The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: mechanic baird on July 05, 2012, 10:32:37 AM
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Just curious to see where folks here keep the FI stash? With rates so low on CDs, uncertainty in the market, it's probably a tough universal issue for everyone..
Anyway, I will start.
Both of our 401Ks/Rollover IRAs are in diverse funds with a mix of corp bonds, mid term bonds and stock funds. mostly with Vanguard. That's about 75% of our stash.
I also have 25% of funds with brokerage accounts that I trade infrequently. But I buy a mix of blue chip dividend paying stocks, high yield ETFs, high tech stocks, and corp bonds. For this 25%, I am trying the "income" + "growth" approach. For the income, don't care for the up and downs in value, but I focus on the dividend checks and reinvest that.. For "growth", I go with high tech. Currently, this 25% of my funds pay about 6% in dividend. And this pie of stash has greatly out-performed my Vanguard share. Mostly because I have some Apple/Google/Amazon stocks I bought a while ago..Plus some high yield ETFs. But I also feel that I am playing with fire.
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Tulip bulbs.
The cycle has been down for about 700 years or thereabouts, so I think they're due to jump any day now.
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Currently - all of my assets are tied up in 401k (options suck, but it's in a Permanent Portofolioish set up), IRA (dividend blue chips), and real estate (current residence that I will either sell or lease when I go back to renting next year).
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Tulip bulbs.
The cycle has been down for about 700 years or thereabouts, so I think they're due to jump any day now.
Watch for the head and shoulders dip, be flush with cash, and act quickly.
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50% in passive mixed fund (index shares, bonds, term deposits)
25% in company shares
25% in cash earning 4%
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50% in passive mixed fund (index shares, bonds, term deposits)
25% in company shares
25% in cash earning 4%
Where do you get 4% in cash? My savings account pays 0.5%!
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25% in cash earning 4%
Details?
That sort of thing is nice to share.
Or is it one of those many niche promotion with so many caveats and addendums (where you need to do 10 transactions/month and have this much assets and all that) it makes it not worthwhile for most people (permanent portfolioites, gooki, and smedley aside)?
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Where do you get 4% in cash?
New Zealand.
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Where do you get 4% in cash?
New Zealand.
Hah. Touche.
I was right about it being a niche promotion. You have to live in New Zealand!
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Tulip bulbs.
The cycle has been down for about 700 years or thereabouts, so I think they're due to jump any day now.
Watch for the head and shoulders dip, be flush with cash, and act quickly.
Silver coin. Just in case.
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Right now my AA looks like this:
Stocks 68.8 (54.5% in taxable accounts, 14.3% in the Roth)
Bonds 3.9% (all in the Roth)
Cash 27.2% (moving this into the stocks, I'm planning on having about 5% in cash)
I'm in the process of selling off my stocks in my Roth account, and moving that money into the bond funds. I'm also selling off my individual stocks and putting the proceeds into VTSAX for now, eventually into the REIT fund also.
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I was right about it being a niche promotion. You have to live in New Zealand!
Humm... Do you have to live in New Zealand, or just have a bank account there?
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Just a bank account. Be aware though currency fluctuations can wipe away that 4% gain in a heart beat, but the opposite is also true, one could easily realize a 10%+ gain with timing the market (trying to time the market is essentially gambling and not recommended).
If your happy to lock your money up for longer we have 5 year CDs paying up to 6.5% per annum.
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Some I was lucky enough to put into I-bonds back in 2000/2001, with an average of 3.3% + CPI. Other than that, have approximately an equal amount spread out in my portfolio among some preferred stocks (mostly REITs of one form or another) and some various domestic /foreign ETFs.
Used to have about 5% of net worth in Muni ETFs, but pared that down to just 3 ETF holdings about 1 1/2 years ago, because most use leverage, and "rates can't possibly go any farther down...and when ST rates start to rise, the leveraged ETFs will get killed when they have to slash their dividend payouts".
Lesson learned about asset allocation! ;)
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Tulip bulbs.
The cycle has been down for about 700 years or thereabouts, so I think they're due to jump any day now.
I was scratching my head when I first saw this.. Finally, I got it and had to come back and give a comment.
It's pretty hilarious man! but if you look a bit deeper, aren't we in the same tulip situation right now? Back in 1600's, they inflated the tulip price so much.. the bubble busted.. Now, we are pulling "wealth" out of the thin air by printing so much money and borrowing so much debt.. I ain't smart in this area, but it doesn't smell good out there..
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Tulip bulbs aren't actually worth anything. They don't actually do anything of economic significance. The tulip bubble inflated due to greater-fool logic. We do have problems today, but they're not just history repeating itself (as you note: there's liquidity, inflationary concerns, and stagnation of actual economic production to wonder about).
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Tulip bulbs aren't actually worth anything. They don't actually do anything of economic significance. The tulip bubble inflated due to greater-fool logic. We do have problems today, but they're not just history repeating itself (as you note: there's liquidity, inflationary concerns, and stagnation of actual economic production to wonder about).
Funny you could say the exact same thing about those little pieces of green paper that we like to carry around (Note: people in other countries may prefer different colored paper).
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Paper money doesn't do anything of economic significance?
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Actually no, the paper doesn't. It is faith and trust in the economic system that gives it significance, but the paper itself is worthless and because it can be printed (US)/deflated/inflated/manipulated (China) it can be lost (doesn't mean it will be) and maybe the currency of choice becomes tulips/gold/dirt (ever see Waterworld).
The US is currently able to print more and more dollars because of the greater fool theory.
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Tulip bulbs.
The cycle has been down for about 700 years or thereabouts, so I think they're due to jump any day now.
I was scratching my head when I first saw this.. Finally, I got it and had to come back and give a comment.
It's pretty hilarious man! but if you look a bit deeper, aren't we in the same tulip situation right now? Back in 1600's, they inflated the tulip price so much.. the bubble busted.. Now, we are pulling "wealth" out of the thin air by printing so much money and borrowing so much debt.. I ain't smart in this area, but it doesn't smell good out there..
Heh, sorry for the unexplained allusion. For anyone else wondering why we're chatting about flowers, it's a fascinating and hilarious story.
Simple explanation:
http://www.damninteresting.com/the-dutch-tulip-bubble-of-1637/
More detail:
http://en.wikipedia.org/wiki/Tulip_mania
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Actually no, the paper doesn't. It is faith and trust in the economic system that gives it significance, but the paper itself is worthless and because it can be printed (US)/deflated/inflated/manipulated (China) it can be lost (doesn't mean it will be) and maybe the currency of choice becomes tulips/gold/dirt (ever see Waterworld).
The US is currently able to print more and more dollars because of the greater fool theory.
The greater fool theory would only apply to gold. I can invest dollars and get a return.
The june 30th edition of the economist had a nice piece, explaining how circumstances have aligned so that USA and UK can exchange low yielding IOUs for real stuff made by foreigners! Why the heck would you not want to print it? [Please don't go off about hyperinflation].
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Actually no, the paper doesn't. It is faith and trust in the economic system that gives it significance, but the paper itself is worthless and because it can be printed (US)/deflated/inflated/manipulated (China) it can be lost (doesn't mean it will be) and maybe the currency of choice becomes tulips/gold/dirt (ever see Waterworld).
The US is currently able to print more and more dollars because of the greater fool theory.
The US is currently able to print more and more dollars because of faith and trust in the government. Fiat currencies aren't based on having someone dumber come along to sell treasuries to, they're based on a perception that the government won't default on its debt.
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The greater fool theory would only apply to gold. I can invest dollars and get a return.
The june 30th edition of the economist had a nice piece, explaining how circumstances have aligned so that USA and UK can exchange low yielding IOUs for real stuff made by foreigners! Why the heck would you not want to print it? [Please don't go off about hyperinflation].
Yes. But technically I can exchange gold for dollars as well, which can then be invested for a return - it is no different. I get why the printing presses are on but there can be good and bad consequences - and the govt is usually late to figure it out.
[The US is currently able to print more and more dollars because of faith and trust in the government. Fiat currencies aren't based on having someone dumber come along to sell treasuries to, they're based on a perception that the government won't default on its debt.
Its semantics, we are saying the same thing but trust can be broken.
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The US is currently able to print more and more dollars because of faith and trust in the government.
But if one keeps an eye on opinion polls, one sees that trust in the US government (at least by Americans) is steadily declining.
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I would argue that tulip bulbs do the exact same thing as gold, or green paper, or diamonds. They each have negligible value related to what they might produce, but mostly they are a store of value. You can store your wealth in tulip bulbs, or piles of gold, or any other commodity, because those things have a price. When more people desire that asset, they bid up the price and your wealth grows.
I don't see how the tulip bubble is ANY different from the gold bubble, in terms of fundamental mechanism.
there's liquidity, inflationary concerns, and stagnation of actual economic production to wonder about).
I'm sure there were some very smart tulip traders suggesting that the price of tulips was about climate conditions, the introduction of new fertilizers or breeding techniques, and expansion into new markets.
Similarly, the value of the US dollar is a store of wealth influenced by all kinds of factors, but ultimately controlled solely by what people are willing to pay for it.
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The greater fool theory would only apply to gold. I can invest dollars and get a return.
The june 30th edition of the economist had a nice piece, explaining how circumstances have aligned so that USA and UK can exchange low yielding IOUs for real stuff made by foreigners! Why the heck would you not want to print it? [Please don't go off about hyperinflation].
Yes. But technically I can exchange gold for dollars as well, which can then be invested for a return - it is no different. I get why the printing presses are on but there can be good and bad consequences - and the govt is usually late to figure it out.
[The US is currently able to print more and more dollars because of faith and trust in the government. Fiat currencies aren't based on having someone dumber come along to sell treasuries to, they're based on a perception that the government won't default on its debt.
Its semantics, we are saying the same thing but trust can be broken.
No, no, no. If indeed you sell the gold for dollars in order to invest you don't have gold, you have dollars. That's why the tulips are like gold, except gold has a much longer tradition of demand or perceived value, doesn't rot, etc.
The risk of us treasury not repaying is (idiot congress excepted) low, because they could if required print the money.
The market is right now putting a premium on short term preservation of capital, rather than yield. Hence demand for us treasuries and gold.
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Over a long enough timeline, the survival rate of all fiat currencies drops to zero.
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Over a long enough timeline, the survival rate of all fiat currencies drops to zero.
Over a much shorter timeline, the survival rate of all human beings drops to zero. I'll take my chances.
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Why does it seem like almost all of the topics in this forum end up off-topic?
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Why does it seem like almost all of the topics in this forum end up off-topic?
Posters have enough free time such that we keep posting after we feel the original topic has been answered, so inevitably it goes off topic?
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Similarly, the value of the US dollar is a store of wealth influenced by all kinds of factors, but ultimately controlled solely by what people are willing to pay for it.
This is a very important notion here. Our dollar is worth what people are willing to pay.
We have a very large portion of the investments coming from foreign investors. When they realize US is no longer a good profitable place to invest, they will pull their money out and invest in their own country instead.
That's when the sharp drop of US dollar owned assets will begin.
So back to my original post question, where do you keep your money.. I think I will take arebelspy's original advise and buy some tulip bulbs..
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Your question is ambiguous to me.
"Where do you keep your FI stach?"
I'm not sure what that means. I see (at least) three interpretations.
Do you mean what is our asset allocation? Or what sort of vehicles is it in (401k vs Roth vs taxable, etc.)? Or what company is it with (Schwab vs. Vanguard, etc.)?
...where do you keep your 'stache is ambiguous, and a clearer question may yield more profitable answers.
Probably not though, as each of those have been discussed (so posters may not want to repeat themselves here), so doing a search on what exactly you're looking for will likely yeild the best results of all.
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Thanks for clarify.
I meant for "asset allocation" for your freedom money. Since the time horizon of FI stash is usually shorter (i.e. people want to start withdraw a lot earlier). I am curious to see where people keep this money now.
As the economy uncertainty grows, I am having a hard time figure out where to put the money if I want to start withdrawing withn 8-10 years.
My major concern is inflation, dollar devalue, another recession.
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Your question is ambiguous to me.
I guess it was somewhat ambiguous but if you read between the lines the OP is basically saying oh shit everywhere I look to invest seems to have major obvious risks.
Diversified portfolio with exposure to real estate, europe, and emerging markets. Bonds should be part of it but a small part right now - between potential for higher rates and inflation they just don't make sense.
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Since the time horizon of FI stash is usually shorter (i.e. people want to start withdraw a lot earlier).
Huh, I look at it the exact opposite. Sure, one may want to start some withdrawals within 5-10 years.
But I see the time horizon of my FI stache as very, very long term - it needs to last the rest of my life, which could be 50+ more years.
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Since the time horizon of FI stash is usually shorter (i.e. people want to start withdraw a lot earlier).
Huh, I look at it the exact opposite. Sure, one may want to start some withdrawals within 5-10 years.
But I see the time horizon of my FI stache as very, very long term - it needs to last the rest of my life, which could be 50+ more years.
Not if I need to withdraw in a few years and saw the stock market lost 70% in value by then..
Like the earlier post.. I see risks everywhere these days, not little risks but very concerning risks.
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You don't withdraw your entire stash the day you retire. You withdraw it over half a century, so that's the time horizon you're interested in.
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You don't withdraw your entire stash the day you retire. You withdraw it over half a century, so that's the time horizon you're interested in.
Exactly. You'll have 50+ years for that market to recover.
Not only that, but when ERing, a retirement date is flexible. Mine is 5-10 years out, depending on how things go. If you set an absolute deadline regardless of anything, sure you could run into trouble. If you're flexible with your retirement date, your spending in retirement, etc... You should be fine.
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I think you're asking, "But what if all this falls apart financially again but somehow the sky is also falling and owning multi-national companies, local rentals real estate, loans to the us gov and others, your portfolio somehow looses 70% and never recovers? That sort of scenario?
You're sounding like a wacko gold hyperinflationist to me.
Good luck mate. A ranch in Montana, off the grid, with lots of gold and lead sounds like a great FI option, given your predictions of the future...
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I think you're asking, "But what if all this falls apart financially again but somehow the sky is also falling and owning multi-national companies, local rentals real estate, loans to the us gov and others, your portfolio somehow looses 70% and never recovers? That sort of scenario?
You're sounding like a wacko gold hyperinflationist to me.
Good luck mate. A ranch in Montana, off the grid, with lots of gold and lead sounds like a great FI option, given your predictions of the future...
Heck, it sounds decent to me, regardless of the future. ;)
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I think you're asking, "But what if all this falls apart financially again but somehow the sky is also falling and owning multi-national companies, local rentals real estate, loans to the us gov and others, your portfolio somehow looses 70% and never recovers? That sort of scenario?
You're sounding like a wacko gold hyperinflationist to me.
Good luck mate. A ranch in Montana, off the grid, with lots of gold and lead sounds like a great FI option, given your predictions of the future...
Heck, it sounds decent to me, regardless of the future. ;)
Is that lead in the form of bullets?
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Will I be near a river to fish in....if so sign me up.
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Since the time horizon of FI stash is usually shorter (i.e. people want to start withdraw a lot earlier).
Huh, I look at it the exact opposite. Sure, one may want to start some withdrawals within 5-10 years.
But I see the time horizon of my FI stache as very, very long term - it needs to last the rest of my life, which could be 50+ more years.
Not if I need to withdraw in a few years and saw the stock market lost 70% in value by then..
Like the earlier post.. I see risks everywhere these days, not little risks but very concerning risks.
OK. You are correct, there seem to be risks everywhere right now, because of past events. (Note, this is usually a great thing for long term investors like us).
Don't panic.
So my recommendation would be to spread your stash using a very conservative AA, that would be as robust as possible to the events you describe and makes you feel comfortable and safe.
The disadvantage of this is that it will reduce returns over 30+ years according to the past history of the world so far. And you are right to remind us of that assumption.
But what are these safer assets? Cash means you'll loose to inflation and lost real returns; gold seems beyond a bubble compared to other commodity prices; real estate seems stuck, stock market volatile;
and bond prices at record highs, increasingly dominated by non- market forces like central banks; municipal bankruptcies...
So,
1/ Look to own a modest mustashian home mortgage free in a place with very low property taxes. Maybe take advantage of the foreclosures market.
2/ Think of adding an adjacent rental unit or 2, if strong cash flow, with 80% financing (30 yr fixed). Learn how to manage it if required to 'force' additional income in extremis.
3/ Asset allocation.
Use the 401ks if you can, and roths etc. Assign assets as per Arebelspy's chart.
Then split between 25% each of :
- commodities,like Vanguards precious metals fund VGPMX, or other ETFs (caution, these can high fee and volatile), energy companies, heck even a little bit of physical gold
- a balanced fund, like VWINX, has a 35/65 bond/stock mix
- international stock, maybe focused a bit away from Japan.
- cash (not too much as green), but insured CDs,
maybe spread across US$, Canadian $, Aussie $, Sing $
I wouldn't do this myself, but as long as you stick to it, I can't see a 70% dip ever.
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OK. You are correct, there seem to be risks everywhere right now, because of past events. (Note, this is usually a great thing for long term investors like us).
This is a good observation. The recency of certain events do disproportionately influence current attitudes about the markets. I often wonder to what degree my own intermediate term bearishness (2-5 years) is determined by the events of the past 3-4 years. Yet while I think the crisis of 2008-2009 was produced by a unique set of circumstances -- unregulated CDSs on crappy MBSs, for starters -- I think the next "phase" of the debt crisis will be most acutely felt in the arena of sovereign debt, which is a different battle altogether, and quite a bit scarier (in terms of consequences) than a bunch of overleveraged multi-national financial concerns going belly up (see Greece, Spain).
I went all cash in 2007 because I thought shit was about to hit the fan. As we inch closer to 2017, however, I want to get much, much longer the stock market, and much, much shorter the doom and gloom.
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Where do you get 4% in cash?
New Zealand.
Wait, is 4% unheard of in the US? I've got 5% (Australia) (Down 0.75% from 18months ago, sadface)
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1% is almost unheard of in the US.
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1% is almost unheard of in the US.
Right. 5 years ago it was different, and 5 years from now it will be different(?), but right now I'm getting 1% on my liquid cash at smartypig.com.
On the other hand, I'm locking in mortgages all the time at low, low rates, so I'm happy if yield on CDs, savings accounts, etc. is low for awhile.
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I think you're asking, "But what if all this falls apart financially again but somehow the sky is also falling and owning multi-national companies, local rentals real estate, loans to the us gov and others, your portfolio somehow looses 70% and never recovers? That sort of scenario?
You're sounding like a wacko gold hyperinflationist to me.
Good luck mate. A ranch in Montana, off the grid, with lots of gold and lead sounds like a great FI option, given your predictions of the future...
No, that's not what I meant. I do not believe in hyperinflation what so ever the none sense. As long as the world trades oil and commodity in dollar, we will not see dollar goes down to zero. Therefore, no doom.
I think the other guys (arebelspy and mark) answered my questions in a much better way. To stay flexible, have some funds for immediate need and bank on a long horizon for majority of the funds.. The key is to stay flexible, cut expenses, learn to live and enjoy on non material things and be patient..
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To stay flexible, have some funds for immediate need and bank on a long horizon for majority of the funds.. The key is to stay flexible, cut expenses, learn to live and enjoy on non material things and be patient..
Exactly.
There will be drops. The answer, though it isn't super comforting, is "Stay the course. Rebalance when necessary."
Flexibility in tough times is obviously helpful to one's comfort level with doing this.
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I wouldn't do this myself, but ....
Hi Mark, thanks for all of your wonderful advises. So what would you do yourself?
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I wouldn't do this myself, but ....
Hi Mark, thanks for all of your wonderful advises. So what would you do yourself?
My situation,as everyone's,is unique. But I would follow items 1 & 2 also., and as priority 1 and 2 as well. I'm a big fan of the American real estate market right now. In places, the opportunities are exceptional.
One reason I love Detroit :-)
My asset allocation would be more complex, and only 15% bonds, no gold at all, very little cash. I've posted that elsewhere. I like diversification. About 15% allocated to local business as a n 'investor' distributed
with multiple partnerships. The rest in Vanguard AA balanced.
I firmly believe all MMM , including those already in FI, should have an infinite investment horizon, btw. This boundary between saving vs FIRE we perceive is false. Except for the opportunity to do part-time real estate properly that comes with the extra time once not tied to the 9_5, investment strategy should be the same.
If you are a trading god, like smedleyB, you could speculate with MAX 5% of your stash, but I'd allow no 'rebuys'!
Does that help?
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I wouldn't do this myself, but ....
Hi Mark, thanks for all of your wonderful advises. So what would you do yourself?
My situation,as everyone's,is unique. But I would follow items 1 & 2 also., and as priority 1 and 2 as well. I'm a big fan of the American real estate market right now. In places, the opportunities are exceptional.
One reason I love Detroit :-)
My asset allocation would be more complex, and only 15% bonds, no gold at all, very little cash. I've posted that elsewhere. I like diversification. About 15% allocated to local business as a n 'investor' distributed
with multiple partnerships. The rest in Vanguard AA balanced.
I firmly believe all MMM , including those already in FI, should have an infinite investment horizon, btw. This boundary between saving vs FIRE we perceive is false. Except for the opportunity to do part-time real estate properly that comes with the extra time once not tied to the 9_5, investment strategy should be the same.
If you are a trading god, like smedleyB, you could speculate with MAX 5% of your stash, but I'd allow no 'rebuys'!
Does that help?
Zing!
My entire family lives the greater Detroit metropolitan area. Next time the sky parts and 100 dollar bills rain on the city, you'll know who's in town for a visit. lol!
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1% is almost unheard of in the US.
Right. 5 years ago it was different, and 5 years from now it will be different(?), but right now I'm getting 1% on my liquid cash at smartypig.com.
On the other hand, I'm locking in mortgages all the time at low, low rates, so I'm happy if yield on CDs, savings accounts, etc. is low for awhile.
"all the time"? How often are you picking up property? I'd be very interested in a post on your real estate ventures by the way... I agree that now is a great time to lock in cheap money in the form of 30 year mortgages and I think that Dallas is a good market to do it in (though I don't think our prices are as depressed as Vegas) - but just haven't figured out what I'm comfortable with getting into after mistakes and issues on my first house.
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I'd really enjoy a post on that too, if you're willing to share.
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"all the time"? How often are you picking up property? I'd be very interested in a post on your real estate ventures by the way... I agree that now is a great time to lock in cheap money in the form of 30 year mortgages and I think that Dallas is a good market to do it in (though I don't think our prices are as depressed as Vegas) - but just haven't figured out what I'm comfortable with getting into after mistakes and issues on my first house.
Maybe "all the time" is an exaggeration depending on your definition of that term.
5 houses in the last twenty months. Close of escrow to purchase the next one is August 15, and should have two more coming up behind that (so we'll figure 8 in two years, but two of them are rehabs to be sold, only 6 are long term holds). Basically somewhere around 3-4/year. Planning on continuing that for the next 5 years or so, pending market conditions.
Dallas (and many other parts of Texas) is pretty darn good. It's one of my top spots in the U.S. if I were looking to invest outside my immediate area.
I'd really enjoy a post on that too, if you're willing to share.
I'm completely willing to share, I just wouldn't know where to start. It'd end up a long, rambling thing where I get off track a ton as I get into philosophy (pay off houses versus mortgage, how to correctly calculate cash flow, refinancing, performing and non performing notes, commercial real estate, etc. etc.) and don't think it'd do much good.
Maybe a reddit style AMA (ask me anything) would work better? I'm open to suggestions.
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"all the time"? How often are you picking up property? I'd be very interested in a post on your real estate ventures by the way... I agree that now is a great time to lock in cheap money in the form of 30 year mortgages and I think that Dallas is a good market to do it in (though I don't think our prices are as depressed as Vegas) - but just haven't figured out what I'm comfortable with getting into after mistakes and issues on my first house.
Maybe "all the time" is an exaggeration depending on your definition of that term.
5 houses in the last twenty months. Close of escrow to purchase the next one is August 15, and should have two more coming up behind that (so we'll figure 8 in two years, but two of them are rehabs to be sold, only 6 are long term holds). Basically somewhere around 3-4/year. Planning on continuing that for the next 5 years or so, pending market conditions.
Dallas (and many other parts of Texas) is pretty darn good. It's one of my top spots in the U.S. if I were looking to invest outside my immediate area.
I'd really enjoy a post on that too, if you're willing to share.
I'm completely willing to share, I just wouldn't know where to start. It'd end up a long, rambling thing where I get off track a ton as I get into philosophy (pay off houses versus mortgage, how to correctly calculate cash flow, refinancing, performing and non performing notes, commercial real estate, etc. etc.) and don't think it'd do much good.
Maybe a reddit style AMA (ask me anything) would work better? I'm open to suggestions.
3-4/yr sounds about like all the time to me considering I've purchased one property in 2 years. I think reddit style would work - but a great way to get it started would be a brief history just describing the pure history (without the philosophical aspects) and then see where the questions take it.
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Maybe a reddit style AMA (ask me anything) would work better? I'm open to suggestions.
Also we could call it AAM (Ask a Mustachian) instead of AMA.
/sometimes i'm ridiculous
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I'm completely willing to share, I just wouldn't know where to start. It'd end up a long, rambling thing where I get off track a ton as I get into philosophy (pay off houses versus mortgage, how to correctly calculate cash flow, refinancing, performing and non performing notes, commercial real estate, etc. etc.) and don't think it'd do much good.
Maybe a reddit style AMA (ask me anything) would work better? I'm open to suggestions.
I'd be more than thrilled to read your "rambling".. would be a good recap of your philosophy anyway... If you have done well in this area, then it's good rambling worth learning from..
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"all the time"? How often are you picking up property? I'd be very interested in a post on your real estate ventures by the way... I agree that now is a great time to lock in cheap money in the form of 30 year mortgages and I think that Dallas is a good market to do it in (though I don't think our prices are as depressed as Vegas) - but just haven't figured out what I'm comfortable with getting into after mistakes and issues on my first house.
Maybe "all the time" is an exaggeration depending on your definition of that term.
5 houses in the last twenty months. Close of escrow to purchase the next one is August 15, and should have two more coming up behind that (so we'll figure 8 in two years, but two of them are rehabs to be sold, only 6 are long term holds). Basically somewhere around 3-4/year. Planning on continuing that for the next 5 years or so, pending market conditions.
Dallas (and many other parts of Texas) is pretty darn good. It's one of my top spots in the U.S. if I were looking to invest outside my immediate area.
I'd really enjoy a post on that too, if you're willing to share.
I'm completely willing to share, I just wouldn't know where to start. It'd end up a long, rambling thing where I get off track a ton as I get into philosophy (pay off houses versus mortgage, how to correctly calculate cash flow, refinancing, performing and non performing notes, commercial real estate, etc. etc.) and don't think it'd do much good.
Maybe a reddit style AMA (ask me anything) would work better? I'm open to suggestions.
Arebelspy,
I like real estate too. And agree its all about cash flow, but smedleyb had a point when he noted the way your portfolio is over weighted compared to market with respect to exposure to the Las Vegas rentals market.
Cash flow entails assumptions about the future. And the assumption of long term (10 years?) capital preservation risk is a fair one. Black swan effect, eggs and baskets, etc. How do you address such systemic risk?
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You're absolutely right Mark, and it's a fair question. Basically... it's a risk I'm comfortable taking right now.
I do plan to diversify out of real estate quite a bit (and maybe one day hold no real estate in my portfolio, who knows), but right now I'm more or less going "all in" due to the (what I feel is a) once in a lifetime opportunity.
It's something I'm planning on doing over the next 5 years (subject to change) while in the accumulation phase and then moving on. There is the potential risk that Vegas becomes a ghost town and all my properties become worthless.
As a fallback, I hit fully vested in my retirement cola'd pension at age 47, so although I'm currently planning on being FI a decade or so before that, plan B lets me ER then with 75% of my salary (more than enough, as our current savings rate is way above 25%). I work 180 days a year currently (after you take out holidays, weekends, and winter, spring, and summer breaks). I love what I do, and may continue doing it after I'm FI. Doing it another decade if something goes terribly wrong with my RE plan doesn't sound too bad to me. And I have plans C and D as well, but I think plan A will work, so they're likely unnecessary.
In other words, yes, I'm doing something that has some risk right now, but I'm comfortable with that risk. Especially given my level of knowledge on the subject. I think the accumulation phase is when one should be riskier, because if it doesn't work out... you work an extra year. No big deal, unless you loathe your job.
If one gets too scared to take an opportunity because they fear a black swan event, I think they'll have a hard time succeeding in general.
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As a fallback, I hit fully vested in my retirement cola'd pension at age 47, so although I'm currently planning on being FI a decade or so before that, plan B lets me ER then with 75% of my salary (more than enough, as our current savings rate is way above 25%). I work 180 days a year currently (after you take out holidays, weekends, and winter, spring, and summer breaks). I love what I do, and may continue doing it after I'm FI.
Don't want to pick a fight and I beleive you are a teacher, which is one of the most important jobs there are and it is hard work. That said, to retire at 47 with 75% pay for the rest of your life is precisely the issue with pensions and the government budgets. I am not sure what your pay is but I believe you are a teacher in CO so you probably top out at around $75k in today's dollars. Assuming 15 years to go until you hit 47 and assuming the top pay scale grows at 2% (below inflation) then at your retirement at 47 your pay would be $100k. $100k X 75% + $75k/ $75K / 4% SWR =$1,875,000. Assuming a 7% return over your 25 year career you would have to save about $30k/year, which really doesn't matter because it is risk free and if the pension is COLA it is even worse. This is not sustainable and when government employees say we are not compensated fairly it is BS. Back when Govt employees made 2/3rds of comparable pay and they got nice pensions then it may be ok - but that doesn't seem to be the case anymore - govt jobs give high pay and even more lucrative pensions, which become even more lucrative because of the high pay. And becomes ever more unsustainable.
I should have got a government job.
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If I'm reading this (http://www.nvpers.org/public/aboutus/) right, Nevada's government pension system is funded entirely by employee contributions for schoolteachers, who deposit 21.5% of their pay in the system in exchange for a pension upon retirement. For non-schoolteachers, the employer and employee contribute 11.25% each. So it's hard for me to see this as that dramatically different than the private sector model, or to see it as a gigantic drain on the government. Care to explain to me how I'm thinking about that wrong?
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If I'm reading this (http://www.nvpers.org/public/aboutus/) right, Nevada's government pension system is funded entirely by employee contributions for schoolteachers, who deposit 21.5% of their pay in the system in exchange for a pension upon retirement. For non-schoolteachers, the employer and employee contribute 11.25% each. So it's hard for me to see this as that dramatically different than the private sector model, or to see it as a gigantic drain on the government. Care to explain to me how I'm thinking about that wrong?
Ok - I got the state wrong and never claimed there were no contributions from the individual although it is high in NV as you say although NV teachers won't be eligible for SS so they don't pay into that system. All that said, the math still results in a huge deficiency. As I pointed out $30K a year, which would equate to average earnings of $140k/year over that 25 year career - clearly not the case as the average is likely much lower so it is still being funded largely by the locality (of course in reality the pension fund is probably grossly underfunded like all the others out there). It is made worse by the early age of the retiree because the benefits have to paid for so long and are COLA. And it is even worse if healthcare is provided indefinitely - some localities provide that.
As I said it is not sustainable. Keep in mind I am not try to argue what is right or wrong or who should be paid what and when - simply claiming that the math for government pensions doesn't work (not sure it ever really did, but it absolutely doesn't now). Over the last two decades the cocktail of increasing pay and benefits, high return assumptions by the pension plans, and the governements themselves not actually funding the plans doesn't work. Many states in the west including NV and CO appear to be tying to reform these systems but that will change the game for employees and taxpayers - both will pay more or concede some benefits.
Unfortunately I think it will be the employees that will not get what they thought they would and in NV they are trying to move from a defined benefit plan to a defined contribution plan and while not the worst thing in the world as that is what the private sector mostly has it is significantly different and in if they did it arebelspy pension would be PV based contributions to date and converted and he would continue to make contributions along with city/state that I guarantee you would not add up to anywhere close to the value of the DPB at 47.
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I should have got a government job.
Funny, I have a government job and I've been thinking I should have gone with the private sector.
For comparison purposes, I only contribute a mere 0.8% of my pay towards my pension, and it then pays me 1% of my salary times of years of service. So if I work 15 years it will cover 15% of my salary. Do the math on it, you'll see it about matches long term market returns.
If you think that's too generous, you're not alone. The law just changed so that new federal employees will instead contribute 3.1% of their pay for the same 1% benefit, which is clearly a losing deal by anybody's math.
Why are federal employees being handed a 2.1% pay cut? To pay for extended unemployment benefits for everybody else, like our friend Financial Samurai who "engineered" his layoff so that he could retire early on unemployment. That money is coming directly out of the paychecks of working feds. How happy do you think I am about that?
To make it even worse, my federal pension doesn't get a COLA until retirement age, which means anybody retiring before 62 gets that 15% of salary from their old salary whenever they quit, non-indexed for (in my case) 20 years of inflation. It's almost worthless.
But my main complaint about being a federal worker isn't the crappy pension, it's the federal pay system. Some feds make as much as their private sector counterparts, but those people have jobs like file clerk and janitor. If you're an educated professional, a scientist, lawyer, engineer, or even a manager, you make about 30% more in the private sector than you do as a fed if you're average. And you make WAY more in the private sector if you're good, since the government cannot reward exemplary service with promotions or raises. Doesn't matter how awesome you are at your job, you make the exact same amount as the guy who always shows up late and watches youtube all day. It's very disincentivizing.
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All that said, the math still results in a huge deficiency. As I pointed out $30K a year, which would equate to average earnings of $140k/year over that 25 year career - clearly not the case as the average is likely much lower so it is still being funded largely by the locality (of course in reality the pension fund is probably grossly underfunded like all the others out there). It is made worse by the early age of the retiree because the benefits have to paid for so long and are COLA.
I'm not following. Are you arguing that NVPERS is actuarially unsound?
If that's the case, wouldn't it not have a funding ratio approaching 80% (http://www.nvpers.org/public/documentation/PERSGoodForTheEconomy.pdf), among the best in the country? What about the math results in a huge deficiency?
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I should have got a government job.
Funny, I have a government job and I've been thinking I should have gone with the private sector.
For comparison purposes, I only contribute a mere 0.8% of my pay towards my pension, and it then pays me 1% of my salary times of years of service. So if I work 15 years it will cover 15% of my salary. Do the math on it, you'll see it about matches long term market returns.
If you think that's too generous, you're not alone. The law just changed so that new federal employees will instead contribute 3.1% of their pay for the same 1% benefit, which is clearly a losing deal by anybody's math.
Why are federal employees being handed a 2.1% pay cut? To pay for extended unemployment benefits for everybody else, like our friend Financial Samurai who "engineered" his layoff so that he could retire early on unemployment. That money is coming directly out of the paychecks of working feds. How happy do you think I am about that?
To make it even worse, my federal pension doesn't get a COLA until retirement age, which means anybody retiring before 62 gets that 15% of salary from their old salary whenever they quit, non-indexed for (in my case) 20 years of inflation. It's almost worthless.
But my main complaint about being a federal worker isn't the crappy pension, it's the federal pay system. Some feds make as much as their private sector counterparts, but those people have jobs like file clerk and janitor. If you're an educated professional, a scientist, lawyer, engineer, or even a manager, you make about 30% more in the private sector than you do as a fed if you're average. And you make WAY more in the private sector if you're good, since the government cannot reward exemplary service with promotions or raises. Doesn't matter how awesome you are at your job, you make the exact same amount as the guy who always shows up late and watches youtube all day. It's very disincentivizing.
(1) Pensions are geared toward longevity in the career so early retirement is highly penalizing, as it should be, but if you spend 30 years you get 30%, which btw is based on your highest pay or avg of 3 years highest pay but certainly not your lowest pay. Plus you get up to a 5% match if you partcipatein the TSP - so you have a DBP and DCP. So contributing 1% to get a COLA pension is nothing - it may not be as good as some states or cities but it is clearly not crappy.
(2) I don't disagree on FS retirement.
(3) Also agree that is is BS that everyone gets paid the same regardless of performance and hard to fire but there are plenty of professional level that are getting paid handsomely just look at the # of fed employees making over $100k - sure some attorneys/engineers could make more but the BLS data says average that is not the case so fed employees give up some upside that is statistically deminimis for a sure thing with above average (BLS) pay and benefits - that's a good trade for anyone that is not exceptional (btw that is most of us). Additionally fed workers don't work nearly as much as their private sector corporate counterparts and should be factored into the equation. Also, private sector people can be fired tomorrow for no reason in most states.
I guess if it is so crappy then quit and get a private sector job.
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I don't have time to read and discuss right now, but I will try to come back to this.
Two general comments:
1) In general most pensions are bull*. Unfounded promises for the future. In theory they could be really good. In practice, they have not worked out well. That being said, I'm gonna utilize mine, cause I sure as heck am gettin paid less because it's part of my compensation package.
2) 30 years, not 25. We have the option to "buy" up to 5 years, which I will be doing. So run your calculations on 30 years.
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[by the early age of the retiree because the benefits have to paid for so long and are COLA.
I'm not following. Are you arguing that NVPERS is actuarially unsound?
If that's the case, wouldn't it not have a funding ratio approaching 80% (http://www.nvpers.org/public/documentation/PERSGoodForTheEconomy.pdf), among the best in the country? What about the math results in a huge deficiency?
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Yes - 80% is means it is underfunded and I think it is actually more like 70%. Assets are based on an 8% return expectation (which is reasonable) but it is combined with discounting liabilities (future pension payments) back at a rate that is higher than normal inflation expectations.
I don't have time to read and discuss right now, but I will try to come back to this.
Two general comments:
1) In general most pensions are bull*. Unfounded promises for the future. In theory they could be really good. In practice, they have not worked out well. That being said, I'm gonna utilize mine, cause I sure as heck am gettin paid less because it's part of my compensation package.
2) 30 years, not 25. We have the option to "buy" up to 5 years, which I will be doing. So run your calculations on 30 years.
1) That is my point exactly and I absolutely agree you should utilize it unless of course it is not there - hope it is there for you, which I am sure it will be in some form/amount but maybe not exactly what was originally promised to you. And there are far worse offenses in the govt pension world than NV - some hardly require contributions, assume high rates of return, have early retirement options, etc.
2) Not of NV but most of these options to buy year are BS from a mathmatical perspective - trade a small percentage where they ask that you prepay five years of contributions in trade for five years of pension payments - further adding to the pension BS point in #1.
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if you spend 30 years you get 30%, which btw is based on your highest pay or avg of 3 years highest pay but certainly not your lowest pay.
Considering that I didn't finish my PhD until I was 31, putting in 30 years of service is kind of a tough sell. The government pension is a pretty good deal if you work til your mid-60s, and an even better deal if you start right out of high school and work that long. It's just a really crappy deal for anyone who lives below their means and saves diligently.
(3) just look at the # of fed employees making over $100k - sure some attorneys/engineers could make more but the BLS data says average that is not the case so fed employees give up some upside that is statistically deminimis for a sure thing
There's a lot of misinformation out there about federal pay levels, pushed by agenda groups. They generally focus on the fact that the average federal worker makes significantly more than the average private sector worker, but they overlook the types of jobs feds have. There are no federal burger flippers, but lots of accountants and lawyers, and when you look at the private vs public pay for a particular job, feds always seem to lose out.
But your point about job security is well taken. On the one hand, it frustrates me to see slackers get the same raise that I get (0% for past two years due to pay freeze, thanks Congress!) but on the other I know my job is more secure than most. Sadly, the private sector equivalent of my job is "tenured professor" so even the job security angle isn't so helpful to me.
Additionally fed workers don't work nearly as much as their private sector corporate counterparts and should be factored into the equation.
Did you just call me lazy?
I guess if it is so crappy then quit and get a private sector job.
I've thought about it, and at this point it's mostly a matter of inertia and complacency. I like my work, I have a family to support, and I own a house 1.5 miles from my office. And more importantly, I just don't really need the money. I have simple tastes and a modest lifestyle, and upsetting the status quo for more dollars hasn't yet seemed necessary.
If I had a special needs child or an ailing parent or some other unforeseen expense, I would certainly uproot my family in search of a bigger paycheck, but for now I'm staying put.
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Yes - 80% is means it is underfunded and I think it is actually more like 70%.
Well, it's cool that that's your opinion, but the official publication of the NVPERS that I linked to says it's 80%, so if you don't mind I'm going to stick with that.
Assets are based on an 8% return expectation (which is reasonable)
In fact, an 8% return expectation is over 2% less than the board has received on its portfolio since its inception.
but it is combined with discounting liabilities (future pension payments) back at a rate that is higher than normal inflation expectations.
Why would they discount based on inflation expectations if there's a COLA in the pension? Also, citation needed. Also, liabilities are also discounted based on incomplete vesting due to things like workforce turnover that occur at known rates-- they have these people there called actuaries that actually do this all day long, for a living! Isn't that marvelous?
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Considering that I didn't finish my PhD until I was 31, putting in 30 years of service is kind of a tough sell. The government pension is a pretty good deal if you work til your mid-60s, and an even better deal if you start right out of high school and work that long. It's just a really crappy deal for anyone who lives below their means and saves diligently.
I agree - the pensions are definitely geared to long term employees and said as much before and it is needed to support the system - in this case a DCB is better because you can take it wiht you.
There's a lot of misinformation out there about federal pay levels, pushed by agenda groups. They generally focus on the fact that the average federal worker makes significantly more than the average private sector worker, but they overlook the types of jobs feds have. There are no federal burger flippers, but lots of accountants and lawyers, and when you look at the private vs public pay for a particular job, feds always seem to lose out.
Agree that there is always agenda driven information out there but I still don't believe I am wrong. Again if you are comparing a fed attorney to a top producing partner at a big firm then no doubt the fed loses - but really would the fed attorney really be capable of that kind of performance. You need to compare to the BLS averages and that will show you that a fed makes as much as or more than the BLS averages (and that is before benefits).
Did you just call me lazy?
No - just recognizing that there is an inherent tradeoff in work/life/compensation for different jobs. I didn't say feds don't work when they are on the clock I am saying that to get ahead and exceed those BLS numbers in the private sector it typically requires far more investment in time on the job and being available all the time (f'in blackberry/laptop). Although there are plenty of arguments that suggests efficiency/productivity for feds is on par with private - and as you pointed out there really is no incentive for feds to work harder/smarter because the lowest common denominator gets the same as the best one.
I've thought about it, and at this point it's mostly a matter of inertia and complacency. I like my work, I have a family to support, and I own a house 1.5 miles from my office. And more importantly, I just don't really need the money. I have simple tastes and a modest lifestyle, and upsetting the status quo for more dollars hasn't yet seemed necessary.
If I had a special needs child or an ailing parent or some other unforeseen expense, I would certainly uproot my family in search of a bigger paycheck, but for now I'm staying put.
This is the tradeoff I was eluding too and the one that would make me switch to govt.
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You're absolutely right Mark, and it's a fair question. Basically... it's a risk I'm comfortable taking right now.
I do plan to diversify out of real estate quite a bit (and maybe one day hold no real estate in my portfolio, who knows), but right now I'm more or less going "all in" due to the (what I feel is a) once in a lifetime opportunity.
It's something I'm planning on doing over the next 5 years (subject to change) while in the accumulation phase and then moving on. There is the potential risk that Vegas becomes a ghost town and all my properties become worthless.
As a fallback, I hit fully vested in my retirement cola'd pension at age 47, so although I'm currently planning on being FI a decade or so before that, plan B lets me ER then with 75% of my salary (more than enough, as our current savings rate is way above 25%). I work 180 days a year currently (after you take out holidays, weekends, and winter, spring, and summer breaks). I love what I do, and may continue doing it after I'm FI. Doing it another decade if something goes terribly wrong with my RE plan doesn't sound too bad to me. And I have plans C and D as well, but I think plan A will work, so they're likely unnecessary.
In other words, yes, I'm doing something that has some risk right now, but I'm comfortable with that risk. Especially given my level of knowledge on the subject. I think the accumulation phase is when one should be riskier, because if it doesn't work out... you work an extra year. No big deal, unless you loathe your job.
If one gets too scared to take an opportunity because they fear a black swan event, I think they'll have a hard time succeeding in general.
What makes you think that the properties you're accumulating won't continue to lose value over the next 10 years at, say, a modest rate of 2% a year?
How do you know that the cash flows you're basing these deals are stable if the economy continues to stagnate and ultimately contract (see Detroit, another one trick local economy).
http://www.rentjungle.com/average-rent-in-las-vegas-rent-trends/
You seem to be saying you have some information at your disposal about the future of real estate in Vegas which puts you on the path to FI and ultimately wealth. Not all real estate markets go up in America. Some markets head down -- way down -- for many years, even it real estate overall seems to go up over time.
But again, how do you know that real estate prices in Vegas will stop going down, and that rents won't take a huge hit as the demographics, economy (gambling is everywhere), and resource scarcity (water shortage, not enough flow in Colorado river to for electricity generation at Hoover, pushing energy costs through the roof) destroys housing demand?
Aren't you really just guessing, and thus gambling?
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Well, it's cool that that's your opinion, but the official publication of the NVPERS that I linked to says it's 80%, so if you don't mind I'm going to stick with that.
Hate to break the news to you but your link and figure is from 2007 current number for 2011 is 70.2%.
In fact, an 8% return expectation is over 2% less than the board has received on its portfolio since its inception.
If you say so, but we all know past is not a predictor, I said 8% was reasonable. Keep in mind that they need to balance short term needs with long term needs so that can't dump all thier investments in bonds or equities exclusively, which will result in an modest rate of return. Also 2011 return since inception (27 years) is 9.7% and last 10 years is 5.6% and that includes a 21% return in last year - again 8% is reasonable for an institutional investor with a balanced portfolio and types of investments they can make that individuals don't have access to. If you think a balanced investment allocation is going to do better than that you know more than I do.
Why would they discount based on inflation expectations if there's a COLA in the pension? Also, citation needed. Also, liabilities are also discounted based on incomplete vesting due to things like workforce turnover that occur at known rates-- they have these people there called actuaries that actually do this all day long, for a living! Isn't that marvelous?
All that is factored in no matter what discount rate you use although all of those can be manipulated as well. If you are discounting it back at a rate that is higher than perceived inflation (obviously open to interpretation) then you are effectively lowering the present value of the liability. As for the Cola you have backwards because we discussing from the party obigated to pay it not receive it (you know when we discuss inflation on these forums and somebody chimes in that I have a COLA pension then everyone says oh great then no worries because your covered - that's because someone else has to pick up the tab. There are other variables that pension funds use to game the books, I assure you pension accounting is the worst and they change it all the time.
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What makes you think that the properties you're accumulating won't continue to lose value over the next 10 years at, say, a modest rate of 2% a year?
How do you know that the cash flows you're basing these deals are stable if the economy continues to stagnate and ultimately contract (see Detroit, another one trick local economy).
Let's not get too stereotypical about the Motorcity ... Detroit is showing a way back, with diversification into services like Quicken Loans, plus urban farming, art scene, bars and clubs, sports, light manufacturing, and the import/export business with Canada. I'd like to think Detroit will be one of the early 'post-modern' cities in the USA.
And housing is a deal, even in the great neighborhoods. :-)