MMB Portfolio Update July 2021: Asset Allocation & Performance

Posted on July 19, 2021 // 8 Comments

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Here’s my quarterly update on my current investment holdings as of July 2021, including our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a small portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a real-world example of a mostly low-cost, diversified, simple DIY portfolio with a few customized tweaks. The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses.

Actual Asset Allocation and Holdings
I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation. Once a quarter, I also update my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation.

Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury (VFITX, VFIUX)
Vanguard Inflation-Protected Securities (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index (FIPDX)
iShares Barclays TIPS Bond (TIP)
Individual TIPS bonds
U.S. Savings Bonds (Series I)

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. Usually, whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

I believe in the importance of doing your own research and owning productive assets in which you have strong faith. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc.

Personally, I try to own broad, low-cost exposure to asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning publicly-traded US and international shares of businesses as well as high-quality US federal and municipal debt. I also own real estate through REITs.

Again, personally, I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin. I own my own house, but I choose not to participate in the higher potential gains but also higher potential risks (of both requiring more time and money) of rental real estate.

My US/international ratio floats with the total world market cap breakdown, currently at ~58% US and 42% ex-US. I’m fine with a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias.

Stocks Breakdown

  • 43% US Total Market
  • 7% US Small-Cap Value
  • 33% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% High-Quality Nominal bonds, US Treasury or FDIC-insured
  • 33% High-Quality Municipal Bonds
  • 33% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. I use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. I plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we can minimize management fees, commissions, and taxes.

Holdings commentary. The world seems to have stabilized since the March 2020 market drop and overall panic, but I try not to get too attached to these numbers. They seem too good to be true, even as things continue to open up. All I can do is listen to the late Jack Bogle and “stay the course”. I remain optimistic that capitalism, human ingenuity, human resilience, human compassion, and our system of laws will continue to improve things over time.

I would like to note that when few people were paying attention, TIPS have had a pretty good run for an insurance-like investment. The iShares TIPS ETF (TIP) went up 8.3% in 2019 and 10.9% in 2020. The 10-year breakeven inflation rate between TIPS and Treasury is currently about 2.3%. I’m still happy owning a chunk of my bonds as TIPS.

Performance numbers. According to Personal Capital, my portfolio is up +9.4% for 2021 YTD. I rolled my own benchmark for my portfolio using 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +8.2% for 2021 YTD as of 7/18/2021.

I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Buffett & Munger Wealth of Wisdom on CNBC: Full Video and Transcript

Posted on July 14, 2021 // Leave a Comment

Update: Apparently there was a lot of the interview that wasn’t shown in the CNBC video below, but is being released in a four part series on their podcast, Squawk Pod. Let me know if you find a transcript.

Original post:

For the Buffett and Munger fans out there, Becky Quick had another CNBC special interview with the pair about their longtime friendship and partnership, called Buffett & Munger: A Wealth of Wisdom on June 29th, 2021. Thankfully, you can watch the full video online and/or read the full text transcript.

All in all, this interview didn’t offer a lot of new insights if you already listened to the 2021 Berkshire Hathaway shareholder meeting and 2021 Daily Journal shareholder meeting (Robinhood still promotes gambling and Bitcoin is still a delusion), but it did provide a little more background into their personal histories.

Here is my single favorite quote from the interview (emphasis mine):

BUFFETT: And we’re still doing it, yeah. We made a lot of money. But what we really wanted was independence. And we have had the ability since pretty much a little after we met financially we could associate with people who we wanted to associate with. And if we had, if we associated with jerks, that was our problem. But we didn’t have to. We’ve had that luxury now for, you know, 60 years or close to it. And, and that beats 25-room houses and, you know, six cars or that stuff is, what really is great is if you can do what you want to do in life and associate with the people you want to associate with in life. And, now, it, it’s and, and we both had that, that spirit all the way through.

These two friends may be famous because they are rich, but they are happy because they are able to spend their time with people that they enjoy.

Buffett and Munger explicitly wanted to get rich, so they could be independent. True freedom is the ability to control how you spend your time. But that usually takes a certain amount of money, so we have the term “financial freedom”.

I think it’s okay to say “I want accumulate a lot of money for the next X months or years”, especially if you’re in debt. As Munger has also stated, the first $100,000 is the hardest. If you really want independence quickly, then you need to embrace some pain and sacrifice to earn your freedom. This is why I try not to criticize anyone taking “extreme” measures to improve their savings rate. Some people are willing to endure a very spartan lifestyle for independence sooner, while others aren’t, or they may have a higher income and not need to give up much.

At the same time, after reaching a certain level of financial stability, we then need to figure how what game we really want to play with our limited time on this planet, beyond simply buying more luxurious stuff. Buffett enjoyed the game of capital allocation and accumulating more dollars; that was his idea of fun. He even had a partner to play the game with him. For most people, I think continuing to make more money involves more stress and hard work.

Filed Under: Entrepreneurial, Inspirational, Investing, Retirement //

Best Interest Rates on Cash – July 2021 Update

Posted on July 13, 2021 // Leave a Comment

Here’s my monthly roundup of the best interest rates on cash as of July 2021, roughly sorted from shortest to longest maturities. You will find lesser-known opportunities to earn 3% APY and higher while still keeping your principal FDIC-insured or equivalent. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 7/13/2021.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). I define “fintech” as a software layer on top of a different bank’s FDIC insurance. These do NOT require a certain number debit card purchases per month. Read about the types of due diligences you should do whenever opening a new bank account.

  • 3% APY on up to $100,000. The top rate is still 3% APY for July through September 2021 (actually up to 3.5% APY with their credit card), and they have not indicated any upcoming rate drop. HM Bradley requires a recurring direct deposit every month and a savings rate of at least 20%. See my HM Bradley review.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000. Porte requires a one-time direct deposit of $1,000+ to open a savings account. New customer $100 bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. OnJuno recently updated their rate tiers, while keeping their promise to existing customers with a grandfathered rate. If you don’t maintain a $500 direct deposit each month, you’ll still earn 1.20% on up to $5k. See my updated OnJuno review.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer plus other hoops, but the lesser-known perk is the 1% APY for everyone. Thanks to the readers who helped me understand this. There are several other established high-yield savings accounts at closer to 0.50% APY.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.30% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 0.85% APY ($1,000 min). Early withdrawal penalty is calculated as the amount of the withdrawal times the remaining term (days) of this certificate at the rate of 2 times the APR (divided by 365) paid on this certificate. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). Unfortunately, money market fund rates are very low across the board right now. Ultra-short bond funds are another possible alternative, but they are NOT FDIC-insured and may experience short-term losses at times. These numbers are just for reference, not a recommendation.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.01%. Vanguard Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays 0.01% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.28% SEC yield ($3,000 min) and 0.38% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.25% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.36% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 7/13/2021, a new 4-week T-Bill had the equivalent of 0.05% annualized interest and a 52-week T-Bill had the equivalent of 0.07% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.09% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.12% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2021 and October 2021 will earn a 3.54% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2021, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are severely capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore, as I feel the work required and risk of messing up exceeds any small potential benefit.

  • Mango Money pays 6% APY on up to $2,500, if you manage to jump through several hoops. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • The Bank of Denver pays 2.00% APY on up to $25,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. The rate recently dropped. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $50k. Thanks to reader Bill for the updated info.
  • Devon Bank has a Kasasa Checking paying 2.50% APY on up to $10,000, plus a Kasasa savings account paying 2.50% APY on up to $10,000 (and 0.85% APY on up to $50,000). You’ll need at least 12 debit transactions of $3+ and other requirements every month.
  • Presidential Bank pays 2.25% APY on balances up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.35% APY ($10,000 min). Early withdrawal penalty is 1 year of interest. Anyone can join this credit union by joining the National Space Society (free). Note that NASA FCU may perform a hard credit check as part of new member application.
  • Abound Credit Union has a special 18-month Share Certificate at 0.80% APY ($500 min), a special 47-month Share Certificate at 1.45% APY ($500 min), and a 59-month Share Certificate at 1.35% APY ($500 min). Early withdrawal penalty is 1 year of interest (and only with the consent of the credit union, so be aware). Anyone can join this credit union via partner organization ($10 one-time fee).
  • Lafayette Federal Credit Union has a 5-year CD at 1.26% APY ($500 min). Early withdrawal penalty is 6 months of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year CD at 1.00% APY. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 1.80% APY vs. 1.41% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 7/13/2021, the 20-year Treasury Bond rate was 1.96%.

All rates were checked as of 7/13/2021.

Filed Under: Banking, Deals & Offers, Investing //

Vanguard: Improving Portfolio Safe Withdrawal Rates for FIRE

Posted on July 12, 2021 // 1 Comment

Vanguard Research has published a new whitepaper titled Fuel for the FIRE: Updating the 4% rule for early retirees, which discusses its assumptions and how different factors can hurt or improve your odds of success. Many of these topics have been discussed at length elsewhere, but as always I appreciate the power of concise definitions and simple charts to help with understanding.

Here is a nice, concise definition for FIRE:

FIRE stands for “Financial Independence Retire Early.” FIRE investors save as much of their income as possible during their working years, hoping to attain financial independence at a young age and maintain it through the rest of their life—aka retirement.

Here is a nice, concise history of the 4% Rule:

Bengen (1994) calculated the maximum percentage that retirees could withdraw annually from their portfolio without running out of money over 30 years. Advisors refer to this percentage as the safe withdrawal rate. Bengen summarized his findings as follows: “Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal rate of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.” And the 4% rule was born.

Here are the potential issues with the assumptions embedded within the 4% rule:

  • The use of historical returns as a guide for future returns
  • A retirement horizon of 30 years
  • Returns equal to those of market indexes, without accounting for fees
  • A portfolio invested only in domestic assets (“home bias”)
  • A fixed percentage withdrawal in real terms (“dollar plus inflation”)

Here are suggested adjustments. Additional, helpful details are in the paper.

Don’t assume historical averages will hold for the future. Vanguard calculates their own forward-looking estimates based on factors like stock P/E ratios, current bond interest rates, and recent inflation statistics. They are a lot lower than historical averages, as seen in the graphic above (at the top of this post).

Understand that your retirement horizon may be much longer than 30 years. The longer a portfolio has to last, the more likely it can fail.

Minimize costs. Advisor fees, mutual fund and ETF fees, taxes, and other fees will cut directly into your net income. 1% in investment fees makes a big impact.

Invest in a diversified portfolio. Vanguard believes that adding some international assets will improve your chances of success. Right now, international stocks have lower valuations (P/E and related) as compared to US stocks.

Use a dynamic spending strategy. As you can see below, this is one of the most powerful ways to improve your odds of success. If you can spend less during a bear market (while also getting to spend more in a bull market), your portfolio’s chances of survival improve dramatically. Either your budget has enough “padding” such that cutting back won’t hurt much, or it hurts but you are willing to endure that temporary pain, or you maintain the option to work a little to earn some additional income if needed.

Vanguard doesn’t give any hard numbers when it comes to replacing the 4% number, but the lower expected future returns, longer time horizon, and fee impact all point to a lower number. However, being flexible with your portfolio withdrawals can raise the number.

I enjoy thinking about these sorts of variables and ways to optimize, but the fact is that nobody knows the future “safe” withdrawal rate, even within a percentage point. You have to let go of the idea of 100% certainty. Planning for flexibility (identifying areas to cut back temporarily, maintaining backup work options) and having belief in your ability to adapt is critical for pulling off FIRE at any reasonable withdrawal rate (say 3% to 4%). FIRE is about balancing the fear of running out of money with the fear of running out of time.

Filed Under: Investing, Retirement //

Stockpile Review: Starter Investing For Kids, Buy Stock Gifts via Credit Card With No Fee

Posted on July 11, 2021 // 4 Comments

Stockpile is a niche stock broker that is designed for beginner investors, especially children. You can purchase a gift card for $25, $50, $100, etc. and then a child/parent can redeem that gift card an open their own custodial brokerage account. They receive fractional shares of Apple, Amazon, Google, Berkshire Hathaway, or an index fund ETF which they can watch go up and down in value (or sell). Their tagline is “Starting is everything.”

There are no monthly fees or account minimums. However, until now, they did have trading fees and gift card fees. Before July 2021, Stockpile had a trading fee of 99 cents if paid with cash (fund with bank account) and 99 cents + 3% if paid with credit/debit cards. There was also an additional $2.99 e-gift fee for the first stock (+ 99 cents for each additional company). Physical gift cards had slightly higher fees. Here is how much it used to cost to gift $100 of stock:

If you give Jack one stock, the gifting fee is $2.99 + 3%. To give $100 of Nike stock, for example, you’ll pay $100 + $2.99 + $3.00 = $105.99.

No trading fees. No debit/credit card transaction fees. As of July 7th, 2021, Stockpile announced that they are getting rid of trading fees and gift card fees. You can buy a $100 stock gift card with a credit card for a total price of $100, and the recipient will receive the full $100 of Nike stock or whatever. You can email an “e-gift card”, or print out a physical voucher. (The giver can put a suggested company like Apple on the card, but the recipient can choose to buy a different company.) Here’s a screenshot from the e-mail they send out:

Here’s what they say regarding payment methods:

What payment methods do you accept?
We try to make buying stock as easy as accessible as we can! That means we offer a multitude of ways to get started with investing. The cheapest and most simple is by linking your bank to your Stockpile account. You can link your bank account by following the instructions here. You can also add cash instantly to your Stockpile account using a debit card.

When buying stock on the web, we accept all major debit cards.

You’ll notice it is silent regarding credit cards. A quiet quirk: You can’t buy stocks directly with a credit card for your own Stockpile account, but you can buy e-gift cards using a credit card which can then be redeemed for stock by anyone. Here is a screenshot of the ability to buy a gift card using a credit card with no fees.

Whenever a 3% credit card transaction fee is removed, it makes it more attractive to pay with a credit card in order to generate cash back or airline miles rewards. The possibility of earning 2% cash back upfront on every stock purchase sounds intriguing, but a potential drawback to this is that Stockpile isn’t a full-service brokerage firm, it’s more of a stock piggy bank for kids with limited customer service and support features. (It’s still SIPC-insured.) I don’t know that I’d want to build up my primary portfolio there, even if they do offer broad ETFs like Vanguard Total Stock Market ETF (VTI). Unfortunately, they don’t offer IRAs, so you can’t do your annual IRA contribution.

Another option would be to buy a cash-like ETF. Two options in their catalog are PIMCO Enhanced Short Maturity Active ETF (MINT) and Goldman Sachs Access Treasury 0-1 Year ETF (GBIL). Potential drawbacks here are that the largest gift card you can buy is for $2,000, and they may limit how many gift cards you can purchase.

I tested this out myself as I already have a Stockpile account from a previous promotion, and I was able to successfully buy a $25 gift card using a Chase credit card, but another credit card was rejected. The purchase total was exactly $25, and it was redeemed for exactly $25 of stock (Berkshire Hathaway to avoid dividends and thus extra tax paperwork).

How will Stockpile make money without charging even credit card transaction fees? Even if Stockpile accepts “payment for order flow”, their volume must be relatively low (no daytraders here) and the spread percentage would be far less than 3% on a trade. A better guess is that they found their “breakage” to be sufficient to cover the fees, which refers to the fact that 20% of all gift cards are never redeemed even after a year. (Ever notice how many gift cards are 20% off face value at Costco and Sam’s Club?)

You pay upfront for the gift card, but if they are never redeemed, then Stockpile just gets to keep that as profit. Their breakage is probably less than 20%, but perhaps it is enough for them to make this move.

Bottom line. If you want to teach a kid about stock investing by giving them actual shares of stock, Stockpile is a convenient way to do so and now has no trading fees and no gift card purchase fees. Spend exactly $100 on a gift card, even using a credit card, and they’ll get exactly $100 worth of stock.

Filed Under: Deals & Offers, Investing //

S&P 500 Dividend Aristocrats Infographic: Current Dividend Yield vs. Years of Consecutive Dividend Growth

Posted on July 1, 2021 // 2 Comments

A Dividend Aristocrat is a company in the S&P 500 index that has paid and increased its dividend payout every year for at least 25 consecutive years. You’re looking at companies that have had such reliable profits over multiple economic cycles that they can just keep sending checks to their shareholders every quarter while still not only maintaining but growing their business. Visual Capitalist just created a Dividend Aristocrat infographic that shows all 65 companies on the 2021 list, charted by current dividend yield and years of consecutive dividend growth.

Genuine Parts (GPC) and Dover Corp (DOV) have increased their dividend payout for 65 consecutive years!

Each year, some companies may be added or removed. For example, new in 2021 are IBM (IBM), NextEra Energy (NEE) and West Pharmaceutical Services (WST). Removed in 2021 are Raytheon (RTX), Carrier Global (CARR), Otis Worldwide (OTIS), Church and Dwight (CHD), and Stryker Corporation (SYK). Note that companies are sometimes removed because they were acquired by another company without the same dividend history.

I’ve always maintained a small side account where I own individual stocks and alternative investments. “Play Money”, “Mad Money”, “Fun Money”, whatever you want to call it. Even though it is only a small percentage of my net worth, I have enjoyed growing it over time and learning from the process. For example, I have found that in times of crisis, I am actually more comfortable buying more of the individual companies inside my self-directed account than buying my trusty broad index funds. I’m also a very low turnover investor, and usually make fewer trades per year than fingers on my hands.

I don’t solely buy companies on this list, but many of the companies are good research ideas if you like to learn about history. I prefer the idea of reliable and growing dividend income, not just momentarily “high” dividend yield. Of course, there are many solid companies that don’t satisfy the requirements for this list, and even list includes questionable companies will be eventually cut (like AT&T, which has already announced a future dividend cut even though still on this chart).

Filed Under: Investing //

DIY Inflation-Protected Pension: Fewer Retirees Claiming Social Security at Age 62

Posted on June 16, 2021 // 9 Comments

An important lever in building your retirement income is timing when you start claiming your Social Security benefits. While you can start as early as age 62, your monthly benefit increases each year that you delay claiming (up until age 70). For example, here is what my payout would be at various claiming ages if I stopped working today*:

By forgoing the potential income during those initial years, I can “buy” a larger Social Security benefit for the rest of my life – essentially an inflation-adjusted lifetime annuity that happens to be backed the US government, as opposed to an insurance company that has a small-but-nonzero chance of failure. There is a big different between $100 a month and $100 month always adjusted for CPI inflation for the next 30 to 40 years. From this WSJ article:

“The very best annuity you can buy is to delay Social Security,” says Steve Vernon, an actuary who is a consulting research scholar at the Stanford Center on Longevity. Mr. Vernon, 67 years old, is himself working part time so he can delay claiming Social Security until age 70.

Did you know that there are now zero insurance companies that sell new annuities that pay lifetime income linked to inflation (CPI)? You can find some with fixed annual increases, but none will guarantee the increases to track inflation. Not a single for-profit company wants to take on the risk of future inflation. Think about that.

For a long time, the most common age of claiming was age 62, as soon as possible. However, this chart from the Center for Retirement Research at Boston College shows that the current trend is that fewer and fewer people are doing that, especially in the last 10 years (hat tip Abnormal Returns). The curve tracks the percentage of people turning 62 that start claim age 62. (This is different than percentage of all claimants, because there is a growing number of 62-year-olds overall.)

I haven’t found any official surveys about the reason for this trend, but here are some possibilities:

  • Fewer people “need” Social Security income right away, because they are healthier and/or able to find work for longer.
  • The stock market has been going up pretty consistently over the last 10 years, so fewer people need the income to start right away.
  • Fewer people “want” Social Security right away, because they expect to live longer or have been educated about the potential benefits of delayed claiming. They want the higher paycheck and are willing to wait.

There are definitely more free tools out there to help you make this decision. My payout chart above was based on mySocialSecurity.gov and SSA.tools and other free calculator is OpenSocialSecurity.com. OpenSocialSecurity actually told me that the optimal choice was for one of us to claim at 62 and the other to wait until 70, so early claiming isn’t always a bad thing.

* Wait, I’m less than 20 years from being able to claim Social Security?! 😱

Filed Under: Annuities, Investing, Retirement //

Single Family Rental Homes: Asset Class with 8.5% Historical Returns

Posted on June 14, 2021 // 16 Comments

How about this housing market? A few weeks ago, the CEO of Redfin shared a viral Twitter thread about what he was seeing. Here’s just a snippet:

It has been hard to convey, through anecdotes or data, how bizarre the U.S. housing market has become. For example, a Bethesda, Maryland homebuyer working with @Redfin included in her written offer a pledge to name her first-born child after the seller. She lost.

Inventory is down 37% year over year to a record low. The typical home sells in 17 days, a record low. Home prices are up a record amount, 24% year over year, to a record high. And still homes sell on average for 1.7% higher than the asking price, another record.

What about single-family homes as an investment asset class? Larry Swedroe points to a recent academic study about the historical total returns of single family rentals. Here are some highlights from the paper:

  • The study covers the nearly 30-year period from 1986 to 2014, including zip codes across the largest 15 US metro areas.
  • Total return is broken down into two components: rental income (net of expenses) and house price appreciation, similar to the dividend income and price appreciation of stocks.
  • Across all cities, the total returns were approximately the same: 8.5% total annualized return. On average, this broke down to 4.2% rental income + 4.3% price appreciation.
  • In higher-priced cities, the total returns were composed of lower rental yields but higher price appreciation.
  • In lower-priced cities, the total returns were composed of higher rental yields but lower price appreciation.
  • On average, they found that net rental income is about 60% of gross rental income. In other words, for every $1,000 of gross rent, $400 was eaten up by operating expenses like maintenance, repairs, property taxes, etc.
  • Single family rentals represent 35% of all rented housing units in the US, and have a market value of approximately $2.3 trillion.

According to Swedroe, during the same period the S&P 500 returned 10.7% annualized but with more volatility.

I definitely acknowledge rental properties are the way that many people have built wealth. As individuals can combine cheap leverage from government-subsidized mortgages along with that 8.5% annualized return, that could make the overall return even better than stocks.

I’ve thought about purchasing a rental property (or four) as well, but I’ve always ended up using my time and life energy in other ways. In the end, I look at managing rental properties as more similar to running your own business. If you have the right personality and skillset, then managing rental properties is a great business and a great way to build wealth in terms of return on invested time. But for me, I’d much rather work on online businesses, what I call “digital real estate”. With excess cash from work, I invest in completely passive shares of businesses (stocks) and REITs which require zero ongoing work. When I am fully retired, the dividend checks will simply show up in my brokerage account. I don’t need to screen tenants, hassle them about late rent, argue about security deposits, or worry about evicting a family during hard times.

What about simply buying an REIT that owns single-family rentals? It appears the two biggest are Invitation Homes (INVH) with 80,000 single-family homes and American Homes 4 Rent (AMH) with 50,000 single-family homes. As you might expect, their recent returns have also been quite hot. The 5-year average return for AMH is 17.45%, per Morningstar, but it’s too young to have a 10-year return history. However, the current forward dividend yields of 1.80% (INVH) and 1.02% (AMH) aren’t terribly exciting.

Here’s a 5-year historical performance chart of American Homes 4 Rent alongside some other REITs and the S&P 500, from YCharts. Buying a specific REIT, even if it owns thousands of properties, can still result in a wide range of results.

If you own the broad Vanguard Real Estate ETF (VNQ), you’ll find that 14% of its portfolio is invested in residential REITs. This includes apartments, student housing, manufactured homes, and single-family homes. INVH is about 1.2% and AMH is about 0.65% portfolio weight in VNQ. The mutual fund version of VNQ is VGSLX, and has a 10.5% annualized average return since inception in 2001. That’s not too bad, either, and I’ve been pretty satisfied with my VNQ holding.

But again, single-family real estate is one of the original “side hustles” that helped folks build their own wealth over time. Sometimes, I wonder if I should work on building the required skills and knowledge base, just to keep my future options open and have something to teach my children.

Filed Under: Investing //

Vanguard 10-year Asset Class Return Projections 2021

Posted on June 10, 2021 // Leave a Comment

The advisor-facing parts of brokerage firms are often of interest to DIY investors. In the June 2021 Market Perspectives article of Vanguard’s advisor site, they included their asset class return projections for the next 10 years:

Our 10-year, annualized, nominal return projections, as of March 31, 2021, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.

These projections should not be used for market timing! GMO offers similar outlooks. Here’s how well their 7-year projections turned out from 2013-2020:

  • GMO forecast in 2013: US Large Cap equities will have a -2.3% annualized real return from July 2013 to July 2020. Reality today: The S&P 500 ETF (VOO) had an annualized real return of +9.9% from July 2013 to July 2020.
  • GMO forecast in 2013: Emerging Markets equities will have a +6.8% annualized real return from July 2013 to July 2020. Reality today: The Emerging Market ETF (VWO) had an annualized real return of +2.3% from July 2013 to July 2020.

That is a huge difference in real-world cumulative returns after 7 years! If you fully believe the forecast, you might have sold all your stocks. If the forecast was correct, that $100,000 would have shrunk to $75,000. Instead, every $100,000 invested in the S&P 500 ETF (VOO) turned into $223,000 during that 7-year time frame. (Source: ETFReplay, SmartAsset)

Limited takeaways. There is some value in these predictions, but not that much:

  • For equities, these outlooks partially assume that valuations will revert back toward their historical averages. Right now, valuations are higher than average due to low interest rates, and thus future returns for US stocks are lower than expected to be lower than average. Temper your expectations. Be prepared for both higher returns than the high end and lower returns than the low end.
  • For bonds, current yields are the best predictor of future returns, and they are low. The possible range is much smaller. You’re just trying to barely keep up and get return of principal after inflation.

In the end, I am mostly posting this for historical reference. Vanguard’s estimate at least offers a range to help illustrate that it’s only slightly better than a wild guess (but about the best anyone can do). I hope to check back in after another 10 years and see how things panned out.

Filed Under: Investing //

Unifimoney App Review: Up to $1,000 Bitcoin Bonus Details

Posted on June 8, 2021 // 6 Comments

Unifimoney is a new “money super app” which promises to help manage all of your assets in a single mobile app. I should start by mentioning that the app is currently iPhone/iOS only. Here’s a quick rundown at what it includes:

  • High-yield checking account. Allpoint ATM network, Billpay, Remote Check Deposit, 0.20% APY. FDIC insurance through UMB Bank.
  • Cash back credit card. Launching later this year with “target” 1.5-2% cash back rewards.
  • Self-directed brokerage account. $0 commission stock trades. SIPC-insured through broker-dealer DriveWealth.
  • Crypto and precious metals trading account. Bitcoin + 30 others, gold, silver. Uses Gemini trust, regulated and reputable crypto custodians, same as the BlockFi promo.
  • Roboadvisor. 0.15% annual advisory fee. SEC-registered RIA.

That’s a pretty impressive bundle out of the gate, especially considering that most other companies start with one thing and then add on other features. For example, Robinhood started with free stock trades, then tried to add on high-yield checking. Ally Bank went many years before buying the brokerage firm TradeKing and renaming it Ally Invest. Unifimoney seems to have put a lot of different parts together and jumped through all the regulatory hoops, but will it work as a user-friendly package?

New user bonus details (Up to $1,000 Bitcoin). First, they need to attract some customers to try it out. I like trying out new apps, but a good bonus is always appreciated. They have a tiered bonus, starting with a $25 bitcoin bonus after depositing $1,000, going all the way up to a $1,000 bonus for a $100,000 deposit. Here is the full chart:

Here’s how those bonuses break down in terms of annualized return. Note some have a 30-day holding period and some have a 90-day holding period.

  • $25 BTC bonus for holding $1,000 for 30 days works out to the equivalent of 30% APY.
  • $100 BTC bonus for holding $10,000 for 30 days works out to the equivalent of 12% APY.
  • $250 BTC bonus for holding $20,000 for 90 days works out to the equivalent of 5% APY.
  • $500 BTC bonus for holding $50,000 for 90 days works out to the equivalent of 4% APY.
  • $1,000 BTC bonus for holding $100,000 for 90 days works out to the equivalent of 4% APY.

So far, those numbers are pretty good, and comparable to the transfer bonuses from many brokerages on the high end. If you kept $100,000 in a 0.50% APY savings account, you’d only have $500 after an entire year.

Here are the steps to earn that bonus (taken straight from their site):

  • Open a new Unifimoney account.
  • Deposit the minimum amount based on the tiers in the chart above between $1,000 and $100,000+ within 14 days of account opening.
  • To qualify, hold that same minimum amount in combined deposits/assets in the account for 30 days for Tiers 1-2 and 90 days for Tiers 3-5.
  • Your Bitcoin reward (shown in the tiers above) will be paid into your Unifimoney Crypto account within 14 days of qualifying.
  • Bitcoin Rewards are inclusive of transaction fees and calculated at the rate of Bitcoin at the time of purchase (see details in terms and conditions below)

Here is an important detail below about funding. I always fund using a push from my online savings account anyway (usually Ally Bank), but I’ve heard many complaints about push/pull from within a startup bank. At least here they tell you the limit upfront.

For single funding transactions greater than $10,000 we recommend these funds are pushed to your Unifimoney account from your existing bank either via ACH or Wire Transfer. Funding transactions initiated within the app are restricted to a maximum $10,000.

Sign-up process details. You will need to have the following things handy at account opening:

  • Cell phone number
  • US Citizens: Photo ID and SSN. Non-US Citizens: Passport and SSN.
  • Address listed on Photo ID should match your current mailing address.
  • Account and routing number for funding bank account. You’ll need to fund with at least $100 initially, and you can add the rest to reach your desired bonus tier above within the next 14 days.

Tip: If you are deep into the account opening process and go off to find your photo ID and your phone goes to “sleep”, it will look like you have to start everything over again. Simply tap on “Login” and type in your phone number, and it should let you resume the application from where you left off.

Bottom line. Unifimoney is an ambitious new fintech with a banking/credit card/stock trading/portfolio management/crypto/gold all rolled into one app. They have a new user bonus of up to $1000 in Bitcoin, depending on how much you deposit. I’ll update this review after I have a chance to play around with the various parts.

Filed Under: Banking, Deals & Offers, Investing //

Best Interest Rates on Cash – Monthly Update June 2021

Posted on June 2, 2021 // 4 Comments

Here’s my monthly roundup of the best interest rates on cash as of June 2021, roughly sorted from shortest to longest maturities. I try to find lesser-known opportunities to improve your yield while keeping your principal FDIC-insured or equivalent. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 6/2/2021.

Fintech accounts
Available only to individual investors, fintech companies oftentimes pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). I define “fintech” as a software layer on top of a different bank’s FDIC insurance. These do NOT require a certain number debit card purchases per month. Although I do use some of these after doing my own due diligence, read about the Beam app for potential pitfalls and best practices.

  • 3% APY on up to $100,000. The top rate is 3% APY for April through June 2021, and they have not indicated any upcoming rate drop. HM Bradley requires a recurring direct deposit every month and a savings rate of at least 20%. See my HM Bradley review.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000. Porte requires a one-time direct deposit of $1,000+ to open a savings account. New customer $50 bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. OnJuno recently updated their rate tiers, while keeping their promise to existing customers a grandfathered rate. If you don’t maintain a $500 direct deposit each month, you’ll still earn 1.20% on up to $5k. See my updated OnJuno review.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer plus other hoops, but the lesser-known perk is the 1% APY for everyone. Thanks to the readers who helped me understand this. There are several other established high-yield savings accounts at closer to 0.50% APY.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.55% APY. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.30% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Lafayette Federal Credit Union has a 12-month CD at 0.80% APY ($500 min). Early withdrawal penalty is 6 months of interest. Anyone can join this credit union via partner organization ($10 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). Unfortunately, money market fund rates are very low across the board right now. Ultra-short bond funds are another possible alternative, but they are NOT FDIC-insured and may experience short-term losses at times. These numbers are just for reference, not a recommendation.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.01%. Vanguard Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays 0.01% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.31% SEC yield ($3,000 min) and 0.41% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.24% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.36% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 6/2/2021, a new 4-week T-Bill had the equivalent of 0.01% annualized interest and a 52-week T-Bill had the equivalent of 0.05% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.08% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.12% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2021 and October 2021 will earn a 3.54% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2021, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are severely capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore, as I feel the work required and risk of messing up exceeds any small potential benefit.

  • Mango Money pays 6% APY on up to $2,500, if you manage to jump through several hoops. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • The Bank of Denver pays 2.00% APY on up to $25,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. The rate recently dropped. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $50k. Thanks to reader Bill for the updated info.
  • Devon Bank has a Kasasa Checking paying 2.50% APY on up to $10,000, plus a Kasasa savings account paying 2.50% APY on up to $10,000 (and 0.85% APY on up to $50,000). You’ll need at least 12 debit transactions of $3+ and other requirements every month.
  • Presidential Bank pays 2.25% APY on balances up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.40% APY ($10,000 min). Early withdrawal penalty is 1 year of interest. Anyone can join this credit union by joining the National Space Society (free). Note that NASA FCU may perform a hard credit check as part of new member application.
  • Abound Credit Union has a 59-month Share Certificate at 1.30% APY ($500 min) and a special 37-month Share Certificate at 1.15% APY ($500 min). Early withdrawal penalty is 1 year of interest (and only with the consent of the credit union, so be aware). Anyone can join this credit union via partner organization ($10 one-time fee).
  • Lafayette Federal Credit Union has a 5-year CD at 1.26% APY ($500 min). Early withdrawal penalty is 6 months of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I don’t see anything available at a 5-year maturity. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 1.80% APY vs. 1.59% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 6/2/2021, the 20-year Treasury Bond rate was 2.21%.

All rates were checked as of 6/2/2021.

Filed Under: Banking, Deals & Offers, Investing //

Practical Portfolio Rebalancing Tips from Vanguard (+My Rebalancing Strategy)

Posted on May 25, 2021 // 2 Comments

Are stocks too overpriced? Is inflation coming to crush bonds? The media is not incentivized to tell you what is often the best advice: do absolutely nothing. If you still want to take action, consider rebalancing your portfolio. If you’ve stayed invested throughout the last several years, your portfolio may have shifted as in the scenario above:

For example, imagine you selected an asset allocation of 50% stocks and 50% bonds. If 4 years go by during which stocks return an average of 8% a year and bonds 2%, you’ll find that your new asset mix is more like 56% stocks and 44% bonds.

Here are some quick tips about rebalancing your portfolio back towards your target risk level, taken from Vanguard article #1 and Vanguard article #2.

Here are three possible rebalancing strategies:

  • Time: Rebalance your portfolio on a predetermined schedule such as quarterly, semiannually, or annually (not daily or weekly).
  • Threshold: Rebalance your portfolio only when its asset allocation has drifted from its target by a predetermined percentage.
  • Time and threshold: Blend both strategies to further balance your risk.

Here are three practical tips from Vanguard to rebalance with minimal tax drag:

  • Focus on tax-advantaged accounts. Selling investments from a taxable account that’s gained value will most likely mean you’ll owe taxes on the realized gains. To avoid this, you could rebalance within your tax-advantaged accounts only.
  • Rebalance with portfolio cash flows. Direct cash inflows such as dividends and interest into your portfolio’s underweighted asset classes. And when withdrawing from your portfolio, start with your overweighted asset classes. (If you’re age 72 or over, take your required minimum distribution (RMD) from your retirement account(s) while you’re rebalancing your portfolio. You can then reinvest your RMDs in one of your taxable accounts that has an underweighted asset class.)
  • Be mindful of costs. To minimize transaction costs and taxes, you could opt to partially rebalance your portfolio to its target asset allocation. Focusing primarily on shares with a higher cost basis (in taxable accounts) or on asset classes that are extremely overweighted or underweighted will limit both taxes and transaction costs associated with rebalancing.

These tips are very closely related to my own simple rebalancing system. Here’s what my process looks like these days:

  • Only peek once a quarter. I update my Google portfolio spreadsheet and log into Personal Capital once a quarter. Otherwise, try not to track daily movements in my portfolio or the stock market in general. Consuming more information is not always better, as you start to confuse noise vs. signal.
  • Rebalance first with available cash. In my Solo 401k and taxable brokerage accounts, this includes bond interest, dividends, and capital gains distributions. During the accumulation stage, this included regular savings from job income.
  • If the stock/bond ratio is still off by more than 5%, then rebalance more using tax-advantaged accounts. I have multiple asset classes, but for triggering rebalancing, I focus on the overall stocks/bonds ratio during my quarterly check-up. My equities are all “risk on” (including Small Cap Value, Emerging Markets, and REITs) and my bonds are all “risk off” (US Treasuries, TIPS, and FDIC/NCUA-insured CDs only). I can use my 401k balance (including brokerage window), IRAs, and Solo 401k brokerage plan to make adjustments with no capital gains.
  • If absolutely required in a rare case, make taxable sale using specific ID of tax lots. I select the “Specific ID” method at Vanguard to identify the tax lots when selling. I can thus choose to realize a bigger gain when my tax rates are low, and a lesser gain when my tax rates are high.

Rebalancing should be a relatively minor adjustment, but selling 5% can be enough to feel like you took some positive action. (I try to avoid large, sudden changes for any reason, even though I do feel the fear at times.) If stocks go down, you can be happy you sold some stocks while they were “up”. If stocks keep going up, you’ll still be mostly invested and participating in those gains.

Filed Under: Investing, Retirement //
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