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tentish klown posted:Where does real-estate fall into this long-term investing? I'm not talking about REITs, but actually buying and renting out properties in major cities. In my experience their return is approximately that of bonds in direct rental revenue, and in places like London, NYC etc. house prices are a fairly safe bet in terms of capital returns as well. There's an excellent thread in D&D right now about the home ownership bubble: http://forums.somethingawful.com/showthread.php?threadid=3640931&pagenumber=1 Summary: Real estate is not an investment
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Jun 19, 2014 18:09
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EugeneJ posted:Summary: Real estate is not an investment I view real estate like I view insurance: purchase it on the merits of serving its primary function, and treat any investment gain solely as an unexpected windfall.
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Jun 19, 2014 18:30
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With the HUGE disparity in market prices vs rents, why isn't that considered an investment?
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Jun 19, 2014 18:35
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Real estate is absolutely an investment when you are purchasing property to rent out. It isn't an investment when you are consuming your dividend (living in your house).
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Jun 19, 2014 18:36
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I think a rental property can serve as an investment. However, buying a house with the intention of flipping it or expectation of realizing value gains(especially after taking into account maintenance costs) is silly. Wish I'd known that six years ago 
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Jun 19, 2014 18:37
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LorneReams posted:With the HUGE disparity in market prices vs rents, why isn't that considered an investment? Because interest/taxes/insurance/maintenance are things that exist and you aren't responsible for when renting
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Jun 19, 2014 18:47
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EugeneJ posted:Because interest/taxes/insurance/maintenance are things that exist and you aren't responsible for when renting But that should be covered by the rents you are collecting, or am I missing a more general point?
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Jun 19, 2014 18:53
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This is highly market dependent, but most individuals can only afford a house or up to a 4-plex as an investment property. And residential properties have extremely high taxes/insurance/maintenance costs relative to rent levels, compared to more "commercial" properties like an apartment complex, office building, or industrial shop.
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Jun 19, 2014 18:56
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It's worth noting that the true yield on a mid term bond fund is much higher than the YTM of its components would suggest - individual bonds get sold off well before maturity. If you buy a 5 year bond yielding 2.5% and sell it off in two years you will make more than 2.5% annualized because most of the interest is front-loaded due to the way interest rates fall as duration falls. The rate curve is flatter for short-term bonds, but there is no point in holding those in the first place as an individual investor when you can get FDIC savings accounts with more yield and zero risk. So bonds aren't quite as bad as they seem. In the other hand, for retirement investors year-to-year volatility is only important in the psycological sense. Minimizing annual volatility or targetting some arbitrary metric like sharpe ratios or annual percentiles are abstract measurements that don't directly impact reality. In the end the only metric that really matters is "if I save X per year and want to retire at age Y and withdraw Z per year until I die, what allocation strategy minimizes the probability of me running out of money?" In that point of view I can see how it might be worthwhile for young investors to have 0% bond allocation for a time. I've been thinking about putting out tool that does a multi-year simulation that does this for you. You'd plug in (or use the default values) picks for each asset class' expected return, volatility, distribution of returns, and expense ratio, plug in some correlations, and put your savings rate and retirement goals in. It then runs a monte carlo sim with your assumptions and a life table and tries to minimize the likelihood of you or your spouse landing in the gutter. I'm sure there are plenty of services that do something like this already (I know wealthfront does a simplified version of this), but would anyone be interested in that?
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Jun 19, 2014 18:57
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Real estate sucks as an investment because it is highly illiquid, heavily taxed, expensive to maintain, and has enormous transaction costs. If you want to invest in real estate as a means of diversifying your portfolio, you have to consider how much of your portfolio you actually want in real estate - for most people, buying an entire property is way too high of an allocation (again, just for diversification). Worse, while real estate as an asset class might be worth diversifying into, investing in an individual property should be seen as similar to investing in an individual stock. In this thread, we tell people to buy mutual funds. Why? Because they're a way of owning an asset class without being exposed to the high risk involved in individual securities. That's why it's normally suggested that if someone wants real estate for diversification, they should buy REITs. Now, there are definitely people who make money by buying real estate, including as rental properties, as remodel/flips, etc. But there are also people who make money by daytrading. Pointing out that someone can make money doing X does not tell you anything about the risk profile of X. I feel the same way about bonds, actually. The argument that bonds historically have poor performance compared to stocks is valid, as is the point that right now, today, bonds don't seem like a great deal. But you're ignoring risk. I don't own bonds because I think they're going to do well, I own them as a hedge against the potential of the rest of my portfolio to do poorly. The fact bonds often move the opposite direction of stocks makes them highly convenient as such a hedge. I think 10% in bonds is the minimum for a long-term retirement investor. Even if you are young and have most of your life to recover from a disastrous start (e.g., you go 100% stocks and then there's a crash), why risk that when you can go 90 stocks 10 bonds and significantly lower your risk, at a pretty tiny cost? If that tiny cost is so important to you, maybe you can balance it by going for a riskier stock portfolio. Losing it all when you're 25 may be something you can recover from, but it'll still be devastating to your long-term portfolio because that money you lost is the money that will have the longest amount of time to build and compound returns. I don't have the numbers, I'm basically just regurgitating the wisdom of the authors of some of the books we recommend in the OP. A small allocation in bonds is cheap insurance.
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Jun 19, 2014 20:09
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Eyes Only posted:I've been thinking about putting out tool that does a multi-year simulation that does this for you. You'd plug in (or use the default values) picks for each asset class' expected return, volatility, distribution of returns, and expense ratio, plug in some correlations, and put your savings rate and retirement goals in. It then runs a monte carlo sim with your assumptions and a life table and tries to minimize the likelihood of you or your spouse landing in the gutter. I'm sure there are plenty of services that do something like this already (I know wealthfront does a simplified version of this), but would anyone be interested in that? If you can pull off something better than http://www.firecalc.com/ (if you aren't falmilar, be sure to play with all the tabs to see the options), I'd waste several hours playing with it 
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Jun 19, 2014 20:15
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SiGmA_X posted:I agree it's too high at 26, unless you're excessively risk adverse. I'm planning to stick with ~10% until 35-40, probably. + 1 on too much in bonds that is a very long investment horizon and in the long run stocks give you more bang for the buck.
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Jun 19, 2014 22:30
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Fancy_Lad posted:If you can pull off something better than http://www.firecalc.com/ (if you aren't falmilar, be sure to play with all the tabs to see the options), I'd waste several hours playing with it Yeah, basically like this but modernized and with more advanced simulation. I'll see of I can find time to jam out a prototype in the next few months after my life calms down a bit.
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Jun 20, 2014 01:39
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Eyes Only posted:Yeah, basically like this but modernized and with more advanced simulation. I'll see of I can find time to jam out a prototype in the next few months after my life calms down a bit. If I could get like an ESPN Accuscore where it says "In 60% of our 10,000 simulations of EugeneJ vs. Life, EugeneJ ended up homeless and boozing", that would be fantastic
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Jun 20, 2014 01:59
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J4Gently posted:+ 1 on too much in bonds that is a very long investment horizon and in the long run stocks give you more bang for the buck. I'd always heard 100% minus age as a good rule of thumb for what percentage of bonds to have. Looking at the allocation that Vanguard uses for its 2055 retirement fund, 10% seems more like it anyway. It seems intuitive to me to keep some percentage in bonds, because they are pretty much uncorrelated to stocks. BND, for example, shows no dip at all around 2008. I keep my shorter term taxable (1-5 years) savings in 60% VT and 40% BND anyhow. Seems reasonable right? Also, all the indexed ETFs seem to weight their holdings by market cap. Are there any that don't do that, to really stir poo poo up? Celot fucked around with this message at 02:26 on Jun 20, 2014 |
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Jun 20, 2014 02:21
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mike- posted:Real estate is absolutely an investment when you are purchasing property to rent out. It isn't an investment when you are consuming your dividend (living in your house). Nail Rat posted:I think a rental property can serve as an investment. However, buying a house with the intention of flipping it or expectation of realizing value gains(especially after taking into account maintenance costs) is silly. Wish I'd known that six years ago Yeah this is what I meant. Thanks for clarifying.
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Jun 20, 2014 13:39
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pig slut lisa posted:Yeah this is what I meant. Thanks for clarifying. I was posting at the same time you were. I wasn't responding to you, but to the guy both of us were responding to. Our posts were a minute apart. Nail Rat fucked around with this message at 14:34 on Jun 20, 2014 |
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Jun 20, 2014 14:23
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Hey guys, I'm almost 27 years old and I need some advice on a game plan for my financial future. I'm asking here as opposed to the personal finance thread because I'm looking to invest my money and make more of a return than the almost-0% interest I'm getting with it sitting in a money market savings account at my credit union. Right now things are pretty good:
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Jun 20, 2014 19:42
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You are lacking a 6-month emergency fund.
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Jun 20, 2014 19:54
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Karthe posted:
Just so we're clear, this is a taxable account? You might think about starting a Roth IRA. quote:I plan on leaving this alone for now but will watch the markets and pull out if things start to take a turn for the worse. Do not do this. Decide on an allocation that is appropriate for your risk tolerance with this money and stick with it. Read the Warren Buffett quote in the OP or simply consider that your strategy sounds an awful lot like "buy high, sell low."
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Jun 20, 2014 20:03
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Karthe posted:The fund is tied to the S&P 500 and is 100% stocks, so I plan on leaving this alone for now but will watch the markets and pull out if things start to take a turn for the worse. Read the Four Pillars book! It sounds like your current plan is to buy high, sell low  When things take a turn for the worse, you should be buying stocks, not selling them.EDIT: ^Awww jeeeah
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Jun 20, 2014 20:03
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Karthe posted:The fund is tied to the S&P 500 and is 100% stocks, so I plan on leaving this alone for now but will watch the markets and pull out if things start to take a turn for the worse. You can't time the market. I feel like you'd probably benefit a lot from reading some of the books in the OP, namely The Four Pillars of Investing. They helped me make a lot of sense of things. edit: I'm way behind.
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Jun 20, 2014 20:17
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EugeneJ posted:You are lacking a 6-month emergency fund. Echo 3 posted:Just so we're clear, this is a taxable account? You might think about starting a Roth IRA. Echo 3 posted:Do not do this. Decide on an allocation that is appropriate for your risk tolerance with this money and stick with it. Read the Warren Buffett quote in the OP or simply consider that your strategy sounds an awful lot like "buy high, sell low." While I take Eugene's advice and build up my emergency fund, I think what I need to work on now is identifying the difference between investing for the long-term versus investing for the short-term. I have no desire to play the market or get into short-term trading - I'm aware of the market and how it works (and I have a token number of shares in two companies I like), and I know enough about it all to know that day trading isn't for me. There's a different mindset when it comes to investing for the long haul, though, and I think I'm still falling prey to the short-term trading mindset. I'll pick up the Four Pillars book and maybe A Random Walk Down Wall Street since that came up in this thread recently.
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Jun 20, 2014 20:23
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Karthe posted:I'll pick up the Four Pillars book and maybe A Random Walk Down Wall Street since that came up in this thread recently. After you read those two, you'll just smile and nod your head and disregard it when your dad says you need an "exit strategy." Everyone who got out of the market in the 2001 and 2007 collapses lost out on a lot of money depending on how long they stayed out of the market. It's impossible to reliably know when is the time to get out and when is the time to get in. The only thing that's a certain thing is that on a long enough timeline the market goes up. Nail Rat fucked around with this message at 20:32 on Jun 20, 2014 |
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Jun 20, 2014 20:30
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Karthe posted:My understanding is that I have a Roth 401k - earnings on my contributions aren't taxable since I contribute with post-tax income, while earnings on my employer's contributions are taxable since those contributions are considered pre-tax. We just had our annual 401K presentation yesterday and I received clarification on that point specifically. It's great that you have a Roth 401(k) and are maxing your employer match. Most people in this thread also contribute to a Roth IRA on top of that, which is what I was suggesting (see steps 1 and 2 in the OP). It's a pretty good deal; you get to put in a fixed amount per year (currently $5,500) and let it grow with no more capital gains or income taxes down the road. You could open one up with Vanguard if you wanted. Also note that you could do a Traditional IRA (which has similar tax treatment to the traditional 401(k)) if you wanted to. Echo 3 fucked around with this message at 20:37 on Jun 20, 2014 |
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Jun 20, 2014 20:35
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Echo 3 posted:It's great that you have a Roth 401(k) and are maxing your employer match. Most people in this thread also contribute to a Roth IRA on top of that, which is what I was suggesting (see steps 1 and 2 in the OP). It's a pretty good deal; you get to put in a fixed amount per year (currently $5,500) and let it grow with no more capital gains or income taxes down the road. You could open one up with Vanguard if you wanted. Also note that you could do a Traditional IRA (which has similar tax treatment to the traditional 401(k)) if you wanted to.
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Jun 20, 2014 21:10
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quote:and I'm not too hot on the idea of not being able to touch that money till retirement.
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Jun 20, 2014 21:24
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Cicero posted:Someone correct me if I'm wrong here, but even if you put it in a traditional IRA and took a 10% hit when taking the money out early, I think you'd still come out ahead relative to never having put in the money into the IRA in the first place, because you would've lost more than that 10% to taxes. You take the 10% penalty on top of income tax. Besides that, since you probably have other income that year, you're taking it out at a higher tax rate than if you were starting from zero. This is admittedly a relatively small change, but it's noticeable. You might have some gains that you could leave in, though, so there is that. Cassius Belli fucked around with this message at 21:54 on Jun 20, 2014 |
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Jun 20, 2014 21:51
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Cicero posted:Someone correct me if I'm wrong here, but even if you put it in a traditional IRA and took a 10% hit when taking the money out early, I think you'd still come out ahead relative to never having put in the money into the IRA in the first place, because you would've lost more than that 10% to taxes. It's 10% on top of paying regular income taxes on the gains. This will only beat out a taxable account over very long periods (certainly more than 20 years).
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Jun 20, 2014 21:56
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Yond Cassius posted:You take the 10% penalty on top of income tax. quote:On top of that, since you probably have other income that year, you're taking it out at a higher tax rate than if you were starting from zero. edit: so pulling money early out of a traditional IRA, you have to pay income tax and a 10% penalty. With pulling money out of a regular account, you have to pay income tax and short- or long-term capital gains. Cicero fucked around with this message at 22:43 on Jun 20, 2014 |
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Jun 20, 2014 21:56
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Cicero posted:If you're desperate for money at that time, your income tax is probably going to be lower than during the good times that you put the money in. That's a good point, but it's not guaranteed. The tax brackets are pretty wide, and you might have to pull for a medical emergency or something. And if you're above the IRA cutoff, you might have paid for the taxes on principal in the higher bracket anyways. I'm not a tax preparer and I don't know the exact way that's handled. I ran a quick-and-dirty Excel simulation, plotting the withdrawal value of $500 at X years in the future. You can undo an IRA contribution in the year it occurred, I think, so "year 0 withdrawals" there are $500 and then drop the year after. Of note is that capital gains taxes are 0 if you're in the 15% bracket or below. The chart assumes a steady 6% year-over-year, but I don't think the specifics matter too much. If you lose money in capital gains you might have a small deduction, but if you lose money in an IRA, it's just gone.  In the 15% income tax bracket, the taxable account is preferable by about 13% (capital gains is 0%, so you just pay income tax on your principal, vs. income tax + penalty on everything), even accounting for reduced initial investment. In the 25% income tax bracket, the taxable account starts off very preferable (14% and some change) and becomes less preferable as more and more falls under capital gains. In the case where you start off in the 25% tax bracket and fall to the 15% bracket, then... it turns out that you come out about the same as withdrawing from an IRA at the 15% range to begin with. It stays within a few cents, and I'm not sure that's not due to my rounding and approximations. I think you'd start coming ahead more if your income tax shifts more than 10% (25%->10%, 28%->15%), but that's more work than I really want to do on a Friday afternoon.
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Jun 21, 2014 00:18
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So I've decided to not do the 401k through my employer for a few reasons: -I work for a small business with a history of financial problems. The bond that is required to insure the funds within our company plan only covers 10% of the plan assets. So if my company goes bankrupt tomorrow, I'm only guaranteed to get 10% of my money. -My company has a "safe harbor" 401k. It's a top-heavy plan (majority of the funds are owned by executives) and by law they have to give extra money to lower-income individuals enrolled in the plan, but they are exempt from that requirement if they don't contribute to profit-sharing. My company has made no profit-sharing contributions in 28 years (since the plan started) -I'm essentially holing away a year's salary (5% per year) for a 4% match. The high expense ratios would negate any growth. So is it worth it to wall off a year's salary over 25 years to receive a year's salary for free? I'm on pace to have $10,000/year to put away in savings anyway, so I'll easily have $300,000 by retirement. -The average balance of someone enrolled in the plan is only $38,000. Most people enrolled in the plan are in their early 50's and have been in the plan for 28 years. This is disturbing. Tldr: My company could go under and I don't trust that my boss isn't using our retirement money to buy a new yacht EugeneJ fucked around with this message at 23:15 on Jun 21, 2014 |
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Jun 21, 2014 23:05
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I feel like you should find a new job as a long term investment in your career...
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Jun 21, 2014 23:25
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Brian Fellows posted:I feel like you should find a new job as a long term investment in your career... Not a bad idea. That's the one thing everyone should know - the law only requires a 10% ERISA bond for *every* 401k in America. It's worth researching how much your own 401k plan is insured for: http://erisa.suretybondcenter.com/understanding.html
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Jun 21, 2014 23:39
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EugeneJ posted:That's the one thing everyone should know - the law only requires a 10% ERISA bond for *every* 401k in America. It's worth researching how much your own 401k plan is insured for:
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Jun 21, 2014 23:54
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I thought that 401k contributions are entirely owned by you and not your company, as well as any vested matches. As far as I'm aware, my employer cannot withdraw funds from my 401k account. That's kind of the whole argument in favor of 401k plans over a pension or defined benefit plan: you own your own retirement. Am I wrong?
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Jun 22, 2014 00:40
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Guinness posted:I thought that 401k contributions are entirely owned by you and not your company, as well as any vested matches. As far as I'm aware, my employer cannot withdraw funds from my 401k account. That's kind of the whole argument in favor of 401k plans over a pension or defined benefit plan: you own your own retirement. That's the sales pitch - the reality is that the money only has to be there when you withdraw. My company cleverly hides away half of our 401k in a trust so they don't have to disclose what they did with that $2,000,000 last year. I've read horror stories of plans being frozen when a company goes bankrupt and people not having access to their money. Look up your 401k plan at Brightscope.com and you can see how much money your company currently holds. EugeneJ fucked around with this message at 00:49 on Jun 22, 2014 |
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Jun 22, 2014 00:47
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The website you link states that ERISA bonds protect against dishonest acts of the fiduciary, not that it's insurance against the 401k in general. Maybe this is a potential issue in some corner cases or if it's a small company, but if your company is using a large provider like Vanguard of Fidelity I'm skeptical that this could ever be a problem as the vested portion of the money is not held by the company.
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Jun 22, 2014 01:54
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Guinness posted:I thought that 401k contributions are entirely owned by you and not your company, as well as any vested matches. As far as I'm aware, my employer cannot withdraw funds from my 401k account. That's kind of the whole argument in favor of 401k plans over a pension or defined benefit plan: you own your own retirement. This is a good article on the topic: http://www.creditcards.com/credit-card-news/gary-foreman-401k-company-bankruptcy-danger-retirement-1580.php Basically once the money vests you own but there are plenty of horror stories for special cases in which the company goes bankrupt. Here's a good department of labor FAQ on the topic: http://www.dol.gov/ebsa/faqs/faq-abplanreg.html Basically in the abandon ship phase you really need to move quick to move the money out via a IRA or rollover with your new company. Also if you have a fairly small 401k balance there's a chance that due to legally allowed wind down expenses most your money would get sucked into a black hole. It's poo poo like the above that makes me wish for a public 401k plan since it would solve problems such as company bankruptcy and also the high expense ratio problem. etalian fucked around with this message at 04:07 on Jun 22, 2014 |
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Jun 22, 2014 04:04
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A couple horror stories: http://www.thestreet.com/story/10925205/1/feds-crack-down-on-401k-fraud.html quote:On Sept. 3, 2009, Barry R. Stokes -- president and CEO of 1 Point Solutions, a Tennessee firm that provided administration services to 401(k) plans -- was sentenced to 151 months of imprisonment and ordered to pay $19.9 million in restitution. The firm collected employee contributions for 401(k)s, but Stokes used it for his personal and business purposes, including buying an extensive Japanese art collection. The total amount of the amount of funds Stokes embezzled exceeded $14 million. So think about it - You start a company with a bunch of 30-year olds. Outside of the rare loan or early withdrawal, no one is going to withdraw any money for another 30 years when the employees reach retirement age. Temptation to play with that money must be strong. EugeneJ fucked around with this message at 05:02 on Jun 22, 2014 |
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Jun 22, 2014 04:48
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