly. I think that most people here expect that they can make some money during retirement, but wisely don't include that in their calculations.
Fine.
Quote
Thirdly, most small businesses fail.  I planned to set up a small business in retirement, but haven't so far. I calculated how much it would cost and added that to my retirement savings. Again we are talking about a SAFE retirement.
Most small businesses may fail, but most small real estate businesses don't fail. This is true in other types of industries as well. Nobody said you have to pick a high risk and high reward small business.  Nobody said you need to quit your job to run a small business on the side either.  If you plan things properly you can greatly reduce risk of failure. 

YOU are talking about SAFE retirement.  The whole world doesn't have the same goals and objectives that you do.  Some people prefer to optimize other things that are important to them.  To some sit-on-the-hammock SWRs are less important than getting to FI sooner while needing to invest quasi-actively.   Again, this discussion carries with it a personal component and thus the dogmatic posts about cutting expenses always being the optimal path are inaccurate to me.

citation needed.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #162 on: June 16, 2015, 01:32:52 PM »
I don't see how that refuted Scandium's point. In fact, your point makes it even worse--these projects are paying near hard money rates but for longer term projects, even less viable than a short term flip that can afford to pay those rates for a short time period.

Is today backwards day or something?  I clearly wrote above that they're for short-term loans. 

I'm not sure what point he was making.  I try to avoid responding to posts that don't really make any tangible points. 

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #163 on: June 16, 2015, 01:35:32 PM »
Hard money loans generally are not used for apartment buildings.  They're short-term loans for other project types generally.

What kind of projects? Roads? Casinos? Salmon fisheries? Public bathrooms? The crowdfund site I went to wouldn't show me unless I registered, which I can't be bothered with right now. Or what I'd really like to know: how can they afford to pay 10%+?

Primarily small development projects, fix/flips, etc.   

The developers can afford to pay 10% plus because this money is very cheap relative to the amount of upside there is in the project.  There are many equity participation projects as well, but those offer less security interest and are harder to underwrite IMO. 

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #164 on: June 16, 2015, 01:38:45 PM »
If you are convinced that index investing carries lower risk and use it then they can not collect their higher fees.  The two go hand in hand.  Your original statement is simply not true.

Please point to the passage where I said index investing carries lower risk.  The risk of an "alternative" investment depends on a lot of factors and may be higher risk or lower risk than index investing.  Alternatives don't trade on exchanges for the most part and will carry fees of some sort.  That doesn't make them bad investments.

I have no idea what original statement you're referring to. 

theoverlook

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Re: Accredited Investors - Why A 4% SWR?
« Reply #165 on: June 16, 2015, 01:42:10 PM »
If you are convinced that index investing carries lower risk and use it then they can not collect their higher fees.  The two go hand in hand.  Your original statement is simply not true.

Please point to the passage where I said index investing carries lower risk.  The risk of an "alternative" investment depends on a lot of factors and may be higher risk or lower risk than index investing.  Alternatives don't trade on exchanges for the most part and will carry fees of some sort.  That doesn't make them bad investments.

I have no idea what original statement you're referring to.

I think you have too many "balls in the air" - too many posts you can't keep track of and you delete relevant portions of the posts you're replying to then get confused when the replies no longer make sense.  I am referring to this:

http://forum.mrmoneymustache.com/investor-alley/accredited-investors-why-a-4-swr/msg698117/#msg698117

The financial industry is deeply invested in investors not believing that the 75/25 index fund investing method is lower risk.

NoraLenderbee

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Re: Accredited Investors - Why A 4% SWR?
« Reply #166 on: June 16, 2015, 02:30:24 PM »


To me the average person can become above-average simply by investing their time learning to invest better and/or increasing their income.  People summarily dismiss their abilities and they're coached on the forums that the path to FI is by slashing expenses to very low levels.  To a point I think this is logical, but past some point it is excessive in my opinion. 
 

The average person can become an above-average triathlete by training at swimming, biking, and running 20 hours a week. That's great if you enjoy doing those things. No one is saying you shouldn't. But what about people who don't like those activities, or who don't want to spend that much time or effort on them, and just want to be reasonably fit? For them, maybe 5 hours week provides enough exercise to keep them fit and healthy. They won't be great triathletes, but they can still be fit *enough*  .

The basic 75/25 portfolio is like the 5-hour exercise program. It provides *enough* to keep you from running out of money in retirement, if you maintain a 4% WR. It doesn't require a lot of effort. It won't make you richer than Croesus, nor is it the fastest way to wealth. But it's *enough* for a lot of us. It's easy, it's accessible, and it allows you to spend time on more interesting things

Yes, you can get higher returns if you develop expertise in alternative investments. That's another way to wealth, maybe a faster way. It requires more effort. It suits some people, not everyone.

It seems like mr orange is arguing (repeatedly) that you can be a better triathlete if you train 20 hours a week, but not hearing the responses that some people don't want to do that.   

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #167 on: June 16, 2015, 03:43:39 PM »



To me the average person can become above-average simply by investing their time learning to invest better and/or increasing their income.  People summarily dismiss their abilities and they're coached on the forums that the path to FI is by slashing expenses to very low levels.  To a point I think this is logical, but past some point it is excessive in my opinion. 
 

The average person can become an above-average triathlete by training at swimming, biking, and running 20 hours a week. That's great if you enjoy doing those things. No one is saying you shouldn't. But what about people who don't like those activities, or who don't want to spend that much time or effort on them, and just want to be reasonably fit? For them, maybe 5 hours week provides enough exercise to keep them fit and healthy. They won't be great triathletes, but they can still be fit *enough*  .

The basic 75/25 portfolio is like the 5-hour exercise program. It provides *enough* to keep you from running out of money in retirement, if you maintain a 4% WR. It doesn't require a lot of effort. It won't make you richer than Croesus, nor is it the fastest way to wealth. But it's *enough* for a lot of us. It's easy, it's accessible, and it allows you to spend time on more interesting things

Yes, you can get higher returns if you develop expertise in alternative investments. That's another way to wealth, maybe a faster way. It requires more effort. It suits some people, not everyone.

It seems like mr orange is arguing (repeatedly) that you can be a better triathlete if you train 20 hours a week, but not hearing the responses that some people don't want to do that.

Well said. And some have a lot more natural (genetic) proclivity towards being a triathlete, just like some make better investors due to their analytical skills, disposition, etc.

Maybe everyone can learn, but not only would many not want to, but for lots of them it would be EXTREMELY difficult if it was even possible.
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mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #168 on: June 16, 2015, 04:32:05 PM »
The financial industry is deeply invested in investors not believing that the 75/25 index fund investing method is lower risk.

I agree with you then. 

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #169 on: June 16, 2015, 04:33:33 PM »
It seems like mr orange is arguing (repeatedly) that you can be a better triathlete if you train 20 hours a week, but not hearing the responses that some people don't want to do that.

I'm not sure why you think that.  Feel free to read about me agreeing with this earlier in the thread.  Some people wish to devote zero energy to investing and others wish to invest more energy in it. 

FI40

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Re: Accredited Investors - Why A 4% SWR?
« Reply #170 on: June 16, 2015, 04:44:45 PM »
But we're interested in Financial Independence here. The problem is, the level of assets at which it makes sense to start worrying about investment returns past the market averages (with all the risk that entails) is high enough that with a reasonable level of expenses, one would be FI already in that situation. So discussing it in the context of SWRs makes no sense to me.

What level would you say this is?

I don't agree that investing in methods other than a 50/50 or 75/25 portfolio has to carry higher risk either.  This is a fantasy that the financial industry wants you to believe, but that doesn't make it so. 

I'm also interested to know what a reasonable level of expenses is as well.

I don't know exactly where to draw the line, but I do think that for instance somebody who's got 1 million in assets and spends 50k a year would find it much easier to bring their spending down to 40k than to learn enough to perpetually guarantee an extra 1% long term market beating return on their investments. Maybe I'm wrong, but from what I've learned from experienced investors it takes a lot of work to be a successful (long term stock/bond market beating) active investor in any area. That's work I'm not interested in doing in this case, and many others aren't either. This should explain some of the pushback you're getting in this thread. Know your audience and all that.

For sure, but you are talking about stuff that does carry higher risk. That's why I brought it up.

A reasonable level of expenses might be, say, half the gross median income in high income areas, or equal to minimum wage income in lower income areas. I say this because obviously there are many people living on those amounts who aren't even trying to be that frugal. So clearly if you're trying to be frugal, you can live fairly well at those levels of expenses. I'm just pulling this out of the air, but you asked so I answered.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #171 on: June 16, 2015, 04:47:48 PM »
Well said. And some have a lot more natural (genetic) proclivity towards being a triathlete, just like some make better investors due to their analytical skills, disposition, etc.

I agree that people have different skills and abilities.  No argument there. 

Quote
Maybe everyone can learn, but not only would many not want to, but for lots of them it would be EXTREMELY difficult if it was even possible.
I don't agree that much of what was originally discussed in this thread is extremely difficult.  What the bigger problem is, IMO, that people are lazy and don't really devote any time to exercising their investing skills.  This is especially problematic when they're trying to make their limited amount of capital work hard.  A 7.5% yield compounded on a large portfolio will yield nice growth quickly.  A 7.5% yield on an already-small portfolio won't really do much in absolute terms without the benefit of a lot of time.  If people simply devoted more energy to learning to grow their yields by educating themselves instead of focusing all of that same energy on cutting expenses many would be better off.  At some point cutting expenses will start trading off your standard of living.  I think rational third parties would agree for the most part that riding your bike to work and limiting your mobility to places within driving range of their house would probably limit their standard of living.  This may work better in places other than Texas, but I can't imagine functioning very well in Texas without a car. 

Anyway....this seems to be more of a philosophical discussion now about how capable investors really are.  Again, I was targeting accredited investors that seemingly have some intelligence and thus are capable of learning to invest.  Maybe all of the folks on here that are accredited are also planning to live on $1M * .04 == $40k/year or less and spend zero time thinking about their investments.  I am sure there are plenty that would rather have $60k/year with the same capital stack though if it meant investing a bit of time to learn to invest better.  Those same folks would probably also enjoy having a larger portfolio because it compounded at a higher rate over time.  They could even convert it to a 4% WR point and grunt Trinity-style after it grew to the point where it met their FI lifestyle. 

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #172 on: June 16, 2015, 04:50:48 PM »
For sure, but you are talking about stuff that does carry higher risk. That's why I brought it up.

No...it doesn't.  I have addressed this point repeatedly in this post.  Please see my previous several responses to this point. 

NoraLenderbee

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Re: Accredited Investors - Why A 4% SWR?
« Reply #173 on: June 16, 2015, 05:09:51 PM »
It seems like mr orange is arguing (repeatedly) that you can be a better triathlete if you train 20 hours a week, but not hearing the responses that some people don't want to do that.

I'm not sure why you think that.  Feel free to read about me agreeing with this earlier in the thread.  Some people wish to devote zero energy to investing and others wish to invest more energy in it.

Then what *are* you arguing for? Serious question.

There are plenty of forums and books and blogs about making more money. "Everyone" thinks more money will make them happier. This forum is one of fairly few that's devoted to the other side of the equation. Cutting expenses is a very powerful way to make your money go farther--and you can do it in a way that does not sacrifice everything that truly brings you happiness


I don't agree that much of what was originally discussed in this thread is extremely difficult.  What the bigger problem is, IMO, that people are lazy and don't really devote any time to exercising their investing skills. . . .

Again, I was targeting accredited investors that seemingly have some intelligence


And this is why posters are not being agreeable and engaging in the kind of discussion you want: You are calling them lazy and stupid.

skyrefuge

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Re: Accredited Investors - Why A 4% SWR?
« Reply #174 on: June 16, 2015, 05:26:43 PM »
What the bigger problem is, IMO, that people are lazy and don't really devote any time to exercising their investing skills.

For some subset of passive index investors, sure, it is probably laziness that primarily determined their preferred investment approach. But there are tons of passive index investors (including myself) who prefer that approach because they have read the research, are well-informed, and legitimately believe that "exercising their investment skills" would do nothing to improve their investment performance, and may in fact harm it.

It's pretty indisputable that training and practice improve athletic performance; the fact that there aren't any popular sports leagues filled with fatass amateurs who have never previously participated in the event in question is sufficient to prove that claim. However, it's much more difficult to prove the claim that investment training and practice improves investment performance, despite how obvious and analogous that claim seems on its face.

I think rational third parties would agree for the most part that riding your bike to work and limiting your mobility to places within driving range of their house would probably limit their standard of living.

Hmm. Again, you're posting on the site written by a guy who believes that riding your bike to work and limiting your mobility DOES in fact make you happier (yes, I'm equating "standard of living" with "happiness" here). That's not even a "secret" mission of the blog, MMM writes about it regularly. Is he a rational third party? Most of us posting here would say so, otherwise it's unlikely we'd be participants in this community.

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #175 on: June 16, 2015, 06:24:38 PM »
This thread may interest you, mr_orange:
http://forum.mrmoneymustache.com/investor-alley/when-compounding-returns-isnt-that-important/

From the article:
Quote
[This example assumes you can earn, though your hard work, 4% more than the market.] Say you are holding a pretty decent job at $50/hour, and you spend 15 hours/week studying companies and analyzing stocks. That is a total of 780 hours per year, valued at $39,000! [Based on your hourly wage.] So in order to justify spending that time this year, you’ll need to have invested $975,000! You need almost a million dollars and a sure 4% increase [over the market] to breakeven on the amount of time you spent on it!
« Last Edit: June 16, 2015, 06:29:25 PM by arebelspy »
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arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #176 on: June 16, 2015, 06:28:51 PM »
Another discussion on the same thing:
I think you're missing the point of my question.  And I don't mean this as an attack, just genuinely curious why you think this isn't the case.

You say this:
Again, bullish over 1330, as SPX works its way to 1390 (maybe a touch higher).  Minor resistance at 1350 (downtrend line) and again at 1365.  These are the zones I'm focusing on.


If these are important zones, why can you pick up on that with only a few hours/week research, when those spending 20x that can't?  Or can they?  If so, why doesn't an efficient market quickly remove the opportunity?

Okay -- it's more than a few hours a week.  I was up til 2 AM last night studying my charts; I was up a 7 (before work) scanning headlines, preparing my game plan, attempting to locate opportunities; it's really a second job, truth be told. 

And yes, the greatest traders in the world know these zones/trends/patterns.  How quickly the opportunity is removed varies, but I've found the most glorious trade set ups allow you plenty of time to get on board.

This brings back up the question... is it worth it?  Which, of course, is primarily dependent upon three variables (as I see it).

Total amount you're trading with (using these methods):  P
Expected increase in yeild over more passive approaches:  r
Increase in time spent analyzing/trading over more passive approaches:  t

Your reward / time function then becomes   P*r/t

Using that and assuming 1,000 additional hours per year (part time job equivalent) for time here are the hourly rates recieved for every 1% increase in performance for different levels of P. 

$100,000 = $1/hour/1%
$250,000 = $2.5/hour/1%
$500,000 = $5/hour/1%
$1,000,000 = $10/hour/1%

Obviously if you spend less time these numbers change but even at 500 hours per year a 2% gain and a $500K portfolio, I'd be at $20/hr.
The opportunity cost will be different for everyone, but even that ( in my opinion top end) situation would probably not be worth it to me personally.  Especially given that the % gain is not guaranteed.  I can pick up part time consulting gigs for much better hourly rates than what I would gain spending a ton of time trying to gain a % or two on my current portfolio (for sure) and probably my FI portfolio as well.

I guess if you enjoy the analysis - maybe that should be factored in as a non monetary benefit too that would make it worth it.  I happen to very much not enjoy that side of things - even though (or maybe because?) I do statistics/modeling/forecasting for a living.
http://forum.mrmoneymustache.com/investor-alley/efficient-markets-rip/msg16174/#msg16174

In general, what you propose mr_orange, of someone learning to beat the market, generally just isn't worth it, even if it is possible for them.  And I maintain for most people, they just won't have the ability/capacity/desire/temperament to do so--a lot would have to go right for it to work, and even in a lot of the cases it did, it wouldn't even be "worth" it, per the above, unless they enjoy it quite a bit as a low-paid hobby.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #177 on: June 16, 2015, 06:36:31 PM »

Then what *are* you arguing for? Serious question.

There is seriously a 4-page thread on this.  Feel free to read back through it.  I'm not going to regurgitate the entire thread for you again. 
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And this is why posters are not being agreeable and engaging in the kind of discussion you want: You are calling them lazy and stupid.

Nope...you made that up.  I never called anyone stupid. 

Lazy is different.  Some actually consider being lazy a virtue.  I don't exactly agree with this rationale, but I can see their point of view. 
« Last Edit: June 16, 2015, 06:41:20 PM by mr_orange »

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Re: Accredited Investors - Why A 4% SWR?
« Reply #178 on: June 16, 2015, 06:40:51 PM »
For some subset of passive index investors, sure, it is probably laziness that primarily determined their preferred investment approach. But there are tons of passive index investors (including myself) who prefer that approach because they have read the research, are well-informed, and legitimately believe that "exercising their investment skills" would do nothing to improve their investment performance, and may in fact harm it.

Which research?  The random walk research that confines itself to the publicly-traded securities markets?  I have never claimed that anyone should try to outsmart millions of others armed with supercomputers and insider knowledge if they're looking for extra yield.  These rules don't really apply in privately traded securities, partnerships, or small business though. 

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It's pretty indisputable that training and practice improve athletic performance; the fact that there aren't any popular sports leagues filled with fatass amateurs who have never previously participated in the event in question is sufficient to prove that claim. However, it's much more difficult to prove the claim that investment training and practice improves investment performance, despite how obvious and analogous that claim seems on its face.
I agree with that.  And that is why this thread is now over 4 pages long. 

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #179 on: June 16, 2015, 07:00:58 PM »
This thread may interest you, mr_orange:
http://forum.mrmoneymustache.com/investor-alley/when-compounding-returns-isnt-that-important/

Thanks for sharing.  As you mentioned in your thread it is oversimplified. 

One could probably spend several week's worth of effort and learn to invest well in hard money loans.  This would yield more on whatever portion of their portfolio they chose to allocate to these projects based on their own personal circumstances and risk tolerance.  So it is hard to say in abstract what it would cost if you were to do an hourly rate comparison.  It is also hard to comment in the abstract about the impact to an unknown portfolio size, but accredited investors would presumably have a large portfolio that would benefit greatly from extra yield. 

If the compounding period is shorter because you start taking withdrawals sooner it does make sense that you'd worry less about trying to increase your portfolio's yield.  That point has been made several times in this thread and it makes sense.  The same is true if you're living on very little in expenses and thus your portfolio size doesn't have to be large.  However, if you're truly growing your portfolio because the WR isn't drawing down your stack of cash the compounding will matter more in each subsequent year.  The utility in growing the portfolio when by definition you already have enough will vary by person.  Some wish to leave an inheritance for their kids or have other rational reasons for wanting to increase the size of their portfolio past FI. 

For those that choose to invest in things they control the hourly bill rate for their services and the return their money makes are linked heavily.  This is the case with a syndicated real estate project, a partnership, or any number of small businesses.  In these scenarios it is hard to measure well how much the money is working and how much of the "yield" is from the entrepreneur pumping in sweat equity.  However, for many of these projects the money does work very hard and it certainly far outpaces (if executed properly...of course) yields from investing passively in any number of other securities transactions; be they public or private. 

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #180 on: June 16, 2015, 07:05:05 PM »
One could probably spend several week's worth of effort and learn to invest well in hard money loans.

A few weeks?

I think that answers that:
To me the average person can become above-average simply by investing their time learning to invest better and/or increasing their income.

If you mean by investing blindly in crowd funded real estate positions, we will have to agree to disagree.  If you mean spending the time to learn about real estate investing, deciding they want to take on the added risk and illiquidity, and making a concerted effort to find properties or other investments that have a high probability of yields well above most paper assets, we can agree.

I think that's also what leads to this:
http://www.gocurrycracker.com/rental-hell/

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mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #181 on: June 16, 2015, 07:33:14 PM »
In general, what you propose mr_orange, of someone learning to beat the market, generally just isn't worth it, even if it is possible for them.  And I maintain for most people, they just won't have the ability/capacity/desire/temperament to do so--a lot would have to go right for it to work, and even in a lot of the cases it did, it wouldn't even be "worth" it, per the above, unless they enjoy it quite a bit as a low-paid hobby.

An accredited investor by definition does not have the same issue that is described in the threads you cited.  That was the intended audience for this thread from the beginning.  I will readily concede that trying to grow a very small portfolio a few extra percent probably isn't worth the time invested. 

That does not, however, mean that people should forgo investing time in gathering business skills if they wish to make the partial transition to FI sooner.  Independence exists on a spectrum and I would argue many people can make money doing things they like sooner by investing time in growing their own business on the side while they're employed. 

"The market" that is discussed in the threads you cited also deals with PUBLICLY TRADED equities, which have very little in common with many private offerings.  There efficient market hypothesis simply doesn't apply well because often there is little to no efficiency. 

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Re: Accredited Investors - Why A 4% SWR?
« Reply #182 on: June 16, 2015, 07:36:58 PM »
However, by your definition, many of the people who have answered you are accredited investors because they have followed the MMM "save most of your pay" philosophy. You are making assumptions that are not valid.

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Re: Accredited Investors - Why A 4% SWR?
« Reply #183 on: June 16, 2015, 07:38:46 PM »
You are making assumptions that are not valid.

Which assumptions are those?

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #184 on: June 16, 2015, 07:47:18 PM »
"The market" that is discussed in the threads you cited also deals with PUBLICLY TRADED equities, which have very little in common with many private offerings.  There efficient market hypothesis simply doesn't apply well because often there is little to no efficiency.

No, it has to do with earning extra percent on your money.  Doesn't matter where it comes from.
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mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #185 on: June 16, 2015, 07:55:31 PM »
Earning a few extra percent trading in super efficient markets with millions of people exploiting any infinitesimal arbitrage opportunity is definitely NOT the same as investing in non-efficient private markets.  How anyone could claim they're the same is beyond me. 

In the former market things are pretty efficient and you get all sorts of idealistic academics claiming they're perfectly efficient to make their simplified math work.  In the latter markets there is plenty of opportunity to identify undervalued assets without every scrap of yield being perfectly priced by supercomputers quicker than your synapses can fire. 

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #186 on: June 16, 2015, 08:07:00 PM »
Earning a few extra percent trading in super efficient markets with millions of people exploiting any infinitesimal arbitrage opportunity is definitely NOT the same as investing in non-efficient private markets.  How anyone could claim they're the same is beyond me. 



There seem to be many things "beyond you" in this thread, as that's not the first time you've said that. 

Here's a hint: if something is so beyond your comprehension, rather than figuring the other person is an idiot, maybe think there's something you're missing.  It might help to try and understand what the other person is saying, rather than just setting up a silly straw man to something you don't understand.

Back on topic, response to your post:  No one said they're the same thing, but I did say that either way, you're earning extra percent on your money, and that may not be worth the time commitment it takes.  It's irrelevant where that extra percent comes from, what matters is how much you make relative to passive and how much time it takes you.

The funny part is, I'm usually on the side you're arguing.  I think the real estate market is extremely inefficient, and I think someone can educate themselves and exploit that.  I'm a big fan of hard money, too.

But where we disagree is that I think you vastly oversimplify it, make it sound way easier than it is, and advocate for things that have a poor risk adjusted return, like crowdfunded real estate, which is the opposite of educating yourself and taking advantage of inefficiencies.
« Last Edit: June 16, 2015, 08:08:44 PM by arebelspy »
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regulator

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Re: Accredited Investors - Why A 4% SWR?
« Reply #187 on: June 16, 2015, 08:07:34 PM »
I spent far more of my life than I would ever wish on anyone pawing through the smoking wreckage of what everyone thought were "safe" commercial real estate loans after the last party ended abruptly.  There is no earthly way I would ever invest in a pool of loans in the private market underwritten by some schmuckatelli who is good at schmoozing the wealthy-but-not-too-bright.  30% "equity" in a development project is your margin of safety?  Haaaahahahaha!!!

Orange, if I were you I would invest my personal money in asset classes that have as little to do with sketchy real estate loans as possible.  That way when the CRE market goes tits up again you will have something to show for all the fees you raked in on the money you help manage.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #188 on: June 16, 2015, 08:13:38 PM »
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There seem to be many things "beyond you" in this thread, as that's not the first time you've said that. 

Here's a hint: if something is so beyond your comprehension, rather than figuring the other person is an idiot, maybe think there's something you're missing.  It might help to try and understand what the other person is saying, rather than just setting up a silly straw man to something you don't understand.

You provided no you reasoning above.  You did below and it merits a response...which I have provided below. 

Kindly point out where I called anyone an idiot.  Talk about straw mans. 

Quote
Back on topic, response to your post:  No one said they're the same thing, but I did say that either way, you're earning extra percent on your money, and that may not be worth the time commitment it takes.  It's irrelevant where that extra percent comes from, what matters is how much you make relative to passive and how much time it takes you.
MAY being the operative word.  This is consistent with pretty much what has been written for 20+ responses now so I am not sure how much good there is in rehashing it. 

skyrefuge

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Re: Accredited Investors - Why A 4% SWR?
« Reply #189 on: June 16, 2015, 08:18:45 PM »
Which research?  The random walk research that confines itself to the publicly-traded securities markets?

Yeah.

These rules don't really apply in privately traded securities, partnerships, or small business though.

This may reveal my ignorance/tunnel-vision, but my impression is that there has been far more research into the exploitability of inefficiencies in the publicly-traded securities markets than in the privately traded securities, partnerships, or small business markets, and thus, your confidence that anyone knows "the rules" of those markets may be unwarranted. Before a nice corpus of easily-analyzed data on publicly-traded security strategies was available, everyone similarly assumed that it was easy for anyone with a little bit of smarts to exploit market inefficiencies (heck, plenty of people still assume that, even at this forum). Since then, we've learned that it's actually really damn hard.

In the absence of easily-collectable data to explore whether inefficiencies are more-exploitable in private markets than they are in public markets, there are two ways to go:

1) Assume the unexpected results of research into public markets might be informative about surprises in those private markets as well.

2) Go on "common sense", which says that inefficiencies are easily exploitable in the private markets, even though that same common sense was proven wrong in the public markets.

I tend to go with #1, the conservative approach, though I'd certainly be happy to be informed that we do in fact have enough data and thus, neither assumption is actually necessary!

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #190 on: June 16, 2015, 08:21:21 PM »
Orange, if I were you I would invest my personal money in asset classes that have as little to do with sketchy real estate loans as possible.  That way when the CRE market goes tits up again you will have something to show for all the fees you raked in on the money you help manage.

Continuing to call something sketchy does not mean that it is.  I do concede that the debate is impossible to have in the abstract though. 

After reviewing the 7-page thread linked above it is pretty clear that the index fund enthusiasts have such an entrenched position that it will be pretty much impossible to modify their reasoning.  Part of this seems rational because their motivation is not really to grow their portfolio past some point because their minimalist lifestyle and desire to reduce time spent investing form conditions that make it rational to avoid actively managing their money in favor of time spent on other pursuits.  There's absolutely nothing wrong with that. 

All I was trying to figure out throughout this thread was why people weren't spending more effort on non-cutting pursuits.  I think I have a pretty good idea why now.  It doesn't fit my personal philosophy or goals, but everyone invests differently and for different purposes. 

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #191 on: June 16, 2015, 08:32:59 PM »
mr_orange, I am an accredited investor.  I own over a dozen rental properties.  I have done rehabs.  I have done HMLs.  I own multiple notes, some performing, some not performing at the moment.  I have stated--more than once--that real estate is the fastest way to FI. I get it, I do.

The problem is, not everyone is like you or me.  I think you underestimate the effort it takes.  I also think you do a disservice to everyone when you continually talk about people cost cutting for the sake of doing so.  Sol provided a good answer for that already.  We're optimizing, and shooting for maximum happiness.  You don't yet see how those are connected, but for most of us, they absolutely are.

Quote
Back on topic, response to your post:  No one said they're the same thing, but I did say that either way, you're earning extra percent on your money, and that may not be worth the time commitment it takes.  It's irrelevant where that extra percent comes from, what matters is how much you make relative to passive and how much time it takes you.
MAY being the operative word.  This is consistent with pretty much what has been written for 20+ responses now so I am not sure how much good there is in rehashing it.

I guess we're all in agreement then--it could be beneficial to try and increase your returns through extra knowledge and hard work, but for many here the chance that you can beat a passive portfolio is not worth the extra risk (not risk from the investments themselves, per se, but the risk of being wrong), especially on a time-adjusted basis.
« Last Edit: June 16, 2015, 08:35:26 PM by arebelspy »
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If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

mr_orange

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Re: Accredited Investors - Why A 4% SWR?
« Reply #192 on: June 16, 2015, 08:41:28 PM »
mr_orange, I am an accredited investor.  I own over a dozen rental properties.  I have done rehabs.  I have done HMLs.  I own multiple notes, some performing, some not performing at the moment.  I have stated--more than once--that real estate is the fastest way to FI. I get it, I do.

I know you do.  It certainly is fun to debate it though ;-)

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The problem is, not everyone is like you or me.  I think you underestimate the effort it takes. 

Perhaps. 

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I also think you do a disservice to everyone when you continually talk about people cost cutting for the sake of doing so.  Sol provided a good answer for that already.  We're optimizing, and shooting for maximum happiness.  You don't yet see how those are connected, but for most of us, they absolutely are.

Nope...I don't yet.  Perhaps as I study things more my opinion will change.  I already started a journal on the other forum and have started some small cutting.  Baby steps.  I know a lot more about making money and investing it than I do about cost cutting and being frugal; no doubt!
Quote
I guess we're all in agreement then--it could be beneficial to try and increase your returns through extra knowledge and hard work, but for many here the chance that you can beat a passive portfolio is not worth the extra risk (not risk from the investments themselves, per se, but the risk of being wrong), especially on a time-adjusted basis.

Probably....we would probably disagree what percentage constitutes "many" though.   This is really a small area of disagreement in the grand ball of wax. 

waltworks

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Re: Accredited Investors - Why A 4% SWR?
« Reply #193 on: June 16, 2015, 08:43:53 PM »
At this point I'm just waiting to see who will insist on having the last word...

Another Reader

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Re: Accredited Investors - Why A 4% SWR?
« Reply #194 on: June 16, 2015, 08:45:25 PM »
I spent far more of my life than I would ever wish on anyone pawing through the smoking wreckage of what everyone thought were "safe" commercial real estate loans after the last party ended abruptly.  There is no earthly way I would ever invest in a pool of loans in the private market underwritten by some schmuckatelli who is good at schmoozing the wealthy-but-not-too-bright.  30% "equity" in a development project is your margin of safety?  Haaaahahahaha!!!

Yep.  In the early 1990's one could buy 50 percent vacant small retail centers in decent areas of Silicon Valley for 10-15 percent plus cap rates on CURRENT income, i.e. no value given to the vacant space.  Lots of see through R&D buildings available at $33-$50 a square foot in the lesser locations in San Jose.  I went one morning to look at a two unit light industrial/service commercial property in mid-1994.  The building was in foreclosure.  I peered in the window of the vacant unit, and saw movement under a pile of blankets.  Turns out the owner had lost the house he had put up to buy the building and was living in the vacant unit, with his possessions stored in an old bus out back.  That wasn't supposed to happen here.  No one is immune.

What was the apartment vacancy rate in Austin in the early 90's?  How much did industrial land decline from the height of the buying frenzy in the mid 80's to the early 90's?  Surely some of the older folks in the business out there can tell you the war stories.

Investing in real estate entails risk.  Real estate is cyclical.   It's not different this time.  Go write that on the nearest blackboard 100 times.

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #195 on: June 16, 2015, 08:51:41 PM »
Quote
I also think you do a disservice to everyone when you continually talk about people cost cutting for the sake of doing so.  Sol provided a good answer for that already.  We're optimizing, and shooting for maximum happiness.  You don't yet see how those are connected, but for most of us, they absolutely are.

Nope...I don't yet.  Perhaps as I study things more my opinion will change.

To that end, here are some resources that might help you:
http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/
http://smile.amazon.com/Happy-Money-Science-Happier-Spending/dp/1451665075/
http://smile.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X/
http://smile.amazon.com/Paradox-Choice-Why-More-Less/dp/0060005696/

Check your local library for them, and check the book section of the forums for more recommendations.
I know a lot more about making money and investing it than I do about cost cutting and being frugal; no doubt!

Yeah, I don't know anything about cost cutting or being frugal.  I buy everything I want.

Sometimes people ask me how to save money, or trim their budget, and I have nothing to say to them--I refer them to this forum and tell them to post a case study, because there are some people here who have some good tips.

To me, it's not about that.  It's about optimization and spending money on what truly makes you happy.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #196 on: June 16, 2015, 09:01:20 PM »
At this point I'm just waiting to see who will insist on having the last word...

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asiljoy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #197 on: June 16, 2015, 09:35:45 PM »
At this point I'm just waiting to see who will insist on having the last word...



Home Alone?

arebelspy

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Re: Accredited Investors - Why A 4% SWR?
« Reply #198 on: June 16, 2015, 09:47:54 PM »

Home Alone?

Actually my wife is here too.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

regulator

  • Bristles
  • ***
  • Posts: 469
Re: Accredited Investors - Why A 4% SWR?
« Reply #199 on: June 16, 2015, 09:50:29 PM »
I spent far more of my life than I would ever wish on anyone pawing through the smoking wreckage of what everyone thought were "safe" commercial real estate loans after the last party ended abruptly.  There is no earthly way I would ever invest in a pool of loans in the private market underwritten by some schmuckatelli who is good at schmoozing the wealthy-but-not-too-bright.  30% "equity" in a development project is your margin of safety?  Haaaahahahaha!!!

Yep.  In the early 1990's one could buy 50 percent vacant small retail centers in decent areas of Silicon Valley for 10-15 percent plus cap rates on CURRENT income, i.e. no value given to the vacant space.  Lots of see through R&D buildings available at $33-$50 a square foot in the lesser locations in San Jose.  I went one morning to look at a two unit light industrial/service commercial property in mid-1994.  The building was in foreclosure.  I peered in the window of the vacant unit, and saw movement under a pile of blankets.  Turns out the owner had lost the house he had put up to buy the building and was living in the vacant unit, with his possessions stored in an old bus out back.  That wasn't supposed to happen here.  No one is immune.

What was the apartment vacancy rate in Austin in the early 90's?  How much did industrial land decline from the height of the buying frenzy in the mid 80's to the early 90's?  Surely some of the older folks in the business out there can tell you the war stories.

Investing in real estate entails risk.  Real estate is cyclical.   It's not different this time.  Go write that on the nearest blackboard 100 times.

I wasn't even looking at the properties.  I was looking at the supposedly well-secured loans that had blown up.  I vividly remember a banker telling me that a mortgage on some development land with a second and mezzanine financing under his loan (as well as supposed equity) was 100%, absolutely, positively certain to be money good.  6 months later the loan was defaulted and an independent appraisal suggested a very substantial loss.  One example of many, many stupid loans that blew up when the music stopped.  It will happen again, just a matter of time.

If you are not underwriting each loan yourself and you do not have the ability to protect your investment in the event of a default, stay far away from this stuff.

 

Wow, a phone plan for fifteen bucks!