Personal Finance Financial Planning & Investing

[TexasBama]

Suggestion for those applying for a home mortgage:

The bad news is that the days of 3% 30 year mortgages are gone. Probably forever, certainly for a while. That cloud, however, has a silver lining.....

The value of extra principal you might pay is also much greater. That can help you own your home free-and-clear quicker.

If you're applying for a 30-year $200,000 mortgage, and the interest rate is 7%, your monthly principal-and-interest payment is $1,330 (Important Note: This does NOT include property taxes, insurance or any PMI).

You could pay on a 20-year schedule and the payment rises to about $1,550. If you can get really ambitious, and pay on a 15-year schedule, the payment is about $1,800

Now here's the thing not many people think about: You can have a 30 year note, but pay it on a 15 or 20 year amortization schedule. Then, if you have an emergency, you can drop back to the lower 30-year payment until the dust settles and you return to the original plan -- paying more than your contract requires.

Yeah, it hurts the first few months. Then it just gets baked into your monthly budget and you don't really think about it much anymore.

The huge advantage is that, if you pay off your 30-year mortgage after 20 years, that’s 10 years -- 120 monthly payments -- you don't have to make. In the case above, that's 120 x $1,330 = $159,600

If you can stomach the 15-year payment, that goes to 180 x $1,330 = $239, 400.

So you get the benefit of a shorter amortization schedule (that you created yourself), but keep the flexibility to go to the lower payment in case something unexpected comes up.

Aside from the increased monthly outflow, one downside is that 15 and 20 year notes typically carry a lower interest rate than a 30-year. But the difference usually isn't much, and to my mind is the price of the flexibility and peace of mind.

The other downside is that you have to have discipline, especially as regards the definition of an "emergency."

The kids wanting to go to Disney World isn't an emergency. Wanting a new F-150 Lightning isn't an emergency. The newest, baddest perimeter-weighted, godamighty carbon, adjustable aerodynamic whipsy-doodle driver certainly isn't.

Losing a job or getting sick or hurt and unable to work is. Fixing the transmission on your 6-year-old Ford, so that you can avoid buying a new one for a while longer might be (though you really should have an emergency fund for stuff like that).

And you have to do it every single stinkin' month. If you make the higher payment only when it's convenient, the whole thing falls apart.

Yes, it's hard. Yes, you sacrifice some fun and some toys. And for that reason, not many people do it. But Mrs. Basket Case and I did. And I'm telling you....when the mailman brings a thick envelope containing your cancelled note and mortgage, that is one of the most fantabulously glorious feelings in the world.

And then you have 10 - 15 years of NOT making mortgage payments injecting a bunch of newly freed-up cash flow into your monthly budget -- providing funds for both additional investment and some guilt-free fun and toys.

100% on this. I would argue further that paying off your mortgage is probably the best investment you can make. I'm pulling numbers out of the air, but I think this is reasonably close:

Say you owe 140k on your mortgage and still have 15 years. Your monthly is 1k. If you have 140k of after tax money you can pay it off with, thats 12k per year you're not paying. 12k per year on 140k is about 8.5% and its on an after tax basis. Find me an investment that make 8.5% for 15 years after tax guaranteed. You can argue perpituity, but if you're 50 or over it's close enough.

 

[Bamaro]

An article from the March 9 WSJ on the high costs of alternative investments and funds.

When Wall Street Rolls Out the Red Carpet for You, Who Pays? - WSJ

Unless you have a subscription, it'll be paywalled. The Cliffs Notes version is:
- Alternative investments and funds generate lots of fees for the broker: Upfront loads, high annual expenses, and often sales fees when you want to cash out.
- This eats into your returns to an incredible degree, and exponential math over years exacerbates the issue.
- The ones who win with alternative investments tend to be the brokers.
- They're really pushing these investments today because they don't make much money on index funds.

I also took away that right now, today, we're in a golden age of investing. Not because of high returns -- I don't think today's long-term returns for US stocks are any more or less than history shows. Rather because we can have a highly diversified portfolio for cheap and thereby keep far more of the long term investment returns for ourselves than our parents and grandparents could.

Here's the deal: Cheap index funds didn't become widely available until the mid-1980s. Before that, you had to build your own portfolio by buying a wide range of individual stocks. Because you had to buy 100 shares to avoid "odd lot" brokerage fees (much greater than the already-high fees for so-called round lots), and you had to do that for a whole bunch of stocks, it also required a pile of money beyond the means of most investors. And even if the investor could afford the purchases, he or she had to ride herd on that portfolio -- something beyond the expertise of most people.

Which is why, before Jack Bogle popularized the cheap index fund, individual investors viewed the stock market as much more of a gamble than it had to be. And they were right. Unless you have enough of them and are diversified enough for the law of large numbers to kick in, Individual stocks are a bit of a gamble. Contrasted with a diversified index fund which is far less volatile and much surer in the long term.

Bottom Line: Don't put your money into "alternative investments" unless and until you fully understand all of the associated fees and expenses, and understand the impact they will have on your return over years. It is highly improbable that you'll put your money into something that beats the long term risk / reward ratio of an S&P or Russell 2000 index fund.

Shouldn't that read Russell 3000, not 2000 since the 2000 misses the 1000 largest stocks?

 

[4Q Basket Case]

Shouldn't that read Russell 3000, not 2000 since the 2000 misses the 1000 largest stocks?

Excellent catch! You’re right, and I’m correcting the post.

Thanks for pointing that out!

 

[Bubbaloo]

100% on this. I would argue further that paying off your mortgage is probably the best investment you can make. I'm pulling numbers out of the air, but I think this is reasonably close:

Say you owe 140k on your mortgage and still have 15 years. Your monthly is 1k. If you have 140k of after tax money you can pay it off with, thats 12k per year you're not paying. 12k per year on 140k is about 8.5% and its on an after tax basis. Find me an investment that make 8.5% for 15 years after tax guaranteed. You can argue perpituity, but if you're 50 or over it's close enough.

Yes and no on this! If your mortgage rate is less than your current rate of return (i.e. savings/investments paying 5.0-5.5% and you've got a 4% or 2.75-4.00% mortgage let your investments grow! If the saving/investments rate of return decreases you can always withdraw the money for payments or to pay off the mortgage! In addition you are paying the mortgage with the depreciated dollar as your current dollar is at least partly keeping up with inflation. One size NEVER fits all.

 

[4Q Basket Case]

Yes and no on this! If your mortgage rate is less than your current rate of return (i.e. savings/investments paying 5.0-5.5% and you've got a 4% or 2.75-4.00% mortgage let your investments grow! If the saving/investments rate of return decreases you can always withdraw the money for payments or to pay off the mortgage! In addition you are paying the mortgage with the depreciated dollar as your current dollar is at least partly keeping up with inflation. One size NEVER fits all.

From a purely mathematical perspective, you’re absolutely right. And I see this argument a lot — if your mortgage is 3-4% and you earn 7-9% in the stock market, why would you pay your mortgage early? Use the cheap mortgage money to fund higher-earning investments.

There are three things here.

First, 3-4% mortgage rates are historically low. At the date this is written, they are no longer originated. It is unlikely that we’ll see that level of spread between long-term market returns and mortgage interest rates at any time in the future. It is highly unlikely that they’ll return anytime soon.

Second, you have to actually invest the difference between your low mortgage payment and what you would otherwise invest. And you have to do it every single stinking month. If you just spend it (and the reason for the spending doesn’t really matter), you defeat the premise.

Third,, you have timing risk. As in the stock market’s returns aren’t a smooth parabolic curve. It’s a sawtooth up. So if you have a 30-year mortgage and invest the difference between your payment and your disposable income, you can still have risk that after 15-20 years, you’re upside down due to expected variation in returns. It’ll come back…eventually. But not many people have the stomach to tolerate downturns and keep on keeping on.

So I 1000% see your point. But I wonder about prevailing market conditions and most people’s dedication and patience to actually execute what is undeniably a mathematically superior approach.

 

[4Q Basket Case]

Article from John Rekenthaler of Morningstar, naming specific domestic index funds that perform well. "Good performance" being defined as low tracking error vs. the index and low expenses.

The Best US Stock Index Funds | Morningstar

All of these funds are widely available through just about any broker you might use. I personally use Schwab, but for these purposes any will do.

 

[Bamaro]

Article from John Rekenthaler of Morningstar, naming specific domestic index funds that perform well. "Good performance" being defined as low tracking error vs. the index and low expenses.

The Best US Stock Index Funds | Morningstar

All of these funds are widely available through just about any broker you might use. I personally use Schwab, but for these purposes any will do.

Or invest in them directly.

 

[BamaNation]

Article from John Rekenthaler of Morningstar, naming specific domestic index funds that perform well. "Good performance" being defined as low tracking error vs. the index and low expenses.

The Best US Stock Index Funds | Morningstar

All of these funds are widely available through just about any broker you might use. I personally use Schwab, but for these purposes any will do.

Thanks 4Q !

As Jack Bogle frequently stated, "You get what you don't pay for." ...There's an extremely high correlation between long-term performance and lowest expense ratios. There's also a very high correlation between, say SCHB (Schwab's Total Stock Market ETF fund) and VTSAX (Vanguard's Total Stock Market Fund). Schwab, Fidelity, and Vanguard all have excellent total market/bond/int'l/etc. funds across the spectrum. The main point (supported empirically) is to avoid actively traded funds. Stick with passive. It's a key principle we've continually emphasized in this financial series.

As shown in the article, If you're paying more than 0.10% in expense fees for total market funds, you're doing it wrong!

As an aside, there may be some minor tax advantages in ETFs but if you do a long-term comparison, the differences even on large sums of invested money is relatively tiny. ETFs are bought/sold during the trade day at the spot price while mutual funds are priced at the end of the trading day. Read Rick Ferri's book on ETFs if you want the specific details. My wife hates ETFs because if price goes down 2 cents 5 seconds after buying, she feels like she lost money (same if she sells and price goes up 2 cents 5 seconds after selling). Me, I make the decision and just do it. She's more susceptible to behavioral economics than me so if there's a need to buy/sell an ETF (which might be the only option sometimes), then I do it.

 

[4Q Basket Case]

Outstanding article from Amy Arnott of Morningstar on how to diversify an investment portfolio and which asset classes have actually provided diversification over the long haul.

Top 10 Things to Know About Building a Diversified Portfolio | Morningstar

 

[4Q Basket Case]

A new article from Morningstar on the improvements of the mutual fund industry over the past 40 years since Morningstar was founded.

It’s Easier Than Ever for Fund Investors to Build a Good Portfolio | Morningstar

Also goes over what it calls some negatives. I actually don't view them as negatives so much as opportunities for gamblers to gamble -- highly specialized funds, funds following the market trend du jour, etc.

Still, it's the best time in history to be a retail investor.

 

[4Q Basket Case]

A couple of articles in recent WSJs. If you don’t have a subscription, they’ll be paywalled. I’ll summarize here and link.

One is on the tax implications of owning gold. It’s treated as a collectible (along with silver, platinum, art, jewelry and wine, amongst other stuff), and that’s somewhat differently from other asset classes.

Gold-based ETFs and grantor trusts are different still, and it can be expensive both to buy and to sell.

I’m not saying that gold doesn’t have a place in a lot of portfolios. I’m saying that it’s different, both God and the devil are in the details, and you and your financial adviser need to understand the details regarding taxes, surtaxes, which accounts can hold gold, and load and sell fees before you invest.

https://www.wsj.com/personal-financ...1odx1nu2azu&reflink=desktopwebshare_permalink

A similarly-themed article on so-called “alternative” investments. They’re easy to buy, but your broker will likely make a fat juicy commission.

And they can be really hard to sell. And they can be expensive both to buy and sell. And the selling period is often limited to once or twice a year. And even then, depending on the specific terms of the investment, you might not be able to convert your shares to cash. And, and, and.

https://www.wsj.com/finance/investi...tjmt2adx1hj&reflink=desktopwebshare_permalink

Caveat Emptor. Know how you get out before you get in.

 

[BamaNation]

Thanks @4Q Basket Case ! I replaced your links with "gift links" so maybe it will allow our folks to actually get through the paywall with a "free link." Jason Zweig's columns are a great read. I went to the Bogleheads conference in October 2019. He sat at the breakfast table with me.

One concept that resonates with me is the thought about the "value" of gold. I've never owned any and don't plan to. It may be the right purchase for some, but not me. So, in this gold value concept, consider that one ounce of gold a couple thousand years ago would purchase a nice "suit" for a man. Guess what one ounce of gold purchases now? A nice man's suit (unless you're an investment banker on wall st and have to wear something 5x as nice ).

The tax treatment of gold/silver as a collectible certainly is not favorable.

As an aside, I know some folks who have a LOT of gold and silver bars. In their house. As they've gotten older are are in their 80's now, they are paranoid that someone is going to steal it so they never go anywhere or allow anyone to visit! It's hard to store, exchange, etc. But, again, may be right for some in certain circumstances.

PODCASTS

On a totally different topic, for those that listen to podcasts, I'm going to recommend two from the Bogleheads site. Both are available on most pod platforms. Start from episode one in each.

• Bogleheads on Investing hosted by Rick Ferri
• Bogleheads Live hosted by Jon Luskin

These are the most "least-hype" podcasts you'll ever listen to, and that alone makes them refreshing. Mundane material but could be life-changing if you've never applied or heard about the BH approach.

Bogleheads (and I consider myself one) "emphasize regular saving, broad diversification, and sticking to an investment plan regardless of market conditions." Most of these threads in our Personal Finance series are Bogleheads-inspired.

The podcast on the origins of the Bogleheads is quite an amazing story.

Also, for just about any personal finance / investing / retirement questions you have (even the most esoteric), you can usually find details in the Bogleheads Forum or Bogleheads Wiki.

Even if you do not follow the Bogleheads principles, I guarantee you'll learn something you didn't know that could be beneficial.

BOOKS

The three Bogleheads books are also on our list of must-reads. (You can see our full list of recommendations in our investing resources page.)

• The Bogleheads' Guide to Investing
• The Bogleheads' Guide to the Three-Fund Portfolio
• The Bogleheads' Guide to Retirement Planning

If you click on the book links above and purchase, TideFans may receive a small comission. Thanks!

 

[UAH]

I thought some of you might be interested in a Fund of Funds Managers view of the market. It is confidential of course and I deleted specific reference to the funds involved. One additional comment is that a couple of long/Short Health Science funds added in the last five years have been consistent contributors. We have been involved in this for 20 years. I only wish that I had taken as good care of my investments elsewhere.

June Market Commentary

• Equity indices put up another strong month in June with most major indices finishing higher. The S&P500 (+3.5% in June), Nasdaq (+6.2% in June) and the Dow (+1.1% in June) reached all-time highs during the month, with the Russell 2000 (-1.1% in June) and SPX Equal Weight (-0.5% in June) finishing lower for the month.
• In Q2, equity indices without outsized representation from the “Magnificent 7 Stocks” actually showed negative performance: S&P500 Equal Weight (-2.6% in Q2), S&P Midcap 400 (-3.5% in Q2), Dow Jones Industrials (-1.7% in Q2), Russell 2000 (-3.6% in Q2) and Russell Microcap (-5.6% in Q2).
• This limited market breadth could be interpreted as a cautionary sign of an impending equity correction. On the flip side, the first half of 2023 also had narrow breadth and weak relative performance between industries and even had a banking crisis, but by the end of 2023, all major indices were higher. Many conflicting signals present can lead to much anticipation (see quote of the month from one of our managers below).
• In June, the U.S. 10-year Treasury yield fell 2.3%, closing at 4.40%, and the 2-year Treasury yield fell 2.5%, closing at 4.8%, leaving the yield curve inverted.

June Estimates and Performance Drivers

• The BarclayHedge FoF Index: +0.4% (+5.1% YTD)
• funds continued their strong year-to-date performance with positive months. Multi-strategy exposure was the largest contributor to June returns. Equity L/S, specifically Financials, had another good month, compounding on YTD performance, which contributed nicely to returns. We also saw strong performance from our Quant and Credit strategies. Overall, like last month, there was positive contribution across all strategies.

Quote of the Month
“Over the last five years, the markets have weathered numerous significant events, including negative interest rates, wars, an inverted yield curve, recession, a -$37 oil price, a pandemic, supply chain disruptions, elevated inflation, rate hikes, bond market turmoil, and bank failures, to name just a few…The 1975 blockbuster thriller "Jaws" runs for 124 minutes, yet the audience doesn't see the 25-foot great white shark until 1 hour and 21 minutes into the film. The phenomenal success of the movie highlights an intriguing aspect of human behavior: anticipation can be terrifying.”

 

[4Q Basket Case]

Nice article from Morningstar on the advantages and disadvantages of buying a home vs. renting one.

Buying a home isn't for everyone. But if it's for you, there are some pointers on how to get there.

7 Steps to Affording a Home in Today’s Real Estate Market | Morningstar

 

[Bodhisattva]

I know this thread is mainly about investing in equities, and I'm slowly shifting more of my disposable income that way, but the last two months has been hectic (in a good way) for me regarding real estate. Just before we left for vacation to Vietnam last month, I finalized a 1031 exchange by selling six aging 1BR condos in Alabama that I bought around 30 years ago for two new 3BR townhouses in St. Augustine. These new properties have no mortgage and, as of yesterday, they are both rented out.

Also, just before we left town, we bought a house (about 10-years-old but completely renovated) in the town center of my community (Nocatee). It was originally a 3BR, but the former owner knocked down the walls of the third BR to turn it into an open office. While we were gone, we had the third BR rebuilt. That is done and the house is now on the rental market. We put about half down on this house. (One cool thing is that we bought the house at the price of a 2BR. Now that we've converted - at a cost of $10k - the house back to a 3R, we've gained about $25k in equity.)

The day after we got back from Vietnam, we closed on the sale of an investment build. We used the returned principle and a very good profit to put down deposits on two 3BR townhouses that will be completed in the fall. We will use the rest of the money from the sale to close on the rental properties with cash.

We have one more investment build that should sale soon, and we will probably reinvest in more builds.

For many reasons, I love living in Florida. A primary reason is the ease of making money. My wife and I have probably tripled our net worth in the last four years.

 

[BamaNation]

I'm going to once again suggest a couple of bogleheads podcasts. I despise all of the hipster/shyster rah rah investing podcasts/youtubes. These two I suggest are the opposite: very "dry" (meaning they focus on the facts and not the rah), promote bogleheads principles, and introduce you to some legit experts who have performed the empirical evidence or deployed strategies adhering to and underpinning these principles. I've listened to all of the Bogleheads on Investing (typically as they are released each month) and am making my way through the Live ones. All episodes of both are worth a listen and you'll definitely learn something. Both are available on your favorite podcast app.

Bogleheads Live

Bogleheads® Live – Financial Page

Bogleheads on Investing

Bogleheads on Investing Podcast – Financial Page

 

[UAH]

I know this thread is mainly about investing in equities, and I'm slowly shifting more of my disposable income that way, but the last two months has been hectic (in a good way) for me regarding real estate. Just before we left for vacation to Vietnam last month, I finalized a 1031 exchange by selling six aging 1BR condos in Alabama that I bought around 30 years ago for two new 3BR townhouses in St. Augustine. These new properties have no mortgage and, as of yesterday, they are both rented out.

Also, just before we left town, we bought a house (about 10-years-old but completely renovated) in the town center of my community (Nocatee). It was originally a 3BR, but the former owner knocked down the walls of the third BR to turn it into an open office. While we were gone, we had the third BR rebuilt. That is done and the house is now on the rental market. We put about half down on this house. (One cool thing is that we bought the house at the price of a 2BR. Now that we've converted - at a cost of $10k - the house back to a 3R, we've gained about $25k in equity.)

The day after we got back from Vietnam, we closed on the sale of an investment build. We used the returned principle and a very good profit to put down deposits on two 3BR townhouses that will be completed in the fall. We will use the rest of the money from the sale to close on the rental properties with cash.

We have one more investment build that should sale soon, and we will probably reinvest in more builds.

For many reasons, I love living in Florida. A primary reason is the ease of making money. My wife and I have probably tripled our net worth in the last four years.

That is really a very nice summary of your real estate investment efforts. I appreciate that. It is encouraging and likely opens up the window a bit on several of us who have differening levels of investments in real estate.

 

[4Q Basket Case]

I know this thread is mainly about investing in equities, and I'm slowly shifting more of my disposable income that way, but the last two months has been hectic (in a good way) for me regarding real estate. Just before we left for vacation to Vietnam last month, I finalized a 1031 exchange by selling six aging 1BR condos in Alabama that I bought around 30 years ago for two new 3BR townhouses in St. Augustine. These new properties have no mortgage and, as of yesterday, they are both rented out.

Also, just before we left town, we bought a house (about 10-years-old but completely renovated) in the town center of my community (Nocatee). It was originally a 3BR, but the former owner knocked down the walls of the third BR to turn it into an open office. While we were gone, we had the third BR rebuilt. That is done and the house is now on the rental market. We put about half down on this house. (One cool thing is that we bought the house at the price of a 2BR. Now that we've converted - at a cost of $10k - the house back to a 3R, we've gained about $25k in equity.)

The day after we got back from Vietnam, we closed on the sale of an investment build. We used the returned principle and a very good profit to put down deposits on two 3BR townhouses that will be completed in the fall. We will use the rest of the money from the sale to close on the rental properties with cash.

We have one more investment build that should sale soon, and we will probably reinvest in more builds.

For many reasons, I love living in Florida. A primary reason is the ease of making money. My wife and I have probably tripled our net worth in the last four years.

I'm curious, Bodhi -- do you manage the properties yourself or have a property manager?

Also, do you maintain the properties yourself or hire that out?

 

[Bodhisattva]

I'm curious, Bodhi -- do you manage the properties yourself or have a property manager?

Also, do you maintain the properties yourself or hire that out?

I have a property manage do all that. I'm planning on retiring in a few years and have thought about doing all that myself. (I used to back in my early days of investing.) But my wife and I are traveling a lot more now. And once I retire, we've talked about living abroad at least three months out to the year. So, I don't think I'll have the time (or desire, quite frankly) of being my own property manager again. I'm liking the idea of not working after I stop working.

 

[4Q Basket Case]

Just a note on recent market movements being a great case study on the benefits of diversification.

For the last couple of years, a lot of the gains have been in the tech and tech-related sectors. AI has gotten a lot of publicity this year. Still, the criticism from many has been that it's a narrow market. IOW, the lion's share of the gains has come from only a very few companies.

But in the last couple of weeks or so, we've seen a strengthening of the Industrial sectors. The notable thing is that while the techs are no longer rising like they were, they're largely holding on to their 2024 gains. Not 100%, but mostly.

Point being, if you have broad diversification in your equity portfolio -- preferably via low-cost funds -- you participated in both.

Due to the way it's figured (market-cap weighted), the S&P is getting increasingly tech-driven. So if you were heavier in NASDAQ or to a lesser extent the S&P, and lighter in industrials, you participated in the tech runup, but are missing out on the industrial recovery.

Trying to predict exactly when a given sector or sectors will get hot is a fool's errand. Even the best minds with the most extensive resources can't do it anywhere near consistently. They might get lucky for a while, but it always turns.

If you have your money spread out amongst all the sectors, you get the benefit of all the movements. Yeah, they'll go down or lag sometimes, but the trend is always a sawtooth up.

Rule #1A: Invest as much as you can every single paycheck, no matter what the talking heads are saying.

Rule #1B: In determining what exactly "as much as you can" is, distinguish prudently and honestly between needs and wants.

Rule #2: Diversify, diversify, diversify.