Treasury Bills + State Income Tax Exemption = 6%+ Effective APY (October 2023)

Posted on October 26, 2023 // 11 Comments

I’ve mentioned this before, but here’s a quick reminder as the tax-equivalent yields are now at 6% APY in most states with income taxes (anything 5% and up, see above graphic). Due especially to high state income taxes, my cash is mostly held in Treasury bills and money market funds that contain 90%+ treasury bills. Both can be owned within most major brokerage accounts that allow the purchase of individual bonds from either auction or secondary markets. (Treasury Direct allows purchase at auction, but I don’t like the user interface or customer service.)

So while I enjoy keeping track of new fintech apps, unless there is a good upfront bonus, it’s hard for me to justify another application at current rates. I skipped Milli when it hit 5.25% APY in August 2023. I skipped Elevault when it hit 5.50% APY in October 2023. I will likely skip Domain Money at 6% APY.

Treasury bond interest is exempt from state incomes taxes, which gives them a comparative boost over interest from banks. If you are subject to state income taxes, use a tax-equivalent yield calculator to compare Treasury bill/bond yields with interest rates from bank accounts and other bonds.

For example, if you are single with $70,000+ taxable income in California, your marginal state income tax rate is at least 9.3%. That means the 5.57% interest from a 4-week Treasury bill is equivalent to a bank account paying 6.42% interest or higher!

Be sure to check and make sure your “Treasury” money market fund is holding 90%+ Treasuries and not repurchase agreements. I’ve noticed that Vanguard Treasury Money Market Fund is now back to 94% Treasuries and only 4% repos, but that could change again in the future, so I’m keeping an eye on it.

Finally, at tax time be sure to look up the appropriate U.S. government obligations income information and use it when filing your state income taxes. You may need to nudge your accountant along with supplying this information.

[Top image credit – Wikipedia]

Filed Under: Banking, Investing, Taxes //

TIPS vs. Treasuries vs. Total Bond Funds, Historical Performance 2008-2023

Posted on October 24, 2023 // 3 Comments

I hold close to 50/50 US Treasuries and TIPS for the bond portion of my portfolio. This is an area where my portfolio differs significantly from most “model portfolios” you’ll find from the major fund companies and robo-advisors. While buying more TIPS recently due to their historically high real yields, I decided to run a quick backtest comparing three intermediate-term fund options:

  • Vanguard Inflation-Protected Securities Fund (VIPSX)
  • Vanguard Intermediate-Term Treasury Fund (VFITX)
  • Vanguard Total Bond ETF (BND)

Basically, an intermediate-term fund of TIPS, US Treasuries, or the Total Bond Index that tracks all investment-grade taxable bonds. You will get different results based on the timeframe, but I decided to look back through roughly the last 15 years.

Here is the real yield for 5-year TIPS during the that time period (2008-2023). While there was a brief spike during the 2008 financial crisis, I would guesstimate the average real yield during this entire period as… zero.

Here is the growth of a $10,000 investment starting in January 2008 through September 2023 via Portfolio Visualizer:

Nobody who held bonds over this time period is celebrating in hindsight, but I’m only comparing these three against each other. There is no clear, dominant winner. Visually, sometimes one would be winning slightly, and then another would be winning slightly. If I changed the start and end dates, the winner may be different each time.

However, I would also note that there was no extended bout of high inflation either. Given our current monetary system, high inflation is much more likely than deflation. Historically, high inflation is much more common as well. My opinion is that TIPS offers an insurance component against unexpectedly high inflation, and it appears that even during a period of “normal” to “low” inflation where it only offered a zero real yield, TIPS didn’t really “cost” me anything to hold. Total bond funds usually yield more since they contain corporate bonds, yet TIPS and Treasuries both still kept up.

If you stretch the time period back to 2000, when TIPS offered a higher real yield, you can see it actually did even better on a relative basis. I’m not saying that this will happen again in the future now with high real yields again, but overall I remain satisfied with holding 50/50 TIPS/Treasuries for my bond holdings. I continue to view owning some TIPS as low-cost insurance against unexpectedly high inflation.

Filed Under: Investing, Retirement //

Optimal Asset Location For Different Types of Stocks (US vs. International, Active vs. Passive)

Posted on October 23, 2023 // Leave a Comment

There is asset allocation (what asset classes to buy and how much) and then there is asset location (where to put those asset classes). In general, there are three overall types: pre-tax accounts (Regular 401ks, 403bs, Traditional IRAs), post-tax accounts (Roth IRA, Roth 401k), and taxable brokerage accounts.

Here are two Vanguard research papers and associated articles which dig into the details. (I always download these PDFs because sometimes Vanguard takes them down after a while.) I won’t rehash the entire topic here, I’m just going to drop some links with the major highlights.

Major takeaways:

  • The first paper found that even super-simple asset location principles such as placing taxable bonds in pre-tax-deferred and stocks in taxable/Roth account can still boost returns between 0.05% and 0.30% a year.
  • The second paper concludes that “additional return that can be attained from asset location according to three equity subclass characteristics: region (ex-U.S., U.S.), dividend yield (growth, high dividend yield) and management style (passive, active).”
  • Specifically, the second paper advises that “for most investors, ex-U.S., growth, and passive equity are best placed first in a taxable account, while U.S., high-dividend-yield, and active equity are best placed first in a tax-advantaged account.”

Here is an example chart and quote that summarizes their analysis as to why international (ex-US) stocks should have a slight preference in a taxable account.

We find that investors can potentially add up to 10 bps of additional after-tax return to their portfolio by thoughtful asset location of ex-U.S. equities. For most investors, preferentially placing ex-U.S. equity in a taxable account is the asset location strategy that maximizes after-tax return. The higher end of the added value is associated with portfolios that have both high levels of qualified dividend income and high foreign withholding rates. Only investors in the top tax bracket, who hold relatively tax-inefficient ex-U.S. equities, may find it beneficial to shield their ex-U.S. equity in a tax-advantaged account.

These conclusions still align very well my this rough “rule of thumb” graphic that I created way back in 2007 (been doing this for too long! 😱):

Filed Under: Investing, Retirement, Taxes //

Microsoft / Activision Blizzard Merger Arbitrage $10,000 Experiment – Final Results

Posted on October 17, 2023 // 9 Comments

In January 2022, Microsoft (MSFT) announced an agreement to acquire Activision Blizzard (ATVI) for $95 per share, in an all-cash $68.7 billion transaction. However, the market placed some uncertainty about this event actually happening, which meant the ATVI share price stayed in the $70 to $80 range for most of 2022.

This created a potential event-driven opportunity. If the deal did work out, you would be cashed out at $95 per share, a ~20% premium. In my previous post Warren Buffett’s Activision Merger Arbitrage Deal, I compared his bet to a credit card bonus for us mere mortals. It was small fries to him, but still a fun and profitable thing to do.

As another educational “$10,000 experiment”, I decided to buy roughly $10,000 of ATVI (131 shares @ $76.65) on May 19, 2022.

All I had left to do was wait and see how things would unfold. This was where the education came in. It can be hard to keep holding during a constant stream of media articles about how various powerful governments were trying to block to deal. New blocks and lawsuits usually meant the ATVI stock price dropped a lot. As issues resolved, the stock price would jump back again.

Here is a Morningstar chart that tracked the growth of $10,000 invested in either ATVI (red) or the Vanguard S&P 500 index fund (blue) from May 2022 to October 2023.

The transaction was initially marked to close around June 2023. After lengthy negotiations with US, EU, and UK regulators, the acquisition finally closed on October 18th, 2023 after Microsoft made various concessions and promises to maintain competitiveness in the gaming industry. I received my cash payment on 10/13/23.

Microsoft was a stable buyer and patient negotiator, and Warren Buffett’s instincts that this would eventually work out were correct. In the end, I received an ATVI dividend of $129.69 on 8/17/23 and my final payout of $12,445 ($95 a share x 131 shares):

ATVI never actually traded at the full $95 on the exchanges, so my final numbers were a bit better than the chart above. My net profit on my $10,040 initial investment was $2,534, as compared to the $1,357 that I could have earned from owning the S&P 500 over the same time period. That’s an extra difference of $1,177. Using the XIRR function, I calculated a 17.4% annualized rate of return.

(Side note: Warren Buffett actually sold most of his ATVI stock before this final closing, between Q3 2022 and Q2 2023. I actually don’t know how much he gained from this purchase, it appears he sold a chunk when ATVI was about $85 a share in Q2 2023.)

Filed Under: Deals & Offers, Investing //

Best Interest Rates on Cash – October 2023

Posted on October 11, 2023 // 1 Comment

Here’s my monthly roundup of the best interest rates on cash as of October 2023, roughly sorted from shortest to longest maturities. There are often lesser-known opportunities available to individual investors. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you could earn from switching. Rates listed are available to everyone nationwide. Rates checked as of 10/10/2023.

TL;DR: Mostly minor movements upwards this month. 6% APY now (barely) available with 12-month CD and rewards checking accounts. More 5%+ savings accounts. Compare against Treasury bills and bonds at every maturity, taking into account state tax exemption.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 5.27% APY ($1 minimum). Raisin lets you switch between different FDIC-insured banks and NCUA-insured credit unions easily without opening a new account every time, and their liquid savings rates currently top out at 5.27% APY amongst multiple banks. See my Raisin review for details. Raisin does not charge depositors a fee for the service.
  • 5.36% APY (before fees). MaxMyInterest is another service that allows you to access and switch between different FDIC-insured banks. You can view their current banks and APYs here. As of 10/10/23, the highest rate is from Customers Bank at 5.36% APY. However, note that they charge a membership fee of 0.04% per quarter, or 0.16% per year (subject to $20 minimum per quarter, or $80 per year). That means if you have a $10,000 balance, then $80 a year = 0.80% per year. This service is meant for those with larger balances. You are allowed to cancel the service and keep the bank accounts, but then you may lose their specially-negotiated rates and cannot switch between banks anymore.

High-yield savings accounts
Since the huge megabanks STILL pay essentially no interest, everyone should have a separate, no-fee online savings account to piggy-back onto 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.

  • The top rate at the moment is at Elevault (app only) at 5.50% APY, but there are catches. I see that it is only valid on balances up to $40k with a $2,500 daily deposit limit? Why? Unsure if that applies to externally-initiated transfers. BrioDirect at 5.35% APY. CIT Platinum Savings at 5.05% APY with $5,000+ balance.
  • SoFi Bank is now up to 4.50% APY + up to $275 new account bonus with direct deposit. You must maintain a direct deposit of any amount each month for the higher APY. SoFi has their own bank charter now so no longer a fintech by my definition. See details at $25 + $250 SoFi Money new account and deposit bonus.
  • There are several other established high-yield savings accounts at 4.25%+ APY that aren’t the absolute top rate, but historically do keep it relatively competitive for those that don’t want to keep switching banks.

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 (plan to buy a house soon, 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. Raisin has a 16-month No Penalty CD at 5.40% APY with $1 minimum deposit. CIT Bank has a 11-month No Penalty CD at 4.90% APY with a $1,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 4.55% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 4.60% APY with a $500 minimum deposit. Consider opening multiple CDs in smaller increments for more flexibility.
  • Credit Human Federal Credit Union has a 12-month CD at 6.00% APY. Minimum opening deposit is $500. Early withdrawal penalty is a whopping 270 days interest (or $50, whichever is greater). Anyone can join this credit union via partner organization.

Money market mutual funds + Ultra-short bond ETFs*
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). * Money market mutual funds are regulated, but ultimately not FDIC-insured, so I would still stick with highly reputable firms. I am including a few ultra-short bond ETFs as they may be your best cash alternative in a brokerage account, but they may experience losses.

  • Vanguard Federal Money Market Fund is the default sweep option for Vanguard brokerage accounts, which has an SEC yield of 5.28% (works out to a compound yield of 5.41%, which is better for comparing against APY). Odds are this is much higher than your own broker’s default cash sweep interest rate.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 5.53% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 5.74% 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 and are fully backed by the US government. 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, which can make a significant difference in your effective yield.

  • 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 10/6/23, a new 4-week T-Bill had the equivalent of 5.43% annualized interest and a 52-week T-Bill had the equivalent of 5.42% annualized interest.
  • The iShares 0-3 Month Treasury Bond ETF (SGOV) has a 5.28% SEC yield and effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 5.25% SEC yield and effective duration of 0.08 years.

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

  • “I Bonds” bought between May 2023 and October 2023 will earn a 4.30% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-October 2023, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

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

  • Credit Union of New Jersey pays 6.00% APY on up to $25,000 if you make 15 debit card purchases, opt into online statements, and make at least 1 direct deposit, online bill payment, or automatic payment (ACH) per statement cycle. Anyone can join this credit union via $5 membership fee to join partner organization.
  • Pelican State Credit Union pays 6.05% APY on up to $10,000 if you make 15 debit card purchases, opt into online statements, log into your account at least once, and make at least 1 direct deposit, online bill payment, or automatic payment (ACH) per statement cycle. Anyone can join this credit union via partner organization membership.
  • Orion Federal Credit Union pays 6.00% APY on up to $10,000 if you make electronic deposits of $500+ each month (ACH transfers count) and spend $500+ on your Orion debit or credit card each month. Anyone can join this credit union via $10 membership fee to partner organization membership.
  • Genisys Credit Union pays 5.25% APY on up to $7,500 if you make 10 debit card purchases of $5+ each, and opt into receive only online statements. Anyone can join this credit union via $5 membership fee to join partner organization.
  • The Bank of Denver pays 5.00% APY on up to $25,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. Thanks to reader Bill for the updated info.
  • All America/Redneck Bank pays 5.30% APY on up to $15,000 if you make 10 debit card purchases each monthly cycle with online statements.
  • Find a locally-restricted rewards checking account at DepositAccounts.

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

  • Farmer’s Insurance FCU has their 3, 6, 9, 12, 18, 24, 36, 48, or 60 month CDs ALL at 5.00% APY for a limited-time. $1,000 minimum. The early withdrawal penalty for all terms longer than a year is 180 days of dividends OR half of the remaining term’s daily dividends, whichever is greater. Anyone can join this credit union via partner organization.
  • United States Senate FCU has a 60-month CD at 4.86% APY $1,000 minimum. Jumbo CDs have slightly higher rates ($100k+, $200k+). The early withdrawal penalty is 360 days of interest. 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. Right now, I see a 5-year non-callable CD at 4.85% APY (callable: no, call protection: yes). Be warned that now both Vanguard and Fidelity will list higher rates from callable CDs, which importantly means they can call back your CD if rates drop later.

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

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CDs at 4.50% (callable: no, call protection: yes) vs. 4.66% for a 10-year Treasury. Watch out for higher rates from callable CDs where they can call your CD back if interest rates drop.
  • 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, currently 2.50% for EE bonds issued from May 2023 to October 2023. As of 10/10/23, the 20-year Treasury Bond rate was 5.13%, I’d wait to see what the new rate is for November 2023.

All rates were checked as of 10/10/2023.

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

MMB Portfolio Dividend & Interest Income Update – October 2023

Posted on October 9, 2023 // Leave a Comment

Here’s my quarterly income update as of October 2023 for my MMB Portfolio. I prefer to track the income produced as an alternative metric to performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing.

Here is the historical growth of the S&P 500 total dividend, which tracks roughly the largest 500 stocks in the US, updated as of Q3 2023 (via Yardeni Research):

That is a much smoother ride than the price index. I imagine my portfolio as a factory that churns out dollar bills, or a tree that gives dividend fruit.

More details on 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) via 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. The starting yield is currently 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 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 October 2023 it would have generated ~$47,000 in annual income over the previous 12 months.
  • If I spent all the dividends/interest every quarter and added no other contributions, as of October 2023 it would have generated ~$36,000 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 simplified numbers to explain 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 10/2/23), 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.

My ttm portfolio yield is now roughly 2.69%, 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 $26,900 in dividends and interest over the last 12 months.

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). I really believe too much time is spent on this number. 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’m actually dreading when I have to delete this sentence from my updates!) 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 //

Tastyworks/Tastytrade ACAT Transfer Bonus: $500 for $25k, $2,000 for $100k, $5,000 for $1M

Posted on October 3, 2023 // 13 Comments

Update: New tiers added with higher bonus values, offer extended. Tastyworks is a discount brokerage targeted at active options traders, as they are cheaper than the big brokers for options trading while also having the full fancy options interface. Right now, they have a up to $25,000 ACAT transfer bonus with promo referral code MYNEWBONUS and you must keep the initial funding there for 12 months.

These ratios are pretty competitive, especially the $2,000 for $100,000 tier (2% of assets), but hey if you have more than that, why not grab more money even at a lower ratio.

New customers who open and fund a tastytrade account with $5,000 or more in cash or by an account transfer (ACATS) and enter MYNEWBONUS into their referral code field when initially registering with tastytrade will receive a cash bonus. The bonus amount is dependent on the initial funding amount. There is a 12-month withdrawal hold on the initial funding amount to retain the cash bonus. You can find each tier’s funding threshold and resulting payout in the table below.

  • $100 with $5,000+ in transferred assets or deposits
  • $500 with $25,000+ in qualifying new money
  • $2,000 with $100,000+ in qualifying new money
  • $3,000 with $250,000+ in qualifying new money
  • $5,000 with $1,000,000+ in qualifying new money
  • $25,000 with $5,000,000+ in qualifying new money

Eligible account types include individual (cash or margin), joint (cash or margin), LLC, Partnerships, S-Corp, C-Corp (cash or margin), and Autotrade enabled accounts. IRAs, trust accounts, and international customers are not eligible. Promotion extended to March 31st, 2024. Note their definitions:

WHEN CAN I WITHDRAW MY AWARDED CASH?
The deposit ($5,000+ cash deposit or account transfer) plus the value of the awarded cash are required to remain in the account for a minimum of 12 months. As mentioned previously, any principal fluctuations due to trading will not preclude you from keeping the awarded position value after 12 months.

IF MY ACCOUNT DROPS BELOW THE FUNDING REQUIREMENT, WILL I BECOME INELIGIBLE?
Principal fluctuations due to trading will not affect your eligibility to keep your awarded cash value. As long as you keep your original $5,000+ deposit in your account, then you will be able to keep your awarded cash.

WILL I BE PENALIZED IF MY ACCOUNT DROPS BELOW MY FUNDING AMOUNT?
Principal value fluctuations are not considered. As long as the initial $5,000 (or more) remains in the account for 12 months, then the awarded cash value will not be debited from your account.

WHAT HAPPENS IF I NEED TO WITHDRAW MY DEPOSIT BEFORE THE 12-MONTH HOLDING PERIOD END?
You are free to withdraw the deposit you made to your account. However, if the amount withdrawn no longer meets the minimum deposit requirements, then the value of the awarded stock position will be withheld from the withdrawal amount.

CAN I TRANSFER THE CASH OUT OF MY ACCOUNT?
Not until the 12-month hold period has lapsed.

Brokerage Asset Bonuses vs. Bank Deposit Bonuses. There is an important difference between brokerage asset bonuses and bank deposit bonuses. A bank deposit bonus pays you extra interest for holding a certain amount of cash with them. A brokerage asset bonus allows you to transfer over your existing investments like index funds, individual shares of Apple or Berkshire Hathaway, individual shares of REITs, and so on. You still own the asset and it’s still doing its thing. The brokerage bonus is on top.

In this example, if you really wanted to compare it directly against an interest rate, you should at least assume you will be holding a T-Bill ETF like SGOV, GBIL, or BIL (current SEC yield over 5%) and then adding the bonus to that yield. However, the real benefit for patient, long-term investors that you can just keep your existing assets and earn yourself a nice “self-management fee”.

Filed Under: Deals & Offers, Investing //

MMB Portfolio Asset Allocation & Performance Update – October 2023

Posted on October 1, 2023 // 3 Comments

Here’s my quarterly update on my current investment holdings as of October 2023, including all of our combined 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 advanced 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 the ability to buy and sell stocks and exceed the performance of basically doing nothing 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.

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 (ex. VTI)
  • 5% US Small-Cap Value (ex. VBR)
  • 20% International Total Market (ex. VXUS)
  • 5% International Small-Cap Value (ex. AVDV)
  • 10% US Real Estate (REIT) (ex. VWO)
  • 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 is up about 5.0% YTD to 10/1/2023. The S&P 500 is up 11.7% YTD, while the US Bond index is down around 1%.

The most notable action this quarter has been… inaction. There was only minor rebalancing via new purchases with cashflows (mostly dividends) this quarter. I haven’t bought any new ETF tickers or sold a single share of anything. I am considering increasing my estimated tax payments to the IRS to compensate for the extra interest being earned on my FDIC-insured savings accounts and Treasury bonds.

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

Filed Under: Goals, Investing, Retirement //

Treasury vs. TIPS vs. Breakeven Inflation Interest Rate Update (September 2023)

Posted on September 26, 2023 // 3 Comments

Just as I track the interest rates on savings accounts and CDs, I also follow the real rates of Treasury Inflation-Protected Securities (TIPS). Right now, the real (inflation-adjusted) yield on TIPS are reaching 10+ year highs and worth a closer look.

TIPS basics recap. The inner workings of TIPS can be complicated. John Rekenthaler recently attempted to break down how TIPS work in this Morningstar article, and I applaud his efforts but… my head still hurt after reading it through multiple times. 😓 Hopefully you’ll do better.

My close-enough version! TIPS are priced based on their real yield. Let’s say a 30-year TIPS has a real yield of 2%. That means it promises to yield 2% above inflation. Let’s say a 30-year traditional US Treasury bond has a yield of 4.5%. This is a nominal number, like that of a bank interest rate. The difference between those two rates is 2.5%, referred to as the breakeven inflation rate.

  • If over the next 30 years, inflation is 2.5%, then both will end up with the same final total return of 4.5%.
  • If over the next 30 years, inflation is 2%, then TIPS will return 4% while the regular Treasury will return 4.5%.
  • If over the next 30 years, inflation is 3%, then TIPS will return 5% while the regular Treasury will return 4.5%.

If inflation is higher than the breakeven rate over the bond maturity, TIPS win. If inflation is lower than the breakeven rate over the bond maturity, the regular Treasuries win.

Let’s take a look at the current numbers as of late September 2023.

30-year TIPS rate is 2.33% as of 9/26/23, the highest since they started selling them again in 2010. Chart from FRED (doesn’t include spike from last two days):

30-year Treasury rate is 4.70% as of 9/26/23, also the highest in a while. Chart from FRED:

The 30-year breakeven inflation rate is thus 2.37% as of 9/26/23. Chart from FRED:

(By the way, according to TIPSladder.com, you can construct a ladder of TIPS with today’s rates that will provide you a guaranteed inflation-protected income over the next 30 years at a 4.62% withdrawal rate as of this writing. In other words, $1 million portfolio can turn into $46,200 a year, inflation-adjusted every year, for the next 30 years. They show you how to build a ladder where the last bond would mature and the principal would be gone at the end of 30 years.)

I don’t know what future inflation will be, so I hold a mix of both regular Treasuries and TIPS in my bond portfolio. Right now, you get a historically solid real rate and a historically reasonable breakeven rate. I should add that as long as inflation is roughly as expected and you hold the bonds until maturity, then both types of bonds will earn roughly the same returns. There isn’t that much “cost” if things remain pretty calm.

The reason to consider dealing with the added hassle and complexities of TIPS is the potential danger from unexpected, high inflation. I’ll repeat that not a single insurance company will sell you similar inflation protection at ANY price. They’ll sell you a 3% step-up every year, sure, but no way will they let it float with actual inflation on an uncapped basis. They know that inflation probably won’t be 5%+ for an extended period of time… but it might. It has certainly happened in the past, and as we’ve seen, lots of things that have never happened ever before can still happen.

Filed Under: Investing //

The Hidden Effect of Securities Lending in Index Funds and ETFs (Are They Already Free?)

Posted on September 17, 2023 // 2 Comments

Morningstar has an educational article called Understanding Securities Lending in ETFs (also see the full whitepaper) that provided a lot of real-world numbers in an often overlooked area that actually affects the majority of ETF and mutual fund investors. ETFs hold a basket of stocks, and securities lending is the practice where the fund sponsor lends out some of those stocks for a fee. Borrowers may include hedge funds participating in a short or arbitrage play, or broker/dealers that need some shares to cover their own settlement needs.

If you own a Vanguard/Fidelity/Blackrock Target Retirement Fund or Total Stock Market ETF, you are benefiting from securities lending and earning a slightly higher return over time (while taking on a tiny bit of extra risk). Every major ETF and mutual fund provider, including Vanguard, Fidelity, Blackrock/iShares, State Street (SPDRs), American Funds, and T. Rowe Price participates in this practice.

Securities lending historically adds an average of around 0.005% to 0.03% of extra annual return. This means that for every $10,000 invested, you might earn an extra $0.50 to $3 a year. Here’s a Morningstar chart of the average securities lending return by sponsor. 1 basis point = 0.01%. It’s hard to tell if any differences are due to some level of operational skill, or that their holdings are simply more attractive to borrowers (more smaller stocks, more crypto stocks or whatever has higher short interest).

Due to the low expense ratios in many index funds, securities lending can significantly offset expense ratios. Securities lending interest usually goes toward quietly increasing the fund’s performance a little bit, as opposed to directly reducing the management expense ratio. Here’s a table of how much of each fund sponsor’s expense ratios are offset by securities lending income overall. Not surprisingly, the fund sponsors with mostly low-cost ETFs have the highest offset percentages.

Are some index ETFs already effectively free? The WSJ says index funds are almost free after State Street’s SPDR Portfolio S&P 500 ETF (SPLG) recently lowered its expense ratio to 0.02%, but given this information, it’s quite conceivable that the real “net” expense is already very close to zero, if not at zero.

These are all pretty small numbers for most individual investors. However, given the tiny expense ratio differences between index ETFs and the huge amount of assets held by them, the importance of every single basis point of additional performance is magnified. I’m glad to see that Vanguard remains competitive in this area, but also not overly aggressive.

Side note: Can individual investors earn even more extra income lending out the ETFs themselves? There is also the possibility of owning an ETF and lending out those entire ETF shares for interest. State Street runs the popular S&P 500 ETF SPY and in the article Unlocking the Securities Lending Potential of SPY makes the case that even though its ETF has a higher expense ratio that say Vanguard’s S&P 500 ETF VOO, the fact that SPY is the most popular ETF used for shorting the S&P 500 means that you might possibly net 8-9 basis points in this manner. The article appears to be targeted to institutional clients, so I’m not sure if any retail customers are getting anywhere near this amount of securities lending income. For my own portfolio as a whole, instead of even a single basis point, I am currently earning less than 0.04 basis points at Fidelity.

Even in the ideal case, retail customers only get about half of the gross income that the broker earns (a 50/50 split), and so given that VOO is still beating SPY in terms of straight-up 5-year past performance by 6 basis points or so every year, even if you allow the theoretical lending edge of 0.06% (with half or 3 basis points going to the investors), that still leaves VOO ahead of SPY. But as a practical matter, has anyone out there actually earned any income lending out their index ETFs? I haven’t; I’d imagine the supply would greatly outpace the demand.

Filed Under: Investing //

TradeStation Brokerage: $150 Bonus with $500 Deposit

Posted on September 14, 2023 // 7 Comments

TradeStation is a brokerage targeted at active traders of stocks, ETFs, stock options, futures, and futures options. Right now they have a $150 bonus promotion when you deposit $500 or more into a new TradeStation Securities account with promo code BRAVAGDC:

Get an extra $150 in your account when you deposit $500 or more into a new TradeStation Securities account. Open a TradeStation account using offer code BRAVAGDC and maintain a minimum balance of $500 and look out for your reward. Additional terms apply.*

You may need to take a picture of your driver’s license during the application process, using your smartphone. I was able to get approved instantly and fund via a Plaid ACH link and transfer.

You don’t need to place any trades to qualify for this bonus, but you do need to keep your deposit there for 2 months after the funding date (first $75 bonus payment) and then until 3 months after funding date (second $75 payment). Therefore you may wish to buy something at least with your funds, like SGOV which holds short-term Treasury Bills at $100.xx per share.

Here is their fee schedule. Note that there is a $10 monthly activity fee unless one of the following criteria are met (I believe that this does not apply during first 90 days, but will once there is 90 days of inactivity): $5,000 average end-of-month equity balance OR at least ten (10) trades placed during the previous 90-day period.

The bid-ask spread for SGOV is only $0.01 on most days. Each share is only a little over $100. I plan on transferring about $505 and simply buying 1 share at a time, and then selling one share at a time, just enough to satisfy the activity requirements. I also plan to hold overnight to avoid daytrading restrictions.

Offer found via DoC. Full terms and conditions:

Only New Entity (non-Institutional) Individual or Joint equities and futures accounts with the correct promotional code entered and initially funded with New Assets (as defined below) of $500.00 or greater are eligible for this cash offer. To qualify, you must enroll by entering the promotional code on new account application or request to enroll a new account, via telephone or email, with a TradeStation Representative. You must initially fund the Account with New Assets within 45 calendar days of Account enrollment. New Assets is defined as cash or securities held at a financial institution other than TradeStation (assets transferred from an existing TradeStation account do not qualify). Your Account will not qualify for the cash offer if you withdraw or transfer assets from your Account, then redeposit them into the Account. Asset fluctuations (up or down) do not affect the calculation of Qualifying Assets. Minimum funding of $500 must be maintained through month following account fund date for first payment and through the next month for subsequent payment. The cash offer will be determined based on Qualifying Assets in the Account as follows:

Less than $500.00 – cash reward of $0;
$500 or more – 2 cash rewards of $75 (total of $150).

Cash reward will be paid out in monthly increments of $75. First deposit of $75 into the Account will be two months following the account fund date. Each subsequent credit will post in following month of qualification. This offer is not affiliated with TradingView and a subscription to TradingView is not required for qualification. This offer cannot be combined with any other offers. Only one offer per client on one qualifying account. Existing clients are not eligible for this offer. Customers who receive promotional offers from any TradeStation affiliate may be subject to IRS Form 1099-MISC reporting requirements should the total value of those items exceed $599 in a calendar year. Please consult a tax professional.

Another drop in my 2023 IRA $6,500 challenge bucket.

Filed Under: Deals & Offers, Investing //

Michigan MESP 529 College Savings Plan: $100 Bonus Per Accountholder/Beneficiary Combo

Posted on September 11, 2023 // 8 Comments

The Michigan Education Savings Program (MESP) is offering a $100 bonus when you open a new account by 9/30/23 and deposit $1,000+ within 10 business days of establishing the account. Your $100 matching deposit will arrive by 1/31/24. The 529 account must be open with a non-zero balance to receive the bonus.

Compared to all 529 plans nationwide, MESP is a top overall plan with reasonable costs and good investment options (official plan of Michigan, run by TIAA-CREF), making it an excellent option for those without specific in-state tax incentives. See here to compare 529 tax benefits across all 50 states.

This offer is very similar to the ScholarShare 529 promo, as both are managed by TIAA-CREF and this also has a limit of “one (1) Matching Deposit pernew Michigan Education Savings Program (MESP) account per unique accountholder/beneficiary combination.” Please see that post for more background information. Additional considerations for this promo:

  • Michigan taxpayers may qualify for a state tax deduction up to $10,000 if married filing jointly ($5000 single), for contributions made into an MESP account.
  • You should be able to stack this with other 529 offers like that from California Scholarshare. If you have multiple 529 accounts from different state plans/managers, you can later transfer the balances and merge them into each other, although there may be a modest amount of paperwork required each time. You are allowed one rollover per beneficiary during a rolling 12-month period.

From the full fine print:

Offer Description: The Michigan Education Savings Program (MESP) is a 529 college saving splan administered bythe Michigan Department of Treasury, and managed by TIAA-CREF Tuition Financing, Inc. (“TFI”). To receive a $100 matching deposit (“the Matching Deposit”), eligible individuals must (a) open a new Michigan Education Savings Program (MESP) account (for a new beneficiary) online at www.MIsaves.com between September 1, 2023 at 12:01 AM Eastern Time (ET) and September 30, 2023 at 11:59 PM ET with an initial deposit of at least $1,000 to be contributed and invested at the time the new Michigan Education Savings Program (MESP) account is opened. The initial $1,000 deposit must be received within 10 business days after the account is established. The Matching Deposit will be made to the eligible Michigan Education Savings Program (MESP) account on or before 8:59 PM ET on January 31, 2024. To receive the Matching Deposit, the Michigan Education Savings Program (MESP) account must be open with a dollar balance greater than zero on the day the Matching Deposit is made. Limit: one (1) Matching Deposit per new Michigan Education Savings Program (MESP) account per unique accountholder/beneficiary combination.

Filed Under: College & Education, Deals & Offers, Investing, Taxes //
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