Investment showdown -- beyond the Roth, SDP, & TSP

[MilitaryToFinance]

On 5/19/2016 at 5:12 PM, 11F... said:

When I was in ROTC, a First Command (I'll buy you a drink AND save you $20,000 if anyone is actually still investing with them...PM me) and a USAA sales pitch were the only 2 "mil sponsored" $$ briefs I ever got while in school.  That is embarrassing and borderline criminal for our service members.  I was too busy eating chicken wings and drinking beer (amongst other things) to pay much attention in college, but if I would have had half a brain and mapped out my financial life at age 22, I would be set for life by now.  If I didn't have a family now, I would never work a day after retiring and live the exact same lifestyle/standard of living as I do now.  

This really is a disservice how little they prepare officers for the real world and saving for their future. Unless you teach yourself nobody ever talks about it.

Real estate plays a role in an investment strategy but the real returns on stocks will outperform in the long run and you shouldn't be sacrificing equity investments to focus solely on real estate. If you take a step back and think about it you'll realize the risks you might not be thinking about. Imagine if I came to you and said I have a great investment strategy for you. i have an investment that will grow in-line with inflation over time, I want you to take the majority of your net worth, leverage it 4:1, and buy this highly illiquid asset and I'm going to take a 6% commission on the trade. In any other situation you would be told you're crazy for that.

Edited May 28, 2016 by MilitaryToFinance

[Ping Hymas]

Not quite.  Your looking at RE as a security. Doesn't work like that. It's hard to articulate your thoughts in a single post so I get what you are saying. It comes down to personal preference. But, for me, I like my cash flowing RE. Buying my first commercial property in the near future and just dropped plans for an RV park....would I trade that for Apple or target?  No, but you would. Just preference. Plus, im done in four years. Not going to work anymore for w2 income, so the cash flow rox. 

[panchbarnes]

8 hours ago, MilitaryToFinance said:

 buy this highly illiquid asset and I'm going to take a 6% commission on the trade. In any other situation you would be told you're crazy for that.

Liquidity/appreciation rate depends on where you are at.  Currently, some markets won't last more than 2 days w/ >20% ROI after 2 years.  And yes the RE market is up and down, just like the stock market.

Also, I'm not a CPA, but from experience there are numerous tax advantages with RE transactions/investments.

I am curious on how the impending tax rate hike will affect the RE and stock markets.

Edited May 28, 2016 by panchbarnes
wordsmithing

[thud]

I believe MtF's point was that most real estate investors fail to discount with an appropriate illiquidity factor and perhaps overlook the true costs/risks of real estate (especially as your capital structure becomes more complex as a real estate mogul).  Most of the squadron bros who were focused solely on any investment (be it RE, equity, debt, Iraqi Dinars, etc) didn't understand how to compare apples to oranges as they considered their investment options.  When the light came on, nearly all of them realized that tilting a portfolio too heavily to one strategy brought with it some unanticipated tail risk and unforeseen opportunity cost.  ...and second-order effects, as well.  Consider your estate plan and how real property (and mortgages) will transfer to your heirs.  Probate ain't pretty in some states and trusts cost cash. 

I would use personal preference as a cautionary tale, considering folks tend to find comfort in the numbers they've crunched.  You can look at it as confirmation bias, but everyone likes to justify their ideas as the right ideas.  Assumptions in your cap rate can be way off, just like that equity analyst's assumptions when he misjudged Target's cost of capital and expected dividend in his Gordon growth model.  Valuation is valuation at some level, so I believe you can approach real estate just as you would an equity investment.  Projecting those cash flows into the future is certainly tricky no matter what you're analyzing.     

While stagflation may be an exaggeration of the current environment, having some real assets in your portfolio certainly helps.   Rent-producing assets have been a nice addition to those seeking current income, especially against the current economic and demographic backdrops.  Rent inflation vs. CPI is a pretty stark contrast (over the last 3-ish years).

11F..., if you enjoy a consumer-centric theme, I would encourage you to investigate a 50/50 portfolio of consumer staples/consumer discretionary from various perspectives, not just total return or income.  Being an active retail investor is a tough business, and I appreciate your conviction.  If you're curious what type of data you're up against, cruise over to RS Metrics and see the real-time info they're selling. 

[11F...]

thud,

First of all, thanks for adding to the discussion.  Your comments bring up one important question people must ask themselves.  What is your goal?    You speak of RE having potential costly effects during transfers.  For some, this may not be a factor and for others frankly, this may not be of any concern at all depending on what their goals are.  You said that trusts cost money, but so do capital gains taxes.   But these are good things, as it means you have profitable assets!  I find it laughable when folks argue about not selling something because of a tax...shouldn't we all be so lucky!  When you asked me about looking at something from various perspectives, not just total return or income...that may or may not be relevant to me.  For some people, income is their only concern.  I'm not a true income only investor, but I lean heavily this way as I am a very reluctant seller of equities (and a patient buyer...I acquire many and miss out on more by selling puts).  For others, it may be total return.  For anyone who plans on retiring and using the "sell 4% of my assets each year", then total return is crucial for them, since by their philosophy they need return to generate $$.  For even others, it may only be to outpace the S&P 500 with whatever combination of investment vehicle.   Or inflation, or whatever metric one wants to use as a measuring stick.  So while your comment about confirmation bias is a somewhat intriguing one, another (equally if not more dangerous) threat in my opinion is investors constantly switching their strategy because they have no goal other than to just "make money."  

If the market does well, some folks get disappointed that their portfolio is struggling compared to so many others, so they switch strategies.  Or conversely when the market dumps, it's tough for many to swallow such a big loss so they switch.  Or they hear their friend/relative/random internet forum guys doing this or that, which works great (right now) so they switch.  But more accurately, I think the fatal flaw is that they don't have any goal they are trying to achieve.   Come up with a well thought out goal, whatever that may be, and then come up with a plan to get there.  Then one can re-evaluate (think constantly debrief yourself) on how you can improve your plan along the way.  

As has been discussed on here previously by several other posters, I think the dollar cost averaging/index fund/low cost mutual fund/etf approach with a periodic rebalance is one of the best plans out there for people who want to maximize their profit potential and minimize their risk and effort put into it, while having no real "goal" set in mind.  

Lastly, I'm not at all familiar with RS Metrics or what they are selling.  Nor am I interested in a consumer discretionary/staples portfolio only.  I only used Target as an off the cuff example in an effort to not just speak in vagaries, as is often the case with investment discussions (I find).   There's much more worthy of discussing, but probably not worth getting bogged down in the forum over it (such as your graph you linked, which is fine and well, albeit generic and irrelevant unless someone is maybe invested in a REIT vs. Consumer staple/disc ETF).  Anyway, again thanks for continuing the discussion here as I think it's one that is severely underrepresented in this community.  

[11F...]

thud, 

I'd also add that I whole-heartedly agree with your sentiments about the dangers of non-diversification.  Also the illiquidity of RE being discounted by some.  Just like you mentioned, future cash flows are difficult to analyze, regardless of investment vehicle.  All three spot-on comments.  

[eindecker]

With Ping Hymas' business and all this talk about RE, has anyone mentioned BiggerPockets?  Many of you may be in the know, but for those who aren't, it's a huge resource. I've met some good people and learned a ton from all of the information that's available on their site. I'm a huge fan of Vanguard, the Boglehead's and their philosophy, but like some have said, RE offers its unique advantages and for those who are interested, I'd recommend hitting up BP. 

[11F...]

On June 29, 2016 at 9:01 AM, eindecker said:

With Ping Hymas' business and all this talk about RE, has anyone mentioned BiggerPockets?  Many of you may be in the know, but for those who aren't, it's a huge resource. I've met some good people and learned a ton from all of the information that's available on their site. I'm a huge fan of Vanguard, the Boglehead's and their philosophy, but like some have said, RE offers its unique advantages and for those who are interested, I'd recommend hitting up BP. 

Eindecker, I've never heard of that site before but read through several of the comment streams the other day and thoroughly enjoyed it.  Would give the site a plus 1 recommendation for any folks thinking of delving into real estate.   Some great discussions on there, particularly from numerous people just thinking of starting out.  I will caution any newbies though that some of it seems a bit "too good to be true."  I see lots of investors/RE newbies on there overestimating their Cash Flow potential, or perhaps more accurately underestimating the hidden costs of RE investing.  And I'm by no means an expert.   Further, there seems to be a ton of folks who really over-leverage themselves and encourage others to do the same, at least according to their comments.  Some of the strategies I read seem to work great right now, but there is little margin for error.  As soon as a crisis hits (major MX required, vacancy, bad tenant requiring eviction which may lose a few months of rent while the legal process works)...any event like this would seem to cause a domino effect and their personal house of cards will crumble.   

 

Anyway, very cool site.  Thanks for linking.  

[bluedevil]

Anyone have any experience with or heard of wealthfront?  I heard about it on Joe Rogan's podcast of all places.  They manage your first $10k for free with a flat 0.25% annual fee on the remaining.  If anybody is interested in opening an account with them, PM me with your email.  If you join with a referral, we both get an additional $5k managed for free.   

[11F...]

On July 4, 2016 at 6:15 PM, bluedevil said:

Anyone have any experience with or heard of wealthfront?  I heard about it on Joe Rogan's podcast of all places.  They manage your first $10k for free with a flat 0.25% annual fee on the remaining.  If anybody is interested in opening an account with them, PM me with your email.  If you join with a referral, we both get an additional $5k managed for free.   

blue, never heard of them but just looked on their site.   Let us know how they do if you end up using them.  My two cents...why pay them for something you can do yourself?  It looks like they just invest in index ETFs.  As has been preached on here before, you can do that yourself and save the .25% commission by logging onto vanguard.com or a variety of other sites.   I'm pretty sure Vanguard or any other of the big investment firms have a little risk tool you can use to build your own little market of etfs if you want.   Just log in once a quarter and rebalance or set up a lifecycle fund thing, etc.  Further, this wealthfront site clams to brag about this fancy tax loss harvest strategy.  First of all, that's the kind of thing I'm not a fan of at all (selling at a loss just for tax benefits).  Second of all, that's something that will help you none if you're using them for an IRA or 401K, as those are already tax havens.   But it looks like maybe you can opt out of this feature....didn't look hard enough.  Good luck. 

[MilitaryToFinance]

Wealthfront and Betterment are decent options for people who want to automate their investing and don't have the time/inclination to stay on top of rebalancing. They are both predicated on a belief in EMH which I believe is faulty but they are better than most people do investing on their own. You can definitely replicate the strategy yourself with the same ETF's in a traditional brokerage account so you can save the 25bps in management fee. However if your account is large enough to take advantage of the tax loss harvesting (the limits are different between Wealthfront and Betterment but I don't recall who is lower) that should cover the 25bps fee. It isn't something you can opt out of and honestly I have no clue why you would want to. I don't think you understand how the feature works. Why would you not take advantage of a free service which increases your investment returns and the expense of the IRS?

I've met the CFO of Betterment and had to research it during business school. The system is really designed with investor psychology in mind in a way which traditional brokers are not. You can split your account into different sections with different risk tolerances and goals. IE Saving for a Downpayment vs Saving for Retirement vs Kid's College Fund. Money is fungible so technically it doesn't matter that you have different goals, the money in your account is the money in your account and that is how traditional advisers treat it. However research has shown repeatedly that despite what economic theory says that isn't how people think of their money. People do a better job of saving when they think of saving $1,000 for the house and $1,000 for a vacation rather than just putting $2,000 into savings for the month. If this sounds stupid to you then these services probably aren't something you need but I can certainly understand why both of them are successfully bringing in billions in AUM. I'm still curious to see if their customers stick with them during periods of poor market performance and no people to talk to/ask questions.

[thud]

On 7/4/2016 at 5:15 PM, bluedevil said:

Anyone have any experience with or heard of wealthfront?  I heard about it on Joe Rogan's podcast of all places.  They manage your first $10k for free with a flat 0.25% annual fee on the remaining.  If anybody is interested in opening an account with them, PM me with your email.  If you join with a referral, we both get an additional $5k managed for free.   

Hey dude,

Here's the short answer -- it's better than not investing, it's grounded in widely-accepted portfolio construction processes (from both an academic and practitioner's standpoint... although that doesn't make it right...), and it's cheap for a fire and forget solution. Tax-loss harvesting is a benefit, especially at the no-cost-to-you higher frequency they run it (daily).

But...

I'm not necessarily a fan.  I can get into the nuts and bolts if you're interested, but I'll leave it with a summary of shortfalls:

1.  Limited investment menu (diversification in name only, in my opinion).

2.  A subjective and incomplete risk tolerance methodology.  Most investors' risk tolerances change under discrete gain/loss scenarios... that is, equal gains and losses aren't symmetric when it comes to the impact on decision making.  Folks get more emotional over losses than they do gains... which changes the risk curve.

3.  Mean-variance optimization of a portfolio is analogous to building a flying schedule under the complete belief that inputs are accurate.  Garbage in = garbage out.  Wealthfront addresses some of the issues with MVO, but the underlying theories that generate the capital market assumptions used in the optimization process -- though widely accepted -- can be improved upon.  HOWEVER, most advisors don't run bespoke portfolio optimization using more robust methods... so I hesitate to bring this up given the lack of options on the outside.

4.  As MtF pointed out, the lack of humans on the other end of a phone may prove detrimental to the business model if things go south.  Betterment caught some flak for suspending trading during Brexit and not communicating anything about it to its clients.

 

 

[11F...]

On July 23, 2016 at 8:13 AM, MilitaryToFinance said:

It isn't something you can opt out of and honestly I have no clue why you would want to. I don't think you understand how the feature works. Why would you not take advantage of a free service which increases your investment returns and the expense of the IRS?

 

1) It is most certainly a feature you can opt out of.  In fact, you have to sign up for it (at least on wealthfront), and there is a FAQ section for what happens if you change your mind and turn it off.    

2) I do understand the concept of tax harvesting.  And I understand why it makes sense based on a passive portfolio of ETFs with thousands of investors pooled together, and they can take advantage of daily (I assume) shifts.  I can't do that anywhere remotely as efficiently as an individual investor.  So I understand and concede that if this was my investment vehicle, while I'd have to look into it in more detail, it is very likely that it would make no sense to "opt out."   But I also understand the concept of selling low and buying high (which I get, is not necessarily exactly what's happening here, as they "shift" their ETF into "similar" portfolios rather than "sell" them per se). Obviously they sell them, but you and I both know what the process is.   So they sell and buy at the same/similar price.  But first of all, they can't be exactly the same ETFs, otherwise the concept goes out the window due to wash rules.   But even if they are similar and you're only washing a small portion of that ETF, still by definition a tax loss harvesting strategy means you are selling at a loss.  And secondly, from my previous posts one can tell that I'm more of a buy and hold investor.  I don't like the concept of selling something at a loss, just because the price has dropped.  If the fundamentals have changed validating the price drop, then it's a different story and it makes sense to me.  Not based on automation.   I think the confusion lies in that I don't like the idea of "tax loss harvesting", because I'm an individual investor but if I was just one in a pool of 10 thousand, then I'd probably buy into it.    

3) That said, just like investing into a portfolio of index funds in Vanguard and rebalancing one's self, or using a service like this is not my cup of tea, thud's comment above was spot on.   It's better than not investing.  Way better.  

4) It needs to be reiterated that this entire tax loss harvesting concept is thrown out of the window when it comes to tax protected retirement accounts (i.e., IRAs).  Which is probably the highest priority for any citizen to get fully funded.  Now once that's done, and folks are looking for additional ways to invest, then this is a seemingly valid option like many things out there.  I've said in the past on here, I don't think there's a right way to invest, but there is a wrong way.  This would be a right way for some people perhaps.  There is a wrong way though.  

  

[BADFNZ]

SDP question:

I deployed earlier this year and put $10,000 into an SDP.  I've been back for 2 months now, but according to my LES, my SDP balance hasn't changed from $10,166 for 3 months now.  I'm hoping this is a mistake as I should be accumulating interest until 90 days after RTB.  This is my first time doing the SDP so I'm not sure how it works in regards to the balance on your LES and how accurate it is.  Any help?

[ThreeHoler]

SDP question:

I deployed earlier this year and put $10,000 into an SDP.  I've been back for 2 months now, but according to my LES, my SDP balance hasn't changed from $10,166 for 3 months now.  I'm hoping this is a mistake as I should be accumulating interest until 90 days after RTB.  This is my first time doing the SDP so I'm not sure how it works in regards to the balance on your LES and how accurate it is.  Any help?

What does the SDP section of MyPay say?

[Herk Driver]

Always check myPay after the first of the month...it doesn't credit until the 1st.

[BADFNZ]

Thanks guys.  I didn't even know there was an SDP section on MyPay.  The balance in that section was different than my LES.

[di1630]

Anyone have a good idea for where to park $100k for 3-4years?....I need min risk of loss, really just looking to keep up with inflation until it's used for business startup money.

[nunya]

Go to depositaccounts.com and find the best 36 month CD rates. 

Edit: Ally, Barclays, and Synchrony look competitive and they're name brands.  I'd probably go there.  If you really want to geek out, look at the 5 year CDs and see if it's worth the early withdrawal penalty for the higher rate.

https://www.depositaccounts.com/blog/2013/01/comparison-of-longterm-cd-rates-after-early-withdrawal-penalties-january-2013.html

Edited July 31, 2016 by nunya

[WTFAF]

I'll give you 2% per year on it and beat all of those CD rates, send it my way.

[Standby]

Anybody have contacts in the skydiving industry?  Specifically looking for somebody that owns a DZ or provides the lift service.

[spaceman]

Dudes, awesome thread!  I'm deployed and using my spare time to finally get a grip on my finances, so I have been researching and finally finished reading this whole thread.  I'm about to turn 30 and so far have been pretty irresponsible as far as investing/saving for retirement...  I probably should've started taking it seriously 6-9 years ago but I guess no time like the present.

 

Anyway I have a couple of questions but first some background:

 

Wife and I are both 29, I'm a pilot (O-2 with maxed out TIS) and she's a teacher; our total income is ~$100k (no kids yet)

We own two houses, one we live in and one rental property back home that we pretty much break even on

Both cars are paid for, but wife has ~$30k in student loans that I'm now focusing on paying off

I have a 401k from my old job worth about $23k sitting in a Wells Fargo account that I haven't really touched in 3.5 years

So far during this deployment I've pumped up our savings account from $10k to almost $25k, so I have a decent pile of money to do something constructive with.

We've also built ourselves a pretty detailed budget that I think we can actually follow, which leaves us $3-3.5k per month for investing/paying off debt.

 

So far my rough plan is to open a Roth IRA somewhere (Vanguard probably) and max it out for 2016, with some combination of the cash that I have plus monthly contributions between now and the end of the year.  (Then continue maxing it out each year by monthly contributions)

Next I'll focus on paying off the student loans as quick as possible.

Then I'll invest whatever's left in some other account (Roth TSP maybe?).  Once the loan is paid off I intend to invest at least 15-20% of our income total.

 

Anyhow, my questions are:

 

1.  Does this plan make any sense?  I know I should pay off the student loans ASAP, but I feel like I have some catching up to do retirement savings wise, so maybe it would be worth it to at least max out a Roth IRA for the year and then put more towards the loan after that.

2.  Is there a rule of thumb or method for deciding if it's worth it to convert a 401k into a Roth IRA?  I know I'd have to pay taxes on the $23k I have to convert, but with my deployment I don't think my taxable income will ever be much lower than it'll be this year.

2b.  Traditional to Roth rollovers don't count towards your annual Roth contribution limit, right?  So I could roll over my whole $23k plus put in another $11k to max out mine and my wife's contribution for this year, if I understand the rules correctly.

 

Thanks guys for all this info; this has been one of the most educational BODN threads ever!

 

ETA: I realize I'm asking for financial tips from a bunch of pilots but many of you guys are obviously way smarter on this stuff than I am so I'll take any free advice I can get

Edited August 12, 2016 by spaceman

[mcbush]

I'll let the guys who are smarter than me take on questions 2 and 3, but for question 1, what's the interest rate on those student loans? That's a huge determining factor in how to prioritize paying them off.

[guineapigfury]

Pay off the loans.  Not sure if that $100k is before or after tax, but you should be able to pay it off in a year either way according to your post.  Take that $30k+ per annum you have available in year 2 and beyond and invest it.  You'll be be back on track for retirement goals quickly.

[spaceman]

Thanks for the replies gents!

The student loans are actually a few loans within one account (subsidized/unsubsidized, etc.), so roughly a third of it is at 4% and the other two thirds 5.88%.

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