SWR for a $2.5 million nest egg...

[FUEGO]

Quote:

Originally Posted by calmloki Count me and my gal in the risk adverse camp. Not really counting on CDs or savings rate interest to provide for us in our dotage either. Not when we can loan out money in the 10-12% range on properties that WE value at somewhere around double the amount we loan. Down side? when it comes time for the loan balloon to be paid off the borrower can't find other financing. In that case we can either keep taking payments (maybe upping the interest rate?) or foreclose. We're trying to back out of real estate, so getting another chunk of property may not be as attractive as getting our cash back, but it beats buying a market giant like GM or Enron or Rath Packing at the wrong moment. A big advantage of stock is the ability to sell it for some price at almost any time. Loans or land are much more difficult to divest. Maybe that forces a certain deliberate nature to the transactions, which could be a good thing.

I don't want to mislead anyone into thinking that accepting what may only amount to highly variable 8-9% long term returns in the stock market is somehow superior to collecting 10-12% from highly secured private lending. But one is passive and one is active. I can buy/sell my investments in a matter of clicks in large or small amounts.

Finding high quality 10-12% long term loans are not as liquid or available or simple. It is basically running a lending business, since you have to really do your due diligence, ensure they are paying taxes, insurance, not destroying the property, etc. Not that there is anything wrong with that. I may get into this stuff more in the future. I just made a little 18% loan this week that should work out nicely as it is amortized over 2 years. Not quite as secure as 50% LTV real estate loans though.

But are you guys really getting relatively safe 10-12% loans on 50% LTV places? That is some amazing stuff if so, and worth a little work to get things going.

[calmloki]

Quote:

Originally Posted by FUEGO .... But are you guys really getting relatively safe 10-12% loans on 50% LTV places? That is some amazing stuff if so, and worth a little work to get things going.

Well, right now we are looking at two 12% loans, one for $130k on about $850 worth of farmland (tax assesor's valuation), one for $100k on a big rough vacant building on a main drag in Salem with a tax value of $400k. Just got this offering tonight:

Mortgage, Inc. has the below described proposed or existing loan available for investment, subject to standard underwriting due diligence (credit, income, title search, appraisal or other value verification, etc.):



PROPOSED/EXISTING LOAN DESCRIPTION

LIEN POSITION First LOAN TYPE Refinance
LOAN AMOUNT $100,000 PROPERTY VALUE $181,870 per assessor RMV
LOAN TO VALUE 54.98% AMORTIZATION/TERM 5 years Interest Only
INTEREST RATE TO Borrower 12% Interest Only PAYMENT INTERVAL Monthly/Qterly/Annual
PAYMENT AMOUNT $1,000.00 BALLOON DATE 60 months from closing
LOAN PURPOSE/USE OF FUNDS:
PAY OFF MORTGAGE(S) $ 0 PAY OFF TAXES $1,736
PAY OFF CONSUMER DEBT $ 0 OTHER (specify) $ 0
Months Payment Reserve $ 0 NET CASH OUT $90,000 Est.
PURPOSE OF CASH OUT put in bank while borrower looks for employment and/or to start another business

PROPERTY INFORMATION

ADDRESS 4751 and 4753 Cougar Court SE, Salem, OR 97317
PROPERTY TYPE duplex ZONING RL: Limited Multi-Family Residential
PROPERTY DESCRIPTION 2 units on 1 level, each 849 SF with 2 bedrooms and 1 bath each, built in 1975, in a neighborhood of other duplexes, on a 7,520 SF lot, on a cul de sac street, near State Street; rent for $724 each.
OWNER OCCUPIEDNONOWNER OCC X VALUE PER COMPARABLES $ NA
ASSESSOR’S RM VALUE $181,870 APPRAISED VALUE $ NA

[Finance Dave]

Quote:

Originally Posted by Kroeran One of the things I remember from my trading period was the idea that its one thing to come up with a valid trading idea, its a totally different thing to execute it....pull the trigger when the system says to. Thats the problem with buy and hold....technically possible, but very few have the stomach to actually do it, and i just never met anyone who has. You've now met someone...I have the stomach for it. I have met a handful of real estate millionaires, business owners, dot com cash outs, and CD saving maniacs, just never ran across a stock market millionaire in my limited travels, but I am in a government town. I was thinking along the lines of trying to time the overall market as being delusional. That is not a consensus view in these here parts? I doubt you'll find any "consensus" view around here of people calling others delusional. I guess very short term or day trading is a different animal altogether. I spent a decade of my life buried in supercharts programming searching for a tradable pattern. Very very addictive....and I guess I am still an addict. I am thinking of getting back into it as a retirement hobby. A friend has convinced me he has come up with a very reliable tradable phenomena...I am looking into verifying this. I assume you're talking about technical charting. I'm a believer in semi-strong market efficiency. Charting assumes that all information about the future is contained in the past, which is a concept I cannot agree with. You are basing your decisions on past data, which means any news not already implied in the stock value is irrelevant. Speaking of pattern recognition...in my little world, I have come to see reliance on the stock market as a source of great pain for everyone involved in it. The seventies meltdown, the futures related collapse in the 80s I think it was? The dot com meltdown and now the latest bear market. Each round of this comes with changed retirement plans and most often selling out close to the bottom, embarassment, strained marriages. Trying to warn people from what I percieve to be a classic trap is part of my schtick.

Not a great source of pain for me. In some ways the meltdowns are good. Think about it, for the past 6-9 months I've been buying stock at huge discounts.

[Finance Dave]

Quote:

Originally Posted by Kroeran I am not a stock guy, but if I was forced to have exposure to the market, why would you not just buy a handful of stock directly? You don't actually believe the mutual fund guys can make better guesses than you, do you?

1) Transaction costs
2) Time you must invest to analyze - how long does it take you to read a 10K for a biomedical company? Do you undersand all the legal wording about the potential for lawsuits, failed drug trials and so on? Assuming the typical 10K is 120 pages, and you buy 13 individual stocks (I recall a study showing that's the minimum number needed for good diversification), and that you'd need to set up an Excel model and plug financial data in, run the ratios, calculate Z-scores and liquidity ratios (or at least get that data off the web)...how much time does that take you? That's about 2 full days work for me.
3) Diversification (several types)


Guesses? You think they "guess" at what to buy? Is that what you do?

[Kroeran]

Quote:

Originally Posted by FUEGO IThis is exactly what FIREcalc does. Basically says more equities = better survival up to a certian point. .

you make good arguments.

does firecalc work with averages, or does it take into account the risk of hitting a downdraft at the worst possible time in your life cycle?

is the expectation that under this scenario, you just keep pulling out your 4% whatever and ride it out?

I am of course focussing on the 5% probability of a worst case scenario at the worst point in ones life cycle. I suppose the key is to have a plan B, that DW agrees to.

That could be for example, moving to Arizona and living in a large RV with a veerry low cost of living, should things go wrong.

For example, when I make my pitch to DW that we can pull the rip cord now at 52 instead of putting in another 3 years to achieve a more normal pension formula...I say, well, we have the big house up north, and the condo in Florida....if my calculations are really off or we get unlucky, we just sell the place up North and suffer living in a resort community in Florida. THe horror

[Kroeran]

Quote:

Originally Posted by Finance Dave 1) Transaction costs 2) Time you must invest to analyze - how long does it take you to read a 10K for a biomedical company? Do you undersand all the legal wording about the potential for lawsuits, failed drug trials and so on? Assuming the typical 10K is 120 pages, and you buy 13 individual stocks (I recall a study showing that's the minimum number needed for good diversification), and that you'd need to set up an Excel model and plug financial data in, run the ratios, calculate Z-scores and liquidity ratios (or at least get that data off the web)...how much time does that take you? That's about 2 full days work for me. 3) Diversification (several types) Guesses? You think they "guess" at what to buy? Is that what you do?

dont the top funds disclose which companies they invest in? can't you just buy those, and hang on? I knew a mutual fund salesman who did just that.

arn't most large companies virtual mutual funds, as they are so widely diversified?

one high tech insider I knew, an Intel VP who cashed out before the tech crash, said that even if you worked in an industry or a specific company, it was impossible to know which ones were better positioned than any other regarding profit trends, unless you were sitting in on Board meetings (and that would be illegal to trade off of) - and that indeed everyone was guessing, with lots of analysis and data to back up their guesses

another interesting factoid is the observation that mutual funds perform better the further their HQ is from Wall Street.

because its all guesses I don't own stock.

my formula:

1) pay down debt, better yet, don't create debt. Own old utility vehichles and find an honest mechanic. Shop at garage sales and dollar stores.
2) cut out the middle man and the tax man by putting money into things you use. For example, own a vacation home cash and occasionally rent it out- rather than investing the money on the hope of profit, IF there is a profit, pay tax on it, then take those after tax dollars, if there are any, and buy a vacation paying sales and tourist taxes all the way along.
3) get taxpayers to fund my defined benefit pension, which includes encouraging democrats/liberals to keep up their support for pro-government legislatures.
4) don't worry about investing, because I dont' have to

[Kroeran]

Quote:

Originally Posted by Finance Dave I was thinking along the lines of trying to time the overall market as being delusional. That is not a consensus view in these here parts? I doubt you'll find any "consensus" view around here of people calling others delusional.

Sorry. Given the level of level of conversation I assumed there were no market timers around and that we could bond by safely mocking them. ; - )

I assume this means I have to make careful polite comments about vacation timeshare owners as well?

I assure you my motivation is not to make people feel unnecessarily bad. The only reason I made any progress through my many screwups is getting routinely wacked on the head by kind advisors - which was much less painful than getting wacked on the head by reality

[Texas Proud]

Quote:

Originally Posted by Finance Dave 1) Transaction costs 2) Time you must invest to analyze - how long does it take you to read a 10K for a biomedical company? Do you undersand all the legal wording about the potential for lawsuits, failed drug trials and so on? Assuming the typical 10K is 120 pages, and you buy 13 individual stocks (I recall a study showing that's the minimum number needed for good diversification), and that you'd need to set up an Excel model and plug financial data in, run the ratios, calculate Z-scores and liquidity ratios (or at least get that data off the web)...how much time does that take you? That's about 2 full days work for me. 3) Diversification (several types) Guesses? You think they "guess" at what to buy? Is that what you do?

Back when I took my portfolio class it was 30.... not sure you could do it with 13...

And as mentioned, you would have to make sure you are actually diversified by industry, location, etc. etc...

[FUEGO]

Quote:

Originally Posted by Kroeran you make good arguments. does firecalc work with averages, or does it take into account the risk of hitting a downdraft at the worst possible time in your life cycle? is the expectation that under this scenario, you just keep pulling out your 4% whatever and ride it out? I am of course focussing on the 5% probability of a worst case scenario at the worst point in ones life cycle. I suppose the key is to have a plan B, that DW agrees to. That could be for example, moving to Arizona and living in a large RV with a veerry low cost of living, should things go wrong. For example, when I make my pitch to DW that we can pull the rip cord now at 52 instead of putting in another 3 years to achieve a more normal pension formula...I say, well, we have the big house up north, and the condo in Florida....if my calculations are really off or we get unlucky, we just sell the place up North and suffer living in a resort community in Florida. THe horror

Firecalc lets you model the assumptions you want to model. The "4% rule" you see here often is basically a summary of the firecalc results that says a 4% withdrawal adjusted for inflation is safe over 30 year periods 95% of the time. I think that number may be a little closer to 3.8% now with newer data??

You probably want to go to the actual firecalc page and read a little about it and plug in some numbers to get a better understanding, but it basically takes your assumptions and runs them for every time period for a hundred years or so. Say you put in a 30 year withdrawal period, then it would analyze your portfolio from 1900 to 1930, then 1901 to 1931, then 1902 to 1932 all the way up to present time. It shows you how many of those analysis runs resulted in failures, and you can get a lot of details about which periods failed, and how bad and when.

I guess the devil is in the details. What does one do in the 5% of cases where there is a failure? And even some of the borderline cases where one's portfolio drops in value by 50-75% before ultimately recovering, what does one do? Plan B, Plan C, etc. For someone like me that may be ER'ing before age 40, I think "go back to work" even if part time is a valid plan B or plan C.

In case you aren't familiar with the danger of inflation, consider a $10,000 investment in CD's. If you live off the 4-5% interest payments and never reinvest into the principal, then the principal value never increases. In 20 years at 3% inflation, your CD has the purchasing power of $5,500 in today's dollars. In 30 years, $4,100. In 40 years, $3,100. I certainly would not base my retirement strategy on something that is likely to cut my income in half in 20 years, and by 70% in 40 years.

[ERD50]

Quote:

Originally Posted by Texas Proud Back when I took my portfolio class it was 30.... not sure you could do it with 13... And as mentioned, you would have to make sure you are actually diversified by industry, location, etc. etc...

Three letters: SPY

-ERD50

[Kroeran]

Quote:

Originally Posted by FUEGO It shows you how many of those analysis runs resulted in failures, and you can get a lot of details about which periods failed, and how bad and when. Plan B, Plan C, etc. For someone like me that may be ER'ing before age 40, I think "go back to work" even if part time is a valid plan B or plan C. In case you aren't familiar with the danger of inflation, consider a $10,000 investment in CD's. If you live off the 4-5% interest payments and never reinvest into the principal, then the principal value never increases. In 20 years at 3% inflation, your CD has the purchasing power of $5,500 in today's dollars. In 30 years, $4,100. In 40 years, $3,100. I certainly would not base my retirement strategy on something that is likely to cut my income in half in 20 years, and by 70% in 40 years.

Wow, an actual forward walk, that is really impressive. [is there an icon for "this is not sarcasm"] : - )

So as long as the investor realizes that this conventional market approach is a 95% roll of the dice, and they have a plan B that the spouse understands and agrees to, they might have a strategy

So then one could up the capitalization target and move the expected failure rate down to 4, 3, 2, 1 % .

Sure inflation sucks. I guess the issue I am trying to get my head around is how does a person build a bomb proof retirement if you are 100% dependant on investments and SS and won't be able to return to work.

I think you would agree, that it might take a 30-50% savings rate that targets 3-4* projected retirement living expenses, and transitioning from 100% stocks to 100% fixed income at retirement, then converting the amount required for living expenses to annuities as required, is the closest you could get.

Of course this is based on looking back. If we are worried that the deficits are going to be paid for with hyper inflation...I guess we are then fighting a war on two fronts. Then I would split the portfolio down the middle and set up half as a hedge against inflation. Not sure how to do that. I guess thats a big part of what you guys are focussing on.

[Texas Proud]

Quote:

Originally Posted by ERD50 Three letters: SPY -ERD50

We were talking about individual stocks.... not indexes...

[ERD50]

Quote:

Originally Posted by Texas Proud We were talking about individual stocks.... not indexes...

Three letters times 2 (and a rhyme):

But why?


-ERD50

[Texas Proud]

Quote:

Originally Posted by Kroeran Sure inflation sucks. I guess the issue I am trying to get my head around is how does a person build a bomb proof retirement if you are 100% dependant on investments and SS and won't be able to return to work.

First.... there is NOTHING that is 100% 'bomb proof'...

Let's say a huge meteor that is 10 miles wide (or whatever size needed to do what I am saying) hits in the middle of the Atlantic... and kills off almost everyone in Europe and the whole East Coast say to the Mississippi river..... and plunges the world into another huge ice age where the ice is a few hundred feet deep as low as Oklahoma... well, will your portfolio tide you over then?

[Texas Proud]

Quote:

Originally Posted by ERD50 Three letters times 2 (and a rhyme): But why? -ERD50

I was responding to FD's comment of what size portfolio of individual stocks you would need in order to have a statistically 'diversified' portfolio... not what to buy..

[FUEGO]

Quote:

Originally Posted by Kroeran Sure inflation sucks. I guess the issue I am trying to get my head around is how does a person build a bomb proof retirement if you are 100% dependant on investments and SS and won't be able to return to work. I think you would agree, that it might take a 30-50% savings rate that targets 3-4* projected retirement living expenses, and transitioning from 100% stocks to 100% fixed income at retirement, then converting the amount required for living expenses to annuities as required, is the closest you could get.

Even annuities can "fail". If the issuing company goes bankrupt, then you are SOL in many cases. I guess you could diversify among 10 different annuity providers and hope the worst case is 10-20% losses if one or two went under. I haven't looked into this lately, but I think many "inflation indexed" annuities have limits on them as to how much they can adjust upwards each year ranging from 3% to 10%. So you could have a few years of over 10% inflation and that would really sap your purchasing power. Looking at US CPI figures, 8 of the last 96 years had inflation over 10%. So figure about one out of every 12 years you historically would have lost real value in your annuitized payments. Maybe 3-4 years during a typical early retirement. You may only lose a few percent, you may lose 10-20%, who knows? Maybe a truly unlimited CPI indexed annuity exists, although my guess is that any insurer may become insolvent if they really had to pay high inflation adjustments year after year. See, for example, the recent blowing up of financial companies once thought bulletproof and stable. Again, add the risk of annuitizer failure plus the risk of below CPI adjustments in times of high inflation, and you once again have an asset that is not risk free.

That ignores the fact that standards of living tend to increase over time with changes in the wage index, which is usually ~1% more than the CPI. While an annuity might provide the same standard of living inflated for future costs (subject to the risks outlined above), it would not allow keeping up with the Joneses (or what is their name in Canada? ).


Equities are full of risk, just a different kind of risk vs. other assets. Maybe "agile, mobile, and hostile" is the best strategy as one poster here would say.

[Nords]

Quote:

Originally Posted by Kroeran Sure inflation sucks. I guess the issue I am trying to get my head around is how does a person build a bomb proof retirement if you are 100% dependant on investments and SS and won't be able to return to work. I think you would agree, that it might take a 30-50% savings rate that targets 3-4* projected retirement living expenses, and transitioning from 100% stocks to 100% fixed income at retirement, then converting the amount required for living expenses to annuities as required, is the closest you could get.

If you haven't already then you may want to read about Taleb's "black swan" portfolios. He basically buys Treasuries and then hopes to earn additional income by selling stock options.

You might also take a look at Milevsky's opinion on annuities in "Are You A Stock Or A Bond?"

[M Paquette]

Quote:

Originally Posted by Kroeran have you personally ever met an old fart who said, "you know, I spent my whole life putting money into the markets, did'nt have a pension, didn't pay down my mortgage, but all that money I put in the markets built up real nice because I held on during the bad years, and now I have a comfortable retirement" ....I have never met such a person myself.

I see him every morning when I shave. He even waves back.

No pension, had a 15 year mortgage that I paid like clockwork (and when paid off, that budget item turned into medical insurance coverage...), invested like clockwork too. Early 1980s, 1987, 1991, 2000-2003; These didn't slow me down, I just kept on chugging.

Now I have a comfortable retirement.

[Kroeran]

Thanks to everyone for your helpful comments. I am learning a lot and recalibrating my thinking on these issues.

After watching Nightly Business Report tonight I am now becoming scared to death of inflation, and lots of it. I need to check if my inflation indexed pension contract has a cap on adjustments.

The guy basically said there is a money supply tzunami coming and the only safe haven will be productive assets.

[Kroeran]

Quote:

Originally Posted by M Paquette I see him every morning when I shave. He even waves back. No pension, had a 15 year mortgage that I paid like clockwork (and when paid off, that budget item turned into medical insurance coverage...), invested like clockwork too. Early 1980s, 1987, 1991, 2000-2003; These didn't slow me down, I just kept on chugging. Now I have a comfortable retirement.

did you do index funds, direct stock, buy and hold?

any tricks you would like to share?

Has anyone tried tweeking buy and hold with diverting savings to cash when the s&p PE is above 15, then redirecting those funds and ongoing cashflow into the market when the PE dips below 15?

Looks to me that we have only just entered a near 15 condition.

S&P 500 P/E Ratio - Chart

http://www.businessinsider.com/sorry...t-cheap-2009-7