Stupidity, Humility, and Stock Picking

Posted on February 20, 2020 // 5 Comments

XCKD’s latest comic is about stock picking and the efficient market hypothesis:

The hidden hover text goes on – On the news a few days later: “Buzz is building around the so-called ‘camping Roomba’ after a big investment. Preorders have spiked, and…”

XKCD is finding humor in the idea that stupidity can be made profitable. But highly efficient markets really do take away the effects of stupidity, because the prices are already adjusted accordingly. You can’t be convinced to buy Apple at $500 a share when it’s trading at $320. On the other hand, if you find success in picking stocks, it’s really hard to separate luck and skill. Humility is in order.

I would also extend the idea of humility to also include skepticism. The promise of easy money solutions anywhere should always ring alarms. It really hurts to read about people being told that buying another new car is the solution to not being able to afford their current car. We have doctors convincing other doctors within Facebook groups to lose millions in a cryptocurrency hedge fund where instead of brokerage statements, they accepted phone screenshots.

Edges are rare. Why does your edge exist? What is your evidence that it exists? Why has nobody else thought of it? How much will it cost to make the bet? If it does exist today, how long will it last? Why is it durable?

In addition, remember the Kelly Criterion and adjust your bet size with the size/confidence level of your edge. Even if you knew with 100% certainty that a coin was biased 60% heads and 40% tails, you could still go bankrupt if you bet improperly! I make some “Fun Money” bets, but they are very small portion of my net worth.

What I like about my retirement portfolio is that I could not touch it for 50 or 100 years, and I wouldn’t worry too much. I can be a little stupid; I don’t need to watch it like a hawk or be a hedge fund genius. My bets are relatively humble.

Filed Under: Investing //

Charlie Munger Daily Journal Annual Meeting 2020 Full Video, Full Transcript, and Notes

Posted on February 17, 2020 // 1 Comment

If you like hearing Warren Buffett and Charlie Munger talk at the Berkshire Hathaway (BRK) annual meeting, you should also watch or listen to Charlie Munger at the Daily Journal (DJCO) annual meeting. DJCO is his personal pet project, and each year he does a Q&A session where he answers any questions by himself. CNBC recorded the full 2020 DJCO annual meeting live (embedded below). I watched the entire 2+ hour session – it’s good but long… might be better as a podcast (although I like to take notes too).

Adam Blum of ValueWalk has generously shared his full transcript as well. It’s very complete so I am too lazy to compete with that. Instead, here are my (often paraphrased) personal notes and highlights:

  • Munger has no idea what the consequences will be that the biggest shareholder in all the biggest companies are index funds.
  • Munger likes the Daily Journal and Costco because it they try to do right by their customers, as opposed to casinos for example that make money by tricking people. You should always take the high road if you can. It’s less crowded.
  • Newspaper are going away, except for maybe the Wall Street Journal and New York Times. This is bad, as now you have misleading opinion media on both sides that just keep spewing hatred. Politics is even sillier than business.
  • Chinese companies are stronger with better growth prospects than US companies. Munger is invested there (and he jokes that you aren’t). Fish where the fish are.
  • Munger is partial to Canada and their working single-payer health care system, especially how they pay lower pharmaceutical prices.
  • There is too much wretched excess in investment management. There are troubles coming.
  • Index funds will still work best for most people, if you can be patient. He notes that the average holding period among Chinese investors is very short. This is not good. He is not a fan of the popularity of gambling among the Chinese.
  • Be a survivor, not a victim. Advocating for reform is important, but on a personal level it is important to to keep plugging along. Munger doesn’t like politicians that get ahead by trying to make everyone feel like a victim. Recognize you are in a bad situation and work to make it better.
  • Munger only knows enough about Crypto to know that he should avoid it. “Too hard” pile.
  • Regarding inflation and interest rates, we should all be modest about our knowledge of economics.
  • No new book recommendations.
  • Munger does not have a hostile attitude towards China. The US should try to get along with China. China should try to get along with the US. As an aside, Munger has admiration for Japan during their 25 years of economic stasis.
  • Learn to change your mind when you are wrong.
  • Tesla – Munger will never buy it, but also never sell it short. Don’t underestimate a man that overestimates himself.
  • We should appreciate our current living standards. What is extra money really going to do for you after you have enough to eat? Medicine has greatly improved. Even with more technological advances, will life be that much better?
  • Munger has no secrets to share about his longevity.
  • His only advice on parenting is to be a good example. Preaching to his kids never worked.
  • On negative interest rates, having worked once, governments will of course try it again, likely to excess.
  • The inversion process. Figure out the easiest ways to make yourself bankrupt, and then avoid them. (Consumer debt? Medical debt?)
  • Munger is known for being rational, yet he 96 years old, enormously rich, and cares a lot about what happens to a little company called the Daily Journal. He calls it insane.
  • Having a two-party political system is good. Power corrupts. It’s better when no one side gets too much power. The ebb and flow is good.
  • American healthcare, in many ways it’s the best in the world. It is powered by a lot of smart hard-working people. However, there is a huge amount of totally unnecessary activity that costs a lot and does nothing or even causes harm. Why? There are big financial incentives to make money with unnecessary care. Change the incentives. The insurance reimbursement system is too opaque. Kaiser system is an example of doing less unnecessary care.
  • People who are deferred gratifiers do better than the impulsive ones that demand immediate gratification. He is afraid the tendency towards one or the other might be genetic.

I actually appreciate when someone admits they don’t know something, as opposed to others who seem to form a strong opinion on everything under the sun. One of Munger’s lessons is that it is important to accept what you don’t know, and make strong bets only on what you do know. That’s the only way to get outsized results.

Filed Under: Inspirational, Investing //

Best Interest Rates on Cash – February 2020

Posted on February 4, 2020 // 13 Comments

Here’s my monthly roundup of the best interest rates on cash for February 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. 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 2/4/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, 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.

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 11-month No Penalty CD at 2.00% APY with a $500 minimum deposit. My eBanc has a 11-month No Penalty CD at 2.00% APY with a $100,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.90% APY with a $25,000 minimum deposit. CIT Bank has a 11-month No Penalty CD at 1.75% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Marcus (GS Bank) has a 12-month CD at 2.15% APY ($500 minimum).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 1.64% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 1.51%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.93% SEC yield ($3,000 min) and 2.03% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.86% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.14% 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.

  • 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 2/3/2020, a 4-week T-Bill had the equivalent of 1.56% annualized interest and a 52-week T-Bill had the equivalent of 1.46% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 1.83% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 1.37% 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. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2019 and April 2020 will earn a 2.22% 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-April 2020, 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.

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 capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. 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.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. 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, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore.

  • Consumers Credit Union Free Rewards Checking (my review) has up to 5.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. Elements Financial has 3% APY on balances up to $20,000 if you make 15 debit card “signature” purchases or other qualifying transactions per statement cycle. Find a locally-restricted rewards checking account at DepositAccounts.
  • If you’re looking for a high-interest checking account without debit card transaction requirements, the rate won’t be nearly as high, but take a look at MemoryBank at 0.90% APY.

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.

  • Hiway Federal Credit Union has a 5-year certificate at 2.71% APY ($25k minimum) and 2.61% APY with a $10,000 minimum. Early withdrawal penalty is 1 year of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • Navy Federal Credit Union has a special 17-month CD at 2.25% APY ($50 minimum + add-on feature up to $75k), but you must have a military affiliation to join (includes being a relative of a veteran).
  • Andrews FCU still has their special 84-month certificate at 3.05% APY. Anyone can join this credit union via partner organization.
  • 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. The rates are not competitive right now. 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. I don’t see anything noteworthy. 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 a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as a hedge against prolonged deflation, but only if you can hold on for 20 years. As of 2/3/2020, the 20-year Treasury Bond rate was 1.84%.

All rates were checked as of 2/4/2020.

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

Investing in International Stocks: More Educational Resources

Posted on February 3, 2020 // Leave a Comment

Want to learn more about investing in markets beyond the US and the S&P 500? Meb Faber of Cambria Investments has a packed Twitter thread summarizing his “6 favorite research pieces of 2019 making the case for global investing”. It may be easier to read in this format. Here are links to the full papers, which I would recommend downloading as PDFs to read and/or reference in case they are later removed. I’ve included one sample graphic from each paper that shows an interesting bit.

Global Investment Returns Yearbook 2019 from Credit Suisse. Chart showing how greatly the markets changed from 1900 to 2019.

Global equity investing: The benefits of diversification and sizing your allocation from Vanguard. Chart showing the historical cap weighting of US vs. international stock markets.

A New Perspective on Geographical Diversification: Revenue Exposure by Region from Morningstar. Chart showing how much revenue came from inside the home country where the companies are based.

Guide to International Investing: How to Go Global in an Uncertain World from Capital Group. Chart showing the different dividend yields of developed international and emerging market companies and indexes.

Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated from Bridgewater Associates. Chart of how country-specific equity performance varied widely across decades.

Are Valuations Now Irrelevant? from Research Affiliates. Chart of their projected long-term returns based on current valuations. What has lagged recently often has the best future prospects.

Filed Under: Investing //

How Your Portfolio Accumulation and Withdrawal Years Are Different

Posted on January 21, 2020 // 15 Comments

The last 10 years of stock market returns have been pretty remarkable. If you invested $100,000 in the S&P 500 in the year 2000 and held it though the dot-com crash and financial crisis, you would be closing in on $300,000 today. However, if you retired in 2000 with a portfolio invested in the S&P 500 and used a 4% withdrawal rate (increasing each year by 3% for inflation), your nest egg would less than $50,000 and on a path to zero!

This stark difference between accumulation and withdrawal modes is illustrated by the chart above, taken from the Blackrock Blog post How to avoid “dollar cost ravaging” in retirement. “Dollar-cost ravaging” is also known as “sequence of return risk”, as explained in the this quote:

Investors have probably heard the term “dollar-cost-averaging,” where you make regularly timed investments to smooth out the risk of “buying high.” Retirees tend to do the opposite. Instead of putting money into their portfolio, they take it out with a regular cadence in the form of income. “Dollar-cost-ravaging” occurs when the market loses value while you’re taking withdrawals, especially in the early years of retirement. Because money is coming out rather than going in, it’s harder for the retiree to recover their losses when markets rebound. We even saw this during one of the most successful bull markets in our history over the past decade. The sequence of returns matters, and the biggest challenge is a bear market early in your retirement.

Unfortunately, there is no easy solution to this problem. This is what the article offers: “Striking the right balance to limit your losses in a declining market is just as important as capturing growth when the market is strong.” In other words, don’t hold too much in stocks, but also not too little. You can more easily weather a recession when you are still working and saving then when you are spending it down. I think more important advice is that you should be ready to withdraw less money out of your portfolio if the market tanks early on in your retirement withdrawal phase. Don’t follow a rigid withdrawal rule from some academic study into oblivion!

Filed Under: Investing, Retirement //

Best Interest Rates on Cash – January 2020

Posted on January 9, 2020 // 4 Comments

Here’s my monthly roundup of the best interest rates on cash for January 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. 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 1/9/2020.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, 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.

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 Bank has a 11-month No Penalty CD at 2.00% APY with a $500 minimum deposit. My eBanc has a 11-month No Penalty CD at 2.00% APY with a $100,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.85% APY with a $25,000 minimum deposit. CIT Bank has a 11-month No Penalty CD at 1.75% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Quontic Bank has a 12-month CD at 2.20% APY ($1,000 minimum).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 1.69% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 1.54%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 2.00% SEC yield ($3,000 min) and 2.16% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.97% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.25% 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.

  • 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 1/9/2020, a 4-week T-Bill had the equivalent of 1.53% annualized interest and a 52-week T-Bill had the equivalent of 1.54% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 1.83% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 1.38% 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. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2019 and April 2020 will earn a 2.22% 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-April 2020, 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.

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 capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. 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.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. 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, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore.

  • Consumers Credit Union Free Rewards Checking (my review) has up to 5.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. TAB Bank Kasasa Cash Checking has 4.00% APY on balances up to $50,000 if you make 1 ACH transfer and 15+ debit card purchases of $5+ each month, but read their vague fine print first. Find a locally-restricted rewards checking account at DepositAccounts.
  • If you’re looking for a high-interest checking account without debit card transaction requirements, the rate won’t be nearly as high, but take a look at MemoryBank at 0.90% APY.

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.

  • Financial Partners Credit Union (LFCU) has a 5-year Jumbo certificate at 3.00% APY ($100k minimum) and 2.85% APY with a $1,000 minimum. As with many credit union specials, this likely won’t last long. Anyone can join this credit union via partner organization American Consumer Council ($8 one-time fee).
  • Navy Federal Credit Union has a special 37-month IRA CD at 3.00% APY ($50 minimum + add-on feature), but you must have a military affiliation to join (includes being a relative of a veteran).
  • Andrews FCU still has their special 84-month certificate at 3.05% APY. Anyone can join this credit union via partner organization.
  • 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. The rates are not competitive right now. Watch out for 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. I don’t see anything noteworthy. 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 a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as a hedge against prolonged deflation, but only if you can hold on for 20 years. As of 1/9/2020, the 20-year Treasury Bond rate was 2.17%.

All rates were checked as of 1/9/2020.

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

Low Stock Market Return Expectations For The Next Decade (2020-2030)

Posted on January 8, 2020 // 1 Comment

We’ve seen that stock market investors have been rewarded for investing regularly during the last decade. $10,000 invested in the Vanguard Target Retirement 2045 fund in January 2010 would have grown to $25,000 in January 2020. $10,000 invested in the Vanguard S&P 500 Index fund would have grown to $35,000 from 2010-2020!

However, the FactorResearch article Global Pension Funds: The Coming Storm summarizes why we should have more reasonable expectations for the next decade. First up, we have low interest rates. If you have low interest rates now, then your future bond returns are highly likely to be similarly low.

For stocks, we have a historically low earnings yield (or historically high P/E ratio). While the correlation is not as high, a low earnings yield usually leads to low future equity returns:

Based on this combination of low starting interest rates and low starting earnings yield, the author’s model predicts an annualized average return of 3.1% nominal for a traditional 60% stocks/40% bonds portfolio over the next 10 years.

(Time to set a reminder for 1/1/2030!)

These predictions can be dangerous in terms of market timing. Low interest rates and relatively high valuations were also true a year ago, but then the US stock market went up another 30%! If you avoided stocks, you would have missed a huge gain only to find yourself with even lower forward return expectations. Returns are lumpy – there might be only a few big positive years and many negative years to average out to a 5% return. What if you just missed one of the huge positive years?

My only takeaway is to maintain both stock market exposure and reasonable expectations. Various factors combined to make 2019 a big year for stocks (and most other major asset classes) and I’ll certainly take it, but also remember that it won’t be like that every year. There is a quote that happiness = reality minus expectations. For investing, maybe it changes to: likeliness of panic selling = reality minus expectations.

Filed Under: Investing //

What If You Invested $10,000 Every Year For the Last 10 Years? 2010-2019

Posted on January 6, 2020 // 2 Comments

Now that you’re done reading articles about what happened in 2019, how about stepping back and taking in the longer view? Most successful savers invest money each year over a long period of time, these days often into a target-date fund (TDF). It may not get you doing silly things on a super-yacht, but this slow-and-steady behavior is a perfectly legitimate way to build wealth. Not everyone gets rich with IPOs or Bitcoin.

Investment benchmark. I chose the Vanguard Target Retirement 2045 Fund as this all-in-one fund is low-cost, highly diversified, and available both inside many employer retirement plans and anyone with an IRA. During the early accumulation phase, this fund holds 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice in a world of mediocre, overpriced options.

Investment amount. For the last decade, the maximum allowable annual contribution to a Traditional or Roth IRA has been roughly $5,000 per person. The maximum allowable annual contribution for a 401k, 403b, or TSP plan has been over $10,000 per person. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark. Therefore, I’m going to use $10,000 as a benchmark amount. This round number also makes it easy to multiply the results as needed to match your own situation.

A decade of real-world savings. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years? You’d have put in $100,000 over time, but in more manageable increments. With the interactive tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year for the last decade would have resulted in a total balance of $174,000. That breaks down to $100k in contributions + $74k investment growth.

Are you a dual-income household that can put away more? If you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, you would have a total balance of $700,000! That breaks down to $400k in contributions + $300k investment growth.

Bonus: 15 years of real-world savings. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 15 years instead? (Now $150,000 total.) This is a self-centered inclusion as it has now been 20 years since I graduated college and 15 years since starting this blog. Here are the extended return numbers:

Investing $10,000 every year for the last decade and a half would have resulted in a total balance of $307,000. That breaks down to $150k in contributions + $157k investment growth. Your gains are now officially more than what you initially invested!

Are you a dual-income household that can put away more? If you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, you would have a total balance of over $1,200,000! That breaks down to $600k in contributions + $620k investment growth.

Timing still matters, but not as much as you might think due to the dollar-cost averaging and longer time horizon. Yes, the last decade has been a great run for US stock markets. But Vanguard Target funds also own a lot of international stocks, which haven’t been nearly as hot and have maintained lower valuations. More importantly, you can’t control that part. You have much more control over how much you save. Here are my previous “saving for a decade” posts:

Work on improving your career skills (or start your own business), save a big chunk of your income, and then invest it in productive assets. Keep calm and repeat. Our path to financial freedom can be mostly explained by such behavior. The only “secret” here is consistency. We have maxed out both IRA and the 401k salary deferral limits nearly every year since 2004. No inheritances, no special access to a hedge fund. You can build serious wealth with something as accessible and boring as the Vanguard Target Retirement fund.

Filed Under: Investing, Retirement //

Major Asset Class Returns, 2019 Year-End Review

Posted on January 1, 2020 // 8 Comments

yearendreview

I used to add up my net worth every month (if not more frequently), but nowadays I limit myself to quarterly portfolio checks to coincide roughly with when my dividends arrive. There is so much daily noise about stock market prices these days that I’ve found it much more relaxing this way. However, I do enjoy a brief reflection at the end of the year. Here are the annual returns for select asset classes as benchmarked by ETFs per Morningstar after market close 12/31/19.

Commentary. As of 2017 year-end, the performance of every asset class was positive. The lowest positive return was from short-term US Treasuries. As of 2018 year-end, the performance of nearly every asset class was negative. The highest return was from short-term US Treasuries.

As of 2019 year-end, we find ourselves again in a situation where the return of nearly every major asset class was positive. And yet again, the lowest positive return was from short-term US Treasuries. Short-term Treasury bonds are slow, steady, and safe… but you also need to be in the risky asset game to reap the rewards when things are hot.

The Vanguard Target Retirement 2045 fund (roughly 90% diversified stocks and 10% bonds) was up 21.4% in 2017, down 7.9% in 2018, and up 24.9% in 2019. The benchmark for our personal portfolio, a more conservative mix of 70% stocks/30% bonds as we are close to living off it, was up 17.1% in 2017, down 5.9% in 2018, and up 21.2% in 2019.

The more stocks keep going up, the more we are reminded that eventually they will go down again. There remains a lot of anxiety about a recession looming around the corner. A famous quote (perhaps by Gary Shilling?) states that “Markets can stay irrational longer than you can stay solvent.” This is usually brought up during stock market crashes, but also applies during bull markets. Yes, stocks will have another bad streak eventually, and future 10-year returns do look rather tepid, but you can also miss out on big gains while sitting on the sidelines waiting for that to happen.

I won’t lie – I am pleasantly surprised at my brokerage statement this year, but I’m also wary about future returns. What keeps me owning a big chunk of stocks is that I am confident that the hundreds of business that I own through these ETFs and mutual funds will collectively make a profit, reinvest some of it to keep growing, and distribute some of it to me in the form of cash dividends. I am also confident that my US government bonds, municipal bonds, and FDIC/NCUA-insured bank certificates will keep the panic if a market drop does come.

Filed Under: Investing //

My Money Blog Portfolio Income Update – December 2019 (Q4)

Posted on December 26, 2019 // 3 Comments

dividendmono225

How do you turn a pile of money into income for the rest of your life? I have read hundreds of articles about this topic, and have found no ideal solution. Much of the advice applies to those aged 65+, but what about someone in their 40s with a much longer time horizon?

During the accumulation phase, I believe a 3% withdrawal rate remains a reasonable target for something retiring young (before age 50) and a 4% withdrawal rate is a reasonable target for one retiring at a more traditional age (closer to 65). If you are not close to retirement, your time is better spent focusing on your earning potential via better career moves, investing in your skillset, and/or look for entrepreneurial opportunities where you own equity in a business.

My crude and simple solution is to first build a portfolio designed for total return, and then spend the income. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Bond interest from high-quality IOUs are more reliable, but won’t rise as quickly.

As you’ll see below, my portfolio distributes about 2.5% in the form of dividends and interest. If we were to stop working, we would then take out another 0.5% by selling a few shares and then we’d have our 3%. Right now, we are both still employed and thus we withdraw less than 2.5%, so we don’t have to sell anything.

I track the “TTM Yield” or “12-Month Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my investment portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 12/24/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.71% 0.43%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.95% 0.10%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.92% 0.73%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.71% 0.14%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.12% 0.19%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 2.23% 0.38%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.96% 0.33%
Totals 100% 2.30%

 

Here is a chart showing how this 12-month trailing income rate has varied over the last five years.

One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. I see it as a very conservative, valuation-based withdrawal rate metric due to our very long retirement horizon of 40+ years.

What’s not shown in the chart above is how the total income rises as the portfolio value rises. I have a chart of my portfolio income as well, but it mixes in my own contributions so it doesn’t present a clear picture.

In practical terms, I let all of my dividends and interest accumulate without automatic reinvestment. I treat this money as my “paycheck”. Then, as with my real paycheck, I can choose to either spend it or reinvest in more stocks and bonds.

The income from our portfolio lets us “work less and live more” now as I now fear running out of time more than running out of money. We use our nest egg to allow us to work less hours in a more flexible manner as parents of young children. We are very fortunate to be in this situation, although I’ve also been working towards this goal steadily for 15 years! Others may use their portfolio income to start a new business, travel around the world, sit on a beach, do charity or volunteer work, and so on.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio Asset Allocation Update, December 2019 (Q4)

Posted on December 22, 2019 // 22 Comments

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Plenty of people will tell you what you should own, but I’d rather they just share what they actually own. Here’s my year-end portfolio update for Q4 2019, including all of our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. Dividends tend to arrive on a quarterly basis, and this helps determine where to invest new cash to rebalance back towards our target asset allocation.

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 accounts, adds up my balances, tracks my performance, and calculates my asset allocation. I still use 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 my YTD performance and current asset allocation visually, 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)
WisdomTree SmallCap Dividend (DES)
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 securities
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 past will necessarily create superior future returns. I mainly make sure that I own 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 make a small bet that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than the more large and broad indexes, although I could be wrong.

While you could argue for various other asset classes, I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith through those fearful times. I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% US Treasury Bonds, intermediate
  • 33% High-Quality Municipal Bonds (taxable)
  • 33% US Treasury Inflation-Protected Bonds (tax-deferred)

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 will 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 minimize management fees, commissions, and taxes.

Holdings commentary. I know that US stock valuations are on the higher side, but this year of all-time US highs is another reminder that you still need to stay in the game. My forward expectations for US stock returns are muted, but I’m not selling a single share. International stocks have also hit an all-time high, but nobody really noticed because US stocks have still outperformed by a long shot this decade. I remain satisfied with my mix, knowing that I will own whatever successful businesses come out of the US, Europe, China, or wherever in the future.

On the bond side, my primary objective remains to hold high-quality bonds with a short-to-intermediate duration of under 5 years or so. This means US Treasuries, TIPS, or investment-grade municipal bonds. FDIC or NCUA-insured certificates would also fit in there. I don’t want to worry about my bonds. I then tweak the specific breakdown based on my tax-deferred space available, the tax-effective rates of muni bonds, and the real interest rates of TIPS. Right now, it is roughly 1/3rd Treasuries, 1/3 Muni bonds, and 1/3rd TIPS.

Performance numbers. According to Personal Capital, my portfolio went up +19% so far in 2019. I see that during the same period the S&P 500 has gone up +29%, Foreign Developed stocks up +21%, and the US Aggregate bond index was up about +10%.

An alternative benchmark for my portfolio is 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 +20.9% for 2019 YTD.

The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses. I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Long Cycles and Hot Asset Classes: Large Cap Growth vs. Value Stocks

Posted on December 18, 2019 // Leave a Comment

As this decade comes to an end, I find it noteworthy that Large-Cap Growth stocks have outperformed Large-Cap Value stocks during most of the the 2010s. When I first started learning about investing in the previous decade of the 2000s, much was made of how Large-Cap Value stocks historically outperformed Growth. You can see this cyclical behavior below, taken from this Morningstar article:

Similar to economic cycles, growth and value stocks have alternated leadership roles based on past performance, as shown here over the rolling three-year periods starting 1973. While value beat growth during the 2000s, the trend reversed in the 2010s as growth outperformed value and continues to post large gains year-to-date 2019. Nonetheless, it’s challenging to predict whether the growth’s premium over value will persist, given the irregularity of the cycles.

Nowadays, when I read about some factor that provides a superior long-term average return, I often wonder if its simply that a hot streak of recent outperformance has tilted it towards one side over another. What if it’s just part of a long cycle that eventually goes the other way? It was only after 2009 that long-term bonds and gold came back as desirable asset classes. Before that, it was commodities. Of course, there are all the ways that stocks are split up – US/International, Large/Small, Value/Growth, Momentum, Volatility, and so on.

From a previous post US vs. International Stocks: Historical Cycles of Outperformance:

us_intl_cycle

Bottom line. Large Value stocks did great during the 2000s, but Large Growth stocks dominated the 2010s. Have some healthy skepticism regarding “hot” asset classes, as the trend may not last and indeed may turn around just as you make the switch.

Filed Under: Investing //
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