Investing Archives - Lazy Man and Money

We’ve Stopped Our Retirement Contributions. Here’s Why.

December 17, 2020 by Lazy Man 6 Comments

Today’s update is going to be very quick. We’ve got a storm, so the kids are home from school. My wife has 4.2 zillion Zoom meetings and I have a lot of snow shoveling to do. We haven’t had a storm in a few years, so finally the kids are old enough to pick up a shovel and help a bit too.

It was back in middle of January this year that I asked, Is it okay NOT to save for retirement. Some stuff happened since then*, and now it’s time to announce that we’ve decided not to save for retirement… at least for the next 6-7 months.

My wife won’t add funds to her government TSP plan (like a 401k). I won’t add funds to my solo 401k. We’ll still max out our Roth IRAs, but that is only because we can withdraw those contributions at any time without penalty.

Why the move now?

A lot of it has to do with the way the stock market has gone this year. I’m not referring to the drop in March. Back in January, I had felt like our retirement accounts were getting too high in comparison to the liquid cash we had on hand. It wasn’t like we were each 401k millionaires with 30 cents to our name, but it was lopsided nonetheless.

And here we are in December. I look at our retirement accounts and they are up 27% for the year.

We do have more liquid cash than we did at the start of the year due to less travel, grooming, and eating out. At the end of the day that 27% gain moves the needle even more past the point where I was questioning it before.

There are two other things weighing on the decision:

More liquid cash now means my wife can choose to retire when she wants to. In some ways she can with a great pension already vested. There are some golden handcuff issues to consider. Also, sometimes she seems to be on the fence on whether she wants to retire or not. In any case, having more cash on hand makes that easier.
If we invest some of this money in dividend stocks outside of retirement, we may end up paying fewer taxes down the line. If we take money out of a 401k plan we’ll have to pay taxes at our regular income tax rate. With my wife’s pension, that income tax rate may be fairly high. Well, it wouldn’t be too high, but it would be much higher than what qualified dividends get taxed at. Since our Roth IRAs are not taxed, we can pull out that money without considering tax rates.

There’s more detail in the original article that I linked to above. That’s about all I can do for today.

* Understatement of the year, right?!?!

The Three Tinas of COVID

November 19, 2020 by Lazy Man 3 Comments

How many Tinas do you have in your life? I have a couple in real life, but I hadn’t had much interaction with them due to COVID-19. Instead, they’ve been replaced by three new Tinas. Two, I will briefly mention, but the third Tina is what we are all here to focus on today.

Giratina

Giratina is one of almost a thousand Pokemon. The kids love Pokemon. We recently watched a movie starting this character. It’s one of the more important Pokemon in their Pokemon Go games.

Each Pokemon has its own brief description and fittingly, Giratina’s is, “This Pokémon is said to live in a world on the reverse side of ours, where common knowledge is distorted and strange.”

Tina Rex

Sometime during COVID (no one knows the timing for sure because time ceased to exist), Cartoon Network inked a deal to show one million episodes of The Amazing World of Gumball. That last fact is probably not true, but it would seem true if you had kids who were a fan of the network as they grew out of Nickelodeon, PBS, and Disney.

Tina Rex, a Tyrannosaurus Rex, is a side character in the show. She’s the school’s bully.

You didn’t come here to read about cartoon Tinas. You (hopefully) didn’t even come here to read about bullying or living in a world where common knowledge is distorted and strange. We’ve got enough of that in 2020, right?

Maybe you’ll be more interested in my investing friend, TINA:

There Is No Alternative

While “There Is No Alternative” can be used in many different contexts, it’s often been used in the investing markets.

Loosely, it means that one has to deal with a sub-optimal asset allocation of investing because other investments aren’t very viable or unappealing. For example, putting money in a savings bank for a number of years hasn’t paid very much interest. Many 2-year Certificate of Deposit rates earn about 0.75%. That’s far less than the typical annual inflation.

Interest rates in bonds are down too. My go-to bond fund is the Vanguard ETF (BND). It’s paying a 1.16% SEC yield. I don’t completely understand the bond markets, but from what I do understand it seems like a very bad time for them as well.

You can look at alternative investments. Gold is up 27% this year. It’s close or at its all-time highs. Bitcoin is also close or at all-time highs. Real estate may be an option, but buying physical houses is competitive with all-time low mortgage rates. REITs (Real Estate Investment Trusts) may be better, but I’m worried about the long-term effect of the lockdown. It’s not an easy time to be asking people or businesses to pay their rent on time.

You could invest in commodities. However, earlier this year the value of oil went negative. It cost more to store oil than get someone to buy it from you to use it. It’s still a messy situation and will probably continue to be one until travel picks up.

That leaves stocks. The S&P 500 is hitting new highs. Markets internationally are doing well too. Everything almost seems to be at highs. There are some stocks that are still in difficult shape. For example, airlines and cruise ships are notably not doing well. However, they aren’t doing as bad as they used to be. Many have anticipated travel to ramp up around the middle of 2021 with better weather, vaccines, and leaders looking to take charge.

As I look at my portfolio, I see a true TINA situation. I have investment games of 20% this year, which has been compounding on investment games from the previous 10 years. I want to be more conservative because these markets scare me. However, it’s hard for me to go to investments with so little upside.

I look at the markets like it’s a Magic Eye poster waiting for the perfect answer to appear. The closest I’ve come are the solutions in my recent article about income investing. I’ve been steadily moving more investments more to dividend funds. For now, that’s about the best I can do to feel a little safer. Other people may find paying off their mortgages to produce a better return. A rational person would tell me to stop looking at the markets and my portfolio and do something to bring in more money. (So far efforts to bring in more money haven’t worked out very well.)

Is anyone else looking at their investments and thinking, “Where do we go from here?”

P.S. I should have mentioned this TINA I love, but it didn’t fit with the article.

Should I Put My Investment Property in an LLC?

November 5, 2020 by Lazy Man 5 Comments

That’s a question I asked myself years ago. I wish I was wise enough to answer it…

… NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO!!!

Or as Al Bundy from Married… with Children once said, “Run hard, run now, run silent, run deep, run like Mexican water through a first-time tourist, but the key word here is ‘run!'”

I could go on about how I feel, and I will, but before I go any further I need to pause and stress something. Much of this is an account of my situation and how I personally feel. Your situation may be different… and your answer may be different. Perhaps you’ll be smarter than I was and get professional advice before jumping in.* In any case, I wish this was one of the 1.31 million personal finance articles I’ve read over the last 15 years or so.

I was going to suggest that no one should put their investment property in an LLC, but I talked with a few people and it seems like there may be some valid reasons to do it. Let’s cover a few of those reasons first.

Why Put Your Investment Properties in an LLC?

My wife and I were looking to simplify our finances. Whenever we needed money for repairs it would come from our checking account or a credit card. Since I love to rack up credit card bonuses, I put the expenses on a few different cards. We’re not the most organized people when it comes to having receipts. Come tax time, it’s a nightmare to put together all the numbers.

It turns out that organizing your finances is NOT a good reason to put your investment properties in an LLC. It can work well for internet publishing like Lazy Man and Money, but real estate is unique. I’ll explain why in the next section.

One reason why people may put investment properties into an LLC is that it can afford some legal protection in the event of a lawsuit. What kind of lawsuit? I’m not sure, but I’ve read that it can be someone visiting the property falls over a deck railing and gets injured. (Presumably, if it is someone living at the property, they have their own insurance and you have landlord insurance.) Because this involves lawyers and specifics of the law, I’m going to defer to your legal counsel to help you with how this can work. The people I know simply get umbrella insurance. One more thing that I’m looking into is protection from liability claims.

While I like legal protection and insurance as much as the next person, I have a limited budget for it. Umbrella insurance is fairly cheap and that’s about where my budget is.

Another reason to put investment properties in an LLC is that you can give some of it away in pieces. Maybe somewhere down the line, we’ll give the properties to our kids. I think we could give away a little at a time, so they wouldn’t have to deal with a big estate tax bill. That’s something that we’d have to tackle with our financial advisor(s). Once against see the “*” citation below. For now, we’re not interested in this. Our 6-year-old lacks the maturity to manage real estate… and probably will for at least the foreseeable future.

Finally, if you are investing in some commercial properties it may be easier if you are a corporation. (We’re not interested in this.)

Why Not to Put Your Investment Properties in an LLC?

I never figured there would be a negative to putting real estate in an LLC. Lazy Man and Money essentially works the same if it is in an LLC or not. My earnings are the same. My hosting costs are the same. I have two additional costs. At tax time, I have to pay more to the tax preparer. I also have to pay the state filing fee. I have a lawyer who automates most of this (at additional cost) and it’s about $1000 a year more than when it was a sole proprietorship. That’s not insignificant, but I’ve learned to live with it.

Real estate investing is different than internet publishing. It often depends on lenders and banks. Banks and lenders complicate things. For example, we’re in the middle of buying a new property, the first since we put it in the LLC, and it is a mess. I couldn’t work with the typical bank lenders because I need to use the “corporate division.” That process is a lot more difficult. It’s harder to track down the lender. They want incorporation documents. It’s a lot more hoops to jump through (which is significant because getting a mortgage is already a hoop-jumping intensive process.)

The first surprise was when we got our lending term sheet. Mortgage rates for 15-year-fixed loans can be as low as 2% now. We know that as investors we going to have to pay an extra 0.75% more. That’s just how it works with investing. What we didn’t know is that the LLC triggering the corporate loan adds another 1%. The rate jumps up to 4%. It’s still decent, but the “LLC tax” that doesn’t give us any real benefit is starting to get costly. In addition to that higher rate, the loan is not fixed. It readjusts every 5 years. What does the lending market look like in 5 or 10 years? I don’t know, maybe the rate will be 6% or 8%. We are very fortunate that we aren’t borrowing much money and can hopefully pay it down quickly.

The LLC nightmare gets worse. We registered our LLC in Massachusetts even though we live in Rhode Island. That may sound odd, but all the properties are located there and my lawyer practices there. We’re trying to manage properties closer to Rhode Island, so we are selling them off there and buying here when it makes sense. Our Rhode Island bank at the last minute decided that we need to register with Rhode Island which is an additional annual filing fee. It also almost caused the deal to collapse.

Finally, it’s looking like we’ll have to pay our tax preparer to file in two states now doubling the tax preparation fees. The annual fees to states and tax preparation are going to be around $2000, I believe. We used to pay a nominal fee when it was included as part of our normal taxes.

Some people may say that $2000 isn’t a big deal, but I’m a person who celebrates finding chicken at $0.69 a pound. I save up for years to buy a $1300 television. It’s significant especially with the potential of more expensive loan terms.

Lesson learned: a real estate LLC can cost you.

* Whenever I try to get professional advice it doesn’t go well. I’ve spent the last month trying to get a CPA who can help with some advanced future tax-planning questions. Most seem to want to manage all your finances at a cost of hundreds of dollars a month. I had a few ask about my investable assets because taking over that aspect is part of the core of what they do. Maybe I just haven’t found the right people.

Further reading: Bigger Pockets – Why You Should Skip the LLC When You’re House Hacking

Income Investing: How to Generate Cash Now

October 16, 2020 by Lazy Man 5 Comments

If you are looking to make income by investing your money you are not alone. For the 73rd straight year, our savings account is earning an interest rate of zero. Yours are probably doing the same. The Federal Reserve has dropped the Federal Funds Rate to 0.25%, which in layman terms means that you aren’t getting paid much interest in your savings accounts. Fortunately, this also means that some of your loans may be charging less interest.

Over the last couple of weeks, I’ve been talking a good friend of mine who is a little older than me… kind of like a big sister. We think alike on many things. In some ways it is almost like talking to myself, but a “me” with ten years of more life experience.

Lately, we’ve been focusing on investments to create income. We’re both in a fortunate situation where income is steady despite COVID-19. Since we aren’t traveling, going to restaurants, or buying much gas for our cars our spending is way down. That leaves us with a little more money to invest than we’d normally have.

At the same time, the stock market continues to be near new highs. I’m worried that stocks are priced too high, especially when corporate profits are likely to be so low. Many, many people seem to be worried about that. For this reason, I’m looking for investments that tend to be safer. I’ll return to my usual growth investing when the pricing is better. In the meantime, I’ll continue to stay invested, but stay conservative.

Many people moving into their 30s and 40s find that they have more responsibilities (i.e. children). It makes sense to have investments that generate income. That income can be used to supplement your salary now or to help phase out your job in the future.

If you could generate $50,000 in cash from investments, you could probably retire, right? Of course, your answer depends on your spending, assumes no inflation, and has a bunch of other messy details.

So in this world of (close-to) zero interest rates, how do you generate income?

Income Investing: How to Generate Cash Now?

This is a refresh of an article from 2015. While I have been talking with my big sister about this topic again, I also participated in this this Twitter conversation with Financial Pilgrimage. Specifically, he asked, “Where can you invest your money passively these days for a 3% return or greater besides stocks?”

I don’t want to discount stocks because they are a viable option… perhaps the most viable option. Let’s start there and branch out.

Dividend Stocks for Income

For most of my investing life, I never looked at dividends. I forgot that people once bought stocks to create income. Companies would pay out profits to shareholders and shareholders could use that money, to… well… buy stuff they need. It was a good little system. I speak of it in the past tense because many companies stopped paying dividends and instead kept the money to grow profits and raise their stock prices. In reality, dividend investing didn’t go away, I was just too wrapped up in tech stocks (which rarely pay dividends) and index investing (set it and forget it) philosophies.

In 2020, I’ve focused more on dividends. I like the idea of companies paying me money even if the stock market is crashing. I’ve mentioned that I’m managing stock market risk and removing tech risk from my portfolio with dividends. Specifically, I’m buying iShare’s high dividend ETF (Symbol: HDV). It has many big companies that you’ve heard of. It also pays a dividend of more than 4%.

Another thing that I like about dividends is that they are very tax efficient. Qualified dividends can be taxed at 0% at reasonably high-income brackets (~$75,000 for joint filers). If you make less than $400,000 qualified dividends are taxed at 15% a year. (This is overly simplistic for the scope of this article. Please see your tax professional for more information and advice.)

Unfortunately, due to COVID-19, corporate profits have dropped. Some companies can no longer afford to pay the same dividends they did in the past. That’s why I like the ETF approach. It spreads that risk over a lot of companies.

If you want to take a more hands-on approach for potentially bigger gains, you could look at making passive income with dividend kings. If you prefer to get higher dividend gains without hours of research, I recommend Sure Dividend’s newsletter. 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.

Find a Strategic Investment Balance

The credit for this idea goes to my aforementioned big sister. She had mentioned that she was looking at the Vanguard LifeStrategy Income Fund (Symbol: VASIX). It’s a conservative blend of 20% stocks and 80% bonds. Historically, it doesn’t go up or down a lot. Since it was created in 1994 it has had annual returns of 6.26%. It’s 1-yr, 3-yr, 5-yr, and 10-yr returns are all between 4.95% and 6.82%, which gives you an idea of how consistent it is. During the big stock market crash of 2008, it lost about 15% of its value. That’s very good when traditional stock investments lost 50% of their value.

This could be an option to park some medium-term money that you may use in 2-4 years. I’m interested in this because it achieves my goal of staying invested, while still providing some protection in the case of a big market crash.

Income from Real Estate Investment Trusts (REITS)

This is really a special case of the dividend stocks above. However, the profits are generated by real estate – which can move in a very different direction than the rest of the stock market. REITS are traded as stocks and have to pay 90% of its taxable income as dividends to shareholders. The end result is that you can earn 4-7% in dividends. However, like a stock, their value can go up and down.

My favorite way to buy REITS is with Vanguard Real Estate ETF (Symbol: VNQ). It’s easy one-stop shopping with a company, Vanguard, that I trust.

Getting Income from P2P Loans

In the past, I’ve recommended P2P loans. They haven’t worked out as well as I have expected. A few days ago the top P2P loan company, Lending Club, announced that it closing down its lending platform.

I had been steadily pulling my money out of Prosper and Lending Club for the past few years. Prosper is still around and it may be a good fit for getting a passive 3%+ return on your money.

Skip Income Investing: Pay Down Your Mortgage Instead

One of the readers of the Twitter thread mentioned an obvious way of getting 3% for many people… paying off a mortgage. That’s a guaranteed return on your money, which may be valuable to you.

I’ve been against this for years because I’ve always felt that I can make 8-10% by investing in the stock market. Over the long run that has worked out exactly as planned. However, his stock market feels different and I’m not sure what has happened in the past is going to continue for the next 10 years.

I’ve mentioned over the last few weeks that we are doing a 1031 exchange – selling one real estate property and buying another one. Because we formed a corporation, the bank is charging us a 4% interest rate. Not only that, but it readjusts every 5 years – it could be 7% or more in 2020. I didn’t know this when we went down the 1031 exchange path. Now, I’m much more interested in paying down this mortgage quickly.

The downside of paying down your mortgage is that you are effectively locking yourself into that 3% (or whatever your interest rate is) return for the long term. Also, in this case, you aren’t creating investment income. Instead, you are reducing debt, which, while different, can be effectively the same.

Get a High Interest Savings Account

Derek of Life and My Finances mentioned that Lake Michigan Credit Union has a 3% Max Checking account.

I didn’t like the requirements of direct deposit, 10 debit card purchases a month and 4 logins to their website. The direct deposit it a one-time change with your work, which hopefully isn’t too difficult. Derek mentioned that using services like Mint and Personal Capital count towards the logins. That leaves 10 debit card purchases a month. If you are still buying coffee shop or Starbucks each day, this may be easy.

For me, making the 10 debit card deposits would be difficult. I also know that I would forget or not be able to keep track of for several months of the year.

Final Thoughts on Income Investing

I think the best plan is to combine multiple of the above suggestions. A portfolio of 35% HDV, 35% VASIX, 10% VNQ should provide some long-term hopefully, safe gains. The remaining 20% of your money could be used to pay down a mortgage and invest in a high-interest savings account.

This wouldn’t survive a big market crash and still make 3%, however, it would probably not lose too much and put you in a position to make 5-6% most years.

This article was originally published on Mar 2, 2015 at 10:45

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.