Richer, Wiser, Happier: Notes From 40+ Super Investors NOT Named Warren Buffett

Posted on August 18, 2021 // 1 Comment

It was very telling that the first chapter of Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life by William Green was a profile of Mohnish Pabrai. In other words, not Warren Buffett! If you aren’t a student of value investing, then you probably have never even heard of him before. He is best known for a being a “clone” investor.

“I’m a shameless copycat,” he says. “Everything in my life is cloned.… I have no original ideas.” Consciously, systematically, and with irrepressible delight, he has mined the minds of Buffett, Munger, and others not only for investment wisdom but for insights on how to manage his business, avoid mistakes, build his brand, give away money, approach relationships, structure his time, and construct a happy life.

That descriptor always seemed a bit derogatory, but after reading more about Pabrai in this book, I grew quite a lot of appreciation and respect for his approach. If you also like collecting outside wisdom (especially about investing) and incorporating into your life, you will likely enjoy this book as well. Green is an excellent writer and journalist that has managed to interview over 40 of the world’s greatest investors (many of which I’d never heard of until now), and this became the most heavily-highlighted book in my Kindle. Here are a fraction of them:

Mohnish Pabrai

Rule 1: Clone like crazy. Rule 2: Hang out with people who are better than you. Rule 3: Treat life as a game, not as a survival contest or a battle to the death. Rule 4: Be in alignment with who you are; don’t do what you don’t want to do or what’s not right for you. Rule 5: Live by an inner scorecard; don’t worry about what others think of you; don’t be defined by external validation.

Cloning Buffett, who once showed him the blank pages of his little black diary, Pabrai keeps his calendar virtually empty so he can spend most of his time reading and studying companies. On a typical day at the office, he schedules a grand total of zero meetings and zero phone calls. One of his favorite quotes is from the philosopher Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” […] He says it helps that his investment staff consists of a single person: him. “The moment you have people on your team, they’re going to want to act and do things, and then you’re hosed.”

John Templeton

To his credit, Templeton was especially demanding of himself. Take his attitude toward saving and spending. “After my education, I had absolutely no money and neither did my bride,” he told me. “So we deliberately saved fifty cents out of every dollar we earned.”

Distrustful of debt, he always paid cash for his cars and homes. He also claimed that his wartime bet was the only time he ever borrowed money to invest. During the Great Depression he’d seen how easy it was for overextended people to come undone, and he regarded fiscal discipline as a moral virtue.

Howard Marks

“Look, luck is not enough,” he says. “But equally, intelligence is not enough, hard work is not enough, and even perseverance is not necessarily enough. You need some combination of all four.

He plans to work indefinitely because he finds it intellectually rewarding, not because he has an “unquenchable” thirst for money or status. He recalls his Japanese studies professor explaining a Buddhist teaching that “you have to break the chain of getting and wanting”—an aimless cycle of craving that leads inevitably to suffering.

Irving Kahn

Kahn became Graham’s teaching assistant at Columbia in the 1920s, and they remained friends for decades. I wanted to know what he’d learned from Graham that had helped him to prosper during his eighty-six years in the financial markets. Kahn’s answer: “Investing is about preserving more than anything. That must be your first thought, not looking for large gains. If you achieve only reasonable returns and suffer minimal losses, you will become a wealthy man and will surpass any gambler friends you may have. This is also a good way to cure your sleeping problems.”

Just think for a moment about those basic ingredients that helped to make for a richly rewarding life. Family, health, challenging and useful work, which involved serving his clients well by compounding their savings conservatively over decades. And learning—particularly from Graham, an investment prophet who, Kahn said, “taught me how to study companies and succeed through research as opposed to luck or happenstance.”

Joel Greenblatt

This raises an obvious but crucial question: Do you know how to value a business? There’s nothing admirable or shameful about your response. But you and I need to answer this question honestly, since self-delusion is a costly habit in extreme sports such as skydiving and stock picking. “It’s a very small fraction of people that can value businesses—and if you can’t do that, I don’t think you should be investing on your own,” says Greenblatt. “How can you invest intelligently if you can’t figure out what something is worth?”

These experiences have led him to an important revelation: “For most individuals, the best strategy is not the one that’s going to get you the highest return.” Rather, the ideal is “a good strategy that you can stick with” even “in bad times.”

Charlie Munger

Munger often preaches about the importance of avoiding behavior with marginal upside and devastating downside. He once observed, “Three things ruin people: drugs, liquor, and leverage.”

Asked for career advice, he opines: “You have to play in a game where you’ve got some unusual talents. If you’re five foot one, you don’t want to play basketball against some guy who’s eight foot three. It’s just too hard. So you’ve got to figure out a game where you have an advantage, and it has to be something that you’re deeply interested in.”

Survivorship bias! I would say that one of the dangers of this book is that it may make you want to be a stock picker. All of the people profiled are probably have a net worth of over $50 million if not much more. Many made a few bold bets, and they paid off big. I want an oceanfront house in Newport Beach, my own private jet, and a vintage car to drive across Asia too!

The rewards for investing intelligently are so extravagant that the business attracts many brilliant minds.

Beating the market means being different. Can you make “unconventional bets that the crowd would consider foolish”? Are you a good fit for the “bizarrely lucrative discipline of sitting alone in a room and occasionally buying a mispriced stock”? Do you have enough humility to make a good judgment, mixed with the self-confidence to bet big when you think you have an edge?

Even if you think you do, survivorship bias reminds us that there are many, many highly-intelligent, hard-working people who tried their best to apply these concepts, but did not succeed. They are missing from the pages of this book, and you’ll never read their stories.

The true goal is independence. The good news is that you don’t need be a great stock picker. Even if you just invest in low-cost index funds and can stick with it, you can do quite well and still achieve the ability to be independent and become in control of your time on Earth.

Buffett said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy.”

Howard Marks: “Most people should index most of their money.”

The pattern is clear. In their own ways, Greenblatt, Buffett, Bogle, Danoff, and Miller have all been seekers of simplicity. The rest of us should follow suit. We each need a simple and consistent investment strategy that works well over time—one that we understand and believe in strongly enough that we’ll adhere to it faithfully through good times and bad.

“You build capital and then you can do whatever you want because you’re independent.” For many of the most successful investors I’ve interviewed, that freedom to construct a life that aligns authentically with their passions and peculiarities may be the single greatest luxury that money can buy.

p.s. Here is a list of the people profiled in this book; I can’t guarantee I got all of them but it’s definitely close. A good source for additional research.

  • Sir John Templeton
  • Irving Kahn
  • Bill Ruane
  • Marty Whitman
  • Jack Bogle
  • Charlie Munger
  • Ed Thorp
  • Howard Marks
  • Joel Greenblatt
  • Bill Miller
  • Mohnish Pabrai
  • Tom Gayner
  • Guy Spier
  • Fred Martin
  • Ken Shubin Stein
  • Matthew McLennan
  • Jeffrey Gundlach
  • Francis Chou
  • Thyra Zerhusen
  • Thomas Russo
  • Chuck Akre
  • Li Lu
  • Peter Lynch
  • Pat Dorsey
  • Michael Price
  • Mason Hawkins
  • Bill Ackman
  • Jeff Vinik
  • Mario Gabelli
  • Laura Geritz
  • Brian McMahon
  • Henry Ellenbogen
  • Donald Yacktman
  • Bill Nygren
  • Paul Lountzis
  • Jason Karp
  • Will Danoff
  • François Rochon
  • John Spears
  • Joel Tillinghast
  • Qais Zakaria
  • Nick Sleep
  • Paul Isaac
  • Mike Zapata
  • Paul Yablon
  • Whitney Tilson
  • François-Marie Wojcik
  • Sarah Ketterer
  • Christopher Davis
  • Raamdeo Agrawal
  • Arnold Van Den Berg
  • Mariko Gordon
  • Jean-Marie Eveillard
  • Guy Spier
Filed Under: Book Reviews, Happiness, Investing //

Turning Small Deals into a $100,000 Nest Egg

Posted on August 17, 2021 // 14 Comments

There is a story circulating about MIT students offered $100 in free Bitcoin back in 2014. A few quickly spent it on dinner at a local sushi restaurant. Some kept it all, now worth about $14,000. Some agreed to help fellow students set up a crypto wallet to hold their Bitcoin, in exchange for some of it. 1 BTC was worth about about $300 back then, and about $45,000 now. Those sushi dinners ended up being quite expensive, but can you really blame them? How many of us went out and backed the truck up on Bitcoin in 2014?

However, that got me thinking about the various deals that I post on this blog. I don’t know what you do for work, but I trust that you work hard and balance your levels of passion, income, and ability. I can’t help you much with your career, but these deals are a way to find common ground, as they are available to the great majority of readers. You may think of them as “free sushi dinners”, but they can equally be a powerful source of retirement savings and income.

1. Consider a target of $500 monthly profit coming from whatever deals are currently available. It could be higher interest on savings accounts, bank sign-up bonuses, credit card cash back, credit card sign-up bonuses, brokerage bonuses, US Mint purchases, savings on your normal everyday purchases, solo-business promotions, and so on. This is a relatively aggressive target, but if you consider everything together and average it out, it can add up quickly. I’ve been doing similar deals since I was 21 years old making $20,000 a year with $30,000 in student loans.

2. $500 a month = $6,000 a year = Maxed-out Roth IRA contribution. The 2021 contribution limit for Roth IRAs in $6,000 a year, with an additional $1,000 for those aged 50+. I always find this a very handy target to help me focus my profit from the “deals and offers” game. If you have a partner, going for $12,000 combined is an even better target. I’ve made every effort to do the max for 20 years now.

3. Invest in simple, transparent, productive assets. Some people are great with real estate, others reinvest in their own private small businesses. We should appreciate that anyone with $1,000 can open a IRA at Vanguard with minimal fees and invest in the all-in-one Vanguard Target Retirement Fund, which is a low-cost, diversified mix of global stocks and bonds. You don’t need to gamble on options at Robinhood, put too much in Bitcoin lottery tickets, or get insider access to a trendy “alternative/long/short/volatility-managed” hedge fund. Put it in, turn on automatic reinvestment of dividends, and walk away. Inside a Roth IRA, you don’t have to worry about taxes on dividends or capital gains distributions.

4. Repeat for 10 years. If you did this from 2011-2020, you’d have over $100,000. Every January, I show how regular, steady investments over time can end up with excellent results. Here is a table from What If You Invested $10,000 Every Year For the Last 10 Years? 2021 Edition:

Global stock markets are up even further in 2021 (VTIVX is up another 12% YTD as of this writing), but we can simply stick with these numbers. The chart assumes a $10,000 annual investment ($833 a month), but we can easily scale it down to our $6,000 annual investment.

If you invested $6,000 a year into the Vanguard Target Retirement 2045 Fund, every year for the past 10 years (2011-2020), you would have ended up with a total balance of $110,822. (If two people did this, they would have over $220,000!) These are real-world numbers based on $500 a month, not a theoretical result from a calculator. You can argue the details, but even with only $250 a month, you’d have ended up with over $50,000. (You would have done even better going all-in with an S&P 500 index fund as well, but this is an easy, set-and-forget choice including global stocks and bonds.)

I admit, I like to play the game of “winning” easy/free money. I find it much more enjoyable than any video game. I also try to only pick and choose those that offer a good payout/effort ratio, usually over the equivalent of $100 an hour. Now, these small deals will never replace a successful career, which can supercharge your savings into the realm of financial independence. However, this is yet another reminder that small amounts, however attained, can add up to a surprisingly big number over time when invested productively and left alone. I have the Vanguard IRA statements to prove it. 😀

Filed Under: Deals & Offers, Inspirational, Investing, Retirement //

Best Interest Rates on Cash – August 2021 Update

Posted on August 10, 2021 // Leave a Comment

Here’s my monthly roundup of the best interest rates on cash as of August 2021, roughly sorted from shortest to longest maturities. I look for lesser-known opportunities to earn 3% APY and higher 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 8/10/2021.

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). I define “fintech” as a software layer on top of a different bank’s FDIC insurance. These do NOT require a certain number debit card purchases per month. Read about the types of due diligences you should do whenever opening a new bank account.

  • 3% APY on up to $100,000. The top rate is still 3% APY for July through September 2021 (actually up to 3.5% APY with their credit card), and they have not indicated any upcoming rate drop. HM Bradley requires a recurring direct deposit every month and a savings rate of at least 20%. See my HM Bradley review.
  • 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. New customer $50 bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. OnJuno recently updated their rate tiers, while keeping their promise to existing customers with a grandfathered rate. If you don’t maintain a $500 direct deposit each month, you’ll still earn 1.20% on up to $5k. See my updated OnJuno review.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • 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 perk is the 1% APY for everyone. Thanks to the readers who helped me understand this. There are several other established high-yield savings accounts at closer to 0.50% APY.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.30% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Lafayette Federal Credit Union has a 12-month CD at 0.80% APY ($500 min). Early withdrawal penalty is 6 months of interest. Anyone can join this credit union via partner organization ($10 one-time fee).

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 Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays 0.01% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.27% SEC yield ($3,000 min) and 0.37% 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 0.22% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.41% 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 8/10/2021, a new 4-week T-Bill had the equivalent of 0.05% annualized interest and a 52-week T-Bill had the equivalent of 0.08% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.07% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.10% (!) 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 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 2021 and October 2021 will earn a 3.54% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2021, 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.

  • The Bank of Denver pays 2.00% 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. The rate recently dropped. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $50k. Thanks to reader Bill for the updated info.
  • Devon Bank has a Kasasa Checking paying 2.50% APY on up to $10,000, plus a Kasasa savings account paying 2.50% APY on up to $10,000 (and 0.85% APY on up to $50,000). You’ll need at least 12 debit transactions of $3+ and other requirements every month.
  • Presidential Bank pays 2.25% APY on balances 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.

  • Abound Credit Union has a special 13-month Share Certificate at 0.80% APY ($500 min), a special 47-month Share Certificate at 1.45% APY ($500 min), and a 59-month Share Certificate at 1.35% APY ($500 min). Early withdrawal penalty is 1 year of interest (and only with the consent of the credit union, so be aware). Anyone can join this credit union via partner organization ($10 one-time fee).
  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.15% APY ($10,000 min). Early withdrawal penalty is 1 year of interest. Anyone can join this credit union by joining the National Space Society (free). Note that NASA FCU may 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 1.05% 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 1.55% APY vs. 1.45% 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 8/10/2021, the 20-year Treasury Bond rate was 1.90%.

All rates were checked as of 8/10/2021.

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

This Becky Quick Quote Sums Up the Buffett and Munger Partnership

Posted on July 29, 2021 // 1 Comment

After finishing up the 4-part CNBC Squawk Podcast containing the full “Wealth of Wisdom” interview with Warren Buffett and Charlie Munger, the journalist Becky Quick summed up the essence of their 60-year friendship and partnership (emphasis mine):

It’s not a complicated lesson, it’s probably just one we don’t sit on and reflect upon often enough. You should surround yourself with people who inspire you, and people you don’t want to disappoint. That’s what it’s all about, right? Making sure we are all our best selves. It’s such a universal truth. All of us can look at the relationships we’ve had over the years, and what inspires you to do better? It’s really those people who put faith in you, and wow, you don’t want to let them down.

Definitely something to reflect upon.

I enjoy all of these CNBC interviews with Becky Quick – you can see that she has a comfortable and respectful relationship with them, while still pressing them for clarity on certain issues. As soon as the interview officially ends, Becky Quick lets out a laugh and remarks:

You’d rather be in jail… than work at a corporation!?!”

Technically, Warren Buffet says he would rather be in jail with some interesting people and a good pile of books… rather than micro-managing the daily activities and hundred of employees of Berkshire subsidiaries. I get your point, Warren! 👍

Filed Under: Investing //

Creating a 10-Year Backup Plan For (Post) Early Retirement

Posted on July 28, 2021 // 1 Comment

My contrarian thought of the day? I feel that the retirement planning industry downplays the role of luck. Life is not a as certain as the smooth exponential curves that they show you. Perhaps the statistically optimal bet is to jump a bit early and hope for the best, while having a backup plan for the worst. You might just win an extra 10 years of freedom.

If you tinker with portfolio survival calculators like FireCalc and cFIREsim that model hundreds of possible paths, you may notice that the “failure” paths usually happen when a bear market occurs soon after you retire. If you keep spending when a portfolio is down, it may never recover.

Even if you have the same portfolio size, same withdrawals, and the same average returns, having the bad years occur upfront can lead to failure while having the bad years at the end can lead to success. This is known as sequence of returns risk.

sor_risk

Retiring in 2000 with a 4% withdrawal rate: Warning! 🚨🚨🚨 In 2021, most people happily accept that the stock market just goes up and up. However, every so often there will be a “lost decade”. If you retired in 2000 with a portfolio invested in the S&P 500 and used a 4% withdrawal rate (increasing each year by 3% for inflation), here’s how that would have looked like (yellow line):

Retiring in 2010 with a 4% withdrawal rate: More money than you started with. 💰💰💰 If you have solid returns upfront, then you gained a decade of priceless freedom! For retirees of the “Class of 2011”, consider that their portfolio is likely larger today in 2021 even after a decade of withdrawals.

Retiring in 2021? Crystal ball is cloudy. If you are in the retirement “Class of 2021”, many predictions call for another lost decade. Yet, even if the next 10 years have poor returns, better times may be right around the corner. From this article by Davis Advisors:

Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns. – Christopher Davis

This article was written in 2012, and it turns out that Davis was right. As of Q2 2021, the trailing 10-year annual return of the S&P 500 is over 12% annualized. Here is a chart showing the subsequent 10-year performance after each past “lost decade of stock returns”.

Surviving the first 10 years of retirement. The lesson here is to avoid taking out big withdrawals during a stock market slump drop during the first 10 years, so that it can benefit from the rebound of the next 10 years. At the same time, you don’t want give up the chance of 10 extra years of freedom. Therefore, perhaps the best bet is to retire when you have a reached your chosen savings target (for example, 25 times annual expenses), but also maintain a detailed backup plan during the first 10 years. Here are some things you might include in that plan:

  • Plan ahead for way that you can temporarily cut back on spending if you need to. Big to small. For example, plan to move to a lower-cost city, country, or housing option.
  • Identify non-essential assets that you will sell if you need to. Vacation property, etc.
  • Maintain employment opportunities in your current career field. Go back to part-time, freelance, consulting, etc.
  • Have alternative employment plans in a different career field to create supplemental income.

(By “plan”, I mean written out on a piece of paper. This improves the clarity of your thinking.)

The most powerful way to counter “sequence of returns risk” is variable withdrawals – a fancy term for the brilliant idea of not taking out as much money from your portfolio when it is getting beaten down. But the first 10 years is the most important, and the first 10 years is probably the easiest to go back to the workforce in a limited capacity.

Bottom line. Deciding when to stop working can be a difficult, personality-driven decision, but one option is to retiring with 95-98% odds of success with a practical backup plan, rather than waiting several more years and reaching 99.5% odds of success. Accept that luck matters (and also that you might have to go back to work). However, you also might gain extra priceless years of freedom. Life is never 100% certain anyway.

Filed Under: Investing, Retirement //

MMB Portfolio Update July 2021: Dividend and Interest Income

Posted on July 19, 2021 // Leave a Comment

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While my July 2021 portfolio asset allocation is designed for total return, I also track the income produced quarterly. 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. Here is the historical growth of the S&P 500 absolute dividend, updated as of 2021 Q2 (source):

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 $50,000 a year, even if you spent all that dividend income every year.

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. 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 7/19/21) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.26% 0.36%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.60% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.44% 0.53%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 1.98% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 2.34% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 1.26% 0.26%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.35% 0.20%
Totals 100% 1.69%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Portfolio value reality check. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market.

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 income history. It was more difficult to track the absolute income produced as I’d have to remove the effect of additional investments, reinvestment of dividends and interest, rebalancing, and capital gains distributions. To get a general idea, I looked at the Vanguard LifeStrategy Growth Fund (VASGX) to see what kind of income that $1 million back in 2014 would have generated up until today. This is not exactly my portfolio, but is somewhat close at a steady 80% stock/20% bond ratio with some international stock exposure. For example, it’s current 12-month yield is 1.59%.

During 2014, VASGX distributed about $0.61 of income per share, at an average price about $29 per share. That’s a yield of about 2.1%. So $1,000,000 of VASGX in 2014 would have distributed about $21,000 of annual income (about 34,482 shares).

Those same 34,482 shares would be worth about $1,510,000 currently (as of 7/16/2021 at $43.79 per share). In 2018, the income produced was roughly $27,500 a year (80 cents per share). In 2019, the income produced was $29,000 a year (84 cents per share). In 2020, the income produced was $23,000 a year (67 cents per share ).

Putting it all together. This quarter’s trailing income yield of 1.69% is the lowest ever since 2014. It is almost exactly 1% lower than what it was in late 2018. At the same time, both the portfolio value and the absolute income produced is higher than in 2014. If you retired back in 2014 and have been living off your stock/bond portfolio, you’ve been doing fine.

However, this is not necessarily good news going forward. There are countless articles debating this topic, but I historically support a 3% withdrawal rate as a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate as a reasonable target if retiring at a more traditional age (closer to 65). However, nobody is guaranteeing these numbers and flexibility may be required to make your portfolio reliably last a long time.

If you are not close to retirement, there is not much use worrying about these 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.

How we handle this income. 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. Even if still working, you could use this money to cut back working hours, pursue new interests, start a new business, travel, perform charity or volunteer work, and so on.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio Update July 2021: Asset Allocation & Performance

Posted on July 19, 2021 // 8 Comments

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Here’s my quarterly update on my current investment holdings as of July 2021, including our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a small portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a real-world example of a mostly low-cost, diversified, simple DIY portfolio with a few customized tweaks. 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, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

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

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the 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 believe in the importance of doing your own research and owning productive assets in which you have strong faith. 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.

Personally, I try to 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. I also own real estate through REITs.

Again, personally, I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin. I own my own house, but I choose not to participate in the higher potential gains but also higher potential risks (of both requiring more time and money) of rental real estate.

My US/international ratio floats with the total world market cap breakdown, currently at ~58% US and 42% ex-US. I’m fine with a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias.

Stocks Breakdown

  • 43% US Total Market
  • 7% US Small-Cap Value
  • 33% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% High-Quality Nominal bonds, US Treasury or FDIC-insured
  • 33% High-Quality Municipal Bonds
  • 33% US Treasury Inflation-Protected 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. I use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. I plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we can minimize management fees, commissions, and taxes.

Holdings commentary. The world seems to have stabilized since the March 2020 market drop and overall panic, but I try not to get too attached to these numbers. They seem too good to be true, even as things continue to open up. All I can do is listen to the late Jack Bogle and “stay the course”. I remain optimistic that capitalism, human ingenuity, human resilience, human compassion, and our system of laws will continue to improve things over time.

I would like to note that when few people were paying attention, TIPS have had a pretty good run for an insurance-like investment. The iShares TIPS ETF (TIP) went up 8.3% in 2019 and 10.9% in 2020. The 10-year breakeven inflation rate between TIPS and Treasury is currently about 2.3%. I’m still happy owning a chunk of my bonds as TIPS.

Performance numbers. According to Personal Capital, my portfolio is up +9.4% for 2021 YTD. I rolled my own benchmark for my portfolio using 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +8.2% for 2021 YTD as of 7/18/2021.

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

Filed Under: Goals, Investing, Retirement //

Buffett & Munger Wealth of Wisdom on CNBC: Full Video and Transcript

Posted on July 14, 2021 // Leave a Comment

Update: Apparently there was a lot of the interview that wasn’t shown in the CNBC video below, but is being released in a four part series on their podcast, Squawk Pod. Let me know if you find a transcript.

Original post:

For the Buffett and Munger fans out there, Becky Quick had another CNBC special interview with the pair about their longtime friendship and partnership, called Buffett & Munger: A Wealth of Wisdom on June 29th, 2021. Thankfully, you can watch the full video online and/or read the full text transcript.

All in all, this interview didn’t offer a lot of new insights if you already listened to the 2021 Berkshire Hathaway shareholder meeting and 2021 Daily Journal shareholder meeting (Robinhood still promotes gambling and Bitcoin is still a delusion), but it did provide a little more background into their personal histories.

Here is my single favorite quote from the interview (emphasis mine):

BUFFETT: And we’re still doing it, yeah. We made a lot of money. But what we really wanted was independence. And we have had the ability since pretty much a little after we met financially we could associate with people who we wanted to associate with. And if we had, if we associated with jerks, that was our problem. But we didn’t have to. We’ve had that luxury now for, you know, 60 years or close to it. And, and that beats 25-room houses and, you know, six cars or that stuff is, what really is great is if you can do what you want to do in life and associate with the people you want to associate with in life. And, now, it, it’s and, and we both had that, that spirit all the way through.

These two friends may be famous because they are rich, but they are happy because they are able to spend their time with people that they enjoy.

Buffett and Munger explicitly wanted to get rich, so they could be independent. True freedom is the ability to control how you spend your time. But that usually takes a certain amount of money, so we have the term “financial freedom”.

I think it’s okay to say “I want accumulate a lot of money for the next X months or years”, especially if you’re in debt. As Munger has also stated, the first $100,000 is the hardest. If you really want independence quickly, then you need to embrace some pain and sacrifice to earn your freedom. This is why I try not to criticize anyone taking “extreme” measures to improve their savings rate. Some people are willing to endure a very spartan lifestyle for independence sooner, while others aren’t, or they may have a higher income and not need to give up much.

At the same time, after reaching a certain level of financial stability, we then need to figure how what game we really want to play with our limited time on this planet, beyond simply buying more luxurious stuff. Buffett enjoyed the game of capital allocation and accumulating more dollars; that was his idea of fun. He even had a partner to play the game with him. For most people, I think continuing to make more money involves more stress and hard work.

Filed Under: Entrepreneurial, Inspirational, Investing, Retirement //

Best Interest Rates on Cash – July 2021 Update

Posted on July 13, 2021 // Leave a Comment

Here’s my monthly roundup of the best interest rates on cash as of July 2021, roughly sorted from shortest to longest maturities. You will find lesser-known opportunities to earn 3% APY and higher 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 7/13/2021.

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). I define “fintech” as a software layer on top of a different bank’s FDIC insurance. These do NOT require a certain number debit card purchases per month. Read about the types of due diligences you should do whenever opening a new bank account.

  • 3% APY on up to $100,000. The top rate is still 3% APY for July through September 2021 (actually up to 3.5% APY with their credit card), and they have not indicated any upcoming rate drop. HM Bradley requires a recurring direct deposit every month and a savings rate of at least 20%. See my HM Bradley review.
  • 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. New customer $100 bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. OnJuno recently updated their rate tiers, while keeping their promise to existing customers with a grandfathered rate. If you don’t maintain a $500 direct deposit each month, you’ll still earn 1.20% on up to $5k. See my updated OnJuno review.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • 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 perk is the 1% APY for everyone. Thanks to the readers who helped me understand this. There are several other established high-yield savings accounts at closer to 0.50% APY.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.45% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.30% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 0.85% APY ($1,000 min). Early withdrawal penalty is calculated as the amount of the withdrawal times the remaining term (days) of this certificate at the rate of 2 times the APR (divided by 365) paid on this certificate. Anyone can join this credit union via partner organization ($5 one-time fee).

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 Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays 0.01% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.28% SEC yield ($3,000 min) and 0.38% 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 0.25% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.36% 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 7/13/2021, a new 4-week T-Bill had the equivalent of 0.05% annualized interest and a 52-week T-Bill had the equivalent of 0.07% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.09% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.12% (!) 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 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 2021 and October 2021 will earn a 3.54% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2021, 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.

  • The Bank of Denver pays 2.00% 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. The rate recently dropped. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $50k. Thanks to reader Bill for the updated info.
  • Devon Bank has a Kasasa Checking paying 2.50% APY on up to $10,000, plus a Kasasa savings account paying 2.50% APY on up to $10,000 (and 0.85% APY on up to $50,000). You’ll need at least 12 debit transactions of $3+ and other requirements every month.
  • Presidential Bank pays 2.25% APY on balances 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 1.35% APY ($10,000 min). Early withdrawal penalty is 1 year of interest. Anyone can join this credit union by joining the National Space Society (free). Note that NASA FCU may perform a hard credit check as part of new member application.
  • Abound Credit Union has a special 18-month Share Certificate at 0.80% APY ($500 min), a special 47-month Share Certificate at 1.45% APY ($500 min), and a 59-month Share Certificate at 1.35% APY ($500 min). Early withdrawal penalty is 1 year of interest (and only with the consent of the credit union, so be aware). Anyone can join this credit union via partner organization ($10 one-time fee).
  • 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 1.00% 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 1.80% APY vs. 1.41% 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 7/13/2021, the 20-year Treasury Bond rate was 1.96%.

All rates were checked as of 7/13/2021.

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

Vanguard: Improving Portfolio Safe Withdrawal Rates for FIRE

Posted on July 12, 2021 // 1 Comment

Vanguard Research has published a new whitepaper titled Fuel for the FIRE: Updating the 4% rule for early retirees, which discusses its assumptions and how different factors can hurt or improve your odds of success. Many of these topics have been discussed at length elsewhere, but as always I appreciate the power of concise definitions and simple charts to help with understanding.

Here is a nice, concise definition for FIRE:

FIRE stands for “Financial Independence Retire Early.” FIRE investors save as much of their income as possible during their working years, hoping to attain financial independence at a young age and maintain it through the rest of their life—aka retirement.

Here is a nice, concise history of the 4% Rule:

Bengen (1994) calculated the maximum percentage that retirees could withdraw annually from their portfolio without running out of money over 30 years. Advisors refer to this percentage as the safe withdrawal rate. Bengen summarized his findings as follows: “Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal rate of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.” And the 4% rule was born.

Here are the potential issues with the assumptions embedded within the 4% rule:

  • The use of historical returns as a guide for future returns
  • A retirement horizon of 30 years
  • Returns equal to those of market indexes, without accounting for fees
  • A portfolio invested only in domestic assets (“home bias”)
  • A fixed percentage withdrawal in real terms (“dollar plus inflation”)

Here are suggested adjustments. Additional, helpful details are in the paper.

Don’t assume historical averages will hold for the future. Vanguard calculates their own forward-looking estimates based on factors like stock P/E ratios, current bond interest rates, and recent inflation statistics. They are a lot lower than historical averages, as seen in the graphic above (at the top of this post).

Understand that your retirement horizon may be much longer than 30 years. The longer a portfolio has to last, the more likely it can fail.

Minimize costs. Advisor fees, mutual fund and ETF fees, taxes, and other fees will cut directly into your net income. 1% in investment fees makes a big impact.

Invest in a diversified portfolio. Vanguard believes that adding some international assets will improve your chances of success. Right now, international stocks have lower valuations (P/E and related) as compared to US stocks.

Use a dynamic spending strategy. As you can see below, this is one of the most powerful ways to improve your odds of success. If you can spend less during a bear market (while also getting to spend more in a bull market), your portfolio’s chances of survival improve dramatically. Either your budget has enough “padding” such that cutting back won’t hurt much, or it hurts but you are willing to endure that temporary pain, or you maintain the option to work a little to earn some additional income if needed.

Vanguard doesn’t give any hard numbers when it comes to replacing the 4% number, but the lower expected future returns, longer time horizon, and fee impact all point to a lower number. However, being flexible with your portfolio withdrawals can raise the number.

I enjoy thinking about these sorts of variables and ways to optimize, but the fact is that nobody knows the future “safe” withdrawal rate, even within a percentage point. You have to let go of the idea of 100% certainty. Planning for flexibility (identifying areas to cut back temporarily, maintaining backup work options) and having belief in your ability to adapt is critical for pulling off FIRE at any reasonable withdrawal rate (say 3% to 4%). FIRE is about balancing the fear of running out of money with the fear of running out of time.

Filed Under: Investing, Retirement //

Stockpile Review: Starter Investing For Kids, Buy Stock Gifts via Credit Card With No Fee

Posted on July 11, 2021 // 4 Comments

Stockpile is a niche stock broker that is designed for beginner investors, especially children. You can purchase a gift card for $25, $50, $100, etc. and then a child/parent can redeem that gift card an open their own custodial brokerage account. They receive fractional shares of Apple, Amazon, Google, Berkshire Hathaway, or an index fund ETF which they can watch go up and down in value (or sell). Their tagline is “Starting is everything.”

There are no monthly fees or account minimums. However, until now, they did have trading fees and gift card fees. Before July 2021, Stockpile had a trading fee of 99 cents if paid with cash (fund with bank account) and 99 cents + 3% if paid with credit/debit cards. There was also an additional $2.99 e-gift fee for the first stock (+ 99 cents for each additional company). Physical gift cards had slightly higher fees. Here is how much it used to cost to gift $100 of stock:

If you give Jack one stock, the gifting fee is $2.99 + 3%. To give $100 of Nike stock, for example, you’ll pay $100 + $2.99 + $3.00 = $105.99.

No trading fees. No debit/credit card transaction fees. As of July 7th, 2021, Stockpile announced that they are getting rid of trading fees and gift card fees. You can buy a $100 stock gift card with a credit card for a total price of $100, and the recipient will receive the full $100 of Nike stock or whatever. You can email an “e-gift card”, or print out a physical voucher. (The giver can put a suggested company like Apple on the card, but the recipient can choose to buy a different company.) Here’s a screenshot from the e-mail they send out:

Here’s what they say regarding payment methods:

What payment methods do you accept?
We try to make buying stock as easy as accessible as we can! That means we offer a multitude of ways to get started with investing. The cheapest and most simple is by linking your bank to your Stockpile account. You can link your bank account by following the instructions here. You can also add cash instantly to your Stockpile account using a debit card.

When buying stock on the web, we accept all major debit cards.

You’ll notice it is silent regarding credit cards. A quiet quirk: You can’t buy stocks directly with a credit card for your own Stockpile account, but you can buy e-gift cards using a credit card which can then be redeemed for stock by anyone. Here is a screenshot of the ability to buy a gift card using a credit card with no fees.

Whenever a 3% credit card transaction fee is removed, it makes it more attractive to pay with a credit card in order to generate cash back or airline miles rewards. The possibility of earning 2% cash back upfront on every stock purchase sounds intriguing, but a potential drawback to this is that Stockpile isn’t a full-service brokerage firm, it’s more of a stock piggy bank for kids with limited customer service and support features. (It’s still SIPC-insured.) I don’t know that I’d want to build up my primary portfolio there, even if they do offer broad ETFs like Vanguard Total Stock Market ETF (VTI). Unfortunately, they don’t offer IRAs, so you can’t do your annual IRA contribution.

Another option would be to buy a cash-like ETF. Two options in their catalog are PIMCO Enhanced Short Maturity Active ETF (MINT) and Goldman Sachs Access Treasury 0-1 Year ETF (GBIL). Potential drawbacks here are that the largest gift card you can buy is for $2,000, and they may limit how many gift cards you can purchase.

I tested this out myself as I already have a Stockpile account from a previous promotion, and I was able to successfully buy a $25 gift card using a Chase credit card, but another credit card was rejected. The purchase total was exactly $25, and it was redeemed for exactly $25 of stock (Berkshire Hathaway to avoid dividends and thus extra tax paperwork).

How will Stockpile make money without charging even credit card transaction fees? Even if Stockpile accepts “payment for order flow”, their volume must be relatively low (no daytraders here) and the spread percentage would be far less than 3% on a trade. A better guess is that they found their “breakage” to be sufficient to cover the fees, which refers to the fact that 20% of all gift cards are never redeemed even after a year. (Ever notice how many gift cards are 20% off face value at Costco and Sam’s Club?)

You pay upfront for the gift card, but if they are never redeemed, then Stockpile just gets to keep that as profit. Their breakage is probably less than 20%, but perhaps it is enough for them to make this move.

Bottom line. If you want to teach a kid about stock investing by giving them actual shares of stock, Stockpile is a convenient way to do so and now has no trading fees and no gift card purchase fees. Spend exactly $100 on a gift card, even using a credit card, and they’ll get exactly $100 worth of stock.

Filed Under: Deals & Offers, Investing //

S&P 500 Dividend Aristocrats Infographic: Current Dividend Yield vs. Years of Consecutive Dividend Growth

Posted on July 1, 2021 // 2 Comments

A Dividend Aristocrat is a company in the S&P 500 index that has paid and increased its dividend payout every year for at least 25 consecutive years. You’re looking at companies that have had such reliable profits over multiple economic cycles that they can just keep sending checks to their shareholders every quarter while still not only maintaining but growing their business. Visual Capitalist just created a Dividend Aristocrat infographic that shows all 65 companies on the 2021 list, charted by current dividend yield and years of consecutive dividend growth.

Genuine Parts (GPC) and Dover Corp (DOV) have increased their dividend payout for 65 consecutive years!

Each year, some companies may be added or removed. For example, new in 2021 are IBM (IBM), NextEra Energy (NEE) and West Pharmaceutical Services (WST). Removed in 2021 are Raytheon (RTX), Carrier Global (CARR), Otis Worldwide (OTIS), Church and Dwight (CHD), and Stryker Corporation (SYK). Note that companies are sometimes removed because they were acquired by another company without the same dividend history.

I’ve always maintained a small side account where I own individual stocks and alternative investments. “Play Money”, “Mad Money”, “Fun Money”, whatever you want to call it. Even though it is only a small percentage of my net worth, I have enjoyed growing it over time and learning from the process. For example, I have found that in times of crisis, I am actually more comfortable buying more of the individual companies inside my self-directed account than buying my trusty broad index funds. I’m also a very low turnover investor, and usually make fewer trades per year than fingers on my hands.

I don’t solely buy companies on this list, but many of the companies are good research ideas if you like to learn about history. I prefer the idea of reliable and growing dividend income, not just momentarily “high” dividend yield. Of course, there are many solid companies that don’t satisfy the requirements for this list, and even list includes questionable companies will be eventually cut (like AT&T, which has already announced a future dividend cut even though still on this chart).

Filed Under: Investing //
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