Lazy Man and Money

Lazy Man’s Market Minute Update #1

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While every other blogger is writing year-end recaps, I’m taking a minute to do something new and different. I’m in the phase of my life where I typically make more from investing than I do from all my side and freelance gigs.

While it’s best to invest over time, there may be specific times when investing in one asset vs. another asset is better. The winning formula is to buy low and sell high.

Stock Market Outlook

Predicting the stock market accurately is impossible. However, it is possible to know when to buy/sell stocks based on when the markets are cheap or expensive. When the stock market is cheap, I buy stocks. When the stock market is expensive, I look for cheaper investments such as bonds or housing. It’s worked out well for me.

I determine if the markets are expensive or cheap by looking at the Shiller P/E. The Shiller P/E is an evaluation that I cover in more detail in the link in the previous paragraph. Since the mid-1990s, the Shiller P/E average has been around 26-28. It was a low of 15 in the crash of 2009 – a fantastic time to buy. The Shiller P/E reached a high of 44 in the dot-com boom – the best time to sell. Before the stock market’s drop this year, the metric was around the 37-38 range – a sign that it would be an excellent time to sell.

I would never sell all my stocks when the market is high. Instead, I adjust my asset allocation to be more conservative. I also focus more on “value” stocks like consumer staples that people need to buy no matter what.

Current Stock Market: Shiller P/E: 28 (Medium)

It’s a great time to stay the course. Nothing seems particularly cheap or expensive.

Housing Market Outlook

Several months ago, I detailed when to buy and sell real estate. The key is to use the NAHB/Wells Fargo Housing Market Index. It’s rated on a scale of 1 to 100. A rating of 1 means that the housing market is low, and a rating of 100 means it is high. When the HMI is low, it’s good to buy. When it is high, it’s a good time to sell.

The year started with an HMI of 83 (a strong indicator to sell).

Current Housing Market: HMI: 31 (Cheap)

This HMI number indicates it is a very good time to buy. However, keep in mind that interest rates are high. You may need to pay a lot now, and hope that you can refinance to a cheaper rate in the future. Also, real estate is particular to the property you are buying. You may be able to find a great value in an expensive market or a poor value in a cheap market.

Final Thoughts

These indicators shouldn’t be signs to make any rash financial decisions. They are important indicators for me, and I share them with the hope that they’ll be helpful to you.

Stocks vs. Real Estate

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Back in 2007, I covered an article in Money Magazine that was interesting to me – Stocks vs. Real Estate. It’s fifteen years later now, and I thought it was worth revisiting now that we sold an investment property. Now it’s time to invest that money in the stock market.

Before I get to that new stuff, let’s review what Money Magazine and 2007 Lazy Man thoughts were:

May’s Money Magazine tries to answer the Stocks vs. Real Estate question. I had thought that real estate would come out as the big winner. I know that real estate has been trendy of late, but I had it as the favorite due to the value of leverage.

Money Magazine declared stocks the winner, but I think they glossed over the leverage factor. For one, they took a two-year timeline for the real estate and deducted many one-time costs. That didn’t seem fair to me. So to the right, you’ll see my attempt at running the numbers in my spreadsheet.

For this example, I assume the investor has $40K to put to work. I assume a 10% (for better or worse) gain for stock picks. I also took a cue from my early physics classes and ignored friction – in this case; it’s the cost of buying stocks. The “Real Estate” column assumes the investor puts 20% down, allowing them to buy a $200K home and pays 10K in closing costs (closing costs from the article). The “Real Estate AC (after costs)” factors in a 6% sales commission (though I believe this can be less), paying off the mortgage, $3,600 in preparing the house for the sale (sourced from Money Magazine), plus the original 40K investment.

I’m not sure that my chart is accurate. I’ve edited it several times, realizing a couple of errors. However, each of the charts showed the same trend. Real estate seems to outperform in the short term, but at some point in the 25-30 year mark, the 10% return of stocks takes over the leverage of real estate. However, if one were to lock in real estate gains at year 8 (around $125K), the person could use the profits to buy three more $200K homes, getting more and more leverage. Leverage can be dangerous as a loss can spiral just as much in the negative direction. Nonetheless, it still makes me think that there are a lot of general gains in real estate.

If you plan to go this route, remember that it’s not a get-rich-quick scheme. In today’s real estate market, I believe you should be prepared to hold onto a home for a minimum of 6 years (while being prepared to hold for ten years). Trying to fix up and flip a home within a year opens you up to short-term price pressures and fixed costs. You should also be aware of other factors mentioned in the Money Magazine article apply. One important thing to remember is that a home is not a very diverse investment. Another is that real estate investing takes a lot of work while investing in stocks is relatively quick and easy.

That was the whole article. I miss the pithy 2007 style of blogging. For the most part, it seems to stand-up well today. Of course, it might be more challenging to buy a $200,000 home than it was back then.

With fifteen years of wisdom, I’d say I should have put more attention into the last few lines of that article.

  1. Investment property is NOT a diverse investment
    There are ways to make investing in real estate more diversified. You can buy a REIT, which trades like a stock. Or you can do crowdfunded real estate like Crowdstreet and Fundrise. Those weren’t around in 2007.

    We all know what happened in the next 12-24 after I wrote that in 2007. The market crashed, and the property I bought for around $275,000 suddenly became worth $175,000. It took years for it to recover. In 2012, we purchased another property for $95,000 and sold it for $200,000. We used that money and did a 1031 exchange into another property now worth $300,000.

    One condo lost nearly a hundred thousand in a few years. Another gained a couple hundred thousand in a decade. Those are extreme examples, but they are two of the properties we owned.

  2. Owning stocks is a LOT easier than managing a rental property
    About 97% of the time, managing a rental property is easy. It’s the other 3% that’s tough.

    The real estate approach is more difficult, but I feel that you have more control over the results. I’d like my kids to have the life skills to be able to fix up an old dump and flip it for profit. I never learned those skills, making being a landlord more difficult. My friend, Carl at 1500days.com has executed some excellent live-in home flipping profits. It’s amazing to take one of your biggest expenses (your home) and turn it into a profit.

Let’s take the case of the property we just sold. We sold the property for $385,000 – close to the Zillow Zestimate. The Zillow Zestimate said that we should be able to get $2375/mo. in rent. We would need to do some updates, but that’s a reasonable number. That’s an annual income number of $28,500. Let’s assume that there was no mortgage on the property. All we have for expenses are property tax, insurance, condo fee, and maintenance. If it wasn’t a condo the condo fee and maintenance would be combined. All those numbers add up very close to $1,000 – so we’ll keep things simple and say that expenses are $12,000 a year.

The profit on a $385,000 investment is $16,500 or about 4.2%. That’s not a great return. It’s better than I can get with most dividend stocks, but the stock market usually grows more than 4.2%, and I don’t need to be a landlord. While I never ran these numbers specifically when I sold, I knew I wasn’t getting great value. Our situation was a little more complicated because we still had a mortgage, so our monthly gain was building the equity towards owning 100% of that $385,000 property.

There are likely better properties out there that would return more. Perhaps there’s a property that’s $250,000 and rents for $2,000, making the numbers more favorable for investors.

I think it’s hard (maybe impossible) to answer the stocks vs. real estate question because the specific details matter. If you do real estate poorly (pay too much, can’t maintain the property, pick lousy tenants, etc.), you would be better off with some index funds. If you can do real estate right (live-in flip, buy at a low market, have a tremendous price-to-rent ratio, etc.), it will probably beat the stock market. And it should, especially if you are putting in the extra work.

I’m left with the same conclusion that I had before. It seems that real estate is great if you are young and can put in the work. As you get older, maybe it’s best to cash out the equity and let the passive income from the stock market work its magic.

(Original version of this article published on: Apr 19, 2007 at 05:55)

The Three Tinas of COVID

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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

Tina

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.

A Brief History of 14 Years of Lazy Man and Money

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Today is the 14th anniversary of Lazy Man and Money. I’m 44 years old, so next year I will have spent 1/3rd of my life as “Lazy Man.” (Those who have known me through the other 2/3rds of my life may claim that it’s closer to 100%). For now, I’ll have to settle for my “inverse pi-anniversary” because 44/14 is a close approximation of pi. (That got way too nerdy. I’ll dial it down.)

There are only a few single-author money bloggers that have consistently been around longer. The only one I could think of was Jonathan of My Money Blog. There were several others that have taken a hiatus or sold their blog and came back under a different brand.

Consistent blogging is difficult for me these days. My priority is to homeschool the two kids (ages 6 and 7), while my military pharmacist wife is virtually-deployed* to help with the coronavirus. I don’t have much energy after putting the kids to bed. Trust me, I still have many, many money stories to tell. Hopefully, if I continue to stay healthy, you can look forward to being bored by them for decades.

The Beginning of Lazy Man and Money and FIRE

It might be hard for many people to understand what the blogging landscape was 14 years ago. Twitter had launched just a couple of months before so no one had heard of it. Facebook was only 2 years old. Lazy Man’s hockey stick growth curve has to be coming any day now, right?

With that historical perspective in mind, I thought it might be interesting to take a look at my first blog post, “Welcome”.

Here’s what it looked like in November 2006 from the Archive.org’s Wayback Machine:

In hindsight my first sentence of more than 2,558 blog posts (and 2 million words) may have been my best:

“This blog is about a man, a lazy man, and his quest to not only retire early, but to retire rich enough to live a comfortable lifestyle.”

I’m not going to say that I invented FIRE (I didn’t). But I specifically set the FIRE goal about a decade before most personal finance bloggers started categorizing themselves that way. The last half of that sentence translates roughly to what those FIRE bloggers call fatFire.

These concepts are the same by any name. They were here before the Great Recession of 2009 and they’ll be here after coronavirus.

I mention this because I ran a Twitter poll awhile back and most people didn’t consider me a FIRE blogger. I wasn’t sure whether I should be insulted or flattered. The truth is that I’m an overall money blogger. I’ve always tried to be a generalist. I’m not the best frugal, investing, real estate, military, consumer advocate, family blogger, but I cover all those topics.

You can think of me as the blogging equivalent of a Susan Lucci and a Jamie Moyer child, but not as talented.

A History of FIRE

Many people have asked me how I became interested in FIRE and why I created Lazy Man and Money. It was a confluence of four factors, in order from most to least importance:

  1. My military wife’s pension

    We were still dating when I created Lazy Man and Money, but she had mentioned that she could retire with 20 years of service – at age 43. Since she was obviously marriage material, I had to find a way to bridge the gap of 22 years from the typical age 65 retirement.

  2. The Dot-Com Bubble of 2000

    I graduated with my computer science degree in 1998. After a year at a century-old insurance company, I went to a big dot-com. I was a rising star, quickly becoming a manager of their search engine technology. The start of my career there until the end was only a couple of years. The Dot-Com Bubble lead to the entire technology team getting laid off. It was supposed to happen on September 11, 2001, but the company wisely rescheduled the layoffs.

    Like many software engineers at the time, I didn’t find steady employment until 2004, almost exactly at the time that I met my wife.

    I had come very close to financial rock bottom, that I knew I never wanted to be there again.

  3. Outsourcing of the mid-2000s

    In the wake of the Dot-Com Bubble, many companies realized that they could reduce their risk by developing software overseas. The cost of living is much lower, so oversea software engineers would work for less money than American ones. The movement picked up steam from 2003-2012. I have lost track after that since Big Tech has consolidated to several big companies.

    I got very worried that the economics of developing software in the United States simply wouldn’t make sense going forward. At this time, the iPhone wasn’t invented yet. And while its software is still developed in the US, the hardware is largely outsourced to China.

  4. Actual Laziness

    Staying competitive in the software engineering world is difficult. In many places, you have to work a 12 hour day and then go home and learn all the breakthroughs that other coders have made.

    Facebook flew me to their headquarters in 2006 and we mutually agreed it was a terrible fit. Like NFL running backs, I was on the wrong side of 30 (by months) and aged out of the Silicon Valley programmer club. I wanted to go home to my wife instead of living on campus.

    5. Unexpected Bonus 5th Factor:

  5. Starting a Family

    There are very few organizations that zero flexibility. You have to do what is required no matter what. One of them is the United States’ military. Another is being a parent. As a military spouse** with children (especially young ones), I have the flexibility of an icicle.

    Because I had a long-term view of our money management, we have some flexibility.

A 14-Year Financial Journey

With the image from Archive.org above you can see my goals (on the right side). I wanted to make around $1700/mo. in alternative income. I had made $23.

It was a start, right?

In my last passive income report I made around $7,500*** for the month. Those “***” are important as it isn’t liquid money we can spend right away. However, we can get to a large portion if necessary.

In that image from Archive.org, you can see that my net worth was less than 200K. My goal was to have a net worth of $3-4 million. What is missing from that is a timeline. I could lack through all my old posts to know for sure, but I think it meant for now when I hoped we’d retire early.

That projection included my wife’s net worth because $3.5M with the rule of 4% (the standard at the time) would allow $140,000 of spending a year. I wouldn’t need that much if I was just trying to support myself.

If you fast forward to today, my wife’s military pension is worth around 2.3M. Our net worth outside of that is less, but not much less. Most of it is tied up in retirement accounts and real estate investments. We’re expecting that all of this will bring in $200,000 a year in income in retirement.

Is it fair to say that we have achieved our goal? I don’t know. It’s not like we have millions in index funds actively throwing off dividends that we can spend. As we’ve learned over the last couple of months, we never know what challenge lies just around the corner. On the other hand, it’s not like our hard work is invested in Beanie Babies – it’s real money.

Nowadays, I try not to look at money as a destination. This article’s goal is to highlight that money is a journey. And in the words of my sons’ favorite TV show, “The journey continues…”

Final Thoughts

You may read financial magazines that project how saving and investing works in the long run. We’ve not only experienced it first-hand, but it’s documented here for all to see. Fourteen years can feel like a long time when you trying to reach financial freedom. However, looking back on it, the time flashes by in the blink of an eye.


* “Virtual deployment” means my wife is still working from home, but it’s 12-hours a day, 7 days a week for the next month.

** Happy Military Spouse Day! I’m double-dipping with two special days at the same time.

*** This number has a lot of qualifications attached to it. There’s a whole FAQ about it. The bottom line is that it’s the number that makes the most sense.

How I’m Managing Stock Market Risk in 2020

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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:

  1. 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.

  2. 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).

  3. 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.