questioning the "money magazine" approach

[hotwired]

Hi All
I'm SURE this question has been addressed somewhere, but I'm not sure how to search it.

1. We have a great FA - but ... like many, he takes an index approach, maybe tweaked a bit -- like he might weigh heavier in large cap value if their research shows this segment is poised to grow faster, etc. But overall, we pay .9% of assets for them to manage us in what amounts to "indexing". The advantage is that my wife feels better knowing if something happens with me, there is someone there to sort it all out.

2. Our "neatly indexed" SMA with them has dropped, like most, 35-40%. Which of course leads me to the annoying place of "hey, I'm paying $7-9K per year for someone to make investments that I could make myself just to make my wife feel more comfortable. Hmmmm... how can I make my wife more comfortable, without spending 7-9K per year??

3. I have decided to begin doing what I have wanted to do for years. Conservatively invest in single family rental houses. Set aside 100K, spend 70K on DPs, use 30K as cushion, not MUCH current CF, but good principle paydown, better appreciation than multi units and THEN belated cash flow when paid off. We have plenty of assets to use for living expenses between FIRE date and mortgage amortization date(s) (This is not in lieu of all my other investements, just in addition to)

4. MY QUESTION is in the line of other investment choices. The question has haunted me for years ... I see people show the long term return of stocks vs. bonds vs. xxx over lng periods of time. I'm beginning to question the validity of this, expeically considering the "price" paid to have a high equity exposure is sometimes losing half your money or more in a few months!!! Why would it not be wiser to assemble an extremely diversified, good quality portfolio of income investments that yield above your safe withdrawal rate? In other words:
1. All investments would be highly secure (stocks would have payout ratios of 50-60% max. bonds would be highly rates, prefferred stocks would come from companies with good solid prospects, etc.)
2. Invest in preferred stock, high div. paying common stock, bonds, international bonds, reits, MLPs, Tax Lien Certificates, Prosper.com etc. etc. I mean just really have it spread out, and just do nothing but seek good, high yields with as little risk as possible. As long as the bonds are held to maturity, the risk is nil other than corportate bonds whose companies might experience downturn - but that risk might be mitigated bykeeping higher quality, etc. If a bond returns an above average return for a year or two, and the prospects aren't above average ... sell. In other words, I'm questioning whether one really has to involve themselves in indexing and common (low or no dividend) stocks at all ... Yes, there are still stocks, but they're "looked at" as income producing and if you're counting on x amoutn per month from xyz company trading at 25 and it goes down to 18, it's no biggie, becuase they've increased or maintained their div for 38 years and you know you can still count on your x amoutn per month....
Any thoughts?? Is my logic faulty??

[travelover]

I think Uncle Mick might have a suggestion.

[dinodino]

Quote:

Originally Posted by hotwired do nothing but seek good, high yields with as little risk as possible

Your logic is faulty. If you want high yields you have to accept high risks.

[Midpack]

Quote:

Originally Posted by hotwired 3. I have decided to begin doing what I have wanted to do for years. Conservatively invest in single family rental houses. Set aside 100K, spend 70K on DPs, use 30K as cushion, not MUCH current CF, but good principle paydown, better appreciation than multi units and THEN belated cash flow when paid off. We have plenty of assets to use for living expenses between FIRE date and mortgage amortization date(s) (This is not in lieu of all my other investements, just in addition to)

"Wanted to do for years" is key here. Depends substantially on where you're located, but I'd suggest you spend 14+ minutes watching this before you pull the trigger on this facet of your plan Crash Course Chapter 15: Bubbles | Chris Martenson. Best of luck whatever you decide, no one has all the answers...

[2B]

Quote:

Originally Posted by hotwired 4. MY QUESTION is in the line of other investment choices. The question has haunted me for years ... I see people show the long term return of stocks vs. bonds vs. xxx over lng periods of time. I'm beginning to question the validity of this, expeically considering the "price" paid to have a high equity exposure is sometimes losing half your money or more in a few months!!! Why would it not be wiser to assemble an extremely diversified, good quality portfolio of income investments that yield above your safe withdrawal rate? In other words: 1. All investments would be highly secure (stocks would have payout ratios of 50-60% max. bonds would be highly rates, prefferred stocks would come from companies with good solid prospects, etc.) 2. Invest in preferred stock, high div. paying common stock, bonds, international bonds, reits, MLPs, Tax Lien Certificates, Prosper.com etc. etc. I mean just really have it spread out, and just do nothing but seek good, high yields with as little risk as possible. As long as the bonds are held to maturity, the risk is nil other than corportate bonds whose companies might experience downturn - but that risk might be mitigated bykeeping higher quality, etc. If a bond returns an above average return for a year or two, and the prospects aren't above average ... sell. In other words, I'm questioning whether one really has to involve themselves in indexing and common (low or no dividend) stocks at all ... Yes, there are still stocks, but they're "looked at" as income producing and if you're counting on x amoutn per month from xyz company trading at 25 and it goes down to 18, it's no biggie, becuase they've increased or maintained their div for 38 years and you know you can still count on your x amoutn per month.... Any thoughts?? Is my logic faulty??

Scott Burns did an article recently on "alternative investmensts" which you seem to be enamored with. Here's a link.

Investment Alternatives: The Nitty Gritty - Registered Investment Advisor

I am primarily an indexer. I bought some "highly rated" closed end preferreds and an individual preferred stock early this year. As of Friday, they were down about 60% from where I bought them. Several have cut their dividend but the money still comes in as scheduled. Based on my experience, I wouldn't increase this asset class over the 5% I originally targeted.

Individual bonds have a place in a balanced portfolio. Evaluating individual bonds is an art form in itself. Enron went from top investment grade to bankrupt in a couple of weeks. By the time anything was known about how bad things were, it was too late for the bond holders. Diversification here is key and it's similar in risk to buying individual equities.

Rental property is a whole different world. You can not generally cover the cost of the single family homes with rent when you factor in a "reasonable" vacancy rate. Your profit will ultimately come from the appreciation if there is any. You also have a whole list of problems that I consider far worse than our recent market corrections. If you want to consider this, I'd suggest you look at apartment complexes that can be cost effectively operated by a professional management company.

[lawman]

I've been an income investor for years. (As opposed to a growth investor).. It has served me very well..I think the stock market is over rated by financial advisors who usually suggest I have way more invested in the stock market than I'm comfortable with. Twice in my lifetime I tried to use them and twice I backed out as I was not comfortable with the level of stock exposure they suggested. Seems to me like now is an excellent time to put new money into municipal bonds..Yields are very high. I wish I understood oil and gas pipelines better because the oil and gas pipeline M.L.P.'s look like a no brainer to me right now. Their yields are double digit, share prices are very low, their revenue is dependent on the amount of oil/gas transferred and not the stock market..For a long term investor I just don't see how one could go wrong now with these M.L.P.'s. Even if share prices go down further, the dividends are not affected by share price.. But I don't invest because obviously I don't understand the risk..
I think you are on the right track!

[2B]

Quote:

Originally Posted by lawman I've been an income investor for years. (As opposed to a growth investor).. It has served me very well..I think the stock market is over rated by financial advisors who usually suggest I have way more invested in the stock market than I'm comfortable with. Twice in my lifetime I tried to use them and twice I backed out as I was not comfortable with the level of stock exposure they suggested. Seems to me like now is an excellent time to put new money into municipal bonds..Yields are very high. I wish I understood oil and gas pipelines better because the oil and gas pipeline M.L.P.'s look like a no brainer to me right now. Their yields are double digit, share prices are very low, their revenue is dependent on the amount of oil/gas transferred and not the stock market..For a long term investor I just don't see how one could go wrong now with these M.L.P.'s. Even if share prices go down further, the dividends are not affected by share price.. But I don't invest because obviously I don't understand the risk.. I think you are on the right track!

I thnk FA's are unnecessary for 99+% of people. If you use FIRECalc, you'll not see a significant drop in 95% safe spending until your equity exposure falls below 30%. That is without "high yield" products in the portfolio.

The pipeline MLPs have a substantial management fee build into them. Their payout also heavily depends on the amount of product transferred and government regulations. Right now their prices are reflecting a significant drop in revenue from the recession. Some have substantial exposure to specific regions and customers/suppliers. These are a "bet" on the financial future of these specific risks.

Check out CQP. They were a "great buy" with a "guaranteed" 10% yield a few months ago. They're down 75% but I wouldn't put too much faith in getting the yield touted way back when.

The Elder Edda has a line in it that says "It's best for a man to be middle-wise." I've found that whenever I get too clever things don't seem to work out as well as I planned.

[Bestwifeever]

Quote:

1. We have a great FA - but ... we pay .9% of assets for them to manage us in what amounts to "indexing". The advantage is that my wife feels better knowing if something happens with me, there is someone there to sort it all out. 2. Our "neatly indexed" SMA with them has dropped, like most, 35-40%. Which of course leads me to the annoying place of "hey, I'm paying $7-9K per year for someone to make investments that I could make myself just to make my wife feel more comfortable. Hmmmm... how can I make my wife more comfortable, without spending 7-9K per year??

Did I miss the part where your plan (not commenting on that, it might be a great one!) makes it easier for your wife to sort things out and makes it more comfortable for her?

[calmloki]

No desire to talk down rental property as a money maker - over the last decades it got us where we are today - but single family homes are not just an investment. They are a job. If you pay others to handle management, repairs, and upkeep your current cash flow will be pretty close to zero if your market is similiar to ours. Failure to view the rentals as a job is a disservice to your tenants. Owning rentals require that someone be available at all times for the burst water lines or whatever. Consider: the water line is yours. the house is yours. the water is damaging your investment. who has an interest and responsibility?

Unless your wife is purely ornamental and can't hear phones ringing she really needs to understand what you are signing up for - because rentals will affect her day-to-day life a bunch more than having a savings account or stock fund. And having a partner in the rental job is hugely helpful.

[nickel]

Weird. I wrote a comment but apparently forgot to submit it. Anyway, if the concern is having someone to handle your wife's finances in your absence, why not save your money now by doing it yourself, and just leave instructions for her as to who to contact in the event of your untimely demise. No need to pay all that money now on the off chance you need the FA later.

[free4now]

Good advice calmloki.

Quote:

Why would it not be wiser to assemble an extremely diversified, good quality portfolio of income investments that yield above your safe withdrawal rate?

You need something that will yield your SWR, plus inflation, plus enough extra in the good years to cover the down years when it doesn't do as well as you had hoped. Nothing does this as well as equities, but if you are willing to accept ~2% less SWR you can probably use non-equity investments.

[haha]

Quote:

Originally Posted by free4now You need something that will yield your SWR, plus inflation, plus enough extra in the good years to cover the down years when it doesn't do as well as you had hoped. Nothing does this as well as equities, but if you are willing to accept ~2% less SWR you can probably use non-equity investments.

Although I do not necessarily disagree with this position, I think it is quite a bit less certain than it might appear.

Do we forget so quickly? For the last 2 months many people have posted how badly their protfolios have been damaged, how painful it has been, and how doubtful they have become about "staying the course"

Couple weeks of gains and all this is forgotten?

Also, I would like to point out that being willing to accept, or OTOH demanding a certain WR, in no way makes it a Safe WR. The universe is unfortunately outside our planning process.

Ha

[freebird5825]

Quote:

Originally Posted by lawman ...income investor for years. ...financial advisors who usually suggest I have way more invested in the stock market than I'm comfortable with. ...now is an excellent time to put new money into municipal bonds..Yields are very high...

i need to look more closely at income investing. right now my 50% stake in bonds are older EE and I bonds and TE munis. i hate paying taxes , so i tend to stay away from the taxable bonds.
and yes, munis are paying nice yields right now. i hold VWHAX and VNYTX, both of which has posted YTD losses but are rewarding me with some nice 30 day free money.
miss logical here has a theory. i'm using deductive reasoning here...
feel free to blow my theory apart -i don't take it personally. this is how i learn.
with Uncle Sam going into all these bailouts, federal money normally given to states will be tight or much reduced. so now states get in yet more trouble with less fed money. add to that their underfunded state pension plans (link from another post). states can do one of two things - raise state taxes or issue bonds to raise capital to finish ongoing public works and start new projects. and what better way to attract investors than higher than normal yields?
am i correct in assuming that this is the reason for higher yields on muni bonds lately? do your tea leaves say this might continue for a while until the market recovers?

[kyounge1956]

Quote:

Originally Posted by hotwired Hi All (snip) 2. Our "neatly indexed" SMA with them has dropped, like most, 35-40%. (big snip)

What does "SMA" stand for? I looked in the slang & acronyms list and didn't see it.

[bubba]

Based on the past year, I'm not comfortable with amount we hold in stocks. I've learned that my risk tolerance isn't nearly as high as I used to think. In the event we ever recover some of this roughly 40% we've lost, we've already decided to realign to more income oriented investments. Granted, accepting less risk pretty much assumes the nest egg has to be much larger to accomodate the SWR. Now the trick is going to be figuring out how to grow the nest egg without the unwanted risk. I imagine that means tacking on a few extra years w*rk, which we didn't want to do, but I'm trying to deal in our reality here and don't see many other options.

[2B]

Quote:

Originally Posted by freebird5825 states can do one of two things - raise state taxes or issue bonds to raise capital to finish ongoing public works and start new projects. and what better way to attract investors than higher than normal yields? am i correct in assuming that this is the reason for higher yields on muni bonds lately? do your tea leaves say this might continue for a while until the market recovers?

Munis are paying higher yields because they are being considered less secure. Muni failures are few and far between but they are brutal when they happen. I wouldn't want bonds in cities hard hit by forclosures or with massive underfunded pensions. They former is reasonably easy to identify. Unfortunately, the latter applies to all of them.

[freebird5825]

Quote:

Originally Posted by 2B Munis are paying higher yields because they are being considered less secure. Muni failures are few and far between but they are brutal when they happen. I wouldn't want bonds in cities hard hit by forclosures or with massive underfunded pensions. They former is reasonably easy to identify. Unfortunately, the latter applies to all of them.

thanks! many real estate foreclosures = majorly eroded tax base.
i do not dabble in individual issues, i let VG do my work for me. i would be in way over my head in individual issues.

[FinanceDude]

Quote:

Originally Posted by kyounge1956 What does "SMA" stand for? I looked in the slang & acronyms list and didn't see it.

Seperately Managed Account, or Strategic Managed Account. Basically, it's a manged portfolio of either mutual funds or stocks, and you pay a quarterly management fee.........

[saluki9]

Quote:

Originally Posted by 2B Munis are paying higher yields because they are being considered less secure. Muni failures are few and far between but they are brutal when they happen. I wouldn't want bonds in cities hard hit by forclosures or with massive underfunded pensions. They former is reasonably easy to identify. Unfortunately, the latter applies to all of them.

Not quite so simple I'm afraid. Yields on Munis are up for several reasons.

1. Problems with the insurers
2. The housing market creating default risk
3. Hedge fund liquidations
4. Several of the largest dealers have gotten out of or suspended their business. In recent weeks there have been some huge dealer liquidations