Schwab Lifetime Adjustable Income: Flexible Withdrawal Rules Based On Portfolio Survival Chances

Posted on February 23, 2022 // 3 Comments

One of the perpetual debates in retirement planning circles is withdrawal rates, AKA how much monthly income can you take from a portfolio. Once you nail down a withdrawal rate and retirement spending target, then you get Your Number – how much you need to have saved to retire (after backing out Social Security and other income streams). It’s common to start with the static 4% rule, but that rule also includes some drawbacks. An alternative is a flexible withdrawal rule that adjusts based on market returns. When your portfolio grows, you can spend a little more. If it shrinks, you cut back a little. Sounds reasonable, right?

However, I haven’t seen many real-world examples of flexible withdrawal rules. Schwab has helpfully outlined one proposed method in this memo: Lifetime Adjustable Income vs. the 4% Rule: Can You Spend More in Retirement with Less Risk? This provides the underlying basis behind their robo-advisor feature called Intelligent Income where you can pick a comfort level and the software will tell you how much you can withdraw each year and from which type of account (IRA, Roth IRA, taxable, etc).

In this memo, we compare a flexible withdrawal strategy to the static 4% rule. We recommend a lifetime adjustable income strategy, described in this paper, that can be put into action using an annually updated financial plan, using technology or an advisor. Doing so may help increase spending early in, and over a long, retirement and help ensure your money lasts.

Here’s their example structure for flexible withdrawals:

  • Set an initial withdrawal rate that delivers an 80% probability of success (savings lasting).
  • Adjust spending amounts after each year based on if the probability of savings lasting falls outside the range you decide: here it is below 75% or above 99%. If these thresholds are crossed, increase or decrease spending by the amount that brings the financial plan back to a 99% probability of savings lasting. This results in fewer but more drastic cuts.
  • Add “guardrails”. A minimum and maximum acceptable annual (real) spending amount of $25,000 and $60,000, respectively, meaning that we will always withdraw at least $25,000 (or at most $60,000).

Using these flexible rules, the initial withdrawal rate was about $43,000 instead of $40,000. Across all of the simulated scenarios, the average annual withdrawal was basically 20%, or $10,000 a year, higher: $50,000 a year instead of the $40,000 a year (in today’s dollars). Even better, the likelihood of running out of money dropped.

However, you must look past the averages and see that you are now exposed to the extremes. Look at that wide expanse of grey. A significant number of the scenarios involved some extended deep cuts to spending, hitting and hovering just above the $25,000 minimum guardrail. You’ll have to decided if you like this trade-off between probably getting more income but possibly enduring some big cuts. This is why many financially-conservative people would prefer to simply start out at a lower 3% or 3.5% withdrawal rate and adjust upwards if the portfolio keeps growing.

In any case, I found it interesting that Schwab used the probability of portfolio survival rate as the factor used to adjust withdrawal rate. DIY investors can implement a similar system themselves. Here are some tools to estimate portfolio survival probability:

Filed Under: Investing, Retirement //

Have You Agreed to Pay the Price Required For Long-Term Stock Returns?

Posted on February 22, 2022 // 5 Comments

On March 6, 2009, the S&P 500 index hit 666.80, shedding 13 years of gains. 13 years! Guess how long it has been since March 2009? 13 years! Something to ponder as the possibility of more war looms ahead.

I remember my portfolio being halved at the time and thinking… how can it not eventually be back at at 1,000? Should I double down on stocks? Meanwhile, Goldman Sachs released “analyst research” that warned the S&P could fall as low as 400. People were panicked and “get out now and wait until things calm down” started to sound more and more like solid advice. The best I could do was not sell anything.

I am re-reading The Psychology of Money by Morgan Housel. In this book of timeless advice about controlling your behavior, he points out that the long-term stock returns that we all expect is not free. There is a price that must be paid.

Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.

We should accept this price volatility as an expected cost of doing business, not something to be avoided:

It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor. Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline. But if you view volatility as a fee, things look different.

From A Wealth of Common Sense, we can get a better understanding of How Often Should You Expect a Stock Market Correction?

I would add one thing. Accepting price swings after looking at a chart may sound okay in isolation. However, you should also prepare for the fact that there will always be a great reason for those drops. We’ve had housing bubbles and dot-com bubbles and now worldwide pandemics. But the next reason will likely be different. And it will be a widely-accepted, legit, scary reason. I will be scared. You will be scared.

If I mentally agree to pay this price now, hopefully it will help me when the next scary thing inevitably comes along.

Filed Under: Investing //

Charlie Munger Daily Journal Annual Meeting 2022 Full Video, Full Transcript, and Highlights

Posted on February 21, 2022 // 1 Comment

Charlie Munger is now 98 years old and still answering questions at the 2022 Daily Journal Annual Shareholder Meeting. Yahoo Finance livestreamed the event again, and you can view the full two-hour recording on YouTube (embedded below, starts at 24:47). You’ll miss out on his snarky tone, but you may prefer to read the entire transcript, kindly provided in PDF form via @DividendGrowth and via Junto Investments.

You don’t have to agree with everything he says, but some of it is just refreshing in that it’s not the same stuff you hear elsewhere. He has a clear opinion. I’ve included a few of my personal highlights below.

One philosophy that I appreciate (but don’t necessarily follow) is to simply stay completely clear of bad things that can destroy either your financial stability or your general happiness. If you don’t own crypto, you can still live a rich and happy life.

  • Avoid treating the stock market like a casino.
  • Avoid speculating in cryptocurrencies.
  • Avoid doing something because you see someone else get rich doing it.
  • Avoid anything so addictive to you that you give up everything else. For some, it could be alcohol. Others, it could be video games.
  • Avoid “pretentious expenditure”.

On the best way to invest:

Well, it may be that you have to choose the least bad of your options. That frequently happens in human decision making. The Mungers have Berkshire stock, Costco stock, Chinese stocks through Li Lu, a little bit of Daily Journal stock, and a bunch of apartment houses. Do I think that’s perfect? No. Do I think it’s okay? Yes. I think the great lesson from the Mungers is that you don’t need all this damn diversification. You’re lucky if you got four good assets. If you’re trying to do better than average, you’re lucky if you have four things to buy. To ask for 20 is really asking for egg in your beer. Very few people have enough brains to get 20 good investments.

On making macro-economic predictions and dealing with the boom and bust cycle:

I figure that I want to swim as well as I can against the tides. I’m not trying to predict the tides.

If you’re gonna invest in stocks for the long term, or real estate, of course there are going to be periods when there’s a lot of agony and other periods when there’s a boom. I think you just have to learn to live through them.

Should we go to cash and wait for better opportunities in the future?

In my whole adult life, I’ve never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find. I don’t think I’m going to change now. The Daily Journal has used up its cash.

On living a happy life:

You want to have reasonable expectations and take life’s results good and bad as they happen with a certain amount of stoicism. There’ll never be any shortage of good people in the world. All you got to do is seek them out and get as many of them as possible into your life. Keep the rest the hell out.

Past years:

Filed Under: Inspirational, Investing //

Gemini Exchange: Bitcoin Bonus

Posted on February 14, 2022 // 25 Comments

(Update: After a incorrect trademark infringement claim and takedown request, Gemini has followed up and taken it back. I’ve brought back an edited version of the original post.)

Gemini is a crypto exchange offering a $150 bonus in Bitcoin if you open a new account and invest $1,000+ in crypto within the first 30 days. Buying the Gemini dollar (GUSD) stablecoin worked for me.

To find it, enter “gemini $150 bitcoin bonus” into Google.com. It should be the first result. I am not affiliated with this promotion. If you open a Gemini account through this promotion, I get nothing.

Here were the overall steps that I took:

  • Use the promo link above to start your application as a new customer. You may need to submit a driver’s license photo.
  • Link a bank account via Plaid.
  • Fund Gemini account via ACH. The daily max is $1,000.
  • Purchase $1,000 in crypto. The most conservative choice is GUSD, which is a stablecoin that is (supposed to be) backed 1:1 with US dollars and trades at a stable $1.00 value.
  • This should trigger the bonus, which arrived within 24 hours for me. You get $150 in Bitcoin, which can quickly go up or down in value.
  • I have kept my BTC and GUSD for now, but you can sell it for USD if you want. There are some transaction fees, roughly $3 for a $150 trade with the basic trading structure but possibly less with their ActiveTrader option.

Filed Under: Deals & Offers, Investing //

Big List of Social Security Tools: Best Time to Start Claiming Social Security Benefits?

Posted on February 9, 2022 // 2 Comments

Social Security is the largest source of retirement income for a majority of Americans. For about 1/3rd of them, Social Security makes up 90% or more of their retirement income.

ss_percent

Depending on your assumptions, the “lump sum value” of your Social Security benefits is somewhere between $300,000 and $700,000. (Source: Kitces)

Even this large figure ignores the fact that your Social Security income is guaranteed to rise each year with inflation, something no other private annuity company in the world even offers any longer at any price!

Therefore, spending a little time and money in order to consider the many options for Social Security (especially for those married, divorced, widowed, or disabled) can really make a difference. This NYT article (free, gift article) lists a number of services that help you navigate the rules (at a variety of service levels and price points). In no particular order:

I don’t have any in-depth experience with any of these online tools, but when the time comes I’d probably pony up the money (adds up to less than $100 for all three) and compare the results. If they are properly programmed, they should all agree, right?

The tools below go beyond Social Security claiming strategies and more into overall retirement income planning.

Even if you’re still far away from claiming time, be sure to sign up for your official mySocialSecurity account (before a scammer does) and take a peek at your stats each year. For those that like tinkering, try copy and pasting your anonymous data into the SSA.tools website (free) and play around with different future scenarios.

In the end, you may not follow the software recommendations exactly, but simply knowing about the different options and factors can be helpful. In my experience, many people just end up claiming earlier because they want “their” money sooner rather than later without understanding the potential drawbacks. A retiree may want to have their “own” paycheck again if their partner still works.

Filed Under: Investing, Retirement, Tools & Calculators //

Best Interest Rates on Cash – February 2022 Update

Posted on February 6, 2022 // 5 Comments

Here’s my monthly roundup of the best interest rates on cash as of January 2022, roughly sorted from shortest to longest maturities. I look for lesser-known opportunities earning more than most “high-yield” savings accounts and money market funds while still keeping your principal FDIC-insured or equivalent. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 2/6/2022.

Significant changes since last month: 7.12% Savings I Bonds still a good idea if you haven’t done it yet, $100 Marcus new deposit bonus is a good deal (details), HM Bradley 3% APY requirements relaxed a bit, new LFCU 2% APY account opening review. In general, there doesn’t seem to be much upside to locking in a 5-year CD at 1.50% when there are so many short-term options nearly as good (or better) while waiting to see how much rates rise in 2022.

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.

  • 4% APY on $2,000/$6,000. Current offers 4% APY on up to $2,000 on each of their “savings pods”. Free users get 1 savings pod, while premium users get 3 savings pods. Potential promos include $50 bonus and “Premium free for life”. Please see my Current app review for details.
  • 3% APY on up to $100,000, but requires direct deposit and credit card spend. HM Bradley pay 3% APY if you open both a checking and credit card with them, and maintain $1,500 in total direct deposit each month and $100 in credit card purchases each month. Please see my updated HM Bradley review for details.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000, requires direct deposit and credit card transactions. Porte requires a one-time direct deposit of $1,000+ to open a savings account. Porte then requires $3,000 in direct deposits and 15 debit card purchases per quarter (average $1,000 direct deposit and 5 debit purchases per month) to receive 3% APY on up to $15,000. New customer bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. You must maintain a $500 direct deposit each month for this balance cap, otherwise you’ll still earn 1.20% on up to $5,000. They also pay 4% on USDC stablecoin, but I avoid this as it is not FDIC-insured (and you can get higher rates elsewhere if you did want to hold USDC.) New customer $50 bonus via referral. See my OnJuno review.

High-yield savings accounts
Since the huge megabanks pay essentially no interest, I think every should have a separate, no-fee online savings account to accompany your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer plus other hoops, but the lesser-known fact is that the 1% APY is available for everyone. Thanks to the readers who helped me understand this. Unfortunately, some readers have reported their applications being denied.
  • Evangelical Christian Credit Union (ECCU) is offering new members 1.01% APY on up to $25,000 when you bundle a High-Yield Money Market Account & Basic Checking. (Existing members can get 0.75% APY.) To join this credit union, you must attest to their statement of faith.
  • There are several other established high-yield savings accounts at closer to 0.50% APY. Marcus by Goldman Sachs is on that list, and if you open a new account with a Marcus referral link (that’s mine), they will give you and the referrer a 1.00% APY for your first 3 months (a 0.50% boost). You can then extend this by referring others to the same offer. They are also offering a $100 new deposit bonus if you move over $10,000 in new money.

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. CFG Bank has a 13-month No Penalty CD at 0.62% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Poppy Bank has a 1-year CD at 1.00% APY ($1,000 min). According to DepositAccounts, early withdrawal penalty is 90 days of interest.

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

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.01%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.68% SEC yield ($3,000 min) and 0.78% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.60% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.64% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 2/4/2022, a new 4-week T-Bill had the equivalent of 0.05% annualized interest and a 52-week T-Bill had the equivalent of 0.88% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.02% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.09% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit 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 November 2021 and April 2022 will earn a 7.12% 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-April 2022, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

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

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

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

  • Lafayette Federal Credit Union is offering 2.02% APY on balances up to $25,000 with a $500 minimum monthly direct deposit to their checking account. No debit transaction requirement. They are also offering new members a $100 bonus with certain requirements. Anyone can join this credit union via partner organization ($10 one-time fee).
  • Quontic Bank is offering 1.01% APY on balances up to $150,000. May be useful for those with high balances. You need to make 10 debit card point of sale transactions of $10 or more per statement cycle required to earn this rate.
  • The Bank of Denver pays 2.00% APY on up to $10,000 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. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $25k. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 2.25% APY on balances between $500 and up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

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

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.70% APY ($10,000 min of new funds). Early withdrawal penalty is 1 year of interest. They also have a 15-month special at 1.05% APY and 9-month at 0.80% APY.
    Anyone can join this credit union by joining the National Space Society (free). However, NASA FCU will perform a hard credit check as part of new member application.
  • American Heritage Credit Union has a 5-year CD at 1.50% APY ($1,000 min). Early withdrawal penalty is 12 months of interest. Anyone can join this credit union via partner organization (free).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year CD at 1.70% APY. Be wary of higher rates from callable CDs listed by Fidelity.

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

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 2.10% APY vs. 1.87% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 2/4/2022, the 20-year Treasury Bond rate was 2.29%.

All rates were checked as of 2/6/2022.

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

Will Your Robo-Advisor Stay The Course? UBS Buys Wealthfront

Posted on January 27, 2022 // 4 Comments

Over time, more and more people are seeing the benefits of investing in stocks and bonds through low-cost index funds. Here is a chart from Morningstar showing the overall flow of assets out of actively-managed and into passively-managed US equity funds over the last 15 years.

For a while, people wondered if low-cost digital advisors that managed a portfolio of index funds for a modest fee would take over. The picture looks a little different today.

Wealthfront was one of the early digital-only startups, promising to manage a diversified portfolio of low-cost ETFs for you for a modest 0.25% of assets, even if you had as little as $500 to invest. They tried a few different things over the years, including changing up their model portfolios, trying to add a in-house risk-parity fund, and even recently adding crypto and individual stock options. Their final move came this week, when they announced they would be sold to UBS for $1.4 billion. This wasn’t exactly a huge exit, given the huge amount of venture capital they had burned through over the years. As usual with such acquisitions, they promise both “nothing will change” and “things will only get better”.

In hindsight, I am relieved that I didn’t let Wealthfront handle my assets. They clearly had no firm guiding principles, tweaking their portfolios with each new trend. Based on the reporting, it looks like they sold their customers to the highest bidder, as UBS is not exactly known for low-cost passive investing. This play is widely seen a way for UBS to obtain young investors that will one day be rich (read: one day will generate lots of wealth management fees). See UBS Buys Wealthfront for $1.4 Billion to Reach Rich Young Americans and Why a Bank for the Super Rich Is Taking Aim at the Younger Merely Rich.

Is this move what is best for Wealthfront’s customers? Or what was best for Wealthfront’s investors? Mark the date. I will be checking to see what Wealthfront clients own in 5 and 10 years, if that is still possible. Keep in mind that any portfolio changes usually result in taxable events.

Funds flowed into index funds for a simple reason: they performed better and made folks more money. Index funds performed better primarily due to low costs and low turnover (low tax costs). However, it doesn’t appear that Wealthfront could operate successfully independently while offering low costs. One way or another, the new owners are going to try and extract more money per client either via portfolio changes or higher fee products.

Unfortunately, I worry that even Vanguard, in its pursuit of growth, is gradually going down the same path as many large nonprofits. Many “nonprofits” are huge bureaucracies that chase money as eagerly as any corporation – more money means bigger salaries to management, more political power, and greater career advancement. (Side note: I thought that Vanguard got away with their huge Target Date fund capital gains distribution with little media attention, but now see: Massachusetts investigating sales of target date funds to retail investors after word of surprise tax bills.)

I don’t write much about robo-advisors any more. They showed promise initially, but apparently the business model just isn’t working.

Filed Under: Investing, Retirement //

MMB Portfolio 2021 Year-End (Late Update): Dividend and Interest Income

Posted on January 24, 2022 // 1 Comment

dividendmono225Here’s my (late) quarterly update on the income produced by my “Humble Portfolio“. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), encouraging me as I keep plowing more of my savings into more stock purchases. I imagine them as a factory that just churns out more dollar bills.

via GIPHY

Income yield history (percentage of portfolio value). Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014. There appears to be a slight recovery from the early pandemic time period.

I track the “TTM” or “12-Month Yield” from Morningstar, 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 over the same period. (ETFs rarely have to distribute capital gains.) I prefer this measure because it is based on historical distributions and not a forecast. Below is a rough approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 1/24/22) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.21% 0.30%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.75% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 3.09% 0.77%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.64% 0.13%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 2.56% 0.15%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 1.14% 0.19%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 4.69% 0.80%
Totals 100% 2.44%

 

Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

The ratio of dividend payouts to 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.

Absolute dividend history. Even though the dividend yield hasn’t been too impressive, there is a different story when you look at the absolute amount of income paid out over time. If you retired back in 2014 and have been living off your stock/bond portfolio, your total income distributions are much higher in 2022 than in 2014.

Here is the historical growth of the S&P 500 absolute dividend, which tracks roughly the largest 500 stocks in the US, updated as of Q4 2021 (via Yardeni Research):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $13,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to over $50,000 a year, even if you had spent every penny of dividend income every year.

Here is the historical growth of the absolute dividend of the EAFE iShares MSCI ETF, which tracks a broad index of developed non-US stocks (VXUS is a newer ETF), via Netcials.

European dividend culture seems to encourage paying out a higher percentage of earnings as dividends, but as a result those dividends are also more volatile, moving up and down with earnings. US dividend culture tends to be more conservative, with the expectation that dividends will be growing or at least stable. This is not true across every company, but in general there appears to be a greater stigma associated with dividend cuts in US stocks than in international stocks.

Big picture and rules of thumb. If you are not close to retirement, there is not much use worrying about decimal points. 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 result, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 30 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). Build in some spending flexibility to make your portfolio more resilient in the real world, and that’s a reasonable goal to put on your wall.

Using the income before “full” retirement. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “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 still working, 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. This is your one life and it only lasts about 4,000 weeks.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio 2021 Year-End (Late Update): Asset Allocation & Performance

Posted on January 23, 2022 // 2 Comments

portpie_blank200Here’s my (late) quarterly update on my current investment holdings, as of 1/23/22, including our 401k/403b/IRAs and taxable brokerage accounts but excluding a side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but just to share an real, imperfect, low-cost, diversified DIY portfolio. The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses.

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

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

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Avantis International Small Cap Value ETF (AVDV)
Cambria Emerging Shareholder Yield ETF (EYLD)
Vanguard REIT Index (VNQ, VGSLX)

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

Target Asset Allocation. This “Humble Portfolio” does not rely on my ability to pick specific stocks, sectors, trends, or countries. I own broad, low-cost exposure to asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning publicly-traded US and international shares of businesses, as well as high-quality US federal and municipal debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I also own real estate through 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. You might own laundromats or vending machines or an online business. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less.

Find a good asset that you believe in and understand, and just keep buying it through the ups and downs.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. Usually, whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well. I’ve also realized that I don’t have strong faith in the long-term results of commodities, gold, or bitcoin. I’ve tried many times to wrap my head around it, but have failed. I prefer things that send me checks while I sleep.

Stocks Breakdown

  • 45% US Total Market
  • 7% US Small-Cap Value
  • 31% International Total Market
  • 7% International Small-Cap Value
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 66% High-Quality bonds, Municipal, US Treasury or FDIC-insured deposits
  • 33% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. This is more conservative than most people my age, but I am settling into a more “perpetual” 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. With a self-managed, simple portfolio of low-cost funds, we can minimize management fees, commissions, and taxes.

Holdings commentary. I’ve been investing steadily for over 15 years, and the results have exceeded my expectations. There is ALWAYS something that looks worrying. Looking back, my best investment decisions were to NOT do anything different during times of stress. Maybe 2022 will have more such times. Ignore the noise, if you can.

I often wonder how I can teach my children such patience in investing, and that seems to be the hardest aspect.

Performance numbers. According to Personal Capital, my portfolio is up another +13.9% for 2021.

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

Filed Under: Goals, Investing, Retirement //

Real-World Numbers: Investing $850 a Month Turned Into $200,000 Over 10 Years (2022 Edition)

Posted on January 18, 2022 // 6 Comments

Instead of focusing on the current hot thing, how about stepping back and taking the longer view? How would a steady investor have done over the last decade? Most successful savers invest money each year over a long period of time.

Target date funds. The Vanguard Target Retirement 2045 Fund is an all-in-one fund that is low-cost, globally-diversified, and available both inside many employer retirement plans and to anyone that funds an IRA. When you are young (up until age 40 for those retiring at 65), this fund holds 90% stocks and 10% bonds. It is a solid default choice in a world of mediocre, overpriced options. This is also a good benchmark for others that use low-cost index funds.

The power of consistent, tax-advantaged investing. For the last decade, the maximum allowable annual contribution to a Traditional or Roth IRA has been roughly $5,000 per person. The maximum allowable annual contribution for a 401k, 403b, or TSP plan has been over $10,000 per person. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark. Therefore, I’m going to use $10,000 as a benchmark amount. This round number also makes it easy to multiply the results as needed to match your own situation. Save $5,000 a year? Halve the result. Save $20,000 a year? Double the numbers, and so on.

The real-world payoff from a decade of saving $833 a month. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years? With the interactive tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year ($833 a month, or $384 per bi-weekly paycheck) for the last decade would have resulted in a total balance of $196,000. Bump that up to $850 a month, and you’d be sitting on $200,000 right now, broken up into $102,000 in contribution and $98,000 in investment gains.

What would have happened if you extended that to the past 15 years instead? Investing $10,000 every year for the last decade and a half would have resulted in a total balance of $353,000. That breaks down to $150k in contributions + $203k investment growth. Your gains are now officially more than what you initially invested.

Real-world path to becoming a 401(k) millionaire. Not theoretical numbers from a calculator! Are you a dual-income household that can put away more? If you each invested $14,150 a year ($28,300 total for both) for the last 15 years, you would have a million dollars. That means starting at age 22 and ending at 37, or starting at 25 and ending at 40.

It gets even better if you started early. There is a popular example of the power of compound interest that shows how someone who started saving at age 25, saves and invests for 10 years but then stops and never saves a penny again still beats someone who starts saving at 35 and keeps on saving for 30 years. Acorns provides a nice illustration:

Once you have that initial momentum, it just keeps going.

Timing still matters, but not as much as you might think due to the dollar-cost averaging and longer time horizon. Yes, the last decade has been a great run for US stock markets. But Vanguard Target funds also own a lot of international stocks, which haven’t been nearly as hot and have maintained lower valuations. Diversification means you aren’t 100% in the hot thing, but your bases are covered if the hot things goes cold. Here are my previous “saving for a decade” posts:

Work on improving your career skills (or start your own business), save a big chunk of your income, and then invest it in productive assets. Keep calm and repeat. The only “secret” here is consistency and starting as early as you can. (The best time is always yesterday. The second best time is today.) We have maxed out both IRA and the 401k salary deferral limits nearly every year since 2004. We are fortunate in many ways, but we received no inheritance and no house downpayment assistance. We are not super-skilled stock pickers or Bitcoin early adopters. You can still build serious wealth with something as accessible and boring as the Vanguard Target Retirement fund (or a simple collection of low-cost index funds).

Filed Under: Inspirational, Investing, Retirement //

Best Interest Rates on Cash – January 2022 Update

Posted on January 9, 2022 // 5 Comments

Here’s my monthly roundup of the best interest rates on cash as of January 2022, roughly sorted from shortest to longest maturities. Significant changes since last month: 7.12% Savings I Bonds annual purchase limit reset for 2022, new 2% APY LFCU checking, few other minor rate changes. I plan on buying I Bonds in late January. You could choose to wait until mid-April to see the next rate, but you’d likely be earning less interest in the meantime.

I look for lesser-known opportunities earning more than most “high-yield” savings accounts and money market funds while still keeping your principal FDIC-insured or equivalent. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 1/9/2022.

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.

  • 3% APY on up to $100,000, but more hoops coming next month. The top rate will be 3% APY for January 2022 (source), but 1% APY starting February 2022 unless you have their credit card and satisfy both a spending and direct deposit requirement. Please see my updated HM Bradley review for details. I’m sticking with them as already have the credit card, but the only real upside for new customers is that they will remove the waitlist in February 2022.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000. Porte requires a one-time direct deposit of $1,000+ to open a savings account. Starting January 2022, Porte requires $3,000 in direct deposits and 15 debit card purchases per quarter (average $1,000 direct deposit and 5 debit purchases per month) to receive 3% APY on up to $15,000. New customer $100 bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. You must maintain a $500 direct deposit each month for this balance cap, otherwise you’ll still earn 1.20% on up to $5,000. New customer $50 bonus via referral. See my OnJuno review.

High-yield savings accounts
Since the huge megabanks pay essentially no interest, I think every should have a separate, no-fee online savings account to accompany your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer plus other hoops, but the lesser-known fact is that the 1% APY is available for everyone. Thanks to the readers who helped me understand this. Unfortunately, some readers have reported their applications being denied.
  • Evangelical Christian Credit Union (ECCU) is offering new members 1.01% APY on up to $25,000 when you bundle a High-Yield Money Market Account & Basic Checking. (Existing members can get 0.75% APY.) To join this credit union, you must attest to their statement of faith.
  • There are several other established high-yield savings accounts at closer to 0.50% APY. Marcus by Goldman Sachs is on that list, and if you open a new account with a Marcus referral link (that’s mine), they will give you and the referrer a 1.00% APY for your first 3 months (a 0.50% boost). You can then extend this by referring others to the same offer.

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. CFG Bank has a 13-month No Penalty CD at 0.62% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Poppy Bank has a 1-year CD at 1.00% APY ($1,000 min). According to DepositAccounts, early withdrawal penalty is 90 days of interest.

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

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.01%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.55% SEC yield ($3,000 min) and 0.65% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.44% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.56% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 1/7/2022, a new 4-week T-Bill had the equivalent of 0.05% annualized interest and a 52-week T-Bill had the equivalent of 0.42% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.06% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.09% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit 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 November 2021 and April 2022 will earn a 7.12% 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-April 2022, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

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

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

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

  • Lafayette Federal Credit Union is offering 2.02% APY on balances up to $25,000 with a $500 minimum monthly direct deposit to their checking account. They are also offering new members a $100 bonus with certain requirements. Anyone can join this credit union via partner organization ($10 one-time fee).
  • Quontic Bank is offering 1.01% APY on balances up to $150,000. This is best for people who have high balances, as the rate is not as high as other rewards checking accounts. You need to make 10 debit card point of sale transactions of $10 or more per statement cycle required to earn this rate.
  • The Bank of Denver pays 2.00% APY on up to $10,000 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. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $25k. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 2.25% APY on balances between $500 and up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

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

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.70% APY ($10,000 min of new funds). Early withdrawal penalty is 1 year of interest. They also have a 15-month special at 1.05% APY and 9-month at 0.80% APY.
    Anyone can join this credit union by joining the National Space Society (free). However, NASA FCU will perform a hard credit check as part of new member application.
  • Lafayette Federal Credit Union has a 5-year CD at 1.26% APY ($500 min). Early withdrawal penalty is 6 months of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year CD at 1.60% APY. Be wary of higher rates from callable CDs listed by Fidelity.

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

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 2.00% APY vs. 1.69% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 1/7/2022, the 20-year Treasury Bond rate was 2.15%.

All rates were checked as of 1/9/2022.

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

GMO: The Case For Investing in Non-US Stocks (Even Though Recent Performance Is Poor)

Posted on January 6, 2022 // 5 Comments

The GMO quarterly letter is on my recurring “must read” list, and the 2021 Q3 letter “Winners, Losers, and the Case for Owning Each” did not disappoint, including some very interesting data for the DIY investor that wants to stay informed. Here are my takeaways and notes:

For bonds, their starting yield tracks very closely to resulting return. 10-year Treasury rate is 2%, so the 10-year future performance for Treasuries will likely be very close to 2%. Plan accordingly. I choose to invest in short-term and intermediate-term bonds (effective duration 5 years or less).

Valuations aren’t everything, but they are an important component. Total return = fundamental return + change in P/E ratio. If you compare the two decades 2001-2011 and 2011-2021, one is referred to as a “lost decade” while the other was one of the longest bull runs in history. However, the growth and reinvestment of earnings was actually about the same. The main difference was the change in P/E ratios (see chart below). Looking ahead, this means that US companies could still be growing profits, but if the P/E ratios drop even just a little, the total return could be quite poor.

The P/E ratios for US stocks overall is still much higher than for international stocks. The gap is pretty significant.

GMO concludes that their is a strong case for having a significant allocation to non-US stocks. GMO shares how they actively adjust the asset allocation for the billions that they manage for large institutions based on this data. I haven’t seen them publicly share this information before now.

The unsaid part: GMO has been saying this type of thing for many years, and the overall US stock market has just kept outperforming non-US stocks. How long will this keeping going? I choose to admit that I don’t know. In this regard, I don’t bet on either momentum (things going in one direction keep going in that direction) or reversion to the mean (things will eventually go back towards long-term averages).

I call my low-cost, index fund portfolio my “humble portfolio” because it doesn’t require genius on my part. I simply track the passive global weighting on the left (60% US, 40% International currently). If US stocks continue to beat International stocks forever, then one day the world weighting will simply be 80% US or 90% or whatever, and that’s what I’ll own. If things revert back, then it might be 50% US or even 40%, and that’s what I’ll own. Again, by accomplishing this at rock-bottom costs and not paying “helpers” for their guesses (who charge their fees regardless of whether they are right), I guarantee myself above-average results.

Just like buying all the companies within the US, I am buying all the companies of the world. I am invested in well-known, important international names like Taiwan Semiconductor, Nestle (brands), Unilever (brands), Shopify, Samsung, and Diageo (brands). When someone buys Gerber baby food, Hellman’s mayo, or Guinness beer, or even support a local small business (Shopify), a tiny portion of that purchase lands in my brokerage account.

Filed Under: Investing //
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