Financial Independence The 100% VTSAX approach appears inconsistent with passive investing as a strategy |
- The 100% VTSAX approach appears inconsistent with passive investing as a strategy
- Daily FI discussion thread - February 06, 2019
- Weekly Self-Promotion Thread - February 06, 2019
- House price has smaller effect on FI than I feel like it should, based on common knowledge.
- Are Asset-backed Mortgages ever worth it?
- Investing earning potential: Invest in retirement accounts or real estate?
- Should I leave a public job with a pension?
| The 100% VTSAX approach appears inconsistent with passive investing as a strategy Posted: 06 Feb 2019 08:05 AM PST Hey everybody, It seems like everybody around here really loves VTSAX. And don't get me wrong, VTSAX is fantastic because it's a very cheap way to invest in the whole US stock market. It's a great fund as part of an asset allocation. That said, buying and holding it as a sole passive investment is somewhat philosophically inconsistent with the tenets of passive investing that FI also claims to believe in, so I find it very strange that there are folks seriously advocating 100% as a strategy. Passive investing is the idea that you should buy and hold equities rather than speculate - so VT should actually be the passive investor's fund of choice (or VTIAX+VTSAX manually rebalanced to capital weighting). Such an arrangement simply applies capital weighting to the entire equity market without any speculation. VTSAX, by comparison, makes the bet that future US stock market returns will continue to overachieve because the US has been the historical overachiver. At least, US returns had better be outsized, because US equities come at a significant premium right now. It's not like buying VTSAX is a suicidal move, but in this respect trying to all-in it is sort of unprincipled - if you're going to speculate by paying a premium for a historical overachiever, why stop at VTSAX/the US? Why not go all in on an even more concentrated band of overachievers like US large caps or even Powershares/QQQ? Don't take any of this the wrong way. I think the United States is an awesome place and I love living here. I also think we have a great economy. But a large amount of economic optimism is already priced in. Another problem, and maybe a more pernicious problem, with the all VTSAX advice is that it is completely incompatible with the average person's risk tolerance. You really need balls of steel to all-in a single equity market. 80/20ing a diversified (intl and natl) stock portfolio with bonds is on the aggressive side for lots of people. Telling strangers to do this sort of thing ignores the human behavioral component of investing. Also as a US citizen your earnings may already be highly correllated with the US market, amplifying your vulnerability to systematic risk. As a side note, I think there are many individuals here who don't properly assess their risk tolerance. People were suddenly talking about the importance of international stocks after the US hit a little correction last month... if you found yourself saying that after the US tanked a little, it might be the time to adjust your allocation. tl;dr VT is the vanguard fund that genuinely doesn't speculate. IMO VASGX and/or Target Date funds are probably the most aggressive one-size-fits-all funds you can really recommend to somebody without them coming with far too great a risk of hurting them for human behavioral reasons. Also, I think we consistently overestimate our risk tolerance. I love vtsax guy as a novelty account, but proferring 100% vtsax as serious advice is rather bad advice, especially for individuals who haven't proved they can hold in a down market. [link] [comments]  |
| Daily FI discussion thread - February 06, 2019 Posted: 06 Feb 2019 03:08 AM PST Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked. Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  |
| Weekly Self-Promotion Thread - February 06, 2019 Posted: 06 Feb 2019 03:08 AM PST Self-promotion (ie posting about projects/businesses that you operate and can profit from) is typically a practice that is discouraged in /r/financialindependence, and these posts are removed through moderation. This is a thread where those rules do not apply. However, please do not post referral links in this thread. Use this thread to talk about your blog, talk about your business, ask for feedback, etc. If the self-promotion starts to leak outside of this thread, we will once again return to a time where 100% of self-promotion posts are banned. Please use this space wisely. Link-only posts will be removed. Put some effort into it. [link] [comments]  |
| House price has smaller effect on FI than I feel like it should, based on common knowledge. Posted: 06 Feb 2019 03:38 PM PST So much of achieving FI has to do with making smart personal residence choices. Or so we are taught. I have been running some hypothetical numbers, to determine what I might be comfortable paying when I take the plunge. I have found that +/- $75,000 swings in purchase price only have 2 to 3 year swings on my FI date. This doesnt seem like a lot to me, all things considered. I feel like this could easily be covered/created by market swings. My timeline is not crazy short like some folks on here. I plan to be a 1 income/some kids family and have generally added that into my analysis. I hope to be FI +cushion by about 50. When I think of the difference in housing that $75,000 would make (MCOL area) it seems like a no brainer to me to spring for a home that will make us happier, be able to house us longer, etc, for ~15 years versus maybe be FI 2-3 years earlier. Anyone else follow me? [link] [comments]  |
| Are Asset-backed Mortgages ever worth it? Posted: 06 Feb 2019 02:46 PM PST There's a theory I've heard in the Early Retirement community that once you retire, even if you have plenty of capital gains assets, you should still get a mortgage for the home you live in. The thinking is, you can spread your capital gains out over 1, 2 or more years, keep your tax rate low, get that sweet deduction, and spend the money you saved on taxes on your mortgage payment. But it seems like the interest on the loan will outweigh any taxes you might pay, even if you pay it off early. Am I missing something? Let's say you want to buy a property worth 1M and have 10M in various stocks; so we'll assume you can find a lender who'll write an asset backed loan at say 4%, but to get at the assets you've got to pay capital gains taxes on liquidating the assets to cash. We need 20% down, so we liquidate 200K and resign ourselves to paying 30K in capital gains. If you paid it all upfront, you'd have to pay minimum 186K capital gains on the 1M you liquidated - you're going to break into the 20% bracket, probably more if you had any other living expenses like groceries. Yikes! That's a lot of taxes. So we visit our friendly mortgage broker. With 20% down, your payment's going to be around 4000/month (just interest and principal), so on top of other living expenses, seems like you'll need to be paying the 15% rate on what you liquidate. (I'm ignoring basis, because I presume that if you're retired early, you're sitting on quite a bit of gains). Your first year you'll pay 30K in interest, but it's still going to take a tax bill of 140K to pay off the remaining over 750K. In total, counting the taxes paid for the downpayment, I'm already losing by a little bit. In my fifth year there's still about $720K left on the loan, so the tax bill to pay off early will still be well over $100K, while we've paid over $150K in interest so far. The longer this goes the worse it gets. I used large round numbers, but it's not much better for smaller houses. Neither is it better if you make a larger or smaller down payment - assuming you gotta pay capital gains to get the money for the down payment too. I'm also ignoring all the fees involved, which add up too especially on smaller mortgages. Maybe there's some niche for a small house, people living lean FIRE and can keep a tiny mortgage payment under the 15% capital gains window, but I'm not seeing why those people keep a mortgage payment either. And doesn't seem like the interest deduction makes much difference either. I suppose if you do have a large basis for your savings your capital gains could be a lot less, but then you're probably not early retired. I'm also assuming that the assets stay the same in value, not betting on going up or down. What am I missing? Are asset backed mortgages just a way to leverage your new house into an even bigger bet that your stocks will go up? Now that I type it out, that seems to make a kind of cynical sense... Bottom line : seems like even in a worst case scenario, where you have zero basis and have to pay capital gains on every dollar, it's still better to pay the taxes all up front in one year, than to take out an asset-backed loan for any number of years. The only way this works out well is if your assets go up significantly in value over that time. Tell me I'm wrong. [link] [comments]  |
| Investing earning potential: Invest in retirement accounts or real estate? Posted: 06 Feb 2019 02:26 PM PST Good evening, I am opening a SEP IRA and i run an S-Corporation with one employee. I am about to put away some money for retirement and defer my taxes. I have a goal of buying a property with no mortgage, all in cash to avoid being in debt. I also want to eventually buy more properties and rent them out. Will putting money in my retirement account and deferring taxes hinder my goals to buy properties down the line? What do you think is the better investment? Is it possible to do pursue both of these goals? How would you recommend going about this and budgeting for it? I'm worried that i will regret putting the money in the retirement account and not have as much money as possible on hand. Thanks for your insight. [link] [comments]  |
| Should I leave a public job with a pension? Posted: 06 Feb 2019 10:44 AM PST Hey guys, A little about my situation. I work at a public university in Florida and have for the past 5 years. Currently enrolled in the FRS Pension Plan which vests at 8 years. Salary is 70k (my FT gig and with Adjuncting). I'll be 33 later this year, married with an infant daughter. I'm the only one that works in the home which I own. Health insurance I get free through the college but I use the marketplace for my wife and daughter (its way cheaper than doing family through my job). I also contribute to a voluntary 403(b) through the job which is about $100 a paycheck. I also have a Betterment account that I throw about $75 bucks a week in, and a high yield savings account that I throw about $80 bucks a week in. I can't really do much more than that financially. My question is this, I've been thinking about leaving my job, maybe to teach at a high school or go back to counseling like I've done before. If there is a paycut I could make it up (or more) if I coupled that with adjuncting at my college (which I do now). But I might be looking for some more work/life balance. My entire family is in LE and they swear by the FRS pension. It looks like a great idea long-term if I stay, but I was wondering what you all think? Im looking at a couple jobs and one has a plan where I can put away a max of 6% and they'll match 50% of that. I'm a little ignorant really on the calculations and things like that so not sure if I should even be contemplating leaving my college or the FRS system in general. Should I just stay? I'd like to obviously retire as soon as possible but want to be able to live and not worry too much about running out of money or not sustaining myself and my wife (she's about 10 years younger). [link] [comments]  |
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