Bonds Archives - Lazy Man and Money

I hope your 2020 is off to a good start. Are you still keeping up with those New Years resolutions? I hope so! If not, it’s never too late. I didn’t make my 2019 resolutions until late February.

So far my 2020 is going well, especially in terms of investment gains in the stock market. The market seems to be continuing making big gains like it did in 2019. I never thought that the S&P 500 would return nearly 30% after an exceptional 9 year bull run.

I’ve been expecting the market to run out of steam for a few years now. Every time I think it might go south, it gets propped up by something. In 2019, I think it was the tax cuts that allowed businesses to buy back their shares. That’s great for investors, but bad for the national debt and United States infrastructure that requires tax money.

I’ve always been a big believer in aggressive stock market investing. I would invest 100% in stocks, which most of it being in technology. That’s because I’ve been young with a timeline of 50 years. So far it’s been a winning forumla. However, I’m nearly 15 years older than when I started my blog. My life expectancy may give me closer to 40 years of time now.

That’s still a lot of time to make up for any reasonable stock market crash. However, I find myself looking to reduce stock market risk. I think it’s just a natural reaction when the stock market feels like a bubble. It’s rare for a bull market to continue for 10 years. It’s also rare for nearly 30% returns. The combination feels like it must be unprecedented.

Of course, I’ve been feeling like there’s a bubble for some time. Back in 2017, I felt that it may be worth trying to the market using historic Shiller price/earnings numbers. Of course, I didn’t pull my money out of the market. I just slowly started to sell stocks and buy bonds. It was around 3% back then. By 2019 I had about 6% in bonds. These were minor changes, but it made me feel better that if the market dropped 10% quickly, I could deploy some of the money in bonds.

Managing Stock Market Risk in 2020

The big gains of 2019 made me fundamentally review how we’re investing. Our net worth has quadrupled over the decade – almost all through stock market and real estate gains. I learned long ago, that when I was up big at the craps table, it’s best to pocket some profits and play with the house’s money. That’s a little of how I’m approaching 2020.

The biggest thing I’m doing is STAYING INVESTED. Some people would sell, but I don’t believe in that. There’s a case to hold cash, but I’m still an aggressive investor with a long timeline. Holding cash doesn’t feel like the right thing for me.

Cue…

Asset Allocations for 2020

Before I get into my new ideas for asset allocation, I think it’s best to review my previous allocation and reasoning behind it:

Old “Rough” Allocation

I have to add “rough” in quotes, because I didn’t adhere to a strong philosophy on it. I know I should have a strict allocation, but I don’t. I defer to the idea that I’m young and being invested in (mostly) diversified stocks is more important than the actual numbers.

I roughly had a 50/50 mix of international stocks (30% emerging, 20% developed) and US stocks – almost all in VTI, a Wilshire 5000 index that aims to cover the “total” US stock market.

Some people believe that investing in US stocks is as diversified as investing in foreign stocks. The theory is that companies like Coca Cola and Google operate internationally. It’s a fine theory, but I don’t believe it… foreign stock indexes often perform very different from the US ones. If someone shows me that they highly correlated, it will get my attention. Until then, I will continue to invest internationally, because I believe investing in dozens of countries over multiple continents is more diversified than invested in one country in one continent.

In that 50/50 mix, I had very few bonds and a small REIT (Real Estate Investment Trust) allocation. It was likely less than 2% of my portofolio combined. In hindsight, their performance, good or bad, might be brushed as a round-off error.

New 2020 Allocation

As I stated before, my goal is to stay invested. I always want to get a return on my money. The difficulty is always how to stay invested while feeling that the market is far, far overpriced?”

I took a few steps:

The first thing I did is sell 40% of my VTI (Vanguard’s total stock market index). I used that money to buy HDV. HDV is an iShares ETF which focuses on high dividend stocks. It returned a 3%+ yield last year. It’s not very diversified, but it focuses on very boring defensive industries that pay high dividends.
It’s very likely that this fund will pay 3% dividends even in a (reasonable) crash. That’s much better than what saving accounts pay*. Also, it’s very close to the 4% rule that (loosely) states that you can retire if 4% of your nest egg covers your expenses.
VTI and HDV both focus on the US stock market, so a crash would impact them. However, HDV’s boring defensive industries probably won’t drop too much as people would buy the stocks for income.
Sold some international stocks
I love international stocks, but I wanted to cut down on some of that risk. I ended up selling about 5% of my VWO (emerging markets) and VEU (companies outside of the US).
Bought some Bonds and Real Estate
The small amount of bonds I’ve added over the last couple of years wasn’t very significant in my portfolio. I like to think that they were, but it was mostly for my peace of mind.
I used the sale of the foreign stocks to buy bonds (ticker:BND) and real estate (ticker:VNQ). Bonds and real estate may crash as well, but they produce strong dividend income. In a (reasonable) stock market crash the value they would lose would be minimal. I ended up doubling both my bonds and real estate allocation.

I don’t know how it’s going to go. I might be leaving some money on the table by not being fully invested in the S&P 500. I really don’t mind, because I’m not trying to chase the best performance.

Now I’d like to hear from you. Are you managing risk with the stock market being high? If so, how are you doing it?

* Obligatory mention that banks pay guaranteed rates and dividend ETFs do not. However, I believe they will as they have always done.

For the 73rd straight year, our savings account is earning an interest rate of zero. Okay, it isn’t exactly 73 years and it some miniscule amount above zero, but you know what I mean.

Over the last few 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, she’s focusing on investments on generate cash. It never occurred to me to ask why, because it just seems like a smart idea in general. As you move from your 20s to 30s and 40s, you have more responsibility (i.e. children) and it makes sense to have some investments that generate income. It can be used to supplement your salary now or to help phase out your job in the future.

If you take a minute to think about it, if you could generate $50,000 in cash from investments, you could probably retire, right? OF course your answer depends on how much you spend, assumes no inflation and a bunch of other messy details. Nonetheless, you get the idea.

So in this world of (close-to) zero interest rates, how do you generate cash? Here’s what I came up with:

Dividend Paying Stocks

Sometimes I forget that people once bought stocks to generate cash. 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.

Growing profits isn’t a bad thing and I own a number of stocks that pay no dividends. Also, it was an exaggeration to say that stocks don’t pay dividends today. Many do and some people (such as My Million Journey to Millions, Dividend Growth Investor, and The Dividend Guy) are buying them with the very idea of generating cash.

Personally, I think this is where investing with Motif can save you money. You could create a portfolio of up to 30 high-dividend stocks for one commission of $10. They’ll even give you up to $150 to get started.

You can also just buy the SPDR S&P Dividend ETF (Ticker:SDY) or Vanguard’s Dividend Appreciation ETF (Ticker: VIG) if you don’t want to spend the time researching companies. (Though the blogs that I mention above have done a lot of the hard work for you.)

Real Estate Investment Trusts (REITS)

This is really a special case of the dividend stocks above. 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.

Lately my “big sis” has been loving these as part of her cash generating plan. I like to think that I talked her into them, but she does so much research it isn’t likely my mention played a significant role.

Bonds

I hope you find this a refreshing breath of honesty… I don’t know much about bonds. I won’t act like I do. I would just rely on Vanguard’s Total Bond Market ETF (Ticker: BND).

P2P Loans

Over the last 5 years, I’ve invested in 550 loans in Lending Club. My return is 7.01%. According to Lending Club statistics I’m doing below average as 8.5% is the norm.

What’s great about how Lending Club generates cash is that money is consistently being paid to you. I like to reinvest it into new loans, but I could easily just take the cash.

Some people are nervous about P2P Loans, but they’ve proven to me that they’ve got staying power. I think that as long as you don’t too carried away with it, Lending Club can play a good role in your cash generating portfolio.

CD Ladders

It’s good to have some money in safer investments. That’s why I would consider laddering some CDs to generate cash too. They aren’t generating great returns, but it’s the closest thing to a guaranteed return here.

Summing it all Up

I said it before, but I think if there’s a lot of value in creating a dividend Motif around the first three asset classes. Perhaps it could be 25% VIG, 25% VNQ (Vanguard’s REIT ETF), and 25% BND… and 25% some of the companies from the other blogs I mentioned. Yes, those stocks might be duplicates of what’s in VIG, but “big sis” says she likes to find some values and focus on a few companies that she likes.

Round out that portfolio with P2P investing and some CDs and you should have a fairly reliable stream of cash coming in.

Let’s pretend that I have a million dollars. I would put $700,000 if the Motif, $100,000 in CDs, and $200,000 in Lending Club. I am somewhat confident in that generating 4% in cash over time. That would be $40,000, which isn’t bad for a passive income to live on.