Lazy Man and Money

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 Instead, they’ve been replaced by three new Tinas.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.

Skip the Product, Buy the Investment

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I’m going to start this article with a couple of housekeeping notes. I hope all the father’s had a great day yesterday.

I know I did. My wife and kids took me to Gillette Stadium (home of the New England Patriots) where I could walk on the field and tour the locker room. It was great to walk on the field and think, “This is where the magic happens!” The biggest draw was the locker room tour. On Tom Brady’s locker there was a motivational “poem.” It said (paraphrased):

1. There are people who “+”
2. There are people who “-”
3. There are people who “X”
4. There are people who “÷”

Surround yourself with 1s and 3s. Ignore the 2s and 4s.

Unfortunately, cameras weren’t allowed in the locker room, so I couldn’t get a picture to give you the exact wording. I tried to find the source and closest I came was this Tweet by Jalen Rose:

The connection makes sense as they both went to University of Michigan with Rose leaving the school as Brady was entering it.

(If anyone can sleuth out the whole thing and post it in the comments, I’d love them forever.)

I have one more quick housekeeping note before we get on to the article. I hope to be writing a lot more in the coming weeks. Camp has started which translates to 2.5 hours more of kids’ care in the evening than I get during the school year. That’s a lot of potential productivity.

Buy the Investment, Not the Product

I was reading Joe from Retire By 40s article about thinking before you buy your first home. The main premise was that the house that you live in is a liability. The bigger the house the more the mortgage is going to be. That’s money that you aren’t going to be able invest. You also need to fill it with stuff. Utilities are also going to be higher for bigger houses in general.

That’s why I always say, “Don’t Buy Too Much House.”

However, Joe notes that real estate can be a great investment. After all that’s how Arnold Schwarzenegger made his first million dollars.

I came away thinking, “Buy just enough house to live in and invest the rest of money into an asset that someone else paying you for.”

iPod Nano, A Love Story

Allow me to illustrate the “Skip the Product, Buy the Investment” with the story of an iPod Nano. To borrow from Dickens, it is the best of examples and the worst of examples.

The iPod Nano came out in September of 2005. For $250, you carry a whopping 4GB of music in an extremely compact space. It was amazing!

You could have bought a share of Apple stock for $6.60 on September 2. While the stock went up a bit on the news, that month you could have bought around 38 shares of Apple stock instead of the iPod Nano (I’m rounding up a tiny fraction of a share, but let’s just attribute it to sales tax.) Today, 38 shares of Apple stock is worth $5548.

You could have made over $5000 if you were able to “think different.”

This is an extreme example, so let me balance it with a counter example. I bought the iPod Nano when it came out. A woman I was dating really wanted an iPod, but she grew up in a family without money. She’d been out of school for only a few years, but had a mortgage (with PMI) and some student loans. It didn’t really make sense for her to buy a Nano.

For Christmas, I surprised her with the iPod Nano and she was speechless. I luckily scored a better investment than buying Apple stock.

Today that woman is my wife. We’ll celebrate our 10 year anniversary next month.

College Funding: FAFSA, Financial Independence, and Real Estate

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I recently wrote that college planning is impossible (but that you should do it anyway). The impossibility comes from having a 2 and a (newly) 4 year old boy. It’s so far away, the best we can do is put aside a significant amount of money and adjust our plans over time.

One of the comments on that article said it best: The decision tree is enormous.

The College Funding Decision Tree

College may be free if some politicians have their way. College tuition could continue to climb at unreasonable rates forcing people to make hard-decisions about whether it’s worth it. Our children may get into some schools and not others. They could be public or private. They could be on a 3-year plan with AP credit and credits from our local college. They could be on a 5-year plan if they switch majors or find it too difficult. All this, and I’m not acknowledging community college or trade schools.

Anything and everything is in play, leading the cost to be literally as low as $0 to as high as $250,000. It seems to make sense to budget for somewhere around $125,000 for each child and let the remaining gap be filled with grants, loans, scholarships, work-study, etc. As another commenter mentioned, many feel it is important for the child to fund part of their own college. I firmly believe in them having some skin in the game.

Financial Independence Makes it A Little Complicated

Regular readers know I am a big believer in the FIRE movement. FIRE is an acronym for Financial Independence/Retire Early. That means you have money freedom before typical retirement age. Money freedom simply means that you’ve achieved Hakuna Matata… you have no worries about money.

When I started this blog ten years ago, I didn’t know such terms existed, but I did know I wanted to get to that place. Years of maxing out retirement accounts, my wife’s military pension, and our real estate have fortunately put us in a good position to achieve that.

It’s so close that the biggest obstacle is the uncertainty of college costs.

Among all the uncertainty, there’s one beacon that represents some stability: The Free Application for Federal Student Aid (FAFSA).

FAFSA and Real Estate

The Free Application for Federal Student Aid (FAFSA) is exactly what it sounds like. It has clear formulas and rules around a family’s income and assets. While those rules may change over time, I would expect the changes to be minor ones.

In other words, it’s something that can be planned around.

For example, retirement assets don’t count. So this person with a hundred million IRA may be in decent shape if he were to fill out the FAFSA. (He’s really not.) To an obviously lesser extent, we would be in better shape as well from years of nearly maxing out all our retirement accounts.

Many people who are financially independent get there by discovering that they can live a fulfilling life and be very happy on a smaller income. It’s easier than trying to save $10 million dollars. We live that frugal lifestyle as well. Having a small income is a big part of the FAFSA application.

It’s like all the pieces are falling into place… except for one… real estate.

One of the legs that supports our financial independence push is real estate. We didn’t plan it that way, but my wife separately bought condos in 2002 and 2005 near the top of the market. When we moved so that my wife could serve in San Francisco in 2006 the properties were well under water. Even today, they are valued at between 25-33% less than what we paid for them.

Fortunately, we were able to rent them and over time the mortgages have started to get paid off. We got a double HARP to refinance them both to 15-year fixed mortgages. Despite all that, we lose a little money each month on them (and a lot when repairs are necessary) while we build equity. In about 10 years, before our children are ready for college, we’ll have significant real estate assets.

[If you are curious you can read a little more about our real estate “empire” here. (There’s a reason why empire is quotes.)]

Overall, I love real estate. I’m not second guessing the decision to keep the properties. The forced savings have really contributed to our net worth.

However, as you may have guessed by now, the FAFSA formula doesn’t work well for those with significant real estate assets. If had taken the money we lost each month and truly maxed out our retirement options (there’s a lot of small business stuff I can do with SEP-IRAs, solo 401Ks) we’d have “protected” assets from the FAFSA. If we created another business, it’s value would also be “protected” from the FAFSA. (And it seems you can’t throw the properties in an LLC and call it a business.)

At the most recent FinCon convention, I talked with a number of bloggers. Some were financial independent bloggers. Others were real estate bloggers. I don’t think I found one person who fit in all the categories of financial independence, real estate owners, and having children… but I’m sure there are many people out there who fit this profile.

I tried to explain my situation to a few people, but it was difficult. It’s taken nearly a thousand words just to paint the picture for you.

I think the correct answer is just to forget about the FAFSA. I have difficulty with that as I like to optimize things in the future. This is the best way for me to look to optimize things.

The other part of me thinks that it might be worthwhile to refinance the 15-year fixed mortgages to 30-year fixed mortgages. Then we’d actually be making money on the properties and we could use it to fund our living expenses which would free me to max out the small business retirement account options. We’d be earning less principle which would make the assets worth less.

Then I stop myself and ask “Is all that worth it for a better FAFSA formula?”

I don’t have any answers here. Maybe you do? If so, please let me know in the comments. Thanks!