Big List of Anti-Lists: Asset Classes NOT Owned By Some Experienced Investors

Posted on August 20, 2023 // 5 Comments

Every asset class has its energetic supporters, from rental properties to altcoins to gold. Listening to each group, you may feel that you need to own every asset class in order to be “diversified”. However, sometimes less is more, and it can be useful to read about why many seasoned veterans consciously avoid certain corners of the investment world. I find it a refreshingly different perspective, even if I may or may not agree. Everyone’s needs are different, and I own several of the things below myself. Here are a few lists along with supporting arguments.

William Bernstein – MD, author and wealth manager. I compiled this list while listening to the linked interview.

  • Commodities Futures
  • Individual Stocks
  • Corporate bonds
  • Long-term bonds
  • Fixed annuities

Jonathan Clements – financial author and long-time WSJ columnist

  • Savings bonds.
  • Long-term bonds.
  • High-yield “junk” bonds.
  • Municipal bonds.
  • International bonds.
  • Individual stocks.
  • Immediate fixed annuities (but he does plan to buy some eventually).
  • Deferred income annuities.
  • Gold
  • Commodities
  • Real Estate Investment Trusts (REITs)
  • Rental properties.
  • Long-term-care insurance.
  • Life insurance.
  • Disability insurance.
  • Flood insurance.

Amy Arnott – CFA, portfolio strategist for Morningstar Research

  • Actively Managed Funds
  • Real Estate Investment Trusts (REITs)
  • Sector Funds
  • Alternative Investments
  • I Bonds
  • High-Yield Bonds
  • Gold

Let me know if you come across any other “What I Don’t Own” lists.

[Image credit: Amazon]

Filed Under: Investing, Retirement //

What’s Your Retirement Mindset? Escaping From vs. Escaping To

Posted on August 18, 2023 // Leave a Comment

In a recent Outside magazine article, the author examined research about how activities can be either positive or negative, not based on the actual activity itself, but your mindset while doing them. For example, exercising could be negative, while playing video games could be positive.

Stenseng’s view, which he first laid out in a 2012 paper, is that we should broaden our concept of escapism to include both negative and positive elements, which he dubbed self-suppression and self-expansion. The former is when you’re running away from bad feelings; the latter is when you’re seeking out good feelings.

Earlier this year in the journal Frontiers in Psychology, Stenseng and his colleagues published a study of 227 recreational runners, in which they tried to tease out the signs of self-suppressing and self-expanding escapism with a series of questionnaires. Runners who agreed with statements like “When I run, I try to learn new things about myself” or “When I run, I open up for experiences that enrich my life” were demonstrating self-expansion. Those who agreed with “When I run, I shut out the difficult things I do not want to think about,” on the other hand, were self-suppressing.

This concept also connects with the pursuit of financial freedom and retirement:

The most powerful message that I take from Stenseng’s work is the distinction between avoidance and approach—between escaping from and escaping to.

What is your primary reason for pursuing financial freedom? If you’re focusing on the negative aspects of your job – horrible bosses, annoying customers, long hours, stressful work, inadequate paycheck, then you are trying to escape from your bad job. That can be a good initial motivator, but it won’t sustain you for very long. You’ll be miserable and prone to burnout. If you do make it to retirement, you might still find yourself searching to ways to fill the day.

This research supports the idea that healthier approach is to start exploring and finding out where you want to escape to. Commit energy into finding a better job laterally and/or entire career switch. Connect with friends and ask about any opportunities. Look at the hobbies you enjoy and pick apart what you like about them. You have to find the “good enough” job that makes the saving phase more like auto-pilot. Even for very early retirees, you are looking at 15-20 years of work. Don’t spend it with people you don’t like or respect. In the end, it’s the retirees with engaging hobbies and friends that are the happy ones.

The August 2023 issue of Costco Connection profiles the second “what if” careers of several different folks. Bank executive turned woodworker. Teacher turned baker. TV producer turned college professor.

Filed Under: Happiness, Retirement //

TIPS Real Yields ~2% Across All Maturities; 4.4% Guaranteed 30-Year Withdrawal Rate

Posted on August 15, 2023 // 5 Comments

One of my regular bookmarks is the TIPS real yield page (along with the regular Treasury yields). I noticed that the real yield on the 30-year TIPS has nudged above the 2% mark:

At the same time, the 30-year regular Treasury is at 4.3%, making the break-even annual inflation rate about 2.3%. Over the next 30 years, I’d take the over on that, or at least take some insurance out on the possibility of high inflation.

In addition, as David Enna of Tipswatch points out, this is the first time in a long while that all the various maturities (5/10/30 year shown below) are all around 2%.

If you wanted to, you can again construct a ladder of TIPS that will provide you a guaranteed inflation-protected income over the next 30 years (including spending down your principal) of over 4% above inflation (~4.4% as of this writing, as rates are higher today that at the time of writing for that post).

That means if you put $1,000,000 into a 30-year TIPS ladder right now, you can create ~$44,000 income for year 1 and then another ~$44,000 adjusted for inflation (CPI-U) annually for the next 29 years. All fully backed by the US government. No stock market volatility. No chance of annuity insurance company failure. Check out TipsLadder.com and Eyebonds.info if you are ready to get deep into the details.

While I am not looking into investing a lump sum into a TIPS ladder, I do own both regular US Treasuries and TIPS to provide the stable, guaranteed growth portion of my portfolio. (I’m roughly 70% stocks and 30% bonds.) If I’m getting guaranteed 5% growth from US Treasuries and guaranteed 2% + inflation from TIPS, I’m pretty happy with that for the safe part of my portfolio.

I am taking this opportunity rebalance my existing bond holdings and free cash to create an overall longer duration for my TIPS. I want to lock in that 2% real yield across longer maturities while it is available. Real yields might go even higher, but I’m more worried about it going lower than higher.

Filed Under: Investing, Retirement //

MMB Portfolio 2023 2nd Quarter Update: Dividend & Interest Income

Posted on July 6, 2023 // 3 Comments

Here’s my 2023 Q2 income update for my MMB Portfolio. I prefer to track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine my portfolio as a factory that churns out dollar bills, a tree that gives dividend fruit.

Recently, I came across this ETF Trends interview with Ryan Krueger of Freedom Day Solutions. While I don’t own the MBOX ETF, I do feel aligned with their overall philosophy of watching dividend growth. (I prefer to let the market figure things out via broad passive index fund, rather than active management.)

Crigger: What is the concept of a “Freedom Day”? And how is it different than a retirement age?

Krueger: In one sentence: Freedom Day isn’t about what asset level to retire at, but about what income number. Frankly, I don’t think retirement should be an age thing, anyway. Why not retire at 50—or if you really love what you’re doing, why not 80 or 90?

Freedom Day is our mathematical version of something better than retirement. It’s the day when your cash flow exceeds your outflows; when you finally know for certain enough is enough.

But it all comes back to income. Advisors’ biggest challenge right now is figuring out how to generate increasing income flows for their clients. As a result, investors are reaching for yield, and taking risks they might not realize are there, all to try to catch up and get that 4-5% withdrawal rate. But if you dig your income well before you’re thirsty, rising dividends oer the potential to be larger than withdrawal rates – and that’s free cash flow, not withdrawing.

Background about why I track dividends. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS).

The dividend yield (dividends divided by price) also serve as a rough valuation metric. 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. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. – Jack Bogle

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would started out paying ~$24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the dividends/interest every quarter but added no other contributions, as of July 2023 it would have generated ~$51,000 in annual income over the previous 12 months.
  • Even if I SPENT all the dividends/interest every quarter and added no other contributions, as of July 2023 it would have generated ~$39,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has increased over time and with dividend reinvestment. Note that these are nominal values and interest rates and inflation have risen more recently.

I’m using simple numbers to illustrate things, but isn’t that a more pleasant way to track your progress?

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 4/2/23), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 30% 1.51% 0.45%
US Small Value (VBR) 5% 2.22% 0.11%
Int’l Total Stock (VXUS) 20% 2.94% 0.59%
Int’l Small Value (AVDV/EYLD) 5% 5.68% 0.28%
US Real Estate (VNQ) 10% 4.52% 0.45%
Inter-Term US Treasury Bonds (VGIT) 15% 2.22% 0.33%
Inflation-Linked Treasury Bonds (TIP) 15% 4.32% 0.65%
Totals 100% 2.87%

 

My ttm portfolio yield is now roughly 2.87%, a bit lower than last quarter’s value. That means if my portfolio had a value of $1,000,000 today, I would have received $28,700 in dividends and interest over the last 12 months. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.)

What about the 4% rule? For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a quick and dirty target, not a number sent down from the heavens. During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am trying to fully appreciate the “my kids still think I’m cool and want to spend time with me” period of my life. It won’t last much longer. I am consciously choosing to work when they are at school but also consciously turning down work that doesn’t fit my priorities and goals. This portfolio income helps me do that.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio 2023 2nd Quarter Update: Asset Allocation & Performance

Posted on July 4, 2023 // Leave a Comment

Here’s my quarterly update on my current investment holdings at the end of 2023 Q2, including our 401k/403b/IRAs and taxable brokerage accounts but excluding our primary residence and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real-world, imperfect, low-cost, diversified DIY portfolio.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
Here’s how I track my portfolio across multiple brokers and account types. There are limited free options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard (previously known as Personal Capital) and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have an archive of my holdings dating back many years.

2023 Q2 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Holdings” and “Allocation” tabs of my Empower Personal Dashboard.

Humble Portfolio Background. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Charlie Munger believes that only 5% of professional money managers have the skill required to consistently beat the index averages after costs.

If beating a “simple, unsophisticated” Target Retirement Index Fund was so easy, they should simply charge money for it. You give me 2% outperformance, and I’ll pay you 1%. You simply have to cover any and all losses if you happen to underperform the “simple, unsophisticated” index fund. Isn’t it strange how nobody would take that deal?

Instead, by paying minimal costs including management fees, transaction spreads, and tax drag, you can essentially guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets 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 businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the broad funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. 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. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

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. You’ll find that whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. My goal is more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target asset allocation.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 15% US Treasury Nominal Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Details. According to Empower, my portfolio went up about 8.8% YTD to 7/4/2023. The S&P 500 is up 16% YTD, while the US Bond index is up about 2%. Remaining invested with stocks has paid off this year significantly more than worrying about the details of Treasury bills and cash rate-chasing.

There was only minor rebalancing with cashflows (mostly dividends) this quarter. I loosely keep up with the new DFA and Avantis ETFs that come out, but am somewhat limited in what I buy as I have lot of capital gains built up right now. DFA has an International Small Cap Value ETF (DISV) and an Emerging Markets Value ETF (DFEV). Avantis also has an Avantis International Small Cap Value ETF (AVDV) and Avantis Emerging Markets Value ETF (AVES). I’ll keep them in mind if there are future drops and other tax loss harvesting opportunities.

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

Filed Under: Goals, Investing, Retirement //

Why I Don’t Use Covered Calls As a Retirement Income Strategy

Posted on June 8, 2023 // 19 Comments

Eventually, you will be presented with the idea of writing covered calls on your portfolio and earning “easy income” from this strategy. I already know intuitively that there must be a cost to this “passive income” and that the net effect is worse performance than simply holding the same index fund or stock for the long term. However, the pushback is usually that you can get a more reliable cashflow in exchange for giving up some of your upside.

The article The Hidden Cost of Covered Call Writing (via Abnormal Returns) does a good job of explaining why there is unfortunately no “free lunch” with this strategy, even if your goal is to create steady income.

Many investors focus on the call premium as a source of portfolio “income” while still participating in a limited amount of appreciation of the stock. As long as the stock stays below the strike price and the call expires worthless, the strategy can generate positive portfolio income, making it ideal for flat or down markets. However, trying to time when stocks and markets will be flat or down is extremely difficult, particularly given the long-term upward bias of the equity markets. As such, there is a hidden cost of covered call writing, which is the potentially significant opportunity cost of having the stock go above the strike price causing lost portfolio appreciation.

Covered calls work great when they work out, since you get to keep your stock and the “free income”. Giving up your upside may seem like a good deal, but you must realize that much of the stock market’s return comes from lumpy periods where it shoots up without warning.

The chart below from the article compares the performance results between simply withdrawing 3% a year from your S&P 500 portfolio from 2013 to 2022, as opposed to writing covered calls with a 3% yield on your S&P 500 portfolio. The chart does add a 0.75% annual management fee for this approach, but even if you add that back in, the difference is still 11.3% vs. 9.2% annualized return.

Lower volatility is also commonly cited as a benefit of a covered call strategy. Well, yeah, if you limit your upside every time the strike price is exceeded, then you will have lower volatility.

In a rising market, covered calls may actually reduce upside portfolio volatility, which is the type of volatility that investors benefit from. As such, when evaluating covered call strategies that show lower volatility statistics than the broader market, investors should be mindful of where that volatility reduction may be coming from.

Am I willing to give up 2% in annual returns for a steady income? Nope. I mean, 2% is already roughly the entire dividend yield of the S&P 500. The problem is that most people who use this strategy aren’t properly tracking their performance and probably won’t know if they are lagging behind simple buy and hold. The call premium income comes in most of the time, so it’s easy not to realize the true cost of missing out on the gains.

There are certainly scenarios where if you think you have an information edge, knowing how to structure an option can help you make the right bet. But they aren’t magic! I am very skeptical of the idea of any options strategy that will somehow give you reliable income without a significant cost of hurting your total returns. That just gives me the same feeling of someone who claims to invent a machine that defies a basic law of physics.

Filed Under: Investing, Retirement //

Do US Stock Dividends Grow Faster Than Inflation? (1927-2021)

Posted on May 12, 2023 // 3 Comments

The hard problem of retirement planning continues to be how to turn a pile of assets (like in a 401k plan) into the maximum reliable income stream for decades without running out of money. Historically, companies that pay a high-yet-reliable dividend have been referred to as “widow and orphan” stocks. The academic paper Why Dividends Matter by Paul Schultz explores the underpinnings of this practice, including the “implicit contract” between the company and shareholders that “you can consume at the level of the dividend for the foreseeable future without fear of running out of money.” The debate about investing based on dividends will not be resolved by this paper, but here are a few quotes:

It is not necessary to think that a practice of consuming only from dividends is a result of limited rationality, biases, or mental accounting. When firms establish a quarterly dividend, they implicitly tell investors that they can consume at the level of the dividend for the foreseeable future. So, investors who want to smooth consumption can do so by consuming dividends.

As a whole, the investors in this survey are far more concerned about the danger of depleting assets by selling stock, than by spending dividends. This is why investors like dividends. They allow to investors to smooth consumption by indicating how much they can consume without depleting assets.

Now that we have many ways to backtest historical stocks returns, the popular counter-argument is that we have other ways to decide how much is “safe” to withdraw, and that amount is often more that the current dividend yield available. We can simply some stock shares as needed if the dividend is not enough. Which is the better way to decide how much is safe to withdraw?

Historically, do dividend payouts keep up with inflation? This would seem to be important if investors are only spending the dividends every year. Otherwise, they would eventually need to sell shares of stock anyway. Table I of the paper “Changes in Dividends and Inflation” covers this using CRSP data for all US stocks. Hat tip to Klement on Investing, who converted Table I into a nice visual chart:

Over the past nearly 100 years, the dividend growth rate has mostly matched inflation. Dividend growth did fall behind inflation during the period of 1970s high inflation. In turn, dividends have grown much faster than (historically low) inflation in the last 20 years.

Here’s another chart from Hartford Funds which separates the portion of S&P 500 total market returns into share price appreciation and dividends.

I would note that these charts cover the broad US stock market, not just a subset of high-dividend stocks nor international stocks. I certainly don’t think we can get away with buying only the highest dividend-yielding stocks and calling it a day. However, I do believe that dividend payouts are is a useful data point to consider, amongst many others. I tend to pay attention to the dividend yield on the S&P 500 and also certain indexes like those tracked by the Vanguard Value Index Fund ETF. I also expect the dividends on both to grow more or less with inflation over the long run.

Even Vanguard’s founder Jack Bogle had the following to say (source):

But you ought to think about all sources of your retirement income. Having said that, when you own an equity portfolio, don’t get into it for market reasons, get into it for income reasons. Oversimplifying, what you want to do when you retire is walk out to the mailbox on Social Security day and on dividend payment day for the funds—assuming they’re the same day—and make sure you have two envelopes out there. One is your fund dividend and the other is your Social Security check. The Social Security will keep up with inflation year after year, and dividends are likely to increase year after year. They have been going up. Every once in a while there is an interruption, such as the Great Depression of the early 1930s. And many bank stocks eliminated their dividends in 2008, so there was obviously a drop. But it has long since recovered, and then some.

Bet on the dividends, and not on the market price. You’ve got those two envelopes and that’s your retirement. If you have a pension plan (one that is not likely to go bankrupt—and a lot of them are likely to) that is a third envelope. You want to be concerned about whether you have enough income to pay utility bills, pay for your food, pay your rent or your mortgage, whatever it might be, every month. You want income to help you pay those bills. And in the retirement stage, that’s what investing should be about—regular checks from dividends and/or from Social Security and/or from a pension account.

Filed Under: Investing, Retirement //

Fidelity Money Transfer Lockdown: Block Fraudulent ACAT Transfer Brokerage Scams

Posted on May 4, 2023 // 21 Comments

For the average person, the most valuable information may be knowing how to identify and avoid the most current financial scams. Nearly everyone I know has either been targeted or has become a victim of one of these scams, and I am betting many people who lost money are too embarrassed to admit it publicly. (Literally in the middle of writing this post, I received another scam call.)

One scam that you may not have heard of is the ACAT Transfer scam. A thief will obtain enough of your personal information to open a new E*Trade brokerage account, and then they will request an ACAT transfer of the entire contents of your existing brokerage account (ex. Fidelity) to that new fake E*Trade account which they control. At this point, they can quickly liquidate the account and send the money elsewhere. The key here is that they just need to be able to open an empty, new brokerage account in your name plus find your Fidelity account numbers from a statement. They don’t need your Fidelity username and password (or pass two-factor authentication).

Even more importantly, you won’t notice unless you log into your account. Opening a new E*Trade or other brokerage account will not trigger a credit alert or most identity protection services. Many brokers (see below) will process an outgoing ACAT transfer without confirming with you or even notifying you in any way. If you don’t look at your statements closely, it may be months or longer before you notice.

You can read about the experiences of multiple victims in this Reddit thread. Here’s a partial quote in case the thread is deleted.

Lost around 150k worth of stock from my fidelity brokerage account to an online scam (ACATS Transfer)

My husband has a fidelity brokerage account and last month all his shares were transferred out of his account. Upon calling the customer care, we were told that his stocks were transferred by him to an account with eTrade.

We communicated that we don’t have any e-trade account and the transfer was not initiated by us. We were shocked that no notification/intimation was sent to us before completing the transfer and no authorization was required!!

It looks like a fake account was created in his name with eTrade which initiated an account transfer. He did not receive any request/emails/text from Fidelity that the stocks are being moved. The etrade account has been frozen but the stocks are already sold and proceeds are transferred to another account.

The good news is that the original poster was eventually able to get back their funds, although it must have been a very stressful two months. It is not clear if Fidelity reimbursed them out of their own pockets or were able to reverse the transactions.

We were able to recover the stocks after waiting and following up for 2 months. Fidelity reps were able able to help us.

The discussion pointed out the potential usefulness of a relatively unique Fidelity feature called Money Transfer Lockdown (Fidelity login required). Here is a summary of the features and how to activate it per Fidelity:

Money Transfer Lockdown, an additional security measure Fidelity provides to its customers, may affect or disallow certain types of transactions. In order to transfer between two of your Fidelity accounts (In your example brokerage and CMA) when Money Transfer Lockdown is enabled, you will need to temporarily disable the feature prior to making the transaction. Once you have successfully made the transfer, you can enable the lockdown again by logging in into your Fidelity.com account anytime and visit “Security Center” from your “Profile” page.

Protected Transactions:

  • Outbound money transfers
  • Transfers between Fidelity accounts
  • Transfer of shares and assets to other institutions
  • Individual withdrawals (previously scheduled EFT transfers from an account might still be processed)

Unaffected Transactions:

  • Deposits or transfers into a Fidelity account
  • Checkwriting and direct debits
  • Debit/ATM transactions
  • Trading
  • Scheduled Required Minimum Distribution (RMD) or Personal Automatic Withdrawal plan
  • BillPay

A member of the Bogleheads forum helpfully tested out this service by attempting various transfers out of their “locked” Fidelity account. The Money Transfer Lockdown service did successfully block a legitimate ACAT transfer request from another brokerage. However, ACH pulls went through for those accounts that have routing and account numbers like a traditional bank account. Here are their brief conclusions:

Fidelity’s account lockdown blocks fraudulent ACATS pulls. It is an excellent, differential feature that Schwab and Vanguard don’t have. However, it has some limitations and vulnerabilities. It provides no extra security against fraudulent push of assets and doesn’t block fraudulent ACH pulls. To deal with ACH limitations, using CMA as an intermediary account from brokerage to the external world may be prudent.

As a result, I have taken to using the Money Transfer Lockdown service on all available account types (doesn’t work on 401k accounts, for example). It’s a little extra hassle, but definitely worth the added peace of mind. I hope that Vanguard and other brokers will add a similar feature to make it harder to perform an ACAT transfer without notice. I also believe that Fidelity would do a much better job of working to restore my assets than any other broker, especially the smaller brokers.

Now, if someone gains full access to your Fidelity account (username + password + 2FA), they can simply turn off the Lockdown feature. However, every time I do that I get both a text and an e-mail, so hopefully that will provide early enough notice to block any fraudulent transfers, or at least make the clawback faster. In addition, I feel that most people need to make sure they have a difficult PIN number on their phone, as login security is quickly coming down to having your phone as a type of physical “key”.

The quiet nature of ACAT transfer is what makes this scam possible! They are taking advantage of standard industry practice that is a weak point in financial security. The scammers all know this. We need to change this process to increase security. First, I’ve never had a brokerage account opening trigger any credit alert or identity theft monitoring service. Second, I recently transferred a significant amount of assets to Fidelity from Public using ACAT, and Public did not send me a single email, text, or phone call. My Public account was simply zero one day. I did legitimately request this transfer, but what if I didn’t?!?

Filed Under: Investing, Retirement //

Worried About Unused 529 Funds? New 529 to Roth IRA Rollover Option

Posted on May 3, 2023 // 10 Comments

One of the concerns about contributing to 529 plan for college savings is that you won’t end up using all the money and end up being hit with additional taxes (at ordinary income rates) and penalties on an non-qualified withdrawal. The funds potentially would have been better off simply invested in a taxable brokerage account (and long-term capital gains rates).

This was partially addressed within the SECURE 2.0 Act of 2022, part of the Consolidated Appropriations Act (CAA) of 2023. Specifically, Section 126 [PDF link], “Special Rules for Certain Distributions from Long-term Qualified Tuition Programs to Roth IRAs”, which adds the ability to roll your 529 funds into a Roth IRA both tax-free and penalty-free starting in 2024. Kitces.com covers many of the major points. Here is a quick summary of the rollover requirements:

  • The Roth IRA receiving the rollover money must be owned by the beneficiary of the 529 plan. (Unless the beneficiary is also the owner, the money can’t go to the owner’s Roth IRA.)
  • The 529 plan must have been open for at least 15 years.
  • The rollover amount must have been in the 529 account for at least 5 years before your distribution date (contributions and attached earnings).
  • The annual rollover amount is limited to annual IRA contribution limits, and is reduced by any “regular” Roth IRA contributions made during the tax year. (You are not able to exceed the usual max contribution limits. However, the income (MAGI) limits that usually lower the contribution limits due to high income do not apply.)
  • The Roth IRA owner still needs to earn taxable income, at least equal to the amount of the rollover.
  • The maximum lifetime amount that can be moved from a 529 plan to a Roth IRA is $35,000 per person. (This may not be as much in 15+ years if they don’t increase it with inflation.)

In general, this seems like a reasonable way to alleviate the over-contribution concerns, although the money must still technically go to the beneficiary (usually the kid) and not the owner (usually the parent or grandparent). Previously, options for leftover money included graduate school, changing the beneficiary to another family member or future grandchild, or paying back up to $10,000 in qualified student loans.

There are a few interesting, potential wrinkles that a few readers have pointed out:

  • Making yourself both owner and beneficiary to fund future Roth IRA contributions for yourself (even with no kids). As you aren’t really increasing the total amount you are able to stuff into a Roth IRA in the future, the primary benefit is basically to access the tax-deferral benefit early. For example, you could put in $2,000 today and expect to roll over $6,000 in 15 years (7.6% annualized return). The exception may be if you expect not to be able to do Roth IRA contributions in the future because your income is too high AND the Backdoor Roth IRA method is not available to you. Still, 15 years is a long time to wait, and the law may change in the future to restrict this type of move. In such a case, it may backfire and subject you to taxes and penalties.
  • Planning to change the beneficiary from kid to yourself later on. Maybe you don’t want your kid to have the unspent funds, and plan to simply change the beneficiary to yourself later on. However, it’s not 100% clear if beneficiary changes will reset the 15-year clock or otherwise affect rollover eligibility. The law specifically restricted the rollover
  • Contributing extra money for the specific purpose of early funding for your children’s Roth IRAs. This might spur higher-income parents to put even more money into their 529s on purpose, as you are essentially indirectly able to fund a Roth IRA with tax-deferred growth for your kid way before they have earned income. When they eventually do have any form of earned income from a part-time or entry-level job in their teens or early 20s, the money can just roll into their Roth IRA officially (up to the limits).

I don’t have any immediate plans to take advantage of any of these potential scenarios, but taken together it does make me feel better about the 529 contributions that I have already made. Which I suppose is the overall idea?

In terms of other actionable advice, it may be worth it to start a 529 for each child immediately or as soon as possible, even if only putting in $25 or whatever is the minimum amount, just to start the 15 year clock in case you do want to take advantage of this feature down the road. There are countless examples out there of the benefit of starting the compounding early, especially when it can keep growing tax-free forever.

Filed Under: College & Education, Family, Investing, Retirement //

Savings I Bonds May 2023 Inflation Rate: 0.90% Fixed, 4.30% Total Composite Rates

Posted on April 30, 2023 // 8 Comments

May 2023 fixed rate will be 0.90%, total composite rate is 4.30% for next 6 months. For Savings I bonds bought from May 1, 2023 through October 31, 2023, the fixed rate will be 0.90% and the total composite rate will be 4.30%. The semi-annual inflation rate is 1.69% as predicted (3.38% annually), but the full composite rate is dependent on the fixed rate for each specific savings bond and so it is a little bit higher.

Every single I bond will earn this inflation rate of ~3.40% eventually for 6 months, depending on the initial purchase month. The fixed rate was higher than I predicted, although still a bit lower than short-term TIPS yields. You may wish to wait until October if you don’t like what you see right now. See you again in mid-October for the next early prediction for November 2022.

Original post from 4/12/23:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2023 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2023 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2023 purchase.

New inflation rate prediction. September 2022 CPI-U was 296.808. March 2023 CPI-U was 301.836, for a semi-annual increase of 1.69%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be ~3.38%. You add the fixed and variable rates to get the total interest rate. The fixed rate hasn’t been above 0.50% in over a decade, but if you have an older savings bond, your fixed rate may be up to 3.60%.

Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month – same as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2023. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.40%. You will be guaranteed a total interest rate of 0.40 + 6.49 = 6.89% for the next 6 months. For the 6 months after that, the total rate will be 0.40 + 3.39 = 3.79%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2023 and sell on April 1st, 2024, I estimate that you’ll earn a ~4.48% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on April 30th, 2023 and sell on July 1, 2024, you’ll earn a ~5.07% annualized return for an 14-month holding period. Comparing with the best interest rates as of April 2023, these short-term rates are roughly on par on what is available via regular nominal Treasury bonds and other deposit accounts.

Buying in May 2023. If you buy in May 2023, you will get 3.38% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS. My rough guess is somewhere between 0.2% and 0.5%. The current real yield on short-term TIPS is lower than it was during the last reset, when the fixed rate was set at 0.4%. Every six months after your purchase, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (based on purchase month, look it up here) + variable rate (total bond rate has a minimum floor of 0%). So if your fixed rate was 1%, you’ll be earning a 1.00 + 3.38 = 4.38% rate for six months.

Buy now or wait? If you buy in April, you will get the remnants of the last period of higher inflation, and a fixed rate that won’t change much for May. If you wait until May, there may be a small possibility that the fixed rate might go up, but even if it does, it will take a while for that to breakeven due to the lower initial inflation rate. Therefore, my opinion is that I would purchase now in April. Note that the real yields on TIPS are currently about 1.2% for a 5-year term, higher than the fixed rate for I bonds.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. You can only buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number. TheFinanceBuff has a nice post on gifting options if you are a couple and want to frontload your purchases now. TreasuryDirect also allows trust accounts to purchase savings bonds.

Note: Opening a TreasuryDirect account can sometimes be a hassle as they may ask for a medallion signature guarantee which requires a visit to a physical bank or credit union and snail mail. This doesn’t apply to everyone and seems to have gotten better recently, but the takeaway is don’t wait until the last minute.

Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my posts on savings bonds.

[Image: 1950 Savings Bond poster from US Treasury – source]

Filed Under: Banking, Investing, Retirement, Savings Bonds //

MMB Portfolio 2023 First Quarter Update: Dividend & Interest Income

Posted on April 4, 2023 // 6 Comments

Here’s my 2023 Q1 income update for my Humble Portfolio. I prefer to track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine my portfolio as a factory that churns out dollar bills, a tree that gives dividend fruit.

Background about why I track dividends. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS).

The dividend yield (dividends divided by price) also serve as a rough valuation metric. 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. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. – Jack Bogle

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would started out paying ~$24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the dividends/interest every quarter but added no other contributions, as of April 2023 it would have generated ~$52,000 in annual income over the previous 12 months.
  • Even if I SPENT all the dividends/interest every quarter and added no other contributions, as of April 2023 it would have generated ~$40,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has increased over time and with dividend reinvestment.

I’m using simple numbers to illustrate things, but isn’t that a nicer, gentler way to track your progress?

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 4/2/23), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 30% 1.60% 0.48%
US Small Value (VBR) 5% 2.20% 0.11%
Int’l Total Stock (VXUS) 20% 2.94% 0.59%
Int’l Small Value (AVDV/EYLD) 5% 4.23% 0.21%
US Real Estate (VNQ) 10% 4.11% 0.41%
Inter-Term US Treasury Bonds (VGIT) 15% 1.89% 0.28%
Inflation-Linked Treasury Bonds (TIP) 15% 6.12% 0.92%
Totals 100% 3.00%

 

My ttm portfolio yield is now roughly 3.00%, a bit lower than last quarter’s value. That means if my portfolio had a value of $1,000,000 today, I would have received $30,000 in dividends and interest over the last 12 months. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.) US dividend rate went down a bit, international dividend rate went down a bit, Treasury bond yield is catching up, TIPS yield is still high from tracking CPI inflation.

What about the 4% rule? For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a quick and dirty target, not a number sent down from the heavens. During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time (see real numbers above). You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am trying to fully appreciate the “my kids still think I’m cool and want to spend time with me” period of my life. It won’t last much longer. I am consciously choosing to work when they are at school but also consciously turning down work that doesn’t fit my priorities and goals. This portfolio income helps me do that.

Filed Under: Goals, Investing, Retirement //

MMB Humble Portfolio 2023 First Quarter Update: Asset Allocation & Performance

Posted on April 3, 2023 // 6 Comments

Here’s my quarterly update on my current investment holdings at the end of 2023 Q1, including our 401k/403b/IRAs and taxable brokerage accounts but excluding our residence and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real, imperfect, low-cost, diversified DIY portfolio. Wouldn’t it be nice if everyone else did the same? (Many people do track the 13F filings of well-known investors.)

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
Here’s how I track my portfolio across multiple brokers and account types. There are limited free options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have an archive of my holdings dating back many years.

2023 Q1 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account.

Humble Portfolio Background. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Charlie Munger believes that only 5% of professional money managers have the skill required to consistently beat the index averages after costs.

Costs matter and nearly everyone who sells outperformance, for some reason keeps charging even if they provide zero outperformance! By paying minimal costs including management fees, transaction spreads, and tax drag, you can essentially guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets 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 businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the vanilla funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. 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. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

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. You’ll find that whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. My goal is more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target asset allocation.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 15% US Treasury Nominal Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Commentary. The goal of this “Humble Portfolio” is to create sustainable income that keeps up with inflation to cover our household expenses. According to Empower, my portfolio went up about 4.9% YTD to 4/3/2023. There was only minor rebalancing with cashflows done this quarter.

Due to the rising real yield on TIPS and rising yields on nominal Treasuries and CDs, there is more incentive to micro-managed the bond side a little bit. When the real yields on individual long-term TIPS go above 1.5% and I have cash to reinvest into bonds, that is what I am buying. As usual, I am trying to maintain high yields across a 1 to 5 year ladder horizon by picking between savings accounts, no-penalty CD, longer-term 5-year CDs, and longer-term Treasuries. However, I am also balancing between the extra yield from opening a new account or just staying with an existing bank where I already have a relationship.

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

Filed Under: Goals, Investing, Retirement //
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