Lazy Man, Author at Lazy Man and Money

The Financially Independent Baby

September 28, 2020 by Lazy Man 9 Comments

invest baby money — Look at all this money!

Thanks to a tip from Joe at Retire by 40, I learned that Bill Ackman recently wrote about an interesting idea. I joke that Bill Ackman is my best friend because I met him once. Maybe Bill Ackman is a reader of this blog, because his idea is suspiciously close to something I wrote about several years ago.

Here’s is Bill Ackman’s idea:

“There are a number of potential solutions to this [wealth inequality] problem. Among them, the government could establish and fund investment accounts for every child born in America. The funds could be invested in zero-cost equity index funds, be prohibited from withdrawal until retirement, and could compound tax free for 65 years. At historical rates of equity returns of 8% per annum, a $6,750 at birth retirement account – which would cost $26 billion annually based on the average number of children born in the U.S. each year – would provide retirement assets of more than $1 million at age 65.”

To bring you up to speed, but the wealth inequity problem that Ackman writes about it is the fact that many, many Americans do not own stock on equities of US companies. The ones who do own stock, presumably all the readers here, have seen their wealth grow greatly. Those that have not owned stock have not enjoyed compounding wealth. They gotten left behind with stagnant wages, rising health care costs, and other systemic problems.

Mr. Ackman’s idea is simply to have Uncle Sam ensure that every new, tiny American human will be included in America’s corporate financial success.

A one-time investment of $6,750 to (somewhat likely) solve America’s financial retirement crisis?

Count me in. That’s why I wrote about this article five years ago. My projection was that we’d need only $6,622, but I like that Bill decided to round up to a more even number. (I’m leaving the projected growth rates in place, even though they may be aggressive in 2020.)

It’s very hard to get the government to act on an idea that is so big. Millions would complain that it would raise the national debt which is already sky-high. Millions more would say that it lacks fairness as they didn’t get a million dollars at retirement. These criticisms are fair and worth discussing. I think there are solutions to these complaints, but that’s an article for another day. For now let’s agree that the government isn’t going to just approve Ackman’s idea overnight and save every baby’s retirement.

In other words, we are going to have to try to do this ourselves…

… And because I like to go to extremes, rather than trying to solve retirement, why not solve all of a baby’s biggest life milestones.

The Financially Independent Baby

I had a crazy idea ~~yesterday~~ in 2015. Let’s imagine that a blessed baby was born today. For lack of a better name, we’ll call him Baby Gronk.

The parents of Gronk aren’t what you’d call traditionally rich. They live a frugal lifestyle and have saved up some money over time. What they lack in excess money, they make up in wisdom… wisdom of personal finance and compound interest.

These parents decide that they are going to use that personal finance wisdom to spoil Gronk by covering some of his major life expenses on the day he is born. (While I believe that little Gronk should learn to “financially fly on his own”, we’ll leave those personal decisions to the reader.)

The question is, “How much should they put aside to cover all the expenses with life’s major milestones?”

Gronk’s parents proceeded to make a bunch of assumptions, many of which will turn out to be wrong. That’s the nature of predicting the future. Their plan is to use the information they have at their disposal to make the best possible estimates and adjust as time marches forward.

They also realize that if their calculation is a little off, Gronk will pitch in the difference. They aren’t going to let a quest for perfection stop them from a great attempt.

First Car (Age 16)

Gronk’s parents have set up a budget of $6,000 for his first car at age 16. Using the rule of 72, they realize that their money may reasonably double when Gronk turns 8 (a growth of ~8.5%). They also realize that it may double again when he’s 16.

Working backwards from their budget, they decide to put aside $1,500 hoping that it turns to $3,000 (age 8) and $6,000 (age 16).

College (Age 18)

Gronk’s parents decide to make this calculation easy and limit this expense to tuition. Yes, there are going

The big question is whether Gronk’s parents want to fund in-state public college or private college. The price difference between the two is huge. Public in-state tuition is ~$9K while private is ~$31K. Multiply that out by four years and it is either ~$36K or ~$124K.

Since the calculations are so different, Gronk’s parents decide to do the math separately.

Age 18 is very close to the age 16 exercise with the first car above. However, it’s just different enough that Gronk’s parents decide to break out a calculator instead of using the rule of 72. They use the “y to the x” key to calculate compound interest. They specifically type in “1.085”, “y to the x”, then “18” to arrive at 4.34… a key number we’ll use. The 1.085 comes from projecting a 8.5% growth on the current investment (the “1”).

Why pick 8.5%? Your guess on the growth of the market is as good as mine. In 2020, I would adjust this lower. I originally went with 8.5% because it was reasonable enough (near Ackman’s 8% assumption) and it was a convenient number coming from the car example above. Now that you know how to do the calculation, feel free to substitute your own growth assumption.

This tells us that every dollar we invest will yield 4.34 dollars… giving our assumptions and uncertainties in the market. We can mentally check this using the above example of doubling, and doubling again. Double a dollar once and you get two. Double it again and you get four. In this case we have a little more time (two years) so it’s a little more than four, 4.34.

Now that we think we can grow one dollar to $4.34 in 18 years, we just need to divide our total expenses…

… for public in-state college, we’d need to roughly put aside $8,300 ($36,000/$4.34).
… for private college, we’d need to roughly put aside $28,571 ($124,000/$4.34).

What’s interesting to me is that this almost comes out to exactly one year of tuition. In fact, if we used an expected return of 8% it comes out to exactly one year of tuition.

It’s impossible to say whether Baby Gronk’s parents should plan for public or private school. Perhaps they could plan public school, because they are already going far above and beyond what most parents would ever do. It’s not too much to ask Baby Gronk to bridge the gap to private college with financial aid if that’s a decision they make down the line.

Wedding (Age 25)

The average cost of a wedding varies greatly. Since Gronk is just a baby, the parents use this to estimate $30,000, a nice round number.

They use the same math as in the previous example and realize that at 8.5% growth a dollar is worth $7.69 in 25 years. This means that they need to put aside $3,900 at birth to pay for the wedding.

(We’ll ignore outdated traditions of the bride’s side of the family paying for it. Additionally, we’ll presume Gronk’s parents want to pay for the whole wedding instead of half. Or we can keep the traditions and calculate the wedding expenses for Gronkette.)

Down Payment for First Home (Age 25)

Who buys a home the same year they are married? I’m not sure and neither are Gronk’s parents. Sometimes people buy homes before they get married and sometimes they get married before they buy homes.

Since we have the same age and the same interest rate, we have the same growth of a dollar – $7.69.

Gronk’s parents decide to put in the 20% down-payment and not buy the house outright. (They’ve already spoiled him more than enough as it is.)

They think a starter home should cost around $200,000. This depends greatly on where they live and what they agree is a starter home. The parents may have to adjust this to their area of the country. The parents budget $40,000 which is 20% down on that $200,000 home.

Anticipating a dollar grows to $7.69, they realize that need to only invest $5,200 to cover the $40,000 down payment.

Retirement (Age 70)

Up to this point, many would say that Gronk’s parents are ridiculous. They don’t care. Instead, they say, “In for a penny, in for a pound!”

They estimate that Gronk will want to retire at age 70. That’s where the trend is nowadays with improved health care. They start with the rule of 4%. This rule of thumb suggests that one can withdraw 4% of his/her investments to live for 30 years. (This is an over-simplified version for the sake of this exercise.)

They realize that they need to get him 2 million dollars at age 70 so that he can withdraw $80,000 a year (4% of $2M) to live off of.

Getting Baby Gronk 2 million dollars sounds absurd, but Gronk’s parents realize that time is on their side. At 8.5% interest, a single dollar grows to $302 in 70 years.

They divide $2,000,000 by $302 and realize that they only need to put in $6,622 at his birth to cover his entire retirement.

Final Thoughts

Smart readers should be screaming “Shenanigans!!!” I didn’t factor inflation in any of the examples above. You got me. I also didn’t factor in taxes. These are very significant. Gronk’s parents might end up having to put twice as much in. Or they may have settle with the idea that they are only covering 2/3rd of all Baby Gronk’s major life expenses. My guess is that they’ll sleep well enough at night if it is the latter.

The idea of this exercise was never about complete accuracy. It’s impossible to accurately plan out a person’s expenses at birth. Instead, it was about illustrating how the idea of applying compound interest at birth could work.

Let’s add up all the expenses:

Car – $1,500
Public College – $8,300
Wedding – $3,900
First Home – $5,200
Retirement – $6,622
———————–
Total – $25,522

If Gronk’s parents were able to put aside around $25,500 at Gronk’s birth, he’d have most of life’s major milestones mostly covered. To be clear $25,500 is not exactly petty cash that everyone (or anyone!) can find in their couch. However, it seems like such a small price to pay for a lifetime of financial security.

This article was originally published Nov 23, 2015 at 12:15 PM

Should I Move?

September 21, 2020 by Lazy Man 11 Comments

Should I move? That’s the question that many people are likely asking themselves these days. If not, maybe they should be asking themselves that question.

Nearly 8 years ago, my family moved from the San Francisco Bay Area (aka Silicon Valley) to Rhode Island. We had lived there for 7 years and it was a difficult decision to leave all those friends behind and start a new life. I had never lived in Rhode Island, but I lived in Massachusetts for the first 30 years of my life, so I figured it would be relatively easy. I won’t get into all the specifics, but it hasn’t been easy at all.

[Editor’s Note: This article was started last week. The focus is on a move within the United States. After the death of Ruth Bader Ginsburg, I’ve seen some talk on social media about moving outside the United States. That’s a topic that I won’t be covering here at this time.]

I’ve been talking with some friends from San Francisco and they’ve sent me some crazy pictures about the wildfires there. The sky was simply red all day. Their rooms were dark orange. My memory of the area couldn’t be more different. The Bay Area had the best climate in all of America. It was about 75-80 and sunny almost every day. No one needed air conditioning because it only got hot for 2 weeks in the summer. My only complaint was that you didn’t get all the seasons. You’d have to drive a couple of hours to Lake Tahoe to go skiing.

Nowadays, I don’t regret our decision to move across the country. In fact, some of my friends are looking to move to New England as well. I don’t blame them. Who wants to live in fear of wildfires and extremely poor air quality?

Of course, the wildfire problem isn’t only in the Bay Area. It’s millions of acres in multiple states all along the west coast… and of course, that’s just the fires. I hope they prepared for an emergency ahead of time.

I’ve been talking with another friend of mine (who writes as Kosmo on this website) about a natural disaster that hit close to his home. The Midwest derecho leveled Iowa in August. He was lucky to have missed most of the damage, but millions of people lost utilities. Last week he told me that they cleaned up 250 million pounds of tree debris and it was still going on.

It barely made the news as this Washington Post article notes.

This made me reach out to a couple of other friends (completely tapping out my network):

I have a friend in Jacksonville, Florida, who roughly represents the southeast portion of the US that has to deal with hurricanes. This year the storms are so bad, they literally ran out of names and had to start going with Greek letters of the alphabet. I asked about her long-term plans. As I guessed, she has plans to move in the future. The hurricanes are just too much.
If you live in Alabama, Lousiana, or another state in the southeast, perhaps you’ve had similar thoughts?
Arizona has always been a very hot state. However, it seems to just get hotter and hotter with more and more days over 100 degrees every year. I contacted Abigail from I Pick Up Pennies who lives in Arizona to see if she is thinking of moving. While she isn’t a fan of the extreme heat, good friends and a low cost of living make it bearable.

To spare you any further gloom and doom, I won’t skip over thoughts of flooding and rising sea waters.

All of these thoughts are presented in much greater detail in Propublica article on climate change. It is a long read, but well worth it.

It’s hard to read that article and come away with any conclusion other than people in the United States will start moving to Maine and Vermont. While those states typically get feet of snow at a time nowadays, the snow may be more moderate over years of climate change.

What does all of this have to do with personal finance? There are a lot of places with expensive real estate that may not make sense over the long term. In my own area, Newport, Rhode Island has many million-dollar

Should I move? — If your city looks like this, it is time to move.

properties on the coast. It’s not like we have the money to buy them. However, if we did, we’d have to think long and hard about whether it would make long-term sense.

What are your thoughts on climate change? Do you think you’d consider relocating in the next decade or two due to climate change? Let me know in the comments.

Passive Income Update: August 2020 ($7,171.08)

September 15, 2020 by Lazy Man 7 Comments

It’s the middle of the month and that means it’s time to review August 2020’s passive income.

August was a mess because our tenants broke their lease and we proceeded to list and sell our condo. We’re trying to do a 1031 exchange which means that if we act quickly we won’t have to pay taxes on the gains. The goal would be to have the property closer to where we live now. Unfortunately, we haven’t been able to identify and move forward on the replacement property.

August was also a time when the kids didn’t have camp or school. In a non-COVID world we would have had at least a week of vacation. We had expected to be able to go to Hershey Park, but COVID numbers got worse and we didn’t want to be in a position to have to quarantine before the kids could get back to school.

We were able to get to vacation again at Block Island. We went looking for the glass orbs that are hidden there as part of a deal with the tourism board. Each kid partnered with a parent and made their own team name, shirts, and flags. Here’s Team Floppy Whale. I’m purposely extending my stomach because the iron-on letters stick on well. It was a tough balancing act for this picture.

You can read how the hunt went as well as how to save money on Block Island.

We also got to do a local beach party/fundraiser, which included s’mores, non-alcoholic beverages, ice cream, and live music. We even got to go to a local water park.

All COVID things considered we had a full month as you’ll hopefully see in the pictures. I’ve read that the pictures aren’t showing up for some users, so if that’s happening please send me a mail. I saw this happening myself once, but then it started working and I have no idea what could be going on.

That’s enough lead-in… let’s start the Passive Income report. I used to call this the Alternative Income Report, but everyone loves passive income better. While I transition to the new terminology, there may be some “alternative income” mentions including the FAQ. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll likely have a lot of questions.

The way I calculate these numbers requires that long explanation – it isn’t intuitive at all. The reason why I do things a little differently is that it is a journey. For example, we don’t have passive income from our rental properties while we are paying down their mortgages. These numbers reflect the progress of that journey.

Lazy Man’s Passive Income – August 2020

I categorize our passive income into 3 main sources that are largely represented in my passive income pyramid. For this report, I ignore the bottom section, “career/job” – that’s not passive at all. (I do have some income in that area, but that’s not the focus of this report.) I combine dog sitting and blogging into one section of “somewhat active” income. I leave real estate and investment income as their own separate main sources of very passive income.

1. Blogging + Dog Sitting Income

After a few months of zero dog sitting, we’re getting dog requests again. July was an almost half a normal month. August was almost exactly the same as in 2020. It seems like for the first time dog sitting is back after COVID.

Blogging income has been consistently low since coronavirus started. Advertising is down, but our spending, in general, is down too. Few people are searching for information about retiring early. In August it was particularly low as I didn’t pay for some advertisements I placed. Those payments should be coming this month and in October. Hopefully, that will set me up for a record-breaking close to the end of the year.

(My oldest plays with one of the only young puppies we’ve boarded. He was only around for a few hours – just the right about fun with minimum destruction.)

You may have noticed that I hadn’t been writing as much. It was tough with the kids around all the time. Often writing blog posts doesn’t pay off until the future. Also, sometimes an advertiser may make a small change that temporarily negates a month of writing. It’s a little like investing in the stock market. I’m investing more money in the form of time spent blogging, but the stock market could go down and end up losing money. That still doesn’t mean that I shouldn’t have invested that money in the first place.

In July, dogs and blogs combined for a total of $2,407.09. In August, it was:

Total Blogging + Dog Sitting Income: $1995.01

Now that dog sitting is coming back my kids can get back to work and pitch in to help. My 7-year old even went to the animal shelter for camp and came back with so many tips and tricks for training dogs. This help means that I can pay them a legitimately earned income (a small percentage of the overall dog-sitting income). Because the income is earned they can save money in their kid Roth IRAs and it will be money that they’ll never pay tax on. I want to get them more involved in blogging, taking pictures and things like that, but it’s going slow. I have a plan for them to be able to help with a few articles by the end of the year. I need to work quickly though, because once school starts in a few days, it will be hard to get them focused.

(Note: The blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

2. Rental Property Income

Once again, we keep reaching new highs in real estate ownership. The value of our properties took a big jump. As with every month, we paid off a couple of thousand dollars of mortgage debt and grow some equity. This combination leads to growth in this area.

The big news is that we lost a tenant due to financial hardship, so this category is going to look a little different going forward as we sell one property and buy another. For August we still collected rent, so I don’t see a need to change right away. I have to think about what I’m doing over the next couple of months during the transition. I’m hopeful that in a few months, we’ll be able to say that this number is moving up nicely with the new property.

My 6-year-old asked for only brown M&Ms and, despite us yelling at him, Newport Creamery made it happen. He wanted to make dirt for his gummy worm sundae creation.

We now have 66.10% of the equity in our properties with a combined rent of $3,325 after insurance, property taxes, condo fees, and estimated maintenance. I use that number because it represents our net gain.

If you multiply $3,325 by 66.10% you get $2,198 in estimated monthly passive income. When I started tracking this (beginning of 2017), we only owned 36.4% of the properties and they had lower rents. The math worked out to $1,174 back then. So in 43 months, we’ve seen the number grow $1024/mo. That’s like giving ourselves an annual $12,288 raise until the end of time. It’s a very nice gain from almost 4 years ago.

The change in properties will be a real test of this accounting procedure. We’ll suddenly lose a percentage of equity, but the rent profit should grow. I’m curious to see how it all works out when the dust settles.

(Kids love their boogie boards in the ocean. Hopefully surfing classes will open next summer)

As the years march on, the ratio will grow to 100% of a rent that should be around $3,750 monthly Since rent is inflation-resistant, we can raise it as costs of living go up, we don’t have to factor in inflation like other investments. With the change in properties, we may be more likely to reach the annual $40,000 income. It should be enough money for us to live on with our own home paid off (plus our solar panels, frugal shopping habits, and military healthcare.)

In the previous report, the rental property income was $2,155. This number always moves slowly as it only changes if one of two things happens: 1) The properties go up in value. 2) We charge more for rent.

Total Rental Property Income: $2,198

3. Dividend Income

For this section, I assume we will earn a 2.5% dividend yield on our holdings. That could be from a high-dividend ETF or from simply holding strong companies that have a long history of dividend growth. For that we’ll look at making passive income with dividend kings. If I wanted to simply retire on this dividend income, I would get Sure Dividend’s newsletter to try to get closer to a 4% average dividend yield. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.

(This one-player Gravity Maze is a big hit with my puzzle-loving 6-year old.)

On the last snapshot, August 5, the market was doing great. It’s only continued to go up from there to this month’s cutoff on September 5th. Maybe the market loves the free money that the government is giving out. Maybe it’s looking forward to vaccines and opening up the country for business. I’m scared by all this, but I can’t deny the math. The market has done very well over the last month. Those last four sentences were actually straight from the last report. I didn’t have to change anything, because the market continued as you probably know. (The market had a set-back after I compiled the numbers, so we’ll have to visit that next month.)

We continue to get a profit-sharing check since I bought (a lot of) a company. The business is doing well. It’s actually almost ideally positioned due to its virtual nature. The investment income from this is essentially the same as dividend income. It is taxed differently, but for the purposes of this report, it makes sense to group together all stock ownership in this bucket.

Total Dividend-ish Income: $2,999

Last month, it was $2,958. We were a little past the pre-COVID numbers. Growing $41 over the month is very strong.

Annualized, this monthly $2,999 is ~$36,000. If our mortgage was paid off, we probably be able to live on this by itself. However, because most of our investments are in retirement accounts, we can’t use much of this income for now. (We can use the profit-sharing check as it goes straight to our checking account.) We’ll let the rest of this income continue to compound for at least another 15 years until we are 59.5, but hopefully a lot longer.

Very Close to Passive Income

Our “very close to passive income” is a combination of rental property income and dividend income. If there were some royalty income from books, movies, or music, I’d include that here. I’m too tone-deaf to have a rockstar music career, but maybe there’s room to have a book someday.

(I got the Trolls World Tour movie from Redbox for free due to an email promotion they were running. It had a bonus dance at the end. Definitely a better value than paying $20 when the COVID lockdown started)

The stock market goes up and down fast, even more so nowadays. That makes the dividend calculation fluctuate a lot more than it normally would. We don’t even know if companies can reliably pay dividends anymore. Without customers, and profits, many companies have cut their dividends.

The rental property income typically keeps going up because the mortgages are always getting paid down every month. Unless there’s a housing market crash, this should continue to happen. We haven’t seen any kind of crash yet.

For a few years, I’ve been saying:

I love having both types of income working together for us. I think everyone interested in FIRE should have stocks and real estate income streams. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate economic event. We’ll still likely get rent checks if the stock market crashes. We’ll still get dividend checks if a tenant is late paying for awhile. Of course a bad economy may impact both at the same time, but that’s what an emergency fund is for.

(Every year the kids play on these rocks while we enjoy weekend concerts at the local Navy Base. It’s cheap and fun for all. This year is different with no concerts and eating being an adventure, but they made the most of it.)

Here we are in an unfortunate economic event. Our stocks went down a lot, but then went back up. Our real estate has held steady. A couple of our tenants continue to pay rent, but one couldn’t and chose to move out before telling us. Overall, the plan keeps rolling along, even during COVID.

While the stock market is doing well, the real economy is terrible. No president wants to see six-figure homeland deaths, and an unemployment rate balloon to ~15%. They shouldn’t want to see climate change create millions of acres of fires. The best answer is a bailout of nearly everyone and everything at a cost of several trillion dollars… and it may go up from there. If only the people in political power believed that an ounce of prevention was worth a pound of cure, the United States would be in a much better situation. To make things worse, he doesn’t acknowledge that the United States had the worst response of any country.

Very Close to Passive Income: $5,197

Last month it was $5,113. We are making new highs every month. This would be $62,359 a year of almost completely passive income thrown off investments without ever drawing down on them – no selling stocks or reverse mortgages. We would still have all the underlying assets (property, stocks, etc.) and be able to will these to the kids for them to build on.

(With the New Octonauts movie hitting Netflix, the kids found their love of their old “Gups” that had been collecting dust for 2-3 years. You can see some of the high tech toys I have bought in some of these pictures, but I love when they simply use their imagination.)

This “very close to passive income” has grown from $2,354 in January 2017. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet (except for that profit-sharing check). Add in stock market growth (of a conservative 4%) and this number could be real, non-fudged $100K/year. I’m especially looking forward to 7 years from now when most of the mortgages on the investment properties (and our primary residence) are paid off. That’s going to be a huge financial swing for us.

Final Passive Income

When you add up “dogs and blogs” to the “very close to passive income” you get:

Passive Income: $7,192.01

Last month it was $7,520.09. If not for that invoicing issue, we probably would have had a new record for post-COVID passive income. There’s still some time left this year to reach new records.

This nearly ~$7200+/mo income is ~$86K+ a year. That largely hypothetical annual income for writing on a blog, taking care of one dog, and investing feels like a dream. In the long term, $86K would be a lot more income than we’d need. Here’s what our necessary expenses look like… for the next 45 years. Of course, those necessary expenses aren’t everything, but it’s a large percentage of everything.

(The local water park may not have had the most slides and excitement, but it was enough for a couple of hours – perfect for a 6 and 7-year-old to have a great time.)

As 2020 has proven, you never know what bad news is lurking around the corner. This preparation gives us the financial flexibility to fight it.

None of the numbers here include my wife’s bread-winning pharmacist income, her vested military pension (more passive income), or the freelance work I’ve been doing over the last couple of years (which isn’t passive at all). That’s the fuel that drives the passive income engine – it allows us to invest more and live well. This is especialy true since I’m good at strenching a dollar.

As always, I’m still hoping to write a book someday. That would add some more passive income. My wife will probably get her book out first. She had an incredibly interesting life until she met me – I am so boring. I may tip my toe into self-publishing sometime next year. I would love to talk to a real publisher, but I don’t want to take on the “job” of writing. That’s probably a deal-breaker. If you know someone who I could talk to contact me.

My favorite thing about the graph below is that it doesn’t dip down too far. It’s been above $6,000 for a while now. I thought that it may be tested with the coronavirus, but it doesn’t look like it will be. It’s consistently over $7,000, but I haven’t been able to turn the corner and make it $8,000 for a while.

(Once again, the blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

Net Worth Update

My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s just a footnote here.

I truly believe that net worth is one of the most important numbers in personal finance so it is worth sharing in some way. Showing relative growth can be useful, I think.

Like most investors in August, our net worth did very well. It was a big jump of 2.83% growth. For the year, our net worth is UP 12.10%. If you didn’t know better you might think 2020 was another boring year and a typical saving and investing plan.

(My 6-year who loves to build creates a rock tower at Block Island. He could have probably made them all day.)

Diversification helps a lot in bad times. Even when the stock market was way down, we were still grounded with our real estate. We can’t control the market, but we can be happy that the amazing river of compound interest has been working well for us over the years.

I feel it’s important to acknowledge that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 14 years. FIRE wasn’t a “thing” back then, but it’s in the news all the time now. We naturally are further along in that journey than some younger readers who may be more towards the beginning their journey. If you are one of these readers, I hope you won’t be discouraged by some of the numbers above. I didn’t start many of these graphs until year 11 of blogging (year 13 of early retirement planning). Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 10-15 years.

There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask whether to include a pension in your net worth. I decided that it does make sense to include it. She could have earned more direct monetary compensation if she didn’t work for the government. That would have boosted all the numbers across the board. Calculating pension value is not easy, but here’s the best way to know what a pension is worth. In the end, it seems my wife’s pension may be worth $2.3 million. However, like most of the money mentioned in this article, this isn’t money we can spend right now.

Because the pension would ridiculously dominate our net worth, I’ll note two separate numbers in my personal spreadsheet. I don’t share the numbers anyway, aside from these hints, so I don’t think it should matter much to you. It’s not like I’m suggesting that you might want to make a financial-based decision on a pension.

I always end this article by asking how your last month went. I know that COVID-19 is making everything difficult. I hope that some of it is getting easier. I’m sure that for many the kids going back to school, in whatever form, represents new challenges and anxieties. Feel free to use the comment space to vent, I try to give a thoughtful reply every comment I get.

How to Remove Tech Risk from your Portfolio

September 9, 2020 by Lazy Man Leave a Comment

One of the best things you can do financially is to set up an automatic purchase of a broad-based stock index. For many people, it’s a mutual fund that mirrors the S&P 500. You can set this up with companies that charge very low investing fees such as Vanguard, Fidelity, and Schwab.

The above is probably the least controversial advice in the world of personal finance. If I wanted to live up to my Lazy brand, I simply just point you to that above paragraph and end the article.

For decades and decades investing in the S&P 500 has been a safe long-term investment. I’m not going to argue that is going to change (at least not today). However, I think there’s more danger in the S&P 500 than there’s been in a long time.

It has become very focused on technology. The top 5 holdings are Apple, Microsoft, Amazon, Facebook, and Google. Over the last 6 months, these companies have done very well because we’ve been home using all their services. Other companies have not done as well. Without people driving or flying oil demand has dropped. On average, the S&P 500 has done well. Apple spent decades in a race to become the first trillion-dollar company… and in 2 years it was a 2 trillion-dollar company.

I love technology. However, it looks like the tech bubble of 2001 to me. It’s very different because there are real profits from these companies, but the growth of already huge companies is unusual and in my opinion, unsustainable.

What about the Wilshire 5000

You may think that the Wilshire 5000, with thousands of companies, would be better diversified. It is, but only barely. If you were to invest in Vanguard’s ETF that mirrors it (Symbol: VTI), you would see that the top 5 holdings are the same as the S&P 500. I don’t see the specific holding percentages, but the top 10 stocks comprise 23.90% of the index. I think it’s reasonable to presume that the top 5 are about 13%*.

Essentially you have a similar problem with the big companies at the top and them all being large technology companies. These large companies tend to move the same way. It’s great (for their bottom line) if there’s a pandemic and everyone needs to use them for basic needs. It’s bad news if the government follows through on their threats to regulate them.

I’m not saying that you should remove tech risk from your portfolio, but it is something that you should at least consider. If you decide that is something you want to do, then…

How to Remove Tech Risk from your Portfolio

One of my resolutions at the beginning of 2020 was to reduce my stock market risk. We had just had a great decade of growth and I’m at the point in life where it is more important to me to be defensive.

I explained that I sold off 40% of my VTI stock and bought iShare’s high dividend ETF (Symbol: HDV). HDV has a bunch of boring companies that pay consistently high dividends. You won’t find Google in it, but you will find AT&T, Exxon, Johnson & Johnson, and Coca-cola. It currently pays a strong yield of over 4%.

You’ll find all of the HDV companies in the VTI that I sold off. However, because there’s a larger concentration of health care, energy, communication, and consumer staples the combination of a VTI/HDV split is more balanced.

How is this plan working?

I have to be honest with you. It’s been a roller coaster. As I mentioned in the beginning, oil has not done well during the pandemic. Oil companies tend to pay high dividends. The nature of this pandemic didn’t work in the favor of HDV vs. the tech-heavy VTI.

However, in the last week or so, people have started to sell off technology stocks. They seem to agree that it is a bubble that has grown too fast. That’s brought VTI down 6-7%. Meanwhile, HDV was only down a little bit. This is exactly what I wanted my HDV holdings to do. When there’s a big tech sell-off HDV holds most of its value.

There are still a lot of companies that haven’t recovered from the COVID shutdown. I like to think that we’ll get a vaccine and things will return to normal within the next year. (I don’t want to think about it taking longer, but from an investing perspective that wouldn’t change my mind.) When that happens, many companies should start to recover and HDV should outpace the market.

Other Ways to Remove Tech Risk from your Portfolio

There are countless other ways to remove tech risk from your portfolio. You could buy more bonds. You could hold cash. You could invest in real estate. You could invest in cousin Fred’s pinecone hairbrush company.

I settled on HDV because it is a US-based stock market index. The money that I allocated to investing in US companies is still the same. That means that I don’t have to call up cousin Fred and tell him that his funding for his hairbrushes has gone away. I also like HDV’s high dividend income even if I’m reinvesting it now. Maybe in the future, I’ll live off of those dividends.

It’s Back to School Day!

September 8, 2020 by Lazy Man 1 Comment

I hope you had the Labor Day weekend possible. As usual, we have to grade everything on a 2020 curve.

Today is the first day of school. Every parent should be singing along with the Staples commercial below:

Unfortunately, there are only a few parents able to celebrate. It is with a lot of guilt that I write that we are dropping them off at the school and leaving. Think of how strange that sentence is. I’ll save (most) of my comments on the United States “leadership” for other articles, but it didn’t have to be this way. It’s safe to say that America was terrible with its COVID response.

We have a few reasons to be more confident about sending kids to than most people. Our area of Rhode Island has done well in keeping COVID numbers low. The kids are at a private school with small class sizes and a sizeable campus for outside classes. The children will also be grouped in pods with limited interaction with other students. I think it works better with our 1st and 2nd graders who can have one main teacher for most subjects. Finally, my wife worked the local pandemic response and feels that it is safe. She’s not the risk-taker, I am.

This puts me in a bit of a unique position. For the first time in a very long time, I can focus more on work. Or at least I think I can. If this morning is any kind of indication of things to come, I’m going to be putting out endless fires like my cable modem being broken, or preparing dozens of documents for our condo sale.

Hopefully, these things will settle down and I will get back to some kind of normal writing schedule. I know the updates here have been sparse. I have a lot of ideas to write about. There are many interesting things going on with investing and personal finance in general with COVID. With the above condo sale I mentioned, I’ll write about doing a 1031 exchange.

While this is more of an informational update, I want to leave you with something interesting on the personal finance side.

The kids are getting laptops from the school this year. They are older Apple laptops (Model: A1465) that seem to available online refurbished for around $600. That’s perfect for what my young kids need in case there’s a switch back to distance learning. The school has an insurance policy that covers everything. It’s $100 to buy and $100 if you need to use it.

If the cost of a replacement is $600, I think we’ll risk it. However, I haven’t been able to get in contact with the school’s business manager to find out what the true cost would be. Sometimes schools have different programs and include bulk discounts or extra charges for free refurbishing.

I think it’s interesting that the school went forward with this insurance without informing people of the value of what they were really insuring. I’m also wondering if I’m the only one questioning it or if everyone else just wrote the check?

If the cost of a replacement is $600 would you buy the insurance? Let me know in the comments. (We’ll be buying a protective case and keyboard cover to give us minor scratch & dent protection.)

The Financially Independent Baby