Switch to Fixed Income

[tacman1123]

I've been investing in the market for decades, overweighted in equities, especially tech stocks.

Took a bath in 2009 (like most investors), at the peak I could have retired comfortably. When the market crashed, I told myself I'd get out when I got to that point again.

Now I'm 10 years older (so 10 years less life expectancy), and my portfolio is even higher than in 2008. Every fiber of my being and neuron in my brain tells me that sometime soon, the market is going to crash, and crash hard.

So the conventional wisdom is "diversify and ride it out". But the memory of 2009 is still with me. And at this point, I'm less interested in market returns and more interested in capital preservation.

I have the opportunity to make a loan that pays a good interest rate. The principal itself is held in an escrow account at Chicago Title, the receiving organization never actually has access to it. The interest payments go to my checking account. Risk seems very tolerable, the worst case is that they default on the interest payments and tie up the principal for a bit. I've done extensive research, cleared it with my attorney, and feel confident that the principal is very safe and the interest payments are probably safe.

Shifting the majority of my assets to that program would give me a very comfortable income stream, and then return my loan in 3 years. I'd miss out on the ups and downs of the market, but given my constant anxiety about pending doom, I'm thinking that this is a good time to take a break from this all-time-high market.

I know it sounds crazy, even as I type this I know it sounds bad. But I feel like someone sitting at a poker table, big stack of chips in front of me, enough to quit the game and thinking that the only way to lose is to continue to play.

Still working this out in my head (and gut), thanks for any wise words.

Tac

 

[HillCountry]

Putting majority of your assets into something you never tried before sounds like gambling to me.

Good luck.

 

[LOL!]

So you are going to shift 51% ("the majority of my assets") to fixed income and want our approval or what?

 

[copyright1997reloaded]

I've been investing in the market for decades, overweighted in equities, especially tech stocks.

Took a bath in 2009 (like most investors), at the peak I could have retired comfortably. When the market crashed, I told myself I'd get out when I got to that point again.

Now I'm 10 years older (so 10 years less life expectancy), and my portfolio is even higher than in 2008. Every fiber of my being and neuron in my brain tells me that sometime soon, the market is going to crash, and crash hard.

So the conventional wisdom is "diversify and ride it out". But the memory of 2009 is still with me. And at this point, I'm less interested in market returns and more interested in capital preservation.

I have the opportunity to make a loan that pays a good interest rate. The principal itself is held in an escrow account at Chicago Title, the receiving organization never actually has access to it. The interest payments go to my checking account. Risk seems very tolerable, the worst case is that they default on the interest payments and tie up the principal for a bit. I've done extensive research, cleared it with my attorney, and feel confident that the principal is very safe and the interest payments are probably safe.

Shifting the majority of my assets to that program would give me a very comfortable income stream, and then return my loan in 3 years. I'd miss out on the ups and downs of the market, but given my constant anxiety about pending doom, I'm thinking that this is a good time to take a break from this all-time-high market.

I know it sounds crazy, even as I type this I know it sounds bad. But I feel like someone sitting at a poker table, big stack of chips in front of me, enough to quit the game and thinking that the only way to lose is to continue to play.

Still working this out in my head (and gut), thanks for any wise words.

Tac

I would never, ever put most of my assets in a single investment. Regardless of what it is or how supposedly safe it was. Never. Ever.

If you think the market is too high, based somehow on your brains knowledge of the future, then sell securities until your brain is satisfied. But don't put them into one thing. Never. Ever.

ETA: If you think this magic investment is the real deal and you can't pass it up, put some of your assets there - but not more than 10%.

 

[W2R]

We have been "riding the wave" of an amazing bull market recently, haven't we!! It seems unrealistic to think it could last much longer, yet it keeps going and going. Wow, what a terrific and thriving market we have been enjoying, and how fortunate we are that conditions have improved so much. I can hardly believe how big my portfolio has grown even though I am retired and withdrawing from it each year.

With a conservative portfolio based on a small handful of broad index funds, riding the 2008-2009 crash would probably be easier for you. I did not retire until 11/2009, but by that time I had more than recovered what I lost in late 2008 to early 2009. The Dow had mostly recovered by that time, too.

I would suggest choosing at least 4 books from the Bogleheads book list, and reading each of them twice, slowly, and carefully. This is a good way to learn sound investment skills that will stand by you if/when the market falls again as it did years ago.

 

[Chuckanut]

If you have won the game, maybe it is time to stop playing.

I am not sure that a 3 year loan would get you through the rest of your life unless you are very old or have a very poor health history. What happens after the three years?

I assume (always a dangerous thing to do) at the end of the three years that you would place most of your pile of money into very secure things like Govt guaranteed CD's, Treasury Bonds, etc. Maybe a small percentage into the bonds of AAAAAA+++++ companies.

If you have enough to last the rest of your life, taking inflation into account, and you have insured that a big disaster (house burns down, outrageous medical bills, LTC needed, kids move back home, etc.) will not destroy your net worth enough to make a big difference in your lifestyle.... Well, why not?

For most of us, the pile of cash would have to be very big in order to meet the above goals. However, it only has to work for N=1, you. Good luck.

 

[redduck]

Every fiber of my being and neuron in my brain tells me that sometime soon, the market is going to crash, and crash hard.

I have the opportunity to make a loan that pays a good interest rate... and feel confident that the principal is very safe and the interest payments are probably safe.

Still working this out in my head (and gut), thanks for any wise words.

So you are going to shift 51% ("the majority of my assets") to fixed income and want our approval or what?

No, the OP doesn't seem to be asking for approval. He states he'd appreciate some wise words regarding his thoughts of making a loan that he described in his original post.

 

[RobbieB]

I don't understand a loan where the dough you lent just stays in a title Co and the guy that borrowed the money doesn't use it. Why borrow money if you have no access to it?

I don't get it.

 

[COcheesehead]

I don't understand a loan where the dough you lent just stays in a title Co and the guy that borrowed the money doesn't use it. Why borrow money if you have no access to it?

I don't get it.

I agree. I would run, not walk away from something like that. Sounds like an episode of American Greed.

 

[samclem]

I have the opportunity to make a loan that pays a good interest rate. The principal itself is held in an escrow account at Chicago Title, the receiving organization never actually has access to it.

Your money is being used to secure something, obviously. If the "other side" could get the money cheaper, they would. Obviously, they can't get the money at the market rate (the reason you are being paid more than the market rate). You have to ask why that is--do you really understand the risk better than the other folks who won't make this same loan?
If it were me, I would not risk a large portion of my portfolio on anything like this. If I was worried about what the market would do next, I'd do the dull, conventional thing you mentioned: readjust my allocation (take some money off the table), and buy some more dull regular fixed income assets.

 

[calmloki]

I make hard money loans on property and at times the funds are held by a Title company. Are you lending on a property? Reason I ask is I've made very nice return but have also had a big chunk of cash go POOF. What and how are very important, do you care to share the specifics of your deal further?

 

[davebarnes]

As we say in Colorado: relax and smoke a J.

 

[petershk]

I have the opportunity to make a loan that pays a good interest rate. The principal itself is held in an escrow account at Chicago Title, the receiving organization never actually has access to it. The interest payments go to my checking account. Risk seems very tolerable, the worst case is that they default on the interest payments and tie up the principal for a bit. I've done extensive research, cleared it with my attorney, and feel confident that the principal is very safe and the interest payments are probably safe.

Without knowing the details of what it is, it's hard to evaluate the risk/value.

Generally I am pretty skeptical of special opportunities that involve paying higher interest that established/public mechanisms can pay. Even corporate junk bonds do not have adequate risk/reward in this climate. There is A LOT of debt floating around and yield curves don't make a lot of sense to me right now.

Of course markets are ALSO high, but they have been for a while.

So what do *I* do. Simple. I just reduce my asset allocation away from equities and bonds and towards cash (in this case CD ladder).

Note, that I'm still about 60% equities, it's just I put more in CDs than I normally would because I don't like the yield on bonds. Of course this depends heavily on your tax situation, when you need the money, withdrawal rate and on and on.

But... I would NOT chase yield and I would NOT try to time the market... and I'd be really nervous about putting a big chunk of money into a special opportunity late in the business cycle when there's heavy loads of debt everywhere.

I've mapped out some scenarios of what to do if the market drops 30, 40, 50%. It's not pretty but by having a plan at least I don't get all emotional and crazy one day . Even if lawyers check stuff out, it's still your money right? See what your lawyer says if you ask him to pay you back if it's a scam .

But of course details matter, so maybe it's a great deal.

 

[redduck]

...Every fiber of my being and neuron in my brain tells me that sometime soon, the market is going to crash, and crash hard.

OK, so all of the eight neurons in your brain cells are telling you the same thing. Sounds like maybe the ultimate group-think. Stalkers experience the same thing: Every fiber and every neuron in their very being tells them that their stalkee would fall deeply in love with them if they could only meet. In reality if often ends in a restraining order (Do not ask me how I know this).


Risk seems very tolerable, the worst case is that they default on the interest payments and tie up the principal for a bit.

Bet that's not really the worse case.

I know it sounds crazy, even as I type this I know it sounds bad. But I feel like someone sitting at a poker table, big stack of chips in front of me, enough to quit the game and thinking that the only way to lose is to continue to play.

You're winning at the poker table and you're thinking the only way to lose is to continue to play. So, your solution is to leave the poker table and start playing roulette?

Still working this out in my head (and gut), thanks for any wise words.

Tac

Apparently, all my neurons are firing this afternoon.

 

[OldShooter]

a) If it sounds too good to be true ... (you know the rest).

b) What others have said about putting most of your eggs in one basket. In the trust business this would be called an imprudent concentration and no bank trust officer would be permitted to do it.

c) It doesn't sound like you even understand why your counterparty is willing to borrow money from you in this odd way. If you still want to proceed, I would ask for copies of all documents relating to all parties involved in this deal. Have your attorney review them. Probably @samclem is right; your money is being used to secure something and if that something gets smelly your money might be used to put it right. That's why you need to see ALL documents and get it in writing from Chicago Title that you have been given ALL of them.

 

[samclem]

I've been investing in the market for decades, overweighted in equities, especially tech stocks.
. . . .
Now I'm 10 years older (so 10 years less life expectancy), and my portfolio is even higher than in 2008. Every fiber of my being and neuron in my brain tells me that sometime soon, the market is going to crash, and crash hard.

As a long time investor, you are likely aware that it is easy to take the opposite side of the "bet" regarding future stock prices. If a person truly believed with a high degree of certainty that "sometime soon, the market is going to crash, and crash hard," the logical thing for that person to do is to buy call options against those market securities. Or, even to buy call options against the futures of those securities. The highly leveraged nature of these investments could make an[-] investor[/-] speculator quite rich with a relatively small investment.

It's not something I would do, because the money used to buy these options is at considerable risk. But, it is possible to use options to hedge against a market decline even as one continues to own the underlying securities. And it is a pure "anti-equities" bet, which fits well with the view of things that you posted. But any money invested this way will be at a lot of risk.

 

[njhowie]

1. How did you become aware of this "opportunity"?

2. What is the interest rate we're talking about?

I have a fair idea of what you're describing here, and I'd say run, don't walk away from it as well as the folks who have pitched it to you.

 

[JustCurious]

I have the opportunity to make a loan that pays a good interest rate. The principal itself is held in an escrow account at Chicago Title, the receiving organization never actually has access to it. The interest payments go to my checking account. Risk seems very tolerable, the worst case is that they default on the interest payments and tie up the principal for a bit. I've done extensive research, cleared it with my attorney, and feel confident that the principal is very safe and the interest payments are probably safe.

This is a very bad idea.

 

[97guns]

I would rather throw the funds at multiple deals rather than tie it all up in 1 loan, if your not going to diversify at least diversify within your sector.

My mom has accumulated $100k in a rental checking account and is going to invest in trust deeds at 12%, spread out over 6 deals

 

[jazz4cash]

I agree. I would run, not walk away from something like that. Sounds like an episode of American Greed.

I also agree with Robbie and COc. How does borrower benefit if funds stay in escrow? That's my immediate gut reaction and relieved to see others puzzled by this.

 

[Cayman]

I'd sell some equities and then ladder CDs. I wouldn't touch that loan based on what you've shared.

 

[mountainsoft]

at this point, I'm less interested in market returns and more interested in capital preservation.

It may be perfectly legitimate, but that loan sounds sketchy to me. Especially when there are safer, more conventional options.

For starters, you could shift your portfolio to have fewer stocks and more bonds. Of course, bonds aren't risk free either.

You could sell stocks and buy CD's, perhaps setting up a CD ladder to get higher returns.

If you have a large portfolio, or if the majority of your retirement income comes from pensions or SS, you might even be able to use simple online high interest savings accounts. For example, there's a point later in my retirement when even my 1.5% savings interest would be enough to last the rest of our life (since the majority of our income will come from a pension and SS).

 

[Dtail]

I'd sell some equities and then ladder CDs. I wouldn't touch that loan based on what you've shared.

+1
If capital preservation is the goal with minimum risk, then a CD ladder would probably work better than bond funds. Steer clear of the loan.

 

[tacman1123]

I make hard money loans on property and at times the funds are held by a Title company. Are you lending on a property? Reason I ask is I've made very nice return but have also had a big chunk of cash go POOF. What and how are very important, do you care to share the specifics of your deal further?

How did it go POOF?



The loan is used to allow restaurant owners to not tie up capital while waiting for a liquor license. California requires proof of capital (in this case, in an escrow account). If the license isn't approved, nothing happens. If it is approved, the restaurant owner pays for the license (to the state) and the borrowing fee, so in either case the money in escrow in always in the lenders name, the "borrower" never actually has access to it.


Thanks, everyone, for your comments and questions.

 

[big-papa]

Looks like you're getting a lot of similar advice from people.

If you're worried about the next market correction and what it might do to your porfolio/ability to fund your retirement, then you should re-evaluate your "willingness and need" to take risk.
https://www.bogleheads.org/wiki/Risk_tolerance
Note especially the section on "behavioral pitfalls".

Meaning you might want to consider reducing equity and increasing the fixed income portion of your portfolio. That can include nominal bond funds (or a bond ladder), TIPs fund (or a TIPs ladder), CDs/CD ladder. If you choose treasuries for the bond/bond ladder, then all 3 of these are at least backed by the govt in one form or another. With bond & TIPs funds there can be short term losses, but unless you choose really long durations, those losses will be muted compared to equities. The TIPs ladder at least has the ability to keep up with inflation.

My own personal view is that the income side of my portfolio is the safety side - meaning I stick only with government issued or insured investments. If they somehow default... Well, then there are bigger problems than my portfolio...

FYI, I"m nearing retirement. I lived through 2008/09. I'm currently at 50% stock, 50% intermediate treasuries. I can sleep with this.