Q&A III: Vamos

 

Image

Vamos

An original painting by Alex Ferrar

On display at his restaurant Sobremesa, Antigua, Guatemala

Welcome to the third in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As with the first two, it is named after the featured painting above.

As described in the last two posts, Q&A I: Gaijin Shogun and Q&A II: Salamat , traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.

So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:

  • It will get responses to readers who were kind enough to comment.
  • It will get the flow of new posts started.
  • It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
  • It might even introduce you to some older posts you’ve missed so far.

Hope you enjoy them!

From:

girls-whispering

Why I can’t pick winning stocks and you can’t either

VK:

Hello Jim,

I love your articles and agree with most of them. I’m on the fence on this particular one.

I’m currently following AAII’s model shadow stock portfolio which has worked great for me since I started following it in the past couple of years.

I’m young and have been investing only a few years in the market and I’ve been seeking the answer to this question – should I invest in individual stocks or index funds.

AAII’s shadow stock portfolio’s return since inception in 1995 has been 17.9% vs S&P 500′s 9.43% for the same period. It seems to me that their model certainly seems to be working. I would like to know your thoughts as well. Do you still believe it’s better to invest in VTSAX vs just shadowing AAII’s model stock portfolio?

jlcollinsnh:
Hi VK…

Glad you love what you are finding here and hope you continue to read more.

This post is really at the core of what I believe and discuss here. It is not just my opinion, but the conclusion of an ever increasing body of research. Even Warren Buffett, perhaps the best stock picker of all time, is on board with the concept of indexing.

I am unfamiliar with the AAII model you mention, but there are countless investments out there striving to out perform the market. Some do for some periods of time, and they are endlessly creative in presenting their track records in the most favorable light.

But every prospectus carries this warning: “Past performance is not a guarantee of future results.”

The are both the truest words in these documents and the most ignored.

It is easy to look back and find the funds and portfolios that have outperformed in the past. It is impossible to predict which will do so in the future.

That said, it is great AAII has worked well for you so far and I completely understand the temptation to continue. It just seems so reasonable. It took me years to accept how vanishingly difficult it is to outperform the market and how rare and fleeting those that seem to are.

For more, check out my story of CGMFX at the end of this post: What we own and why we own it

Good luck!

From:

cat food eating

Social Security: How secure and when to take it.

John:

Excellent article.

I have heard that if the income limit on SS taxes was removed, the cash in/cash out future problem with the SS trust fund would go away.

Of course the “richer folks” would get socked with a big tax increase that they have not had to bear for years and years and years, as the “poorer” folks have been doing since the “poorer” have been paying the SS tax on all of their earnings in most cases.

Another plus for the SS fund would be that since there are fewer “richer folks”, there won’t be a rich-baby-boom bubble to deal with.

Two other points, SS is also a disability insurance program, and pays survivor benefits to children and widows if the worker dies. So, it is more than just a retirement fund. It’s a mixed bag with heavy social overtones.

And it still is a financial floor on which one can build on with their own savings plan.

Secondly, as to early retirement, another reason to take the money and run, is that you may still be “young” enough to want to do and enjoy many things that down the road ten years or so, you won’t care so much about doing. Or your physical situation will have gone down hill as is the case with older folks (two heart attacks + for me), and as such, doing some things will be out of the question. For example, it’s hard to paint or do needlepoint with shaking hands. And doing most things requires the ability to be able to walk, and walk a lot, and go up and down stairs or pathways. So, if you can’t walk much, or you get dizzy, etc., plan to stay home a lot.

Lastly, SS is an insurance system by which workers save for their future via the SS tax on their earnings, so that if or when they die, get disabled, or get old, society won’t have to pick up the tab for their or their family’s full support.

I used to work for SS many years ago, and have no work connection with SS anymore. My views and opinions are mine alone.

jlcollinsnh: 
Thanks John…

Glad you liked it, especially as someone who used to work there. I appreciate you adding your perspective. Great points!

Since SS payments are at least somewhat tied to contributions made, I wonder how that would be handled if the income limit were removed. If the payouts were still capped at the current levels, SS would become more of a simple income redistribution scheme.

Depending on one’s viewpoint, that may or may not be a good thing. But I think it should be part of the discussion.

As for SS and early retirees, check out: Go Curry Cracker: Social Security and Early Retirement

I think you and my other readers will find it interesting and useful.

From:

walk_away

The College Conundrum

Meghan:

This is an old thread, but I’m hoping my question will get answered!

Of course I’ve read a lot about the subject, but I’m wondering your personal belief regarding student loan debt and investing. Unfortunately my parents didn’t school me in the “value” of education, nor did they school me in the (EEK!) terrible side of debt.

Anyways, I have no other debt except student loans and live very frugally. I also make a decent salary and have a good retirement fund going. Should I focus on paying off my student loans before building up anymore retirement funds? What are your thoughts? Or does anyone else have opinions/experience in this situation?

Super big thanks!

jlcollinsnh:
Hi Meghan…
And I’m hoping you are still tuned in for an answer!

Basically, I would apply my rule of thumb for paying off a home mortgage. If the interest rate is:

6% or more, focus on paying off the loan.
4% or less, focus on building your investments.
In between, follow your heart.

Since I despise debt that last for me would mean focusing on paying off the loan.

If you do decide to focus on the loan, pay the absolute maximum you can each month.

The good news is, by the time you’re done, you’ll have a very strong habit of sending that money off. So it will be easy to then channel it into your investments and watch them build! You’ll be amazed at the progress.

Good luck and please keep us posted!

From:

eye of god

How not to drown in the sea of assholes

m:

I’d add a third thing to this list…

3. Empathy/Perspective. Unfortunately, some days for one reason or another I am the asshole.

jlcollinsnh:
Good point m!

While this was written from the point of view of dealing with the assholes around us it is worth remembering that we are all, at times, the asshole in question. :)

From:

  thought experiment

What Poker, Basketball and Mike Whitaker taught me about luck

Scott W:

Great article Jim. I’m a big believer that people create some of their luck but I think its important if you are doing well to be appreciative for some of the good fortune you may have had along the way.

Unfortunately many people who make bad decision after bad decision blame their lot in life on bad luck. I have a good friend who has a terrible attitude and he is convinced his lack of success is 100% bad luck when it is actually his attitude holding him back.

jlcollinsnh:
Thanks Scott…
Sorry to hear about your friend, but all too many people seem to fall into that trap. It becomes a vicious cycle and a self-fulfilling prophecy. Help if you can, but be sure not to get drawn into the vortex.

From:

spitfire

The. Worst. Used. Car. Ever.

Cline:

I had an illness in the late 70′s and early 80′s that caused me to use my student loan money to purchase a TR3A ( a lot of it in boxes), then I traded a perfectly good Pontiac for a Spitfire with the rocker panels completely rusted out because it looked so cool. Of course it had the identical self destructive engine as yours.

Then, during my first job out of college I bought at TR6 with a credit card. (Still had TR3 in the yard not running) It broke in two one day while driving over a railroad track. I had paid 2300 for it, 400 in welding the frame back, and sold for $4500. I guess that financed my losses on the other two.

Moral of the story, you need to buy a couple more Triumphs, kind of a dollar cost averaging thing. (What I learned in college with the rest of the student loan money)

jlcollinsnh:
“It broke in two one day while driving over a railroad track.” 

Ha! That got coffee sprayed all over my keyboard!

Too damn funny! And I’ll bet those reading who have never owned a Triumph (lucky devils) think you exaggerate. Ha, again!

So, I should DCA into a couple more, you say? Mmmmm. Spoken like a man who has a couple to unload…

From:

Princess Diana BB

Beanie Babies, Naked Barbie, American Pickers and Old Coots

Jen:

This post sent some shivers down my spine, because my husband just started collecting bank notes – hey, this stuff will be worth millions some day, and yes, we will send our kids to college on them.

Shipments from ebay arrive daily to our home – some with old notes costing several thousand $$ per pop. Sad thing is that I am sure the ebay value of these things already has taken into account the note appreciation (if any) and they are selling at net present value.

Just hoping we can resell those notes some day for what he paid for them.

jlcollinsnh:
And your comment sent shivers down mine, Jen.

Hope you have a plan “B” :)

If not, it will be character building for your kids to pay their own way… ;)

From:

eggs

Stocks Part XIII: Withdrawal rates — How much can I spend anyway?

Elisabeth:

Hi Jim. I’ve spent the past week reading almost all your blogs and it’s been wonderful! A friend helped me find MMM and he lead me to you. I thank all of you for posting all this great advice to help me achieve freedom as soon as possible! And for free!

I understand the principles of 4% and calculating what I need my net worth to be but I’m struggling with details. Based on our current spending I’d like our retirement expenses to be about $40k. That means I need to save $1m before we are free. But, how is inflation calculated? I understand I need $1m in today dollars but if we can get there in 10 years do I keep tracking to $1m, or will this number go up as the years go by? Because in 10 years we will need more than $40k due to inflation.

My husband and I are in our early 30s and while we have saved a lot over the past 10 years it all hasn’t been invested, earning maximum returns for us. We’ve stepped up the rate and I hope to get there in 10 years I’m just struggling with the details of calculating what my “freedom fund” needs to be.

Thanks for the help!!!
Elisabeth

jlcollinsnh:
Welcome Elisabeth…
Glad you found your way here.

There are a couple of ways to approach your question.

You could estimate the rate of inflation and plug it into one of the many on-line calculators and let it figure how much you’ll need to replicate the spending power of 40k when you retire. The problem, of course, is that inflation will likely not unfold as you predict.

Better, it seems to me, to simply aggressively build your freedom fund and track how much it can throw off at 4% each year as it grows. At the same time you can assess each year how much you’ll need/want when you retire.

Over the years, those numbers will come together. When they intersect, you’re there!

That’s what I did anyway! :)

But if you want to get a bit more technical, Eric Bahn also just put up a nice post you might find helpful: Calculating when you can say: F-you

Good luck!

From:

esperando un camino

Travels with Esperando un Camino

ak907:

I am a bit late to the party with this comment but I have been reading through your site and loved this post. It describes very well how I would like to travel the world.

I recently traveled to Thailand, it was fun and a great learning experience as my first international trip. But the trip, taken with and largely planned by friends, suffered from some of the very issues you describe. I had small bits of experiences as you describe, but I would enjoy having even more genuine travel experiences.

How do you do it? From my little bit of experience I can tell it will take a lot of research and planning. Unlike your daughter I traveled little as a kid and am not sure how to go about travel and having experiences like those you describe. Simply flying to a foreign location and going from there does not seem like it would lead to experience such as you describe.

Sites/sources such as lonelyplanet seem have been ruined by commercialism/tourism. Any recommendations? Perhaps the answer is simply experience.

How do mesh the competing goals of f-you money/financial independence and expensive travel?

AJ:
To the last commenter… I would say that the lack of planning is what makes the types of experiences Jim describes most likely. 
jlcollinsnh:
Hi ak907…

No worries being late, glad you made it!

I think AJ nailed it, a lack of planning is the key and it sounds like your trip to Thailand suffered from a bit of over-planning. I tend to just show up, wander around and see what happens.

Now that I’m older and have gone soft,  I do book the hotel for the first night or few  before I arrive and I like to arrange for a driver and car to meet me at the airport. There is nothing like stepping off a plane after a long, tiring flight and finding someone there with a smile holding up a sign with your name on it.

If I know someone who has been, I’ll ask for their recommendations for a hotel. And since I like my hotel centrally located and an easy walk from places, I’ll check the location on their website. This is exactly how I found the place where I stayed in Guatemala last month.

For what it is worth, I don’t use the travel guides like Lonely Planet or sites like Trip Advisor. Nothing against them, just never felt the need. And, as I think about, I guess I’ve always kinda figured they’d be out of date by the time I got there and would lead me to places that were by then overrun.

Once there, I just ask people where to go and what restaurants are good. Other travelers are easy to talk to and happy to help. When I find a good place to eat, I’ll also ask the owners where else they’d recommend. Figuring this stuff out gives you a reason to engage people in conversations. Which is one of my key goals.

But mostly it just takes showing up, not being tied to a schedule and going with the flow. This can take a few days, so it’s good to have more than a week to play with. Even now it is not unusual for me to hit a bit of a depression in the early days before things begin to come together. So, if this happens to you, don’t be overly concerned.

As for the FI/travel balance, it is a matter of choosing what you want to spend your money on. It is a fallacy, it seems to me, that pursuing FI means you can’t spend money on anything else. You just can;t spend money on everything else. Most people can afford both FI and travel assuming, of course, that they are not also indulging in fancy cars, homes, wardrobes and the like.

Plus, traveling this way can be surprisingly cheap. My hotel in Antigua was about $18 a night. Not fancy, but spotlessly clean, well located and run by incredibly friendly folks.

For more check out: So what does a month in Ecuador cost anyway?

Here’s another great source on the hows and costs: Go Curry Cracker

Oh, and it helps to travel alone. When you are with other people you are less approachable and less likely to approach others.

Good luck and safe journeys!

From: 

Rukeyser

1st annual Louis Rukeyser memorial Market Prediction contest results

Bryon:

Sorry to be a detail Nazi, but it drives the math nerd inside me wild. You say that your prediction of the high was .013% off. It was 1.3% off or off by a factor of .013. Adding in the percent sign moves the decimal place. Your point still stands, and I greatly appreciate the fantastic content on this site.

jlcollinsnh:

No worries, Bryon…

…your correction is very much appreciated

I operate this little blog with no help. No proofreaders or fact checkers. But I am very concerned that what appears is as technically accurate as possible.

So I am always grateful to readers who care enough to point out any errors.

That said, I am not enough of a mathematician to fully understand your correction here. Could you elaborate?

Thanks!

From:

girl-shrugging-shoulders

Stocks Part XXI: Investing in Vanguard for Europeans

If you’ve read this far and have concluded that only I have answers around here, it’s understandable. But wrong. Click on the link above for a remarkable guest post and equally remarkable conversations, all in an area where I have little to nothing to offer.

From:

Einstien

Stocks — Part XX: Early retirement withdrawal strategies and Roth conversion ladders

from a Mad Fientist

Kurt:

“It’s possible though, due to a low amount of income during early retirement, that he won’t have to pay any tax at all on the conversion”

How is this done? Anywhere I have read it is taxed as ordinary income when you do the conversion. Oh, unless you mean his Personal Deduction/Exemption take care of the tax due on the conversion??

That’s pretty much how you do it. Standard deduction and personal exemption = $20k per year tax free for a married couple with zero kids.

With our 3 kids, we can actually convert $31,700 totally tax free. And even more than that since we get the child tax credit (x3). Needless to say, the Root of Good household won’t be paying federal taxes in retirement either.

Posted in Uncategorized | 11 Responses

Q&A II: Salamat

Image

Salamat

An original painting by Alex Ferrar

On display at his restaurant Sobremesa, Antigua, Guatemala

Welcome to the second in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As before, the post is named after the featured painting above.

As described in the last post, Q&A, traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.

So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:

  • It will get responses to readers who were kind enough to comment.
  • It will get the flow of new posts started.
  • It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
  • It might even introduce you to some older posts you’ve missed so far.

Hope you enjoy them!

From:

no fun

Stocks Part VI: Portfolio Ideas to Build and Keep your Wealth

Scott:

Hi Jim,

I’m loving your posts referred by MMM, thanks so much for all the great info.

A long time ago, I kinda fell into the conventional wisdom trap of 60/40 allocation of stocks/bonds; but I have to say that I am comfortable with a bit more risk (even at my advanced age :).

I’m 56 and retired 3 years ago, and left my 401k in my company’s plan because it’s cheap and easy. 58% is mostly in 3 funds, S&P Index (.06 fees), BlackRock US Equity (.09) and BlackRock Extended Equity (also 9 cents). The 42% is in PIMCO’s biggie, the Total Return Fund, but the expense here is significant — 0.46 %.

The past 10 yrs has been great, but the last 2 PIMCO has suffered. So I guess I have 3 questions for you, if you care to opine:

  1. I’m happy with the stock fund returns and think the expense is low, am I right?
  2. Am I crazy to want to change the allocation by 10 pts, to 68/32?
  3. Even if PIMCO’s expense is high, I think it has performed much better than Vanguard’s — do you still think it’s a bad idea to stay with it?

You should know that I’ve got a separate 50k invested in REIT’s outside the retirement fund, as well as 50k in a Colombian coffee farm! And I’m considering Lending Club as well… so I feel like I’m doing pretty well as far as diversification goes.

Thanks! Scott

jlcollinsnh:

Welcome Scott!

Glad you found your way here.

You certainly sound well diversified and I bet there is a great story behind your Columbian coffee farm! If you care to share it, I also bet I’m not the only one who’d be interested. ;)

As to your questions:

1. Your S&P index fund and the two BlackRock funds have nice low ERs. While it is good you’re happy with the returns, don’t forget we’ve been in a powerful Bull market for the last few years. At some point the Bear will revisit for a while. This won’t mean the funds stopped working. Just a heads up.

2. Not crazy at all, especially with your other diverse investments and as long as you recognize that you will be adding some risk in seeking greater returns. Balancing risk/reward and smoothing the ride is what asset allocation is all about. But don’t be tempted to try to time the market in doing this. See: Investing in a Raging Bull

3. Jack Bogle is fond of saying “performance comes and goes, but expenses are forever.” Or something like that. Many actively managed funds will outperform the index for a year or two or even several. But ultimately they underperform as apparently PIMCO is now. If, as I suspect, your BlackRock funds are also actively managed I would have the same concern about them even though it sounds like they’ve done well for you of late. This is why my money is only in index funds as described in the post.

Hope this helps!

Scott:

It DOES help, thanks Jim.

So… the story on the Colombian Coffee Farm, it’s interesting. When my last company offered me a generous early-out pkg a few years ago, at 53, I could have walked across the virtual street to Apple or Google etc., but I was already in the mindset of escaping the cubicle.Since I had saved pretty well and they literally GAVE ME the F-you money (how ironic), my wife decided to take a sabbatical and we hit the road, living in several places in Mexico for the past year, then Florida’s “Space Coast” for a few months, and I write to you now from our current temporary home in S Africa, right next to Kruger Nat’l Park, where zebras and giraffe regularly block our driveway and hang out on the porch. We are so thrilled to be able to do this, and it is definitely on a tight budget.

Anyhow, while living in Mexico with a lot of free time to read, I stumbled into various excellent blogs, like MMM and Live and Invest Overseas and now yours.

Live and Invest Overseas is where I learned about the coffee farm, and so I took a week-long “due diligence” trip last August to Medellin to investigate. It seems that Colombia has the POTENTIAL to grow some of the very finest coffee in the world, yet their multiple layers of profit-grabbing, price-dictating middlemen have not only impoverished the coffee farmers, they have indirectly forced the production of mediocre coffee.

Along came a company called Coffee Latin America and its sisters Logistics Latin America and Tierra Cafetera (now Cima), which bought a few very large farms that were in distress, and created a new model by inviting investors to share in the land ownership and the profits from coffee production.

By cutting out the middlemen, they are able to focus on high-quality coffee only, return to the old ways of production (mono-crop to multi-crop), stop using chemical pesticides, and rewarding the farmers with higher pay, incentive bonuses, and health & pension benefits (never seen before).

So, I can’t vouch for the results yet, because I’ve only been invested a half-year, but the 5-year projections show profit growing steadily from 3% to 19%, and continue on indefinitely at 19. Plus I physically own my 3 acres of the 120-acre farm, and am free to sell it, but the company has first right of purchase.

So in a nutshell, I bought 3 acres of a Colombian coffee farm that is now dedicated to replanting high-quality beans in a sustainable, organic manner, with socially responsible practices, for $50,000 US, and I lease it back to the coffee farm in return for 2.5% (my share of the farm) of 80% of the profits. (The 20% goes to the farmers as incentive bonus.)

I think it’s a win-win-win and I’d rather have it there than where it was, in employee stock shares that were going up, down, and nowhere. I can only hope that the returns will be as promised, but I know 19% is a lot to ask for; I’d be happy with 10.

If anyone is interested, I can pass along the website for the company, I’m hesitant to do it now because it may appear that I’m promulgating or shilling for them. That’s not my intention…but you asked! :)

jlcollinsnh:

Wow Scott!

By all means, post the link if you’d like.

Great story, on many levels.

Perfect example of how new vistas open up when we lift our noses from the grindstone.

Right now I have a question in Ask jlcollinsnh concerning ethical investments. Your coffee plantation will be part of my response.

And I love how they gave you the F-you money to fund a chuck of your escape. Ha!

Now I want to hear about living in South Africa! My wife is from Zanzibar and ever since our last visit we’ve talked about return to explore more of that continent.

Thanks!

Clint:

Two questions regarding small cap stocks:

1. If small caps historically tend to outperform large caps (over the long-term and provided you don’t panic), why do you not recommend overweighting small caps? Or being only invested in a small cap index?

2. More practically, if one only has a choice of an S&P-tracking index fund in a 401K, would you see any problem with balancing it out with the addition of a small cap fund?

3. If one were to look to tilt toward small caps, would you recommend VISVX (small value) or VSMAX (small cap index)?

As always, thank you. Hope you’re having a good vacation.

jlcollinsnh:

Great questions, Clint…

and thanks for the kind wishes on my travels and you patience in waiting tim my return for this response! It was a wonderful trip!

OK….

 1. Your premise is correct and that could be a fine strategy.

But you have two considerations. First, the small caps will give you an even more volatile ride, along with long periods of underperformance. Second, you’ll want to consider adding an international fund, and the extra risk these entail, as you won’t have this covered as with VTSAX. For more:  International Funds

 2. That would work. Just remember, if your aim is to duplicate VTSAX, that index holds only about 20% in small caps. So 80/20 would be your S&P 500/SC allocation.

 3. I’d go with VSMAX for the broader sweep of small cap stocks it holds.

Hope that helps!

From:

 journey path

What we own and why we own it

Alan:

Hi Jim, hope all is well. I’ve been absorbing your blog like a sponge absorbs water. I just finished reading the entire stock series… really great stuff you’ve got here, it’s enlightening to say the least. Thank you!

I have a question for you regarding Vanguard’s money market fund (VMMXX). Since it is a money market account, Vanguard allows for checkwriting services… my question is, are there any tax implications for writing checks? Vanguard states on their website that “for tax purposes, checks are considered redemptions”.

Here is a link:
https://personal.vanguard.com/us/whatweoffer/accountservices/checkwriting

 jlcollinsnh:

Thanks Alan…

Glad you’re enjoying it and I appreciate the kind words!

Money Market funds strive to maintain share value at exactly $1, so typically there is no capital gain or loss when you sell shares. So, no taxable event — even though checks written on them are redemptions.

I say typically because on rare occasions an MM fund will “break the buck” — that is the share value will drop below $1. This is a very big and negative deal. It last happened in the financial crisis of 2008, but only with a couple of MM funds. None were Vanguard’s.

So for all practical purposes, you have nothing to worry about here.

But, with interest rates so low, MM funds are no longer a very profitable place to keep cash. Banks, especially on-line banks, pay more these days and enjoy the benefit of FDIC insurance. My checking account actually pays more interest than VMMXX. But both are vanishingly small percentages.

I still use the MM fund, but mostly now just for convenience.

From:

Old wooden buckets

Stocks Part VIII: The 401k, 403b, IRA and Roth Buckets

Jonathan:

Hey Jim,

Just wanted to tell you I’m so glad I came across your blog!!

I’ve always found the stock market to be so interesting and wanted to become a broker but in the end I’m majoring in accounting. Turned out to be one of the best things I’ve done because I’m already working for a firm making about 25k a year (after taxes).

Anyway, I’m 19 and just opened a Roth and invested my first few paychecks – 3k (enough for VTSMX). I’m extremely lucky at the opportunity I’ve been given.

I still live at home and only have my phone payment; saving about 90%. I’m currently working to get my AA, while it’s not easy being a FT student and maintaining a FT job, I know it’ll be worth it in the end.

Can’t say how grateful I am at the plethora of information I’ve devoured on your site, One step closer to having my FU Money.

Thanks – Jonathan

 jlcollinsnh:

Hey Jonathan…

Congratulations on what sounds like a splendid start. Would that I were as wise when I was 19!

As you might well already know, once your VTSMX account hits 10k Vanguard will automatically roll it into the lower cost VTSAX for you.

Finally, thanks for the kind words. You made my day!

From:

 sailing ship

Stocks Part XVII: What if you can’t buy VTSAX, or even Vanguard?

Ali Clark:

Newbie here! Trying to make sense of all this.

I’m looking for your Vanguard recommendations in my freshly started 401K.
Are these index funds?

Vanguard LifeStrategy® Conservative Growth 0.70%
Vanguard LifeStrategy® Moderate Growth 0.70%
Vanguard LifeStrategy® Growth 0.70%
LVIP Vanguard International Equity ETF 1.20%

What about this guy?
LVIP SSgA S&P 500 Index 0.54%

jlcollinsnh:

Welcome Ali…

Always nice to have another newbie join in!

Only the last one is an index fund.

However, the first three are each what are known as a “fund of funds.” That is, they are made up of other funds and each of these are made up of index funds.

The idea is that you get diversification and automatic rebalancing, but the ER (expense ratio) is a bit higher.

For instance, Vanguard LifeStrategy® Growth –https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT — is made up of:

–Vanguard Total Stock Market Index Fund Investor Shares 56.1%
–Vanguard Total International Stock Index Fund Investor Shares 24.1%
–Vanguard Total Bond Market II Index Fund Investor Shares† 15.9%
–Vanguard Total International Bond Index Fund 3.9%

Basically an 80/20 stock/bond split using a nice selection of funds.

Were I young and planning a few more years of work, of those you listed that’s the one that would be my choice.

From:

walking the dog

Case Study #7: What it looks like when everything financial goes wrong

Deacon:

Great story and some very worthwhile advice from all involved. I love the points about living with less and focusing on relationships over “stuff”. I’m also amazed by Tom’s ability to live such a mobile life with a family in tow. Hard to do that with lots of unnecessary possessions on hand. Reminds me of the wisdom in one of David Cain’s recent posts on raptitude.com (“Everything In It ‘s Place, Now and Forever.” )

So as not to armchair quarterback Tom’s decisions in an effort to apply lessons to my own life, I’d love to hear what advice he has based on his story. Above and beyond his very wise comment about the value of relationships over material desires, that is. With all the forks in the road that he faced, I’m sure he developed at least an unconscious list of rules to live by that have helped him maintain such a positive outlook and ability to attract quality people in his life. I say this based on both his successes and his failures, as lessons obviously can be learned from both.

 Tom:

Hey, Tom here. In response to Deacon’s request, I have a few rules I live by …

#1. Seek the truth; there is a lot of deception in the world. Learn to find out what is true and what is false. It takes some effort, but it’s worth it.

#2. Get outside everyday and breath fresh air, get some exercise, even if it’s just a nice long walk.

#3. Look everyone in the eyes when you talk to them; it will instill trust in both parties and you will learn to read others’ responses.

#4. Tell the ones you love (family and partner) that you love them.

#5. Simplify, simplify … Thoreau was right. We sure can’t take all this stuff with us.

#6. Work at a job you love and put your all into your work. That being said, don’t take your work home with you. Take time to unwind.

#7. Eat healthy, have a drink daily, but don’t overdo either.

#8. Be thankful for the things money can’t buy.

#9. If you have kids, take them fishing, camping, whatever. Show them there is another world out there that has nothing to do with electronics or stuff.

#10. Take the back roads in life, stay off the freeways.

Deacon:

Thanks for the response Tom, and to jlcollinsnh for the addendum. Very wise words to live by. I have to say that my #1 and #2 would be exactly the same. Interesting how certain life events will cause me to remember or re-evaluate certain of my own ‘rules’, but these two (and maybe a couple others) are constantly in focus. Thanks again for the words to live by.

Tom Kemper:

You will end up a wealthy man Deacon … like me. :)

From:

flux capacitor

Stocks Part III: Most people lose money in the market

Chris:

One thing I don’t get: How is it that supposedly MOST people perform worse than the corresponding index share market?

Let’s say you are right and one can not predict shares that outperform the market, – is it then not that by pure chance 50 % of us would perform better, 50 % would perform worse, – i.e. would there not a normal bell curve type distribution around the mean?

This is of course different if I pay fees for a managed fund, or if I pay lots of fees for trading, – but if we take that out of the equation for this question, – if it just came to me deciding to pick my own stocks out of a basked (let’s say the Dow Jones), – would my chances not have to be 50 : 50?

Thanks for clarifying!

 jlcollinsnh:
Hi Chris…

Sorry for the delay. I was actually hoping to get the Mad Fientist to weigh in on this as I’m curious as to what his take might be.

In any event, my answer is simply that people have an almost endless array of ways to repeatedly lose money in the market:

  • Trying to time it
  • Trading
  • Stock picking
  • Bad managers
  • High fees

..and a bunch more I’m not thinking of just now. So it is not just one event with a 50/50 chance but an endless stream of events, each stunningly easy to get wrong.

But you are right in this way: If you and I were to choose a given stock and you went long while I went short, we would each have a 50/50 chance of being right.

In fact this is exactly what happens with each specific trade in the market. For every buyer who thinks the time is now, there is a seller happy to unload. At that moment, only one can be right.

Index funds, on the other hand, rise relentlessly (although not smoothly) and are self cleansing. as described in this series.

Make sense?

Mad Fientist:

Hey Chris, Jim emailed me to ask if I’d take a stab at replying to your comment.

Luckily, Jim chimed in with a great response (no big surprise there) so hopefully that answered your question.

I wrote an article about some of the cognitive biases that cause us to make bad investing decisions so feel to check that out for a few more reasons why most people underperform the market.

From: Stock Series

Mike P:

Hi Jim,

I recently found your site along with MMM and the Mad Fientist and I am loving everything I have read. I have implemented most of the stuff you teach here in my own finances.

My question is about a traditional IRA vs a Roth IRA. I am 24 with a $50K salary. I noticed you are a big proponent of the Roth IRA however in Part XX, Mad Fientist contradicts this and suggests it’s better for someone in my position to use a traditional IRA.

Just wanted to get your thoughts on this and if you actually recommend the traditional or Roth for someone in my position.

Thanks for creating this amazing blog and I look forward to anything you might post in the future!

jlcollinsnh:

Hi Mike…
…and welcome!

Thanks for the kind words. Glad you like it here.

Astute observation and great question.

Indeed MF’s analysis has altered my thinking. Go with the ideas in Part XX.

 Mike P:

Thanks for the quick response! I was hoping you would say that since I already maxed out my Traditional IRA for 2014 haha!

From:

tougher up cupcake

Stocks Part I: There is a major crash coming!!!

Mingtian:

I am so happy I have found your blog. It is slowly changing my thinking.

Have you ever watched/read anything from Michael Maloney such as his series Hidden Secrets of Money?

These are extremely well produced and (I think and would love to hear why you think not) very persuasive. I understand he is someone who could be just selling something (precious metals) but he doesn’t come across that way at all.

So I am torn. Is what he says right or is it more unreasonable to bet against this country and its economy?

I would love to hear your thoughts!

Thanks so much for your blog!

 jlcollinsnh:

Welcome Mingtian…

Glad you are finding value here.

I am not familiar with Mr. Maloney or his series and unfortunately don’t have the time, or candidly the inclination, to spend with it.

I will say that one of the reasons I started this blog is because there is so much nonsense out there. Some is simply bad advice. Much is bad advice design to sell you crap.

I will also say that there are no “Hidden Secrets of Money.” ;)

As you read thru the blog here you’ll have a clear idea of how I see things. It then shouldn’t be hard then to contrast my ideas with others and decide for yourself.

Just be careful. And you might want to read this: You, too, can be conned

From: Disclaimers

Farmboy:

Love to read here.

Just a thought . . . not that I’m a lawyer…

Looking at the following text “…By leaving a comment on this blog it becomes the property of jlcollinsnh.com and it may be used in another post, article or book. …”

I wonder if you might be better served by adjusting a portion of that from “…becomes the property of jlcollinsnh.com…” to something along the lines of “…becomes licensed to jlcollinsnh.com in an ulimited fashion, though the material itself is solely the product and property of the posting entity…”

My thought may be obvious, though if not, I suspect it’s a better liability to have an unlimited license to use the product rather than becoming the owner of the product, with whatever liability the ownership may carry.

If you happen to read this comment and find it way off base, I look forward to finding out how/why.

Cheers
Farmboy

Often willing to “pay it forward” & encourage others to do the same . . .

jlcollinsnh:

Thanks Farmboy…

Glad you like it!

Thanks, too, for your suggested phrasing. It may well be better than what I’m using, or not. Thanks for giving me a chance to reconsider it.

I’m not a lawyer either and am just trying to let people know what to expect when they post comments and questions and I respond.

I know we have lawyers out there reading. Any thoughts?

Posted in Money | 8 Responses

Q&A I: Gaijin Shogun

Image

Gaijin Shogun

An original painting by Alex Ferrar

On display at his restaurant Sobremesa, Antigua, Guatemala

Traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But there is a price to be paid.

Returning from this latest trip to Mexico and Guatemala I have over 100 comments and questions waiting for a response here on this blog. That’s just counting the ones that actually require a response.

I love getting questions and comments here and, when I’m around, look forward to them each day. On a daily basis, it is relatively easy to keep up. But left to build for a few weeks they become an intimidating task. Catching up can easily overwhelm the time normally allocated to writing new posts. And, of course, new posts are also thin and rare while I travel.

When readers take the time to comment I am very appreciative and if they ask a question or two I very much like to be able to respond. But buried in the comments section of whatever post they’ve chosen, our conversation is unlikely to be seen and enjoyed by other readers. In fact, when answering I can’t really even be sure the original commentator has subscribed to the comments and will see the response. It is tempting to blow off these questions and simply move on to writing new posts more readers will see.

But the calibre of most of the questions I get here is excellent and, as I’ve often contended, the comment section on this blog has some of the best, most interesting content. So here’s my plan. I’m going to start working thru all these comment/questions, answering them in the posts where they were made. In addition, I’m going to select several of the most interesting and reproduce them in a series of posts — starting with this one. I see three benefits:

  • It will get responses to readers who were kind enough to comment.
  • It will get the flow of new posts started.
  • It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
  • It might even introduce you to some older posts you’ve missed so far.

OK, that’s four. Works for me! Hope it works for you, too.

Oh, and I’ve named this post after the featured painting above. Enjoy!

From:

gates foundation building

How to give like a Billionaire 

Workinghard:

I don’t know how many times I’ve thought about a charitable trust fund. It’s been on my someday wish list. However, it’s my understanding that any money in the fund can only go to qualified non-profit or tax exempt organizations. Is that correct? Or can the money be used to help individuals in need? We give 10-12k a year to people rather than churches or organizations. I also prefer giving anonymously which calls for some creativity and using people out-of-state to help. It would be nice to have some of the advantages of a charitable trust fund.

Thanks for addressing this topic! Now to read your other blogs.

jlcollinsnh:

Welcome WH…

Correct. Your fund can only contribute to qualified, established charities. I suspect this is because, since it is tax-deductible, the same rules for IRS charitable tax deductions apply.

As it happens, like you, I frequently prefer to give directly to individuals and small organizations that may not qualify.

So what I do is occasionally fund my charitable trust with larger donations that get me over the IRS standard deduction for the tax benefit. This money is then distributed over the next several years.

At the same time the money I choose to give anonymously and to places not qualified I give randomly and without concern for the tax break.

Hope that helps.

Workinghard:

Thanks for replying and everything you’re doing to help us (me)!

I don’t care about the tax advantages per se of a charitable trust but the anonymity would be great.

bookaunt:

Just to let you know that you can open a charitable gift account at Fidelity for $5000 while you are waiting to build a bigger stake

jlcollinsnh:

Good to know, bookaunt.

But for smaller sums like $5000 I would just distribute the cash directly to the charities of my choice without bothering with a charitable trust.

Such trusts, in my view, are better at providing an immediate tax advantage for a larger donation that will be distributed over time.

For instance, unless you have other deductions $5000 will be under the standard deduction amount and no tax benefit will be realized.

But if you fund your trust with 25k and then distribute the money over five years at 5k per year, you get a very valuable 25k deduction in the year you fund your trust.

Make sense?

bookaunt:

There are times when even a $5k charitable fund can be useful. It worked for us a couple of years ago when we wanted to sell some stock that had a significant capital gain. By funding our gift fund with that stock, we were able to shield the profit from taxes – worthwhile to us even though the amount was not much over $5k (but we did have other deductions).

Also – when looking at setting up one of these funds, note that both Vanguard and Fidelity charge an annual cost/maintenance fee.

  From:

simple

Stocks — Part V: Keeping it simple, considerations and tools

Stephen:

I love this blog and am making my way through this series avidly.

I was wondering how much of this applies to international investors? I live in Australia. Does “the market always goes up” still apply to the Australian market? It seems to historically, however since it’s such a small slice of the international market I was doubtful it was as secure.

I would like to simply invest in VTSAX, but the vanguard situation is different over here.

https://www.vanguardinvestments.com.au/adviser/adv/investments/overview.jsp

Most of those charge a fee of 0.70% or .090%, and they track the Australian share market, not the US.

However there are also ETFs listed at Vanguard Australia – these appear to have much lower pa fees. There is one which is the “total US market” for 0.05% pa! Is buying such an ETF the same as buying VTSAX in the US, or am I missing something?

https://www.vanguardinvestments.com.au/adviser/jsp/investments/etfs.jsp#etfstab

I’m sorry if this is confusing, I guess I’m just wondering the best way to attempt to emulate your strategy of buying the total US stock market whilst living in Australia

jlcollinsnh:
Welcome Stephen…
Sorry for the delay in responding. Hopefully you read the part about my disappearing to Central America for a few weeks.
“The market always goes up” refers to the US stock market, which has the advantage of being such a large and dominant player on the world stage. The same would apply to the world markets overall. I would be hesitant applying the idea to Australia as the economy there is far smaller. I encourage investors outside the USA to consider investing in World Index Funds that include the US market.

VTS, in the second link you provided, is indeed the equivalent of VTSAX and the ER of .05% is great. Be careful, however. Since it is an ETF you might well face commission charges when you buy or sell.

Since you’ve been working your way thru the blog, perhaps you’ve already come across these two posts:

http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/

You’ll especially want to read the comments in both those posts. Several Aussies have weighed in with their ideas and experiences.

Cheers, mate and good luck!

Rich:
Hi Jim,

Great information and thank you for sharing all this.

I can tell you that with all the career emphasis most folks have, we just don’t seem to wrap our minds around the investing logic until it’s late in the game.

I’m retiring in May this year when I turn 62. I have a pension that will “just cover” my monthly expenses. I plan to ‘not’ take my social security benefit until I reach full 66yr status. I also have an employer 401K with sufficient funds that is managed by Vanguard. I will likely need to tap into earnings to bridge the gap until I reach age 66. 81% of my holdings are currently invested in company stock (oil) and I’m considering utilizing your “4 tools” advice.

Any advice on how to arrange dividend/earnings income withdrawals and whether to roll into an IRA?

Also I notice you state the rule of thumb for Stock/Bond ratios, but then you say…doesn’t matter. Can you explain why?

Thanks, Rich

jlcollinsnh:

Hi Rich…

Thanks and glad you find it useful.

Were I in your position I would be VERY concerned about having 81% of my assets in just one stock. Even if I loved that stock.

If this holding is in a tax advantaged account I’d promptly shift it into the broad-based index funds discussed in the post. If not and assuming you have a large capital gain, I’d begin shifting as rapidly as possible consistent with limiting the tax hit as best you can. This, of course, will take a careful analysis of your full tax picture; something well beyond the scope of this blog.

Structuring withdrawals can be almost anything you choose. For us, we first spent down the various investment “mistakes” I’d accumulated. Now we pull what we need each month from our joint VTSAX fund in our non-tax-advantaged account. In our IRAs we have more VTSAX along with the bond and REIT funds described above. The dividends from these I have reinvested. We also shift some each year to our Roth IRAs to reduce the amount we have once we hit age 70 and the Minimum Required Distributions (MDRs) kick in. The idea is I’d prefer to pay up to 15% now than 25%+ later.

Once I have to take the MDRs, those will provide our living expenses and our joint VTSAX fund in our non-tax-advantaged account will be left alone to grow again.

As you can see, this is all unique to our situation and needs. It may or may not be useful to others.

But I would suggest not worrying about just spending your dividends and interest. Better to look at all your investments as a whole, limit yourself to total withdrawals of 4% or less and take those withdrawals from wherever it makes sense at the time.

I don’t recall saying stock/bond ratios don’t matter. They are a tool for smoothing the ride. Once you stop working and start drawing on your investments, this is important. But while you are still working and adding money to your investments, I suggest toughening up and accepting the wild ride for the greater return stocks provide over time.

Brian Boatman:

I LOVE YOUR BLOG! I have a question for you. I’m 37 years old and work for a Governmental Agency with a Pension. On the side, I contribute some money into a 457(b) plan. I currently have $67,000 in there in a Vanguard Target Date Fund, 2045. The Expense Ration is .18. Now, I understand that this ER is great, but I had a thought…can’t I invest in each of the three index funds that make up the 2045 Target Date Fund and save some on the ER? Am I missing something here!?

Thanks for your blog and for your willingness to share your wisdom with us young, dumb people!

Brian

jlcollinsnh:

Thanks Brian!

And no one who asks questions is dumb. I wish I’d been smart enough to ask more back in the day.

Anyway, your thinking is spot on. You can absolutely replicate any target date fund using a selection of index funds, and with lower ERs (expense ratios) to boot. You’ll just have to remember to do the rebalancing on your own, something the TDF does automatically for you.

In fact, I just did our annual rebalancing of the three funds described in the post last week. Easy peasy! And fun. At least for me.

 From:

Hacienda Cusin

Chautauqua 2014 Preview

Justin:
Man, that chautaqua sounds sweet. We’ll be somewhere in central America but I don’t know if we’ll make it that far south to Ecuador. Maybe I can rearrange our itinerary some. I’d love to meet some of you guys (well, all of you guys). I think we’ll be somewhere in the Caribbean during the FinCon this year so 2015 might be the earliest I’ll meet all these other online personalities I’ve interacted with. Salud!
 jlcollinsnh:

It would be great to meet you one of these days, Justin. Enjoy your travels and who knows what little dive we might stumble across each other in?

From:  
house in iowa

Walt:

I’m actually in much the same boat as Jim was, but without the $300 rent coming in.

We bought my mother-in-law a condo and pay the HOA for it to the tune of $350 a month plus debt service of course. We also pay for cleaners to come in once a month, because she is an awful housekeeper.

She, of course, has zero savings, doesn’t work, and lives on social security of around $750 a month.

Fortunately our association is the opposite of the one he describes – the HOA hasn’t gone up in three years, and there are no special assessments. As with many condo boards they’re a bunch of kooks, but they’re very careful with the money. One of them wanders the pool area over the summer yelling at people who leave the outdoor shower running too long.

I look at the condo when I’m visiting, though, and I wonder how long until she starts complaining about the ancient carpet and other things – but the carpet was in very good shape when she moved in. Add in a woman who flat out doesn’t clean, her piggy 12-year-old grandson and two cats who pee everywhere, and things don’t stay nice for long.

She has occasionally said things that make me think she believes this arrangement is somehow to our financial advantage. Of course, she hasn’t made a sound financial decision in her whole entire life, so there’s that…

My strong suggestion is to NOT buy your parents’ housing. Go ahead and subsidize it if needed but it’s not a comfortable place to be.

jlcollinsnh:

Yikes!

Your situation sounds much worse than mine!

David:

Next time she suggest the condo is to your financial advantage, suggest she move somewhere else if she can find a better deal. And if she can’t find a better deal, you expect a sincere “Thank you” or she can move out anyway.

My mom and dad taught me not to put up with passive-aggressive excrement (or any other kind!) from anyone.

From:  

pickpocketduckPickpocket at work

Stocks Part VIII-b: Should you avoid your company’s 401k?

Ally:

HI Jim, GREAT post, GREAT video. I am really enjoying having my eyes opened. I always thought I was good at watching the fees in my 401k.

I am lucky enough to have Vanguard options in my 401K which I utilize. My boyfriend on the other hand has an awful 401K (in my opinion). I tried picking the “best” of the options available but I feel lost.

He has JP Morgan and Putnam funds available to him and all have annual expense ratios of 1.04%-1.38% and all are Actively Managed accounts so the Load Charge is anywhere from 5.25% to 5.75% per fund. I think this is just outrageous.

My question is, is it best to just pick one fund with an outrageous fee or spread the money and diversify? Does it cost more to have all your money in one bad fund or many bad funds?

Thanks,

Ally

jlcollinsnh:

Holy crap, Ally….

Those options he has really do sound ugly. “Outrageous” doesn’t seem strong enough a term. pastedGraphic.pdf

Are there no choices without the loads?

As for your question: The only reason it would cost more to have the money spread around is that some of those funds are even worse than the others. Other than that, more funds are just more hassle in keeping your allocation choices in balance. Given those loads, he should be sure to do that with new money rather than buying and selling shares.

Personally, I’d look for the lowest cost fund offered. It is likely to be the index fund if they offer one, and that’s what you’d want anyway.

But if all the funds have fees as intense as what you describe, I’d be tempted to skip it all together. I’d certainly hesitate before funding it beyond the company match. (Please tell me there is a company match!)

If he is feeling ambitious, he might also campaign for better choices with his HR department.

Read Addendum #1 very carefully and walk thru the Mad Fientist’s math as it applies to your boyfriend’s situation, and then decide.

Good luck and please keep us posted!

Jeff:

My 401k includes the following Vanguard funds – is there any reason to choose something other than the mid-cap index fund? Just want to make sure I’m navigating these correctly!

Mid-Cap Index (VIMSX) Prime Money Market (VMMXX) Target Retirement 2010 (VTENX) Target Retirement 2020 (VTWNX) Target Retirement 2030 (VTHRX) Target Retirement 2040 (VFORX) Target Retirement Income (VTINX) Total Bond Market Index (VBMFX)

jlcollinsnh:

Hi Jeff…

The mid-cap index fund is likely your lowest cost fund choice, but it is also very focused on one type of stock: Mid-sized companies.

If you have other investments outside your 401k you can balance this with large cap and small cap index funds. I’d shoot for about 70% large and 15% in each of the small and mid cap funds. This will roughly duplicate the Total Stock Market Index fund like VTSAX.

If you don’t have other investments, one of the better diversified Target Retirement funds would likely be a better choice for you, even with the bit higher expense ratio.

From:

tar--feather-1794-granger

Why your house is a terrible investment

Jon:

Mr. Collins:

Another terrific article where you provide a compelling argument mixed in with a “single finger salute” ( f-u money’s second cousin, twice removed) to tired conventional wisdom.

Of course, many of these “experts” that dispense this advice are broke and/or leveraged. I wish I would have “met” you years ago but sure enjoy your work now. Thanks for what you do.

By the way…I’m a satisfied homeowner yet don’t claim be a real estate baron by any means.

jlcollinsnh:

Thanks Jon…

Glad you liked it and glad we’ve “met” now. Also glad to meet someone who can be both a satisfied homeowner and still appreciate the concepts in the post. I’ve owned them myself for 28 years.  

Nickster:

I don’t mind renting, but I don’t know how much is my “F-You Rent.” That is to say, how much money do I need to:

1) Rent in pretty much any area I like2) Rent as much space as I need3) Have the option to renovate or decorate as I please4) Not worry about getting evicted

jlcollinsnh:

Welcome Nickster….

The best way is to simply take your annual rent and multiple it by 25. That is, if your monthly rent is $1000, you’d multiple 12k x 25 = $300,000. In turn, 4% of 300k = $12,000. It is the same formula as for figuring your FI number: http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/

Only you can answer your questions 1 & 2. Once you do you should be able to figure the rent needed.

As for #3, most landlords will limit your ability to move walls or paint the place in the exotic colors of your choice. At the very least, you’ll be expected to return the place to it’s original and presumably more rentable condition.

It is the same as if you owned the place. Come time to sell you’ll need/want to walk back any exotic renovations you’ve made. Even the most tasteful updates can simply go out of fashion by the time you chose to sell. Unless, of course, resale value is not a concern.

As for #4, most landlords are looking to keep good tenants not evict them. But if you plan on behaving badly, owning might be the better choice. It is much tougher for your neighboring owners to get rid of you than a responsible landlord.

Posted in Money, Stock Investing Series, Travels | 6 Responses

Top 10 posts

Image 17

With any luck at all, by the time you read this I should be sitting in the cafe in Antigua that affords this view

Since I’ve learned how to schedule posts to publish automatically (at least I think I have), I thought I’d put this one together to appear while I’m gone. Maybe it will give you something to read here until my return and new posts begin to flow. Something perhaps you might have missed.

Compiling it proved a bit more interesting than I might have guessed. For me, anyway.

Here is the Top Ten over the last year:

  1. The Stock Series
  2. What we own and why we own it
  3. How I failed my daughter and a simple path to wealth
  4. Why your house is a terrible investment
  5. Stocks Part I: There’s a major market crash coming and Dr. Lo can’t save you
  6. Stocks Part VI: Portfolio ideas to build and keep your wealth
  7. Why you need F-you money
  8. Rent v Owning your home: Opportunity cost and running some numbers
  9. Stocks Part II: The market always goes up
  10. Stocks Part V: Keeping it simple — Considerations and tools

As you can see The Stock Series and posts from it dominate, snagging half of the top ten. In fact, if we stretched this out to the top 20, stock series posts would take six of the next ten slots too. Not surprising as this series has become what the blog is most famous for. So what does it look like if we strip those out?

Here’s the Top Ten sans the Stock Series:

  1. What we own and why we own it
  2. How I failed my daughter and a simple path to wealth
  3. Why your house is a terrible investment
  4. Why you need F-you money
  5. Rent v Owning your home: Opportunity cost and running some numbers
  6. Manifesto
  7. About
  8. Ask jlcollinsnh
  9. The bashing of Index Funds, Jack Bogle and a Jedi dog trick
  10. The Smoother Path to Wealth

What is interesting to me here, and that I would not have expected, is that 6, 7 and 8 are all what are called “Pages,” those buttons found across the top of each page.

With 6 & 7 it seems before investing too much time folks want to get idea of what this is all about around here. Makes sense.

As for Ask jlcollinsnh, this is basically a collection of mini-case studies that illustrate the principles discussed in action. No surprise it draws readers.

But what about if we pull those three?

Here’s the Top Ten sans the Stock Series and “Pages”:

  1. What we own and why we own it
  2. How I failed my daughter and a simple path to wealth
  3. Why your house is a terrible investment
  4. Why you need F-you money
  5. Rent v Owning your home: Opportunity cost and running some numbers
  6. The bashing of Index Funds, Jack Bogle and a Jedi dog trick
  7. The Smoother Path to Wealth
  8. Dividend Growth Investing
  9. My path for my kid: The first ten years
  10. The Monk and the Minister

That last one is my very first post!

In addition to all these, at the top of the right hand column on this (and every) page you’ll find a list of some of my personal favorites. Several are on these lists, but some are not.

If you are a regular reader here, there is a good chance you’ve read many, maybe even all, of these. For you, here’s my final list. None are on the lists above; they’ve been far less popular for reasons that escape me. But I like ‘em. You might too.

In no particular order:

Ok, that’s enough. I’m off to have una cerveza.

Posted in Random cool things that catch my eye | 10 Responses

Cafe No Se

Magical Antigua, Guatemala


So I am here in Antigua, Guatemala hanging out in one of my favorite dives, Travel Menu, drinking beer and eating some awesome food and talking to my new pal Lito.

The talk turns, as talk will do, to other worthy dives here in town and he asks if I’ve made it to Cafe No Se yet. Of course I have. I’ve been here six days after all.

Anyway, this is a unique and tough to describe place. Fortunately, I don’t have to — Lito already has. Here’s his piece on it. I think he’s a hell a writer, but be warned. Stop here if you are easily offended.

The Medicine Man

Guest post by Lito Croy:

You Don’t Se?

Well you certainly should.

Cafe No Se. It’s the first Antiguan bar you could hope to stumble into and the last one you’ll want to stagger out of. Tuck yourself into this hole in the wall, fill up on some free popcorn and soak in the live music jammin’ every single night.

Pushing this creaky door aside sinks you straight into what I like to call “The Real Deal.” You took the red pill, hombre. If what you’re looking for is the back alley cultural melting pot, then this is it. No Se is the real deal; like the bastard child of a Wild West saloon and an old pirate hideout. It’s dark. It’s dingy. And it’s exactly where I want to be.

Simmer down, saddle up and step on in. You won’t have to search for the blasphemy here. It’ll bite you in the face. It’s the kind of stuff you couldn’t buy in Vegas and can’t burn off once you’ve gone. It’s hanging on the walls, it’s etched on the tables, and it’s served hot on a plate: Grilled Cheesus sandwiches. Only Q15… Or your eternal soul. Either way, it’s pocket change.

Bow under the halfling door and you’re on sacred soil, now. Welcome to The Mezcal Bar. Time to pay the piper. But only the penitent man will pass. So drop your elbows to the bar and PRAY, brother! Grab an Oferta for Q44 and Randy will swing you a Vicky and a shot of the Joven. A quick glance at the sign: “Two Shot Minimum” and you reevaluate. Better make it two.

Mezcal. Some call it the Mexican Scotch. I call it delicious. “Ilegal” brand Mezcal is served from what appear to be funny looking shot glasses. But a second nip, a double take down the barrel and the joke is out. There’s a cross on the bottom. On all of them. They’re sacramental candle holders. Add this to the photos of lusty nudes and it’s the kind of sacrilegious irony I could only dream of in Catholic school. Will this be the bite-sized evil that keeps me out of Heaven… Or am I already there? I still have half a shot left. So I take another swig to find out. Waste not. And oh yeah – Amen.

Take a look around. There are some real characters here. It’s the kind of place you’d hope to see Tom Waites growl or Kerouac scribbling away. Sometimes I scan the flame-lit faces, just to check. If you get the chance, buy one of the regulars a drink. I chose Pete. He’s a part-time wordsmith, full-time Mezcal worshiper. Fill his glass and he’ll fill your head. Stories, sonnets, shamanic songs; he knows them all. Make sure to check out his latest literary work, available in the sober hours at the adjoining bookstore.

But he’s not alone. Drinking here are intense personalities from all over the world. The cream of the grime. And they’re not all pretty. Most of them are dreamers, and a few of them are real assholes. This ain’t Applebee’s. And no, we don’t all have to get along. This is the black sheep herd, and they’re chewing up the moonlight.

But there’s no reason to get your panties in a bunch. There’s no need to wear panties at all. No Se is a place for everyone. Where anyone can show up, drink, and say exactly what they feel. Even the walls speak their mind. Ask them and they’ll dish out their favorite one-line philosophy. There’s plenty of fading Sharpie to write the book, but one quote says it all. And it’s enough to throw you tits first into their boiling brains.

“Today is not for thinking.”

I can drink to that.

Chewing up the moonlight.

In this bar, your sins are never forgiven, they’re only forgotten. Until the next nearest moment of clarity, that is. Old dreams wither and new ones are drunk away. It’s Cafe No Se. It’s the bottom of the barrel. It’s the end of the road. It all drops off from here. But that’s all right. It’s okay. Because every dive needs a town.

Posted in Travels | 21 Responses

Chautauqua 2014 preview, closing up for travel and other random cool things that caught my eye of late.

Hacienda Cusin

Hacienda Cusín

Well, I’ll be back in Ecuador this summer and the coolest part of that trip is going to be the same as last time:

Chautauqua 2014!!

We all had a blast last year and the finishing touches are now being put on Chautauqua 2014. The biggest news is that this year there will be two.

August 9-16 is the one I’ll be attending and it will be modeled on the first, as I described here:

Meet-mr-money-mustache-jd-roth-cheryl-reed-me-for-a-chautauqua

Hacienda Cusin 2

The view over the Hacienda rooftops

We’ll be returning to Hacienda Cusín because, well, everybody who attended loved this place!

Plus we got to party with people like these:

Chau - Pete's house party

And we got to skim off a big chunk of the revenue to help local people like these:

 Chau family by Rich

And go visit cool places like this crater lake:

Chau - crater_lake-300x170

Cheryl, Mr. Money Mustache and I will all be returning as your hosts and presenters. Joining us will be Jesse Mecham from youneedabudget.com. Jesse was an attendee last year and having met him, and having seen his presentation at FinCon last October, inviting him to join the 2014 team was just too obvious.

This also freed up JD Roth to move over to the second Chautauqua August 23-30. Along with Cheryl and JD, David Cain of raptitude.com will host and present. Damn, I’m gonna hate to miss that one…

Last year’s event was truly extraordinary, and this was my take: Chautauqua-2013-a-week-of-dreams

Here are still other takes on this event:

Mister Money Mustache

JD Roth

Johnny Moneyseed

One life, many adventures

Carlos reports on the ERE forum

Anyway, for more details as they develop check out: Above the Clouds Retreats. That’s also where you can register should you decide to join us, and I hope you do. As before, this event is limited to only 25 people and last year it sold out in three weeks.

As for now, by the time you read this I’ll be in Mexico. We are returning to San Miguel after about 25 years. My pal Jeremy put this idea in my head with an invitation to stay at his $1000 a Month Home. But at the time, we had already booked our tickets to Guatemala for Christmas. And now he and his wife Winnie have moved on to Taiwan.

Screw it!

Going is still a good idea and while there we’ll get to catch up with Karl, one of the attendees at last year’s Chautauqua and a new friend. He lives and works in Queretaro which, as luck would have it, is the city we’ll fly in and out of. We even get to be there on his birthday, February 26th. All together now: Happy Birthday, Karl!!

Both these guys were key reasons behind our choice to go to Guatemala in December. Karl with his tales of the place and Jeremy with his classic post They will kill you for your shoes!

We had a grand time, so good in fact after our week in Mexico I’m headed back and will be there for the month of March. A few pictures will give you an idea as to why.

Image

 Guatemalan children about to kill a tourist for her shoes. They even shared their orange, trying no doubt to create a false sense of security.

Gua street

 Gua street 2 Gua woman Image 5

When the risk to your shoes gets to be too great, this sign conveniently shows the way out.

Image 17  Gua lake  Gua two women Gua rest

Gua sunset

Gua girls

One more reminder of what those kids look like. Keep your eyes peeled.

Scary, but I’m going anyway…

…and, as regular readers know, I travel without a computer. Therefore the blog tends to go a bit dark while I’m gone. My phone will allow me to approve new comments as they come in, but the tiny screen and my lack of skill will keep all but my shortest replies on hold until my return.

No new posts or detailed answers over on Ask jlcollinsnh for a while either. Still, if you haven’t already, there are lots of mini-case studies to read over there. Plus may I suggest:

The Stock Series

The Case Studies

How I lost money in real estate before it was fashionable

Podcasts and Guest Posts 

Here are some thoughts on figuring the number you need to retire:

The number you need to retire safely?

The Rule of 300

Withdrawal rates: How much can I spend anyway?

Over 20 years ago Billy and Akaisha Kaderli hung it up and embarked on a saga of long-term slow travel across the world. They are still at it and as luck would have, we caught up with them in December in Guatemala. They are as fascinating as you’d expect, and we plan to meet up again on my return.

Since then, they have asked me to adapt two of my posts for their blog Retire Early Lifestyle:

One on My way of travel: Esperando un Camino

Another on Why Your House is a Terrible Investment

For more on Billy and Akaisha, check out their interview with the Mad Fientist.

And in case you missed it and on the off chance you’re interested, the Mad Fientist interviewed me, too.

So did Johnny Moneyseed: A man with F-you money

Since I’ll be traveling, why not you? Here’s the New York Budget’s wacky and wild Cheap Travel destinations for all 50 states. Maybe you’ll find a few to add to your bucket list.

Finally, here’re some random cool photos:

fawn rescue

Orangutan spear fishing

 

Reine-Norway

Other cool villages in Europe

cart-ruts-malta-3[2]

Ancient Cart Ruts

Norilsk, Russia

 Norilsk, Russia

China houses

Houses in China

Andromeda

What the sky would look like if the Andromeda Galaxy was brighter.

Addendum:

Seems the Chautauqua has sold out for 2014. It took two weeks from the date of this post. Last year, it took three.

Cheryl is accepting people for the waiting list just in case a spot of two opens up and I believe there is still space available in the second one, but I won’t be there for that one.

We limit the number of attendees to 25 so we all have the chance to really spend time with each other. But unfortunately that means not all who want to get to come. Hope you’ll plan for next year!

My thanks to all who have taken the leap of faith and will be joining us. I look forward to meeting you. If it is anything like last year, we are in for a very cool time together!

Posted in Chautauqua, Random cool things that catch my eye | 20 Responses

Case Study #10: Should Josiah buy his parents a house?

house in iowa

No! No, no, no. A thousand times, No!

Or maybe, just maybe…

For this blog, two great things about the Ask jlcollinsnh posts are that they help me understand the real world concerns of my readers and they provide ideas for a steady steam of great Case Studies. These are ideas and topics I would have never thought of on my own.

But today’s is a little different. This one gives me a chance to share a story I’ve had pending in the files for over two years. Josiah is contemplating a move quite similar to one I made long ago and his asking about it was just the spur I needed.

Josiah:

Hello Mr. Collins

I have loved reading your website! It is the exact information that I have been craving in regards to where the heck to park my money.

My wife and I are on the road to FI. We have a few more miles to go (10-15 years) but we are on our way. My goal is to never “have” to work a day after my 42 birthday.

With all that being said, my parents are 50 and 53 respectively and are not destitute but pretty poor. They have jobs that are a bit above minimum wage but absolutely nothing in the realm of savings or pensions.

My wife and I have realized that we will be ultimately responsible for them in roughly 30 years as my brother is not in the best boat financially and has expressed disinterest in taking care of them, because of different family issues.

I am going to help them get a Vanguard account and put a bit of money aside for them each month. The big problem is that they are currently spending 600 dollars a month in rent in the middle of Iowa, which is normal if they had kids living with them, but as my brother and I are gone, it’s a bit much, especially with them making just over ends meet.

My question is would it be prudent to buy a cheaper property and rent it to them so they could cut their rent in half, and then after it is payed off when they are in their 80′s that expense will basically be non exist? There are plenty of houses in their community that could be had for around $50K-$70K.

I have read your post about how real estate is not the best investment and I am realizing that I really don’t want to make a habit of getting rentals, but I am wondering since you have owned a house before, is it worth the extra costs that will be associated with owning a home, to provide that stability for them, or should we just find them a cheaper rental?

Thanks for all you do,
Josiah

jlcollinsnh:

Welcome Josiah…

…and thanks for the kind words! Glad you found your way here and thank you for the question. I have actually long been planning a post about the time I did exactly what you are considering. It was a major mistake and I’ll share that story with you, along with some thoughts as to how you might evaluate the decision for your unique circumstance.

But first, congratulations on having your feet firmly on the path to financial independence! And for being clear-eyed enough to see that your parents are not and that this is likely to become your problem. The good news is you will have positioned yourself well to help.

Here’s my tale:

Back in ’79 I was young, single, renting, making good money and very foolish.  I bought my mother a condominium, for reasons much the same as yours. It was just about the worst decision I could have made, both financially and psychologically.

My father died in 1974 and in 1976 my mother sold their house and moved to Florida to escape Chicago’s winters and to be closer to her retired brother. She took the proceeds from the house and invested in some dividend paying stocks to supplement her Social Security. She found a lovely apartment near her brother and settled in.

Unfortunately, her stocks failed to keep pace and her rent continued to rise. By 1979 she was expressing grave concerns.

Now, with the benefit of hindsight I can see her concerns were greatly overblown. But at the time I got swept up into them, as us good sons are prone to do. Plus then, like now, (like always, really) the vested interests in the real estate business were relentlessly pounding the drum of how wonderful owning property is.

On a visit I rashly told her I would solve her problem by buying her a condo. I gave her a budget of 40k, a fairly hefty sum in those days, and told her whatever she found in that price range that she liked was fine with me. We agreed she would pay me her current rent of $300 a month and I would absorb the difference and all future cost increases. Not surprisingly, this worked exceedingly well for her. For me, as we’ll see, not so much.

She found a beautiful 2-bedroom, 2-bath unit in a very nice complex. It was a step up from where she had been and it came in under budget. It looked like a pretty neat, if expensive, solution.

To see just how expensive, let’s run the monthly numbers:

$390 — Mortgage payment (interest rates were much higher in those days)

$125 — Association fees

$50 — RE taxes

$565 — Total

So I knew going in I would be supporting mom to the tune of $265 a month. And I was good with that.

But there were two big things I naively hadn’t counted on.

First, I was now her landlord and as such she turned to me for improvements on the property. Not all at once, but over the years:  New appliances, carpet, painting and other costly stuff I don’t remember. Maybe because they paled in comparison the the second thing I hadn’t counted on…

men at a table

The Association

See, this was a building owned and operated by geezers who were retired and had cash on hand. They wanted to keep their money in their own pockets as long as possible and so were loathe to pay a little extra each month to build a contingency fund. The monthly assessments covered only the monthly costs.

So about once a year, sometimes twice in the bad years, I’d get a notice announcing a “Special Assessment” had been approved to re-pave the driveways or re-roof the buildings or some such, and telling me my share. Typically $5-6000. Oh, and by the way, it is due next Tuesday.

Now this is a perfectly fine way to do things for retired folks with money in the bank. But each notice sent me into a mad scramble to pull the cash together in time. At least the first couple of times. After that, I created my own contingency fund.

My mother lived there for about seven years, until 1986. Each year, of course, these costs marched ever higher. Fortunately so did my income, but the cash hemorrhaging was always a shock. Meanwhile, Florida went into one of its routine real estate collapses, just in time for my sale of the property.

So it was financially ugly. But expensive as it was, that would have been OK. It did solve my mother’s problem. But then there was the psychological factors that came in to play. Those started before the condo was even bought.

The Saturday after I returned from my trip to Florida, the one where I had told my mother I would do this, I got a call from one of my sisters. She was not happy.

She got it into her head that somehow I was exploiting our mother and that I was going to make a financial killing on this condo. Now I had no idea at the time just how financially ugly it would get (had I known I would have run for the exits) but I could certainly see that there was no monetary killing to be made.

When she got done yelling at me (and this took a while) I told her I really didn’t want to do this at all (I didn’t) and if she wanted to I would be happy to step to the side and out of her way. Unfortunately, she said she couldn’t afford it. She later suggested we buy it together but, after all the harsh words, I was uninterested in a partnership. That might have been my only smart decision in this sorry affair.

My other sister was considerably more financial savvy than either of us. She could see both the hole I was digging for myself and the way it would ease her share of the burden of providing help to our mother.

Now here’s where the psychology gets really interesting. My mother was a smart woman. She understood intellectually that I was supporting her to the tune of hundreds of dollars each month, thousands each year. But she never saw that money. What she saw, and felt emotionally, was the $300 check she wrote and mailed to me each month. Wrote and mailed to (cue me twirling one end of my imaginary handlebar mustache) her landlord.

Meanwhile, when my sisters would visit once or twice a year, they’d slip her $100 to “help with the extras.”  A kind and generous gesture that she very much felt emotionally. And, of course, when I’d visit I would get to hear in detail just how kind and generous my sisters were and what a blessing in a mother’s life such children are.

Now, a better man would not have been bothered by this. I am not that better man. I was the guy doing the heavy lifting.

As a postscript to this story, and in fairness to my sisters, when my mother took ill and moved back to Chicago for the final two years of her life I was living in Cleveland. The heavy lifting of her care fell to the two of them. In retrospect, mine was the easier burden.

So that’s my sad tale. What should I have done instead? That’s easy. I should have said to mom on that trip: “Don’t worry about your rent increases. Just let me know and whatever the amount over the $300 you are now paying I will send to you.” Much cheaper for me. Better psychology, too.

Oh, and then I’d’ve had plenty of spare hundred dollar bills around to slip her on my visits. You know. To help with the extras.

So, enough about me, Josiah. You can decide for yourself how much of this little tale potentially relates to your situation. But here are my thoughts for you….

First, buying your parents a house is likely to turn out to be much more expensive than you might anticipate. While you won’t have association assessments, you will have an endless parade of repairs as all houses require. If your parents are unable to handle these repairs or arrange for them to be done, those efforts will fall to you. As will the costs.

And, of course, the house will have all the drawbacks I describe here: Why your house is a terrible investment.

So why isn’t my answer a simple short and sweet:

Don’t do it!!?

The $600 rent and the houses available for 50-70k you mention is why. This suggests rentals are thin on the ground and pricy, while houses are easily and cheaply available.

You may have read this post: Rent v. Owning, opportunity costs and running the numbers. If not, please do. In it I describe just how to evaluate your choices and compare them financially.

In my experience, renting is most often less expensive. But not always and, from the rough numbers  you’ve shared for where your parents live in Iowa, maybe not for you and them. So run the numbers and see where you stand. Owning just might be the less expensive choice.

But for me, the financial case for owning would have to be very compelling before I’d accept the downsides in this situation. When I’ve owned houses they were expensive indulgences I could afford and the benefits made me willing to pay the costs.

In your case, supplementing your parents rent might be the expensive indulgence. Only the numbers will tell. But if renting proves more costly, personally I be willing to pay a fair amount to avoid the hassles and pitfalls.

One final thought.

You mentioned your intention to open and fund a Vanguard account for them. This is a fine and generous idea, but I’d keep it in your name. Unless your parents are willing and able to embrace your style of fiscal discipline, and that doesn’t appear likely, in their name such a fund would be at too great a risk of being dissipated. Plus, if held in their name, upon their death your money will go to the heirs they choose.

Held in your name you retain control and your parents are spared the responsibility while still enjoying the benefits. Perhaps this is the greater kindness.

Good luck and keep us posted.

More Case Studies

Addendum #1:

At the same time as buying my mother’s condo I was buying one of my own. You’ll find that little adventure recounted in this series of posts: How I lost money in Real Estate before it was fashionable.

Posted in Case Studies, Homeownership | 36 Responses

Case Study #9: Lars — maximizing some good fortune and considering “dollar cost averaging”

college leaving

When I was first out of college and back in Chicago, it took me two years to find my first professional job. I filled the time trying and failing to launch an advertising agency and working for a landscaper. The first gave me something to put on my resume, the second put some much-needed money in my pocket.

That first professional job, when it came, paid the princely sum of $10,000 per year. They had originally offered $8500. Despite being bold enough (and that was pretty bold given I had no other prospects) to negotiate the higher salary, I still sat at my desk the first week or so wondering what I could possibly do for this company that would be worth ten thousand dollars!

Around this time I became friends with John P, a guy about my same age. From his grandfather, John had inherited a portfolio of stocks that produced an income of just about my salary: $10,000 per year. I remember thinking what a beautiful thing this was. Here was a guy who had all his living expenses covered and who was completely free to choose whatever path appealed, unburdened by the pedestrian need to earn money for food and shelter.

I lost touch with John when he moved to New York City. I often wonder how things turned out for him.

But as for me, his situation planted in my head for the first time the idea of having investments to do the heavy lifting of paying for life’s expenses. It would be a few years yet before I came across the term F-you Money and had a name for what had become my ambition.

Since I was groping blindly about in the dark and index funds were just being invented (and even once the news reached me I would still stupidly reject them for years), reaching this goal took far longer than it should have. Far longer than it will for the astute readers here.

But I’ve always wondered what it would have been like to have John P’s head start. Like him, would I have been smart enough to follow his grandfather’s advice and live on the investment returns, using the inheritance as a platform from which to build? I like to think so. It is certainly the advice I’d give to someone on the receiving end of such luck. Someone like Lars.

Just as I have little use for people who whine about not getting the breaks they think they should, I have even less use for those who fail to appreciate those breaks that come their way.

But Lars recognizes his good fortune and, as you’ll see, is busy making more of his own and is ready to work at making both pay off. Plus he presents an interesting scenario to explore.

Lars and his questions showed up in Ask jlcollinsnh last week. Here is our conversation:

Lars:

Jim,

I love your blog. I’ve read every single part of your “stocks” series, and send them to friends who ask me questions about investments.

I am a mid-20s man about to enter a very good financial situation via marriage to a great woman, also in her mid-20s.

We are both fairly thrifty and are completely debt-free. We have college degrees and steady jobs. We each have reliable, working cars that are paid-in-full. Our annual combined salary is about $125k, but will probably drop to $70k as we have children in the next few years.

Because a family member started a successful company years ago, we will receive about $6-7k per quarter in cash dividends.

We have already saved about $100k in combined 401k/IRA retirement savings (in VTSAX and index funds, thanks to your blog) and are maxing out our 401K/IRA accounts every year.

We have about $75k in combined cash savings. We don’t own a home or any other noteworthy assets. We live fairly frugally, and save about 40-50% of our after-tax income, and we plan to continue to do so in marriage.

Here are the details again in bullet form:

Total debt (student, credit, mortgage): $0
Combined annual salary (before tax): about $125k
Annual cash dividend: $25k (or $6-7k quarterly)
Current combined retirement savings: $100k
Current Cash savings: $75k

I know we have too much cash on hand, and I want to invest it. We’re not interested in buying a home soon, we would rather rent for a while. How would you invest our current cash on hand ($75k) as soon as we get married and how would you continue to invest $6-7k quarterly?

Any other investment allocation or other life-planning advice is MUCH appreciated.

Lars

good fortune Budah

The Good Fortune Buddha:

Shall we rub his belly or invest?

jlcollinsnh:

Welcome Lars…

…and thanks for the kind words and for passing the blog on to your friends. That’s the highest praise of all.

One of my pet peeves is people who look at the asset building strategies discussed here and dismiss them as accessible only to those who are very lucky.

You certainly appear to have been luckier than many who write me. But to your credit you are not squandering the luck that has come your way. Far too many would, followed by their complaints of how unfair life is.

So kudos!

The biggest risk I see for you is the lure of lifestyle inflation.

So my first suggestion would be to cap your spending at 35k, half the income you’ll have when the kids start coming. Or, if you are feeling really badass, live solely on that ~25k dividend and invest all your earnings. Then let your lifestyle expand only at the pace those investments grow.

That said, it sounds like you’ve already nailed my nine steps as described here: How I failed my daughter and A Simple Path-to-Wealth

Well done!

If you haven’t already, take a look at this: My Path for my Kid: The First 10 Years

While it seems you’re hitting most all these already, it never hurts to review as an aid for staying the course.

The 75k in cash I’d put into VTSAX. With your dual incomes and cash flow you can afford to have little or no emergency fund. This is especially true since you don’t own a house. Since houses require a relentless parade of often expensive repairs, they are the single biggest generators of the need for emergency cash.

While I am blissfully back to being a renter now, I’ve owned houses for over 3o years. In each case, I’m glad I did. But only because I wanted the lifestyle at the time. They are an expensive indulgence and as such should only be bought if and when that indulgence is worth the price and the price is one you can easily afford.

That may well be when your kids are around school age and school districts become critically important. But be sure to read this first, if only to be sure you enter homeownership with your eyes wide open:  Why your house is a terrible investment

Then to be sure you fully understand the financial ramifications in your particular situation, run the numbers as explained here: Rent v Owning, opportunity cost and running the numbers.

VTSAX is also where I’d put your investable cash flow, either from those dividends and your saved income or from all your income as you live on the dividends.

First, of course, fully fund your 401k and deducible IRA accounts.

Congratulations on your upcoming marriage and the awesome financial start!

Lars:

Awesome advice Jim, thanks for the attention. Love your idea about living off the dividends.

Clarifying question: would you invest the $75k in VTSAX in one lump purchase, or would you space it out somehow using dollar cost averaging? If so, is there a DCA time-segment strategy you would use in our case? (i.e. $5k every month for 15 months).

jlcollinsnh:

purse overflowing

Glad you like the living off the dividends idea, Lars. That’s what I’d do personally and it is what will get you to financial freedom fastest.

As for DCA (dollar cost averaging), I am not a fan. For three reasons:

1. It messes with your allocation. Initially with DCA you are way too cash heavy and then over time the balence shifts. Better to simply decide what allocation works best for your situation and then implement and maintain it.

2. You have a 50% chance of it working against you. If the market rises while you are DCA you’ll be paying progressively more for your shares. Of course, it could work the other way and by choosing DCA you are betting it will. So basically you are predicting the direction of the market in the short-term. That’s market timing and market timing is a loser’s game.

3. Since you are in the wealth building stage, as you invest new money over the months and years you are in fact stuck with a de facto DCA situation. This one you can’t avoid, but no sense adding to it with your cash on hand.

Make sense?

Lars:

I’ve never heard that reasoning against DCA, but it helps me feel better about dumping the money into VTSAX as a lump sum. It’s basically a bet that the index will be higher in 20-30 years than it is now. I’ll take that bet.

Thanks A TON for your help.

jlcollinsnh:

Yeah, DCA is one of those popular things designed to make people feel more comfortable without fully understanding the implications. This might help: Investing in a Raging Bull

It is far better in my view to take a little time to understand the market and how it really works.

Addendum #1: For more on luck and good fortune….

You make your own luck by JD Roth

What poker, basketball and Mike Whitaker taught me about luck

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Posted in Case Studies | 12 Responses

Case Study #8: Ron’s mother – she’s doin’ all right!

Yesterday I got a call from a good friend from whom I haven’t heard in a while. He’s a fan of the blog and, after a bit, he gently chided me for the infrequency of posts lately. It is always nice for a writer to hear readers complaining that there should be more.

Of course, I had many excuses. Other projects (some involving the blog!), re-certifying with the IRS and VITA, disappearing to Latin America and generally goofing off.

goofing off royalty-free-office-clipart-illustration-37094

But one of the more legitimate reasons is that as the blog has grown, so have the comments and questions. I’m grateful to receive them, but I’m also finding that much of the time and energy I have for writing here gets absorbed in responding. Not a complaint, but an observation. And a reminder, as I’ve said before, some of the best material to be found here is in the comments.

A while back I created this new section: Ask jlcollinsnh. There is fresh stuff up there almost every day now. So, if you haven’t already and are looking for more jlcollinsnh to read, check it out.

It is also a fine source for my Case Studies Series (see “categories” in the sidebar) including today’s.

This recent question appeared there and especially appealed to me. Ron’s mom, at 73, is certainly not an early retiree. In fact she didn’t even choose to retire. After 35 years her firm kicked her to the curb, with a lousy 12 week severance no less. It can happen to anybody. It has happened to me.

Fortunately, she was financially prepared and as it says in the song, she’s doin’ all right.

Her son writes:

Hi Jim,

My mother is 73.5 years old and was just terminated after a 35 year career as a legal secretary in Manhattan. She has saved pretty well and I just want to throw some numbers at you to see what you think.

She has 491K in a traditional 401K from her job. My brother has been managing those investments fairly conservatively within the plans offered and he made an 11% return last year.

She has 225K in a traditional IRA and her friend’s son has been managing the money and charging her .75% annually. He did not do as well and probably lost 1 or 2% on top of his fees last year.

He is also managing about 61K in a Roth for her as well. He is a bit of a pessimist and has her in gold among other hedge type investments.

Her expenses have been about $3K per month although that may rise with extra time on her hands. She has a pension of $900 per month and collects $1600 per month from social security.

She owns her coop apartment outright. She has 12 weeks severance and can then collect unemployment. She will now be responsible for her own health insurance.

How would you invest this money to keep it safe and make it last another 20 years?

Thanks so much,

Ron

My reply:

Hi Ron, and welcome!

To start off, your mother is in excellent financial shape.

weight-training-for-women

Her annual expenses are 36k. She has 30k in income from her pension and SS, and 777k in invested assets. Using the 4% guideline these assets can provide another 31k, for a total of 61k in potential annual income. Far more than it seems she needs, even if she were to dramatically increase her spending by, say, 33% to 4k per month.

Using VTSAX as a benchmark, let’s first look at how her managers did. This is the total stock market index fund and it returned ~33% in 2013. Of course, 100% stocks is way too aggressive for your mother, but it is a useful point of reference.

  • Your bother’s 11% return suggests to me he is managing your mother’s assets very, very conservatively, likely with a heavy bond concentration.
  • Your friend’s son, based on your comment and his negative 1-2% return in last year’s raging bull, suggests he is investing for Armageddon. A very poor strategy should Armageddon fail to arrive.

If you haven’t already, please take a moment to read “The Wealth Preservation and Building Portfolio” which is the second half of this post: Stocks –Part VI: Portfolio Ideas to Build and Keep Your Wealth.

In it you’ll find my reasons for the funds I’m going to suggest. You’ll also notice my suggested allocation percentages for your mother are much more conservative than those suggested in that post. My sense is you and she will sleep better, and with her assets she doesn’t need to pursue performance.

This is what I’d do were she my mother:

389k/50% VBTLX -bonds – current yield 2.2% = $8558 annual income
194k/25% VTSAX -stocks –  current yield 1.8% = $3492 annual income
194k/25% VGSLX -REITS – current yield 4.2% = $8148 annual income

Total annual income of $20,198, without touching principle.

This also represents a very conservative 2.5% withdrawal rate on her 777k. In addition, she’ll have bonds as a deflation hedge and real estate as an inflation hedge. If we do have a financial Armageddon, it will likely take one of those two forms.

This boosts her annual income from 36k to 50k, a 39% increase. With only a 2.5% withdrawal rate her portfolio will also continue to grow, likely leaving a substantial legacy for her heirs.

Hope this helps!

Ron’s reply:

Thanks so much Jim. My brother has read your response and is on board. We are firing the financial adviser and opening up new Vanguard accounts.

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Posted in Case Studies | 15 Responses

roundup: Some random cool things

motorbike

It’s Better in the Wind

Guest posts I’ve done lately:

Retire Early Lifestyle: Esperando un Camino and Why Your House is a Terrible Investment

And an interview: A man with F-you money

How Warren Buffett got his start. 

How state taxes influence where people choose to live.

Crazy House in Vietnam

Strange Houses

Cliffs of Dover

Cliffs of Dover

scientific_facts_02

29 more scientific facts

old-cigarette-ads-4

Old cigarette ads

serpent docean loire nantes Huang Yong Ping  7

Giant Serpent off the coast of France

 

thor harris

How to live like a king for very little

 

little girl as flemmish painting
Looks like an old Flemish painting, right?
Spain somewhere
This is somewhere in Spain. Anyone know where? I don’t.
mars
This is sunrise somewhere on Mars
sea stack
Posted in Random cool things that catch my eye | 14 Responses