What Fixed Rate Would Get You Out of Stocks?

[Meadbh]

Another way of looking at this is to consider the risk premium that you would expect for investing in equities compared to GICs or CDs. I’m assuming we are looking at long term investment and, as in the original question, reallocating 10% of the portfolio.

0% risk premium: no reason to reallocate to equities
1% not worth it
2% not worth it
3% leaning to equities
4% equities favoured
5% would definitely reallocate to equities

 

[kcowan]

The 5 year total return for Canadian banks stocks has been around 13% so 5% spread means 8% for fixed.

 

[Lsbcal]

Thanks for the responses. The origin of the post is that I'm considering changing my AA. I'm about 50% equities currently, but am considering going down to 40%, and taking the tax hit since I have a lot of gains and it's a non-retirement account. I have access to "hard money lending" opportunities that, although far from the completely safe scenario I described in the original post, are actually fairly safe because there's at least 70%+ equity in each property I loan against, and the interest rates tend to be in the 7.5% - 10% range. So I was hoping to get people's gut take on what "safe rate" would get them out of stocks, and it sounds like the consensus is ~5%.

This completely changes the tone of your OP. If you are looking for true safety then this does not seem to fit the bill.

As others have mentioned above, my safe rate would be defined by the historical average real return rates. TIPS are a good example. The data I have for bond real returns (1926-2010) are:

1yr Treasury is 1.7%
5yr Trearury is 2.3%
10yr Treasury is 2.3%

 

[Danmar]

The 5 year total return for Canadian banks stocks has been around 13% .

Agree on the returns. In fact these returns have been around 12-13% for about 50 years! As you know my portfolio is heavily weighted in CDN banks. Been a very nice ride.

 

[Totoro]

Remarkably consistent answers.

Anyway, +1 on the 3%-4% real returns, which is 5%-6% nominal in the current climate.

Duration doesn't matter, although I don't like long durations in general, too much exposure in case of inflation shocks.

Conversely, if stock yields drop below inflation I also run for the hills. With the current shiller e/p at 3.3% and inflation at 2.2% we are approaching that moment.

 

[marko]

I remember earning 4%-5% with hardly any risk. Those were the days.

IIRC there were 15% CDs back in the 70s

 

[REWahoo]

IIRC there were 15% CDs back in the 70s

And mortgage rates.

 

[aja8888]

And mortgage rates.

Really saw 18.5% mortgage rates back in 1981. That was from California B of A as I was moving into L.A. to work for Big Oil. Yeah, Columbia Savings was offering 12%+ CD's at the time.

 

[nun]

I'm getting 4.38% in TIAA traditional and can access the money in 10 equally payouts over 10 years. I'm very happy with that.


Sent from my iPhone using Early Retirement Forum

 

[Z3Dreamer]

In the 80's the widow model we thought of, had her with a modest pension or ss check of about $500 per month which is $6,000 per year. Said widow also had a $100,000 CD at 6% and $100,000 of utility stocks paying in the 6% range. Total income of $18,000 which was deemed to be a reasonable living.

So 6%.

 

[kgtest]

I get where you are coming from, but in my case, probably not. My portfolio has out performed the appropriate benchmark (TSX) by a wide margin for a long time. The divs from the portfolio are very safe and weren’t cut in the financial crises. Accordingly, I would need something in double digits to overcome the tax differences between divs/cap gains and interest. My portfolio has returned double digit total returns for all relevant periods.

I have a lot of confidence in my portfolio(rightly or wrongly) coupled with a high risk appetite. Also, I have a very generous pension as a backstop. So everyone is different.

As Mr Wonderful the Tech Titan from the hit show Shark Tank says... "I don't get out of bed in the morning for less than 10%"

 

[jazz4cash]

Yeah, but Mr Wonderful takes a lot of risk and he is actively involved.

 

[kgtest]

Yeah, but Mr Wonderful takes a lot of risk and he is actively involved.

This is true. Lifestyles of the rich and famous. I want the lifestyle of the rich and not famous. Waaay too much risk being a celebrity with money.

They don't record themselves and air out their bad bets on TV that probably wouldn't sell ads.

I have a friend in hollywood. A year ago she didn't have anything saved. If i told you what 6year running sci fi sit com she was in dueing 2000s you would not believe it. She was the co star and she's flat broke slummin around Hollywood now.

 

[kcowan]

As Mr Wonderful the Tech Titan from the hit show Shark Tank says... "I don't get out of bed in the morning for less than 10%"

He was running several investment funds but sold them off when they could not match the average performance of other funds.

 

[calmloki]

RenoJay - we also have been doing hard money loans but are currently down to two; albeit for a healthy amount. Feels like there is a lot of loose cash out there right now and not a huge amount of worthwhile properties at attractive prices. We've a few owner-carry contracts that are at 7%, one for over 15 years, and that interest has felt fairly good - little high, little low through the years, but pretty good overall. Have some money out @ 5%, which is better than CD rate but not very exciting. Are you using a loan broker or making your own loans? I'm wondering if my interest expectations are too great for the current climate. Think we may have spoken on the phone a few years ago...

 

[Abe Frohman]

Thanks for the responses. The origin of the post is that I'm considering changing my AA. I'm about 50% equities currently, but am considering going down to 40%, and taking the tax hit since I have a lot of gains and it's a non-retirement account. I have access to "hard money lending" opportunities that, although far from the completely safe scenario I described in the original post, are actually fairly safe because there's at least 70%+ equity in each property I loan against, and the interest rates tend to be in the 7.5% - 10% range. So I was hoping to get people's gut take on what "safe rate" would get them out of stocks, and it sounds like the consensus is ~5%.

I own a hard money lending business and I have about 50% of my NW in this business.

It's unclear to me if you are beginning to lend hard money, i.e to borrowers or if you are lending to someone like me who then lends the money. All I will say is that there are 472 different ways to lose money in this business, if you are lending directly to the borrowers. And about 63 different ways to lose money if you are lending money/investing with the hard money lender.

I lost about 20% of my portfolio value in the 08-09 great recession. My 'lenders' lost nothing and received all their interest as it was due.

But, at least 70% of my colleagues that lend money, ended up in default with their investors.

So, yes, hard money lending is a great return, but is not safe like a CD. It's a different asset class.

If you are going to lend money to someone like me and it's only 10% of your NW. I'd be ok with that. But I'd much more prefer you to have 2-4 different lenders you are lending money to, so that you are more diversified within this asset class.

If you are lending money directly to investors that own the house, I'd be ok with that, but just start slowly. The beauty of this business is you can start with a 25-100K loan. Learn the process and figure out the 472 different ways you can lose money so that you can start dealing with those problems up front and have a way to mitigate potential losses. Then, as you feel more comfortable, you can ramp up the money you have invested.. But ramp very slowly.

 

[LRDave]

I continue to feel good about having a good chunk in TIAA traditional - getting about 4% with no principal risk. (only about 20% of it subject to TPA liquidity issues).

 

[Car-Guy]

Already there earning a little over 3% on the average. IRA/CD's are earning ~2% and 401k is earning ~3.5% in the fixed interest fund. (more funds in the 401k than in CD's.)

 

[CyclingInvestor]

I get about 3% dividends from my stocks (where I keep all my $$), and these dividends have risen at about 5-8% annually over the years. I do not consider price variations to be a risk, only dividend cuts, which are factored into the average dividend growth rate.

Therefore, I would need bonds to yield about 8-11% to buy any. I bought my last bond in 1985 - CA munies yielding 9.5%.

 

[jollystomper]

If inflation stays under 3% then 6% would be fine with me.

 

[mathjak107]

I get about 3% dividends from my stocks (where I keep all my $$), and these dividends have risen at about 5-8% annually over the years. I do not consider price variations to be a risk, only dividend cuts, which are factored into the average dividend growth rate.

Therefore, I would need bonds to yield about 8-11% to buy any. I bought my last bond in 1985 - CA munies yielding 9.5%.

how about since you only care about income and not total return i will pay you 1% more but i keep you principal ?

there is zero difference between pulling a dividend out of a stock investment and drawing the same dollars from a portfolio . you may have some slight transaction or tax issues that differ but success rate and balance wise it is the same thing .

so total return is what matters when spending down .

 

[RenoJay]

RenoJay - we also have been doing hard money loans but are currently down to two; albeit for a healthy amount. Feels like there is a lot of loose cash out there right now and not a huge amount of worthwhile properties at attractive prices. We've a few owner-carry contracts that are at 7%, one for over 15 years, and that interest has felt fairly good - little high, little low through the years, but pretty good overall. Have some money out @ 5%, which is better than CD rate but not very exciting. Are you using a loan broker or making your own loans? I'm wondering if my interest expectations are too great for the current climate. Think we may have spoken on the phone a few years ago...

Hi Calmloki. Yes, I think we may have chatted when I was first getting into hard money. For me, I'm generally willing to trade interest rate for LTV, i.e. the lower the LTV, the less I'm willing to accept in interest. That said, the lowest I've gone on a loan to a stranger is 7.5% and I've typically limited the loan term to 5 years or less. For a friend, I've offered 6%. I agree with a few others that there's a risk for inflation and that if it happens, it can pop up quickly. So usually with the borrowers I'll just tell them that short of a major surprise inflation, I'll likely be happy to renew the loan when it comes due. In the past year, I've definitely seen rates on hard money come down, so rather than chasing numerous loans, I'll tend to hold out for ones that meet my criteria (max 70% LTV, min 7.5% interest) and simply seek bigger loans. All are done through a loan broker I know and trust and all paperwork is run through a real estate lawyers who's quite familiar with our local judges and what they tend to do in the event of borrower BKs.

 

[RenoJay]

I own a hard money lending business and I have about 50% of my NW in this business.

It's unclear to me if you are beginning to lend hard money, i.e to borrowers or if you are lending to someone like me who then lends the money. All I will say is that there are 472 different ways to lose money in this business, if you are lending directly to the borrowers. And about 63 different ways to lose money if you are lending money/investing with the hard money lender.

I lost about 20% of my portfolio value in the 08-09 great recession. My 'lenders' lost nothing and received all their interest as it was due.

But, at least 70% of my colleagues that lend money, ended up in default with their investors.

So, yes, hard money lending is a great return, but is not safe like a CD. It's a different asset class.

If you are going to lend money to someone like me and it's only 10% of your NW. I'd be ok with that. But I'd much more prefer you to have 2-4 different lenders you are lending money to, so that you are more diversified within this asset class.

If you are lending money directly to investors that own the house, I'd be ok with that, but just start slowly. The beauty of this business is you can start with a 25-100K loan. Learn the process and figure out the 472 different ways you can lose money so that you can start dealing with those problems up front and have a way to mitigate potential losses. Then, as you feel more comfortable, you can ramp up the money you have invested.. But ramp very slowly.

Abe, thanks for the words of caution. I've been doing hard money for about four years and (knock on wood) no one has ever been late on a payment yet. I use a broker to process all the deals and make sure they're Kosher, but I've chosen not to invest in any funds that do lending. The loan is directly between my trust and the borrower, and the lien is filed that way. Ultimately, the reason is that I want to do my own underwriting of each loan, meet the borrower, view the property, etc. It's not that I don't trust brokers who run funds; it's that their incentive is different.

 

[Scuba]

I own a hard money lending business and I have about 50% of my NW in this business.



It's unclear to me if you are beginning to lend hard money, i.e to borrowers or if you are lending to someone like me who then lends the money. All I will say is that there are 472 different ways to lose money in this business, if you are lending directly to the borrowers. And about 63 different ways to lose money if you are lending money/investing with the hard money lender.



I lost about 20% of my portfolio value in the 08-09 great recession. My 'lenders' lost nothing and received all their interest as it was due.



But, at least 70% of my colleagues that lend money, ended up in default with their investors.



So, yes, hard money lending is a great return, but is not safe like a CD. It's a different asset class.



If you are going to lend money to someone like me and it's only 10% of your NW. I'd be ok with that. But I'd much more prefer you to have 2-4 different lenders you are lending money to, so that you are more diversified within this asset class.



If you are lending money directly to investors that own the house, I'd be ok with that, but just start slowly. The beauty of this business is you can start with a 25-100K loan. Learn the process and figure out the 472 different ways you can lose money so that you can start dealing with those problems up front and have a way to mitigate potential losses. Then, as you feel more comfortable, you can ramp up the money you have invested.. But ramp very slowly.

I agree with your post that hard money lending is not risk free. Rates reflect the relative risk so that's why it pays a lot better than CD's.

We lend through a firm that finds and vets borrowers. In the 08/09 recession, lenders had to defer loan payoff dates to avoid principal losses. The owners of the firm we deal with put in their own money to ensure that lenders remained whole.

We started with one smallish loan and have slowly built up from there. It's 20-25% of our total portfolio now, all in IRA's. I could see it going to 30-40% as we spend some of our taxable portfolio, but if it creeps above a third or so, as loans mature, we'll roll over funds and invest them in the market.

Bottom line, the only way a "safe" fixed rate investment is going to pay high rates is if inflation is high (so real return is not so great) or if it's not as safe as alternatives paying lower rates.

 

[Scuba]

Abe, thanks for the words of caution. I've been doing hard money for about four years and (knock on wood) no one has ever been late on a payment yet. I use a broker to process all the deals and make sure they're Kosher, but I've chosen not to invest in any funds that do lending. The loan is directly between my trust and the borrower, and the lien is filed that way. Ultimately, the reason is that I want to do my own underwriting of each loan, meet the borrower, view the property, etc. It's not that I don't trust brokers who run funds; it's that their incentive is different.

+1 except I no longer go view the properties. I look them up online just to make sure they actually exist in the stated location, but my borrowers are totally rehabbing them anyway and work in a limited geographic area. The loans I make are generally one year terms, and mostly I lend to repeat borrowers who have built up a track record with me.