Personal Finance: Financial Planning & Investing

[4Q Basket Case]

More on the ease of buying into a Private Equity (or Credit) fund, but difficulty in getting out....

https://www.wsj.com/finance/investing/this-small-town-pension-fund-has-a-warning-for-millions-of-retirement-savers-24ed0112?mod=Searchresults&pos=1&page=1

It's the WSJ, so it's behind a paywall.

Bottom Line: Private Credit and Private Equity accept your investment quickly and easily. They might claim high returns, especially when calculated over an entire business cycle. But their fees are high (which eats substantially into the investors' returns), and they give you your money back whenever they please.

Point being: If you need cash at a time inconvenient for them, they don't care one iota about why you need it.

College tuition? Parent's nursing home? Wife's or child's medical bills? Lost your job and you need the cash to stave off foreclosure on your primary residence? Doesn't matter. They allow you to withdraw what they want, when they want, at asset values that they (not the publicly traded financial markets) calculate -- IOW, just figuring what your investment is worth is an exercise far beyond checking the market.

Clinching quote:

"[Institutions for which PE or PC investments might be appropriate] are likely to be perpetual; you won't be. They have many sources of revenue.....you probably don't. They have in-house specialists who analyze alternative investments; you don't. With billions of dollars [to invest], they get access to the world's best alternative investment managers; you aren't likely to."

And the so-described pros still mess it up.

Unless you're both a Chartered Financial Analyst and a professional in alternative investments, just don't invest any more in Private Equity or Private Credit than the amount to which you can afford to lose access and still say, "Well, dang. But I'm having a good time."

 

[BamaNation]

Unless you're both a Chartered Financial Analyst and a professional in alternative investments, just don't invest any more in Private Equity or Private Credit than the amount to which you can afford to lose access and still say, "Well, dang. But I'm having a good time."

@4Q Basket Case : Thanks for the update! I fail to understand how this makes sense for 99.999% of the folks ... much less how any fiduciary would allow this in a 401k. It is a lawsuit waiting to happen if you're on your company's 401k board / selection team and you select PE/PC as an option. At least when it's been limited to accredited investors then they know (or should know) what the risks are and they have money to lose.

John Doe, a hardworking American (to use the political parlance) working at a job making $50K / year and having a 401k plan, looks at the 1yr return (ie. 30+% per year for some of these PE/PC funds) and says I'm putting all my retirement savings there! Disaster in the making for all of the reasons you mentioned.

In the Bogleheads' Philosophy this is an alternative investment AND is only for those who have "money to lose" AND the amount invested in these should be no more than 5% of your net worth.

Or, go to Vegas or Tunica and put that 5% on red. At least you'll get a free meal, probably.

 

[4Q Basket Case]

In the spirit of Thanksgiving, today's column from Morningstar is a good one.

https://www.morningstar.com/portfolios/10-things-we-can-learn-warren-buffett-that-have-nothing-do-with-money?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_69471&utm_id=36083

As the title says, it's 10 things Warren Buffett preaches. And they are only tangentially related to money.

They boil down to (1) Keep calm, (2) don't chase trends, and (3) treat people -- employees, peers, business associates, friends, family and neighbors -- right.

Taken collectively, the list of 10 is really a lesson that successful investing naturally falls out from a thoughtful and disciplined approach to life in general, not just money.

I especially like #8 -- Be content. If you follow the approaches of Buffett and Jack Bogle -- they're really similar to one another -- and do that for a working life, you'll retire secure. You probably won't be the richest guy in town. But you'll be both financially set and well-respected in your community. Be content with that, and don't compare your car or house or trips or investment accounts or your wife's jewelry to what others might have.

There will always be people richer than you are. But you're fine and will be until you step off the mortal coil. So why should you stew about somebody else's pile being bigger than yours?

It's a more concise way of phrasing my one of my favorite maxims: Comparison is the thief of joy.

 

[4Q Basket Case]

An excellent article on how regular folks can build true wealth.

Financial influencer tracks 'quiet millionaires': Here's the No. 1 strategy they all share

Financial influencer JC Rodriguez reveals how ordinary people become millionaires through consistency, not flashy investments, in 'quiet millionaires' talks.

www.foxbusiness.com

Two excerpts summarize:

"It really comes down to your behaviors with money, not so much your income… people who don't even have an outlier salary are still able to build wealth through consistent habits and investing into the market…"

I added the underline because this is really important. So many people think their tight financial situation is the result of insufficient income. When the real problem is often an unwillingness to manage their money properly. If they suddenly made more money they'd just spend more, and their spending habits would put them right back in strapped finances in pretty short order. To be fair, this isn't always the case, but it often it is.

I've seen this in my own family. Had a relative who spent more than she made from childhood. If she had a $10 allowance, she'd spend it all the day she got it and beg or bum stuff off of others until the next allowance came. Later, if she made $100, she'd spend $120 and put the overage on credit cards. If she made $100,000, she'd spend $120,000. Not surprisingly, she quickly accumulated far more credit card debt than she could ever pay back. Got an inheritance and bought a nice house, but then bought nice clothes and accessories and cars (which she wrecked with insufficient insurance) and trips and dinners out, couldn't maintain the house, and ended up having to sell it at a material loss.

Note that this is a string of behavioral issues. The unsustainable finances are a symptom, not the core problem. Plus, this sort of thing doesn't happen in a vacuum -- she's been irresponsible on a lot of fronts. Equally unsurprisingly, life hasn't turned out well for her.

Obviously, a decent income is necessary. But if you weren't born with a trust fund, behavior with money is more important in building long-term wealth.

And...

"Nothing about their approach screams overnight success. It is steady and thoughtful."

This is really the hard part. You have to keep on keeping on no matter what your friends are doing or what the talking heads are screaming. And you have to do it for 30 years or so. It's not easy, but anybody can do it.

Another of my favorite adages applies: There are no shortcuts to anyplace worth going.

 

[4Q Basket Case]

OK, we need to stop this nonsense around 50 year mortgages being the solution to buying a house.

The bottom line is that it doesn't help,

It puts the borrower in a worse position than being a renter. That's because it loads the borrower with all the obligations of homeownership, makes negligible reduction in the debt with each payment, yet gives the borrower no benefits of being a renter -- primarily responsibility for property tax, homeowners insurance, HOA fees, and maintenance of the structure and associated systems.

Geek alert: This involves numbers that few of either the talking heads or general public truly grasp. It's a lot easier to rail at "the man" than it is to understand the problem.

Today's interest rate on a 30 year mortgage is about 6.25%.

Say you want to borrow $250K for 30 years at 6.25%. The monthly debt service will be $1,539.
Note: This is debt service alone. It doesn't include property tax and insurance escrows, PMI, or any other charges and fees.

Even if the interest rate on a 50 year mortgage was the same as a 30 year, the debt service is still $1,362. A savings of only $176 a month. Two problems with that.

First, the interest rate won't be the same. There is no established market for 50-year mortgage debt, so we don't know exactly what it might be. We do know that a 15-year mortgage is currently about 5.5% -- or about .75% below the 30 year rate.

The yield curve tends to flatten as you go out far into the future, so let's guesstimate that the 50-year rate would be only .375% higher than a 30 year -- half the difference between a 15 year and a 30 year.

The second problem falls out from that. Now your interest rate is 6.625%. And your monthly debt service is $1,432 -- only about $100 less than a 30 year.

Here's the more insidious side that nobody on the news talks about -- you're essentially paying rent, but with the obligations of homeownership. Property tax, insurance and HOA fees? On you. HVAC craps out? You can't call the landlord. Water heater stops? Repair or replacement is on you. Roof leaking? Again, on you.

What do I mean by, “essentially paying rent”? I mean that you're not reducing your debt obligation by any material amount until a long way in. Here's the geeked-out math.

If you decide you want to sell in, say, 7 years, you've made 84 monthly payments.

On a 6.25% 30 year mortgage, you've reduced your original $250K debt to about $225K -- a $25K reduction after having paid $1,539 every month for 84 months -- that's after forking out, a total of $129K. Plus handling property taxes, insurance, HOA fees, and all other costs of homeownership and maintenance of the structure and all associated systems.

On a 50 year, it's worse.

If you have a 50 year mortgage at 6.625% and want to sell in 84 months, your mortgage balance is still a bit over $244K -- a reduction of a less than $6K after 7 years of paying $1,432 every month, or a total of $120K. Plus all ancillary costs and maintenance.

A 50 year mortgage solves nothing about affordability and creates problems that don’t exist with shorter-term debt.

Increasing the supply of housing solves the problem of affordability.

Late Add: Regardless of how long or short your mortgage term is, homeowners do get the benefit of any increase in property value. And even noting exceptional geographies and economic cycles, homes do generally increase in value.

Problem there is that everybody else's house has also generally increased in value. You benefit from that increase only if you can replace the home at a lower price. For most people, that happens under only two circumstances. One is that you move from a high-priced area to a lower-priced area. The other is downsizing later in life when you no longer need or want a larger home with a big yard and ancillary amenities.

So yeah, your home is worth more, and it feels good to think about that. But how are you going to access that increase without moving? It's not like you can sell off part of your house. And please for goodness sake don't say you'll get a Home Equity loan like the talking heads on TV say you can. You're going to solve affordability by borrowing more? Really?

You increase affordability by increasing the supply of housing. You do that by removing barriers to new construction -- the permitting process (expensive, time-consuming and there are no guarantees you'll get the permit after years and tens or hundreds of thousands of dollars in expense) deporting a big portion of the labor supply, increasing required pay for low-value-added work, requirements for restitution, restrictions on rents, etc., etc., ad infinitum.

I'm not saying you eliminate each and every one of these restrictions in total. We need to understand that it's a balancing act and that there is no free ride either way. With any restrictions, no matter how small, you increase the cost of construction and therefore the price of the home. With every relaxation of restriction, we lose a bit of control.

We need to consciously decide that we're willing to accept $X in increased cost in order to have Y amount of control over what would otherwise be unfettered development. You fill in what X and Y are.

 

[4Q Basket Case]

Good article from Amy Arnott of Morningstar.

She makes the point that what you don't have in your investment portfolio is as important as what you do have. So she lists several types of investments that she steers clear of.

https://www.morningstar.com/portfolios/7-things-i-dont-own-my-portfolio-2?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_70357&utm_id=36692

I think she does a fine job of explaining why at least six of the asset classes don't belong in most investors' portfolios. I do think she misses on I-Bonds. She's right about the clunky buying process. And she's right in that it takes a while to accumulate enough to move the needle on an established portfolio.

But not everybody has been investing for 15+ years and has an established portfolio. Yes, these things are clunky to buy. And yes, they have a $10K annual cap on purchases. But for a young investor, they can be good vehicles to accumulate an emergency fund that means something (like 3-6 months worth of expenses) in a safe asset with attractive yields that have tax advantages.

Maybe they're not good for Amy. That doesn't mean they're not good for someone in different circumstances.

I also think her 10-year period of analysis for REITs is too short. Real estate cycles are typically longer than the general business cycle. So over the real estate cycle, the correlation with the stock market is lower than she cites.

She's right, though, that you have to have patient money in REITs. When the real estate market goes into a down cycle, it can be a doozy, and you have to have the intestinal fortitude to ride it out. If you panic and sell, you not only lock in a loss, but you un-do the lack of correlation with equities....which is the whole purpose of buying REITs in the first place.

The other asset classes I think range from not good to outright gambling.

 

[Bamaro]

Annual reminder, with the new year you can again purchase another 10K of Series I bonds.

 

[dayhiker]

I have been reading a fair amount of talk about the possibility of a pull back equal or to exceed the Great Recession. I'm seriously considering dumping all of my personal stock, holding cash until the drop, then putting it all back in. Do any of you think that's crazy talk?

 

[UAH]

I have been reading a fair amount of talk about the possibility of a pull back equal or to exceed the Great Recession. I'm seriously considering dumping all of my personal stock, holding cash until the drop, then putting it all back in. Do any of you think that's crazy talk?

Under any similar circumstance FDIC may fail. Then what for holders of cash? I do believe that the winners will be those who own real assets. We are holders of quite a bit of cash and are questioning where to put it. Farm land, timber? Any thoughts?

 

[dayhiker]

Under any similar circumstance FDIC may fail. Then what for holders of cash? I do believe that the winners will be those who own real assets. We are holders of quite a bit of cash and are questioning where to put it. Farm land, timber? Any thoughts?

I wish I'd bought metals a few months ago. The logistics of it is why I haven't.

 

[UAH]

I wish I'd bought metals a few months ago. The logistics of it is why I haven't.

We have investments there but regret not having more. The entire complex of metals and minerals is blowing up with the decline of the dollar. Not a bad place to search for investments.

 

[4Q Basket Case]

There has been a lot of breathless reporting and SM videos about "the coming financial Armageddon." Reminds me of the Y2K stuff.

If you're a long-term investor, this is the sort of thing that you have to tune out. Selling all your stocks and keeping the proceeds in cash or buying gold isn't the answer.....a diversified portfolio, balanced to fit your circumstances is.

IOW, if you buy or sell any asset because of what talking heads say, you're trying to time the market. Which not even the best investors can do. You might hit it right every now and then. So does a stopped clock.

At some point we will have a recession, complete with a 30%+ decline in the stock market. But when the wailing and gnashing of teeth are at their loudest, it'll bottom out and start back up. You'll hear talk of the dead cat bounce, and it may spit and sputter as it crawls back up. But it will crawl back up.

If you have one or more business cycles left in your working career (i.e., you're 8-10 years or more from retirement), the best move is to keep on keeping on. You keep putting your money into the market even as it's on the way down....even as the world is shrieking that its collapsing.

You do this because you're buying shares cheap. Which means you get more shares for the same amount of money. Which really pays off when the upswing happens.

If you do this, when you do retire and look back over your investing career, you'll see that buying during (and all the way through) recessions is where you made your retirement comfortable.

Fear sells. And fear is what the talking heads and SM influencers are really selling. Whether they're (1) selling their own books, products, services or seminars, or (2) getting revenue from ad sales, they're selling fear. And the fundamentally flawed idea that if only you'll listen to them -- and buy their book or seminar -- you too can time the market.

These guys are a stuck record forever proclaiming rain. One day, they'll be right. That doesn't mean they're prescient.

Regarding gold and silver: Gold has value because it has value because.....well, because it has value. There aren't a ton of industrial uses for it. Silver's a bit of a different story in that it does have a lot of industrial uses. Yeah, if I had today's newspaper in 2023, I'd have bought both (I'd also have won the Billion dollar PowerBall). But today both metals are at all-time highs. Now isn't the time to get in. The time to get in is long past. And note that in 2023, nobody other than those selling gold and silver was saying that was the time to get in.

Most of us weren't born with a trust fund and didn't found our own successful business. If you're someone who did neither of those things, the surest way to financial security is a diversified portfolio, balanced to your circumstances, to which you contribute a meaningful amount each and every single stinkin' paycheck.

Assuming you don't have any circumstances that portend a need for cash before you reach 60 - 65 (i.e., normal retirement age), you do that over 30+ years, keeping on keeping on no matter what the talking heads say. Absent circumstances that dictate a need for a bunch of cash before then, you're heavy equities. For demographic reasons, I concentrate my equity exposure in US indices. But you do you.

Then, as you approach retirement, you gradually shift your portfolio to less equity exposure and more cash and short-term bonds or CDs.

If you do have circumstances that dictate a need for a ton of cash before that time -- for example, a special needs child, a parent or sibling for whom you'll be funding care, or a limitation to your own ability to work until you're 60-65, you're lighter equities and heavier bonds and cash earlier in your investing career.

 

[4Q Basket Case]

One more thing: the idea to cap credit card interest rates at 10% is stupid as a sack of rocks.

Credit card portfolios are hyper-cyclical. Meaning that banks and credit card issuers make a massively disproportionate amount of money during good economic times (like right now -- which is why they're making record money), but lose a massively disproportionate amount during recessions.

The net result is that through the cycle they don't make a ton of money....even charging interest rates that seem ridiculous. Which is why they tend to get in and out of the business over time.

So they're not making a sufficient long-term return even though they're charging 18 - 22% interest -- or more. So what happens if you cap rates at 10%?

Only the least risky / highest credit scores will have cards. Who will lose them? A demographic that skews heavily toward low to middle income, urban and rural residents, and federally protected minorities all of which the cap purports to help.

This moronic idea actually helps no one. If you don't like the interest rate you're paying on your credit card, either don't carry a balance or shop for another card.

 

[PA Tide Fan]

I have been reading a fair amount of talk about the possibility of a pull back equal or to exceed the Great Recession. I'm seriously considering dumping all of my personal stock, holding cash until the drop, then putting it all back in. Do any of you think that's crazy talk?

We typically have a correction during a mid-term election year. Sometimes single digits and sometimes double digits but usually the market comes back strong after the correction. There's some that claim we're in an AI bubble that will end badly like the dot.com bubble of 2000. Some of those doom and gloomers are just trying to sell people gold and silver however so what they say should be taken with a grain of salt. Right now the Fed is easing rates and inflation is not out of control so I don't see a bear market right now. If you have too much stock holdings from all the gains we had then you could take some off the table but otherwise it's probably best to just hold. All the so-called experts who said to sell when the tariff tantrum happened in April of last year turned out to be wrong.

 

[4Q Basket Case]

We typically have a correction during a mid-term election year. Sometimes single digits and sometimes double digits but usually the market comes back strong after the correction. There's some that claim we're in an AI bubble that will end badly like the dot.com bubble of 2000. Some of those doom and gloomers are just trying to sell people gold and silver however so what they say should be taken with a grain of salt. Right now the Fed is easing rates and inflation is not out of control so I don't see a bear market right now. If you have too much stock holdings from all the gains we had then you could take some off the table but otherwise it's probably best to just hold. All the so-called experts who said to sell when the tariff tantrum happened in April of last year turned out to be wrong.

Absolutely right.

Nobody can even remotely consistently time markets -- whether those are stock markets, commodity markets or metals.

Not Warren Buffett. Not Peter Lynch. Not Jack Bogle. Certainly not a talking head with a YouTube channel.

How many times over the past few years has Jamie Dimon been wrong?

One day it will rain. That doesn't mean people who have been predicting it every day forever know what they're talking about.

 

[dayhiker]

I appreciate the detailed writeups. I'm not explicitly trying to time the markets. I guess I am and I'm not. I realize that I won't hit the top and jump back in at the bottom. Usually, when there is a huge drop, it happens very suddenly. I'd just like to hop out in a significant way before that happens. Whether I sit on the sidelines or park money somewhere else, I don't know. Also, I should say that this is not my retirement money. Someone manages that. This is solely investments that I've made over the years. It certainly feels like there are several bubbles in play. Decisions, decisions.

 

[RollTide_HTTR]

This isn't financial advice but watch out for all the fraud out there! They are getting better and better at it. I see it all the time.

ALWAYS make sure you verbally confirm any wire instructions if you are buying a house, a car, etc. Make sure your financial advisor or institution always verbally verifies any bank information with you as well.(They have to but just make sure they actually do it) Don't trust anything over email without verbal confirmation. Fake checks and wire instructions are very common!

Oh and also the federal government is never going to ask you to buy Bitcoin! If you get a call from the feds about fraud it may be fraud itself!