Daily Advice Thread - All basic help or advice questions must be posted here. Investing |
- Daily Advice Thread - All basic help or advice questions must be posted here.
- The ETF Tax Dodge Is Wall Street’s ‘Dirty Little Secret’. Banks are pumping billions of dollars into and out of funds with “heartbeat” trades.
- Luckin Coffee Office Raided as China Regulators Probe Fraud at Starbucks Rival
- Oil plunges more than 25%, extending recent losses as storage fills
- Back to Basics: Real Estate Investing
- Study says buying a winning stock is easy: Just find a cool ticker symbol
- Bears, where are you now?
- Schwab Now Suspending Oil Trading for June and July contracts
- What's the riskiest position you currently hold and why do you have it?
- Q2 Tanker earnings estimates.
- Southwest Airlines (LUV) loses $94 million as coronavirus snarls flights
- TMF and TQQQ
- Thoughts on $HEAR (Turtle Beach)?
- Airbus CEO has announced company is "bleeding cash" & 'survival at stake" -
- How is Buffett investing in this climate?
- BP's net profit plunged 67% in Q1
- Do you compare your returns to the market? If so how?
- Live Nation is up 10% in the last week - what gives?
- Negative effective bond yields - What does this mean?
- How come the managers at VGENX don’t start investing more into alternative energy?
- How do you measure someone authenticity in the finance world?
- Tesla stock falls as extended shelter order dampens hope for California factory
- Impact of TSLA entering the S&P500
- Tips for using Margin on Interactive Brokers
- Is there a trailing effect time bomb that's going to kill retail CRE over the next 6-18 months?
| Daily Advice Thread - All basic help or advice questions must be posted here. Posted: 27 Apr 2020 05:17 AM PDT If your question is "I have $10,000, what do I do?" or other "advice for my personal situation" questions. If you are going to ask how to invest you should include relevant information, such as the following:
Please consider consulting our FAQ first - https://www.reddit.com/r/investing/wiki/faq Be aware that these answers are just opinions of Redditors and should be used as a starting point for your research. You should strongly consider seeing a registered financial rep before making any financial decisions! [link] [comments]  |
| Posted: 27 Apr 2020 08:21 PM PDT One day last September an unidentified trader pumped more than $3 billion into a tech fund run by State Street Corp. Two days later that trader pulled out a similar amount. Why would someone make such a large bet—five times bigger than any previous transaction in the fund—and then reverse it so quickly? It turns out that transfusions like these are tax dodges, carried out by the world's largest asset managers with help from investment banks. The beneficiaries are the long-term investors in exchange-traded funds. Such trades, nicknamed "heartbeats," are rampant across the $4 trillion U.S. ETF market, with more than 500 made in the past year. One ETF manager calls them the industry's "dirty little secret." Typically, when you sell a stock for more than you paid, you owe tax on the gain. But thanks to a quirk in a Nixon-era tax law, funds can avoid that tax if they use the stock to pay off a withdrawing fund investor. Heartbeats come into play when there isn't an exiting investor handy. A fund manager asks a friendly bank to create extra withdrawals by rapidly pumping assets in and out. "If the IRS were looking at it, they would say that's a sham transaction," says Peter Kraus, a former chief executive officer of mutual fund manager AllianceBernstein Holding LP who now runs Aperture Investors LLC. Imagine that a grocer got a tax deduction every time someone returned a box of cornflakes to his store. Heartbeats are when the grocer asks a friend to buy all the boxes and return them, just to pocket more deductions. Fund managers and bankers say the trades are perfectly legal, and that most of the taxes that they help regular ETF investors avoid will be paid in later years. The biggest ETF managers, including BlackRock, State Street, and Vanguard Group, all use heartbeats, with help from banks such as Bank of America, Credit Suisse Group, and Goldman Sachs Group, according to market participants who spoke on condition of anonymity. Spokesmen for those companies either declined to comment on the trades or defended their use. The Internal Revenue Service says it's aware of heartbeats and wouldn't say whether it considers them an abuse. To people in the industry, heartbeats are just smart tax strategy. "It's removing a negative from the investment process," says Bruce Bond, a pioneering ETF executive who was among the first regular users of heartbeat trades. "There really isn't a need to have to pay the tax every year. The goal is the best investor experience you can have." To understand heartbeats, it helps to know that they're just a supersize version of something ETFs do every day. ETFs are funds whose shares trade all day on stock exchanges. Unlike mutual funds, ETFs aren't sold directly to regular investors. Instead, they use banks and brokerage firms as middlemen. These large traders don't transact in cash. They make an ETF bigger or smaller by adding portfolio stocks to it, or by taking them out. They call this activity "creating" and "redeeming" ETF shares. (All this is invisible to small investors, who just buy ETFs from brokers.) Enter the Nixon-era tax law. In 1969, Congress decreed that mutual funds can hand over appreciated stocks to withdrawing investors without triggering a tax bill. Lawmakers never explained why they blessed the industry with this unique break, but back then, it didn't seem like much of a giveaway. Mutual funds rarely took advantage of it, because their investors preferred cash payouts. Fast forward to 1993, when American Stock Exchange executives devising the first U.S. exchange-traded fund realized they could put that old tax rule to a new use. Say an ETF needs to get rid of a stock that went up. Selling it would trigger a taxable gain that would ultimately be paid by fund investors. But handing the stock off to a broker who's making a withdrawal achieves the same goal, tax-free. Every time a broker redeems a stake in a fund, it's another chance to avoid taxes. That loophole gives ETFs a tax advantage over mutual funds. It went from a footnote in the tax code to the cornerstone of a new industry. For some of the earliest ETFs, which followed broad indexes such as the S&P 500 and rarely changed holdings, the daily process of brokers creating and redeeming was enough to wash away almost all capital gains. The first and largest ETF, State Street's SPDR S&P 500 ETF, hasn't reported a taxable gain in 22 years. In contrast, a traditional mutual fund run by Fidelity Investments that tracks the same index had a taxable gain in 10 of those years. ETFs proliferated, and some new entrants shuffled their holdings more frequently, so routine redemptions weren't always enough to wipe out the taxes. The PowerShares funds, co-founded by Bond, started trading in 2003 and changed their portfolios every three months. He says his funds wouldn't have kept capital-gains taxes away without heartbeats. "This tool was there," says Bond, who sold PowerShares to Invesco Ltd. and now runs Innovator Capital Management LLC in Wheaton, Ill. "We were the ones to first really utilize it to its full potential." U.S. stock ETFs avoided tax on more than $211 billion in gains last year, according to a Bloomberg Businessweek tally based on annual reports of more than 400 funds. The disclosures don't show how much of that is from the funds' routine use of the ETF loophole and how much is from special heartbeat trades that maximize the benefit. But heartbeats certainly contribute billions to the total. Funds pass taxable gains along to their investors, so by avoiding those gains, they're allowing investors to defer the tax until they sell the ETF itself. The $211 billion in avoided fund gains probably translates to about $23 billion in deferred taxes last year. It's the equivalent of a $23 billion, no-interest loan from the U.S. Treasury to ETF investors, with most of the benefit going to the wealthiest Americans. Heartbeats have had a few nicknames over the years, including "friendlies," but they haven't attracted much attention outside the industry. Elisabeth Kashner, an ETF specialist at FactSet Research Systems Inc., was the first to write about the practice in a December 2017 report. She called them heartbeats because the telltale blips in fund-flow data on her computer screen reminded her of a cardiac monitor. Bloomberg Businessweek identified 2,261 such blips in equity ETFs since 2000. Last year there were 548, worth a record $98 billion. Most heartbeats take place when an ETF has to get rid of stock because of a change in the index it tracks. That was the case in September with State Street's $23 billion Technology Select Sector SPDR. Some of the fund's largest holdings, including Facebook Inc. and Google parent Alphabet Inc., were being dropped from the portfolio because they were leaving the index the fund is designed to mimic. Both stocks had more than doubled since the fund first acquired them, so it probably faced a hefty tax bill if it sold them. On Wednesday, Sept. 19, two days before the index change, $3.3 billion of new assets poured in, increasing the fund's size by 14 percent. The additions came in the form of stock that matched the fund's holdings at the time. The investor's identity wasn't disclosed, but market participants say that, given the size of the transaction, it was probably a large investment bank. On Friday of that week, someone pulled more than $3 billion back out. Trading data suggest it was the same investor that had appeared two days before. Rather than take back the same shares of stock it had contributed 48 hours earlier, the investor appears to have walked away with the fund's oldest shares of Facebook and Alphabet, the ones with the biggest capital gains. Thanks to winnings on stocks like that, the fund reported more than $4 billion in capital gains for the year. But since it used the ETF tax loophole to shield those gains from taxes, its annual report shows, it ended up reporting a $309 million capital loss to the IRS. Sourced:- https://www.bloomberg.com/graphics/2019-etf-tax-dodge-lets-investors-save-big/ [link] [comments]  |
| Luckin Coffee Office Raided as China Regulators Probe Fraud at Starbucks Rival Posted: 27 Apr 2020 01:33 PM PDT Luckin Coffee Inc. (LK) confirmed Monday that it its being investigated by market regulators in China as its Nasdaq-listed shares continued to be suspended following revelations earlier this month that it may have "fabricated sales" reports that could have totaled more than $300 million of more than $300 million. The China-based rival to Starbucks said it was "actively cooperating" with the State Administration for Market Regulation in Beijing after it reportedly raided the company's headquarters over the weekend. The statement followed a move by the China Securities Regulatory Commission earlier this month to investigate fraud claims linked to Luckin's April 2 admission that around RMB2.2 billion ($310 million may bane been fabricated in a scheme linked to its former chief operating officer. The Nasdaq, meanwhile, said Monday that shares in the group remain halted, following their first cessation on April 6, https://www.thestreet.com/investing/luckin-coffee-offices-raided-as-china-regulators-probe-fraud [link] [comments]  |
| Oil plunges more than 25%, extending recent losses as storage fills Posted: 27 Apr 2020 07:05 AM PDT
[link] [comments]  |
| Back to Basics: Real Estate Investing Posted: 27 Apr 2020 04:28 PM PDT Hi All, First of all, I'm a data scientist by profession but a history major by training. So I've tried to cite all relevant data points with a (<source>) tag. This allows us to separate debating the data vs. the analysis. I'm also a complete newbie to real estate investing. One of the main goals in fact of this post is to organize my thoughts so far and solicit feedback from more knowledgable individuals. As part of a balanced portfolio, I've invested passively in real estate for several years (both public REITs and a small amount in a private platform). As my assets have grown and I'm entering the age to buy a primary residence, I've been trying to educate myself on the housing real estate market. After all, even if you don't own any investment properties the purchase of a home is the largest single financial transaction you'll likely ever make. In fact, if you look at the chart linked below (1, see Sources below) you'll see housing is the single largest asset for households with net worth below 1 million dollars, i.e. ~90% of Americans (2). In fact, even in 2010 (in the midst of the Great Financial Crisis): "The primary residence represented 62% of the median homeowner's total assets and 42% of the median home owner's wealth" (3). In fact, reading the Economist recently (obviously in my slippers) I was surprised to discover housing is the world's largest asset class. This HSBC report (avoiding the Economist paywall) cites housing as a $226 trillion (!) asset class at the end of 2016 (4) out of a total net worth in 2018 of ~$360 trillion according to Credit Suisse.
Even with my casual research, it's clear that real estate is divided into multiple segments including residential, commercial, industrial, farm land, etc. Even the subsector of residential is divided into single family, multi-family, commercial, mobile homes, etc. These segments are further divided across geographies with wildly different tax, capital, and regulatory regimes. So far I've limited my research to the US residential sector: single family homes, multifamily, and small commercial apartment buildings. Therefore moving forward when I say real estate I will limit the scope to the above US residential housing market, i.e. acquiring individual or personal portfolio of US housing properties.
More formally, the purpose of my analysis below is:
Note: I considered posting this in /r/realestateinvesting, but ultimately my goal is to evaluate real estate vs. other asset classes. Obviously some people will simply prefer real estate for a variety of reasons, but personally my goal is to achieve the greatest return for the least risk and work. I should stress that I love my career (data scientist) and have no intention of quitting, so the last point is particularly important.
Analysis
One thing that immediately strikes me as an investor accustomed to public securities, e.g. bonds / stocks, is how odd the real estate market (in particular housing) is in comparison. Having a margin account from a broker, i.e. getting leverage, is often a difficult process reserved for "advanced" investors. In residential real estate, it's considered "conservative" for an individual to have leverage of 4-5 to 1 (FHA loans, for example, only require 3.5% down in some cases!) . What's even crazier is that the loan is often issued at only 2-4% over the 10 year US treasury rate. For example today, April 26th, the 10 year treasure is 0.606% while NerdWallet has a rate of 3.3% for a prime credit score, single family home, primary residence 30 year loan.
Perhaps because real estate is the only avenue available for newer investors to take on large amounts leverage immediately, I've seen extreme and, in my opinion, irrational positions on the subject. Even a cursory glance at BiggerPockets, /r/realestateinvesting, etc. uncovers multiple posts along the lines of either "real estate investing is the best investment ever!" vs. "the real estate market is a massive bubble and will crash soon". I've summarized a few of the common tropes I've seen below with my analysis.
As noted above, real estate / housing has numerous segments that are further divided across geographies with wildly different tax, capital, and regulatory regimes. Saying that "real estate" will crash is like saying the "food industry" will crash. What segment and where? US soybean growers? Fast Food? Argentinian ranchers? McDonalds in particular? Limiting our discussion to US housing: the Case-Shiller national price index (7) shows that home prices dropped ~27% from peak to trough in the Great Financial Crisis over a period of almost 6 years (Mid 2006 to early 2012). The reason this was such a catastrophic event is that housing had never decreased nationally in a significant way before in the modern era (see Case Schiller home price index). Of course, it's worth noting that housing had rarely increased rapidly against inflation before. Let's assume we had an equivalent event occur. The Jan 2020 index was at 212, so home prices would decrease by 27% to ~155 (mid 2008 levels). Crucially though, this price drop would be expected to play out for years! During that time vested interests (more on that later) would lobby governments extensively for support, foreign and US investors could form funds to take advantage of the situation, etc. As a reference point there is ~$1.5 trillion available in US private equity funds alone as of January 2020. However, it is worth pointing out that this is at the national level. Local real estate markets, particularly those dependent on select industries or foreign investors, could easily see more dramatic price movements. The US census has a really cool chart (22) that shows the inflation adjusted (as of year 2000) median home values every decade by state from 1940 to 2000. We see that Minnesota home values actually dropped from $105,000 in 1980 to $94,500 in 1990, a fall of more than 10%.
Everyone needs a place to eat, but restaurants and grocery stores are famously low margin businesses (5). Farms supply an even more basic need, but many go bankrupt (6). The question isn't whether housing will go down or not, but whether it will return an attractive rate of return compared to alternative investments. It's also worth pointing out that for most "retail" US housing real estate investors, they are investing in a narrow geographic area. Migration and births/ deaths can play a huge role in the need for housing in a given area. Case in point, NYC may have actually begun losing population to migration in 2017 / 2018 (23). Even more interesting, NYC has experienced a substantial loss due to domestic migration which is almost balanced by foreign immigration / new births (24). If foreign immigration decreases in the post-COVID we would expect NYC's population to decline more rapidly given current trends. It is entirely possible for national housing prices to modestly increase while expensive coastal markets decline significantly, for example.
This one has some factual basis. Freddie Mac put out a study in Feb 2020 (18) which indicated that there is a shortage of housing units between 2.5 - 3.3 million units. Some interesting notes about this study is that they consider the "missing" household formation and extrapolate interstate migration trends. As noted below, the US builds ~1.3 million housing units a year, so this reflects ~2 years of housing construction. It's also worth noting the geographic variation, with "high growth" states like Massachusetts, California, Colorado, etc. seeing ~5% housing deficits vs. states like Ohio, Pennsylvania, etc. seeing housing surpluses of ~2-4%. However, a Zillow analysis on our aging population (11) points to a slightly different conclusion. Based on their analysis, an additional ~190,000 home will be released by seniors between 2017-2027 compared to 2007-2017. That number increases by another 250,000 homes annually between 2027-2037. Combined, this is about ~50% of the average annual homes constructed in the US between 2000-2009 at ~900,000. Given these slightly conflicting reports, let's get back to basics. First, let's separate housing into single family homes, multi-family units, and large apartment buildings. Single family homes, particularly near dense and economically vibrant metros, are far more supply constrained. In contrast, multi family units / apartment towers are, barring regulatory issues (see California), less constrained by available land. See Hudson Yards in NYC, the Seaport area in Boston, the Wharf in DC, etc. It's worth noting that due to costs / market demand most of these developments cater to the entry level luxury category and above, but they are new supply. I actually wound up looking at US Census projections to get a sense of the long term outlook. By 2030 the Census estimates the population will grow from 334.5 million to 359.4, for a total increase of 24.9 million or an annual increase of 2.49 million (8). In 2019 the Census estimated 888,000 private single family units and 403,000 units in buildings w/ 2+ units were constructed for a grand total of 1,291,000 units (9). The average number of people per US household is 2.52 (10). Some simple math suggests that if we assume each new single family home contains the average number of Americans and each apartment conservatively contains only a single person we get 888,000 * 2.52 + 403,000 = ~2.64 million. Now, talking about averages in a national real estate market reminds me of a joke about Mars: on average it's a balmy 72 degrees. But the point still stands that at a high level, theoretical sense there is sufficient "housing" for the US population. The question, as always, is at what price and location?
This one honestly irritates me. While there are many advantages to real estate I can see, safety is not one of them. It is a highly leveraged, illiquid, extremely concentrated asset when bought individually (i.e not in a REIT). Let's use an example here. Is there a financial advisoy in the world who would recommend you put your entire investment portfolio in Berkshire Hathaway? Of course not, diversification is the bedrock of modern personal finance. And yet Berkshire Hathaway is an extremely diversified asset manager with well run and capitalized companies ranging from Geico to Berkshire Homes to Berkshire Energy. Oh, and it also has $130 billion (with a B) in cash equivalents. I honestly think this impression stems from 3 factors:
One common theme I'm already noticing listening to podcasts, reading blogs, etc. is that many people started investing in the aftermath of the Great Financial Crisis (2009 - 2011). And, in retrospect, it was clearly a great time to buy property! But it was also a great time it turns out to buy almost every investment. I plugged in the average annual return of the S&P 500 from December 2009 to December 2019 with dividends reinvested (and ignoring the 15-20% long term tax on dividends) (12). It was 13.3%. If you managed to buy at the market bottom of Feb 2009 it was 15.8%! The long term annual average of the S&P 500 from 1926 - 2018 is ~10-11% (with dividends reinvested). (13). The S&P has never lost money in a 30 year period with dividends reinvested, see the fantastic book Stocks for the Long Run (14). In fact, if you're investing before 30 the worst 35 year period (i.e. when you would turn 65) is 6.1% (15). Housing, in general, has tracked at or slightly above inflation ( 16). Even a click bait CNBC article (17) about "skyrocketing" home prices states that homes are rising 2x as fast as inflation (i.e. ~4%). If you look at the CNBC chart for inflation adjusted prices, you'll see a compound annual growth rate (CAGR) of 2.3% from 1940 to 2000. Let's do this same exercise again with the Average Sales Price of Homes from Fred (i.e. Fed economic data) (18). In Q1 1963 the average sales price of a house was $19,300. In Q4 2019 it was $382,300. That is a CAGR of ~5.38% over ~57 years. Another thing to keep in mind is that while real estate does have some tax advantages, there are also property taxes, maintenance, etc. But it's harder than that. Because real estate is an illiquid asset. In general, illiquid assets require higher returns than the equivalent liquid asset because of the inconvenience / risk of not having the ability to transact frequently.
Case study of real estate purchase: I'd like to focus the rest of my analysis on an area that many members of BiggerPockets, /r/realestateinvesting, etc. seem to gloss over: credit. I was surprised to see that for first time home buyers, 72% made a down payment of 6% or less according in Dec 2018 according to (27). This would imply prices only have to decrease 6% to put these new homebuyers underwater, i.e. owe more after a sale than their mortgage. But this fails to take into account costs associated with buying a property, which are substantial at 2-5% for closing according to Zillow (28). Costs for selling a property are even more substantial, ranging from 8-10% according to Zillow (29). This means that sellers only putting down 6% could be underwater (in the sense that they couldn't sell without providing cash during the sale) with even modest price decreases when taking into account these transactional costs.
Obviously there are ways to reduce these costs, so let's walk through a hypothetical example of the median valued home of ~$200,000.
A young, first time home-buyer puts down 10%, or $20k, and takes out a mortgage for $180,000. They also pay (optimistically) closing costs of 2% for $4000. Luckily, they bought in a hot housing market and prices increased 5% (real) over the next 5 years. Their house is now worth ~$255,000. They sell their house and again, optimistically, closing costs are only 4%. This means they pay $10,200. Consequently, after netting out costs we calculate naively that they would make $255k - $10k - $4k - $200k (original purchase price of home) = $41k. Given they only invested $20k of their own money, this is a compound annual growth rate (CAGR) of ~15.4%, which is handily above the S&P 500's average. This is the naive calculation I first made, but as we'll see it is deeply flawed. First, let's look at costs.
WalletHub has a really nice chart that shows (conveniently) property taxes on a $205,000 home across all 50 states (30). The average American household spends $2375 on property taxes, so let's assume a little less and go for $1500. So 5 years x $1500 = $7500.
For home maintenance, the consensus seems to be ~1% annually for home maintenance with wide variation. We'll assume that's $2000 off the base price, so $2000 * 5 = $10,000. (31).
For homeowner's insurance, Bankrate (32) provides a nice graph that shows the average annual cost for a $300,000 dwelling across all states and then a separate chart for costs based on dwelling coverage. For a $200,000 dwelling coverage we have a figure of $1806 per year, so over 5 years we have $1800 * 5 = $9000.
Finally we need to calculate the interest on the debt. One thing that I didn't realize until I looked at an amortization table how front-loaded the interest payments are. Case in point, I plugged in the $180,000 loan into the amortization calculator (34) using a 3.5% interest rate and saw that we pay on average ~$6000 each year in interest vs. only ~$3800 to principal.
So lets's run the new numbers. You sell your home still for $255,000. After 5 years, your mortgage is now ~$160000 (i.e. you paid off 20,000 over 5 years, or ~$4k per year). So after the sale you are left with ~$95,000. The buying and selling costs remain the same as before, so we subtract the $14k for $81,000. We also then subtract $7500 (property taxes), $10,000 (home maintenance), $9000 (homeowners insurance) which gives us $54,500.
We paid ~$9,700 each year in mortgage interest + principle (~6000 interest and $3700 principal). So 5 * 9700 = $48,500.
So, net of everything we get $255,000 - $160,000 (remaining mortgage) - $48,500 (mortgage payments over 5 years) - $14k (buying / selling costs) - $7500 (property taxes) - $10,000 (home maintenance) - $9000 (home insurance) = $6000. And we put down $20,000 as a downpayment, for a net compound annual growth rate (CAGR) of negative $21.4%.
That is truly an astounding result. We had 10x leverage on an asset that went up 5% each year for 5 years and we somehow lost money on our "investment" of a down payment? Keep in mind we also used fairly optimistic numbers (particularly home price appreciation) and didn't factor in PMI, etc. On the flip side, this home provided shelter, i.e. you didn't pay rent. That's a massive "avoided" cost and I don't mean to minimize it. But the point here is that many homebuyers I've spoken to fail to account for the substantial costs of home ownership and expect their primary resident to generate a substantial return.
Now, of course, for real estate investing you would likely either a) hold the property for less time and attempt to flip it via forced appreciation or b) have tenants in the property. Let's focus on b) because frankly that's more of my interest. From what little research I've done flipping houses requires much more time that's incompatible with my day job.
I went ahead and used the rental price calculator I found online at (36) to calculate the return. I used a rent of $1300 monthly, a bit lower than the average national rent of $1476 (35) because our home price was also lower than the national average. I assumed a low vacancy rate of 5%, and no other expenses beyond the ones cited above (i.e. I didn't assume property management, higher loan interest rate, higher property taxes).
The calculator spit back a 5 year internal rate of return (a metric in this case useful to compare against the securities markets) of 27.79% return, i.e. a profit of $63k on an initial investment of $20k. The IRR as I understand it captures the time value of money, basically accounting for when you made various returns (37). E.g if an investment over 30 years pays nothing then gives you a lump sum payment at the end that's very different than if it pays 1/30th of that lump sum every year. It's useful in this case for comparing against the stock market because the IRR takes all future cash flows back to a net present value of 0, i.e. as if we invested all the money immediately.
&Now let's do some scenario modeling (originally we had 10% down, 3.5% interest rate for an IRR of ~28%):
This scenario for me demonstrated a number of interesting properties.
401k analysis As I mentioned above, one of the big questions around real estate investing that I rarely see asked is "is it an appreciably better investment than the alternatives"? For W2 workers, which is ~50% of private sector workers, this question becomes even more pertinent because 401ks have massive tax benefits. In fact, only 33% of US households own taxable accounts outside of a 401k, which means the vast bulk of US households either have no accounts, 38%, or own only a retirement account like a 401k, 29%, according to (39). Let's assume we have a middle to upper middle class worker making ~70k (this puts them roughly at the 75% percentile). They want to invest, and see two options:
At a salary of $70k and assuming you took the $12k standard deduction, you would still see much of your income fall into the 22% tax bracket. While certain states charge no income tax, they generally make it up in much higher sales / property taxes, so let's also assume a 3% state income tax (40). This means that if you invest $19,500 in a 401k (the maximum in 2020) that's equivalent to only $14,625 post-tax (because the $19,500 would be taxed ~25% before it got to you). That leaves almost $6000 when compared with the down payment figure above, which is coincidentally the exact IRA contribution limit for 2020! The math for deductions for the IRA gets painful, but we can assume a deduction of ~$1500 (i.e. 25% of 6000). Now, if your work offers an HSA it gets even better, because those contributions are tax-free even from social security (which is typically a 6.2% tax) + medicaid (1.45%). This means that if you contribute the $3500 limit, that's equivalent to only $2300 post-tax.
This is getting rather long, so for the sake of simplicity we can basically say that in lieu of putting down a $20,000 post-tax downpayment on an investment property you could instead invest $19500 + $6000 + $3500 = $29000 into the stock market. What's more, fees for well managed 401ks through Vanguard, Schwab are often ~0.25% (i.e. $72 annually on the $29k above).
If we assume the average S&P 500 index returns of 10% (we'll ignore the $72 annually in expenses and of course there are no taxes), we would see $29k compounded over 5 years = $47,809. Since we're investing the money all immediately, this is (I believe) more or less equivalent to the IRR rate.
So, what do we need to achieve to beat that return with our investment property? Well, we previously assumed a blistering 5% real home price appreciation. With inflation at ~2%, that's a nominal 7% home price appreciation. According to both Zillow and Core logic, Idaho is the state with the fastest home appreciation values pre-COVID at ~9%. We're essentially predicting close to this level for 5 years, which is quite rare. In August 2019, US home prices nationally were gaining ~2.6% according to (41). Let's plug those numbers into our rental property calculator from above. At a 10% down payment, 3.5% interest rate, and 2.6% home price appreciation we see an IRR of 18% per year. Game, set, match, real estate, right?
Well, sort of. Right now we are assuming optimistic projections about maintenance (1%), closing costs (2%), and selling costs (4%). What if we bump those up to the averages cited by Zillow (3% and 8%)? Uh-oh, now we're down to 12.38%. Okay, but what if we assume rent goes up by the same amount, ~2%? Great! Now we're back up to 14% IRR. But if we assume all the other expenses like home insurance and maintenance go up 2% a year as well, we're back down to 11%.
We could go on forever, but the point is that real estate (particularly for rental properties) are extremely sensitive to assumptions you make on a number of factors. Given the risk, illiquidity, and work involved with a real estate property I would want to see a substantially higher return than the tax advantaged, hands off 10% my 401k gives me. I didn't even include the typical 3% match for the 401k, which would have added $2100 to the initial investment amount and increased the 5 year return to $51,272.
The bottom line in my mind is that for most W2 workers who have access to pre-tax investments, they should max them out first. If you're lucky enough to be able to max out all of the above pre-tax accounts + get a 3% match (i.e. $31k total) every year, after 15 years at a 10% return you'll have $1.2 million. In 30 years you'll have $6.8 million. And again, keep in mind that maxing out your pre-tax accounts only "costs" you ~$20k, because that's what you would get after taxes. And you'll have "made" those millions without spending a single hour outside of your day job working.
Based on the above analysis and calculations, here's what I've come away with as a newbie to real estate investing:
Some thoughts on the future: Forecasting is always risky, but at the same time we all have to form an opinion on where the future is headed. My general thoughts are that crisis tend to accelerate existing trends rather than create new ones. There were already recession concerns in late 2019, and US GDP growth expectations had been downgraded to ~2.0% by the OECD even before COVID (45), albeit with slight optimism around the Phase 1 trade deal with China. Geopolitical tension and capital controls in China had led to mainland Chinese investors slowing their investments in US real estate and increasing dispositions (47).
From my point of view, I'm interested in seeing how the market reacts over the next 3-6 months. Do sellers react by rapidly putting properties on the market before it's "too late"? Are there enough prime buyers given the tightening credit, particularly for expensive coastal markets, to absorb a spike in listings? As Warren Buffett once said: ""At rare and unpredictable intervals...credit vanishes and debt becomes financially fatal. A Russian-roulette equation--usually win, occasionally die--may make financial sense for someone who gets a piece of a company's upside but does not share in its downside." We shall see. Sources:
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| Study says buying a winning stock is easy: Just find a cool ticker symbol Posted: 27 Apr 2020 07:50 PM PDT |
| Posted: 27 Apr 2020 12:53 PM PDT I wanted to gauge the sentiment on this sub. This subreddit has been extremely bearish in the past couple of weeks. How are you doing now? Do you still feel bearish, if so why? What are your positions? [link] [comments]  |
| Schwab Now Suspending Oil Trading for June and July contracts Posted: 27 Apr 2020 01:50 PM PDT "Crude Oil Traders: Effective April 24, only closing trades are being accepted for June and July WTI Crude Oil futures (CLM20) (CLN20), Brent Crude Oil futures (BZ1M20) (BZ1N20), and mini-Crude Oil futures (QMM20)(QMN20). Please contact Futures Support at 877.280.6040 for any assistance." [link] [comments]  |
| What's the riskiest position you currently hold and why do you have it? Posted: 27 Apr 2020 03:20 PM PDT |
| Posted: 28 Apr 2020 02:30 AM PDT I posted in WSB, but the DD is more in the style of r/investing. Estimates used actual fleet composition of each company, using spot rates of each vessel class starting from beginning of Q2. For you all that think it's too late to get in the tankers, some of these companies are going to put up earnings numbers in Q2 that are 1/4-1/2 of their market cap. EURN will put up about 3.50eps- stock is 12.20 TNK 7.50eps -25 TNP 2.00 -4 (that's 50%) NAT 1- stock price anywhere from 4-20, at this point who knows DHT- 2.50 -8.30 (going to have a disappointing q1 because they got unlucky in the beginning of q1, as they said in their q4 conference call) FRO 2.50- stock 10.50 And half the quarter is basically locked in because the ships are chartering for the first week of May at high rates. The day rates would have to crash to alter these projections. Even if rates went to 0 TNP still makes 1/4 of its market cap q2. The product tanker guys, like stng and asc are even higher going forward, because their rates just jumped this past week. Just today, an LR2 (2 sizes smaller than a VLCC) now charters for more a day than a VLCC. Now this wasn't all quarter, but if it kept up, those rates would earn stng and asc (who own only MRs) closer to 80%-90% of their stock price every 90 days. Lastly, every conference call these companies do, they let the analyst know what their average fleet TCE (day rate) is for the quarter to date. If you look at the analyst projections right now, they have not been updated yet. You are going to a get line of upgrades as the q1 conference calls end because of the monster numbers that the tankers have already put up in q2. To show you how out of date the projections are, EURN has a q2 projection of 1.20.... they earned that in April. [link] [comments]  |
| Southwest Airlines (LUV) loses $94 million as coronavirus snarls flights Posted: 28 Apr 2020 04:17 AM PDT Southwest Airlines lost $144 million before taxes during the first three months of the year as the elimination of non-essential travel aimed at slowing the spread of COVID-19 brought business to a grinding halt. The Dallas-based air carrier lost $94 million after a tax benefit, or 18 cents per diluted share, as revenue slid 18 percent to $4.2 billion. Wall Street analysts surveyed by Refinitiv were expecting a loss of 41 cents a share on revenue of $4.42 billion. https://www.foxbusiness.com/markets/southwest-airlines-coronavirus-earnings-q1-2020 [link] [comments]  |
| Posted: 27 Apr 2020 09:26 PM PDT 50/50 rebalancing quarterly. I used to buy these two ETFs all throughout 2010-2018. I also owned stocks and I never held these two ETFs for too long because lots of older people with more financial industry experience than me said it wouldn't work. Now it's 2020 and I've gotta ask... If we look at a portfolio of TMF/TQQQ bought 50/50 on January 1st is up 28%. That is better than any stock index. If we do a back test for multiple years I get higher Sharpe ratios, higher CAGR, the best year performance is significantly more exaggerated than the worst year performance, etc. You are forced to buy low and sell high... And it's clearly beating the SPY. If anything it might make sense to add a small position in an actual treasury fund like TLT or IEF to offset some of the leverage... But the back testing says something else. I used portfolio visualizer and SPY as my benchmark. Anyone have any legitimate reasons why this is not a good idea? Edit: I've added some data. We are starting in 2010 with $10000 invested equally into TQQQ and TMF. Then $1000 is added quarterly. Portfolio is rebalanced quarterly as well. SPY: final balance $84,114 CAGR 25.89% best year 32% worst year -19% Sharpe .79 50/50 TMF/TQQQ: final balance $386,000 CAGR 48.46% best year 86.59% worst year -7.36% Sharpe 1.41 TLDR considering how the fed has been acting, the precedent is bailouts and socialization of losses. What real world scenario am I missing where TMF/TQQQ does not continue to outperform a more traditional stock/bond portfolio? Considering the portfolio is up 28% YTD can we assume it has been debunked that leveraged ETFs can't be held long term. (I have also had lots of success buying and holding UGLD for long periods, I have shares I bought in November of 2019) [link] [comments]  |
| Thoughts on $HEAR (Turtle Beach)? Posted: 27 Apr 2020 06:38 PM PDT So I watched a video on Turtle beach stock. In 2013 when the last generation of headsets came out turtle beach made an incredible run from $10 a share to nearly $80 a share. In 2018 when fortnite blew up they made a run from $3 a share to nearly $40 a share. The new generation of gaming consoles is set to be released later this year and in the last 1 week they are up 44%. I feel this could just be the start of another crazy run and might be a great time to buy. In addition, about half of their headsets on their website are sold out and they are all sold out at my local Walmart. [link] [comments]  |
| Airbus CEO has announced company is "bleeding cash" & 'survival at stake" - Posted: 27 Apr 2020 06:53 AM PDT The quotes out of context sound more dire than reality would seem to indicate. I feel the general consensus is that the EU would never allow Airbus to go under, just as the same would be true with the US and Boeing. I am looking at the price of EADSY right now and can only think it's a good buy and hold. If it's under $14/share I feel there's money to be made. Just curious what others like or dislike about the only other commercial airline maker in the world. [link] [comments]  |
| How is Buffett investing in this climate? Posted: 27 Apr 2020 03:50 PM PDT Earnings are down, economy is frozen. Unemployment at historic highs, yet valuations are rising. The Feds are printing on overdrive yet the USD is still strong relative to other currencies and commodities (especially oil). Have the feds truly found the secret to infinite value creation? Is value investing dead? [link] [comments]  |
| BP's net profit plunged 67% in Q1 Posted: 28 Apr 2020 04:37 AM PDT https://www.cnbc.com/2020/04/28/bp-earnings.html The U.K.-based oil and gas company posted first-quarter underlying replacement cost profit, used as a proxy for net profit, of $800 million. That compared with $2.4 billion in the first quarter of 2019, reflecting a fall of 67%. The company added $6 Billion in debt and announced a dividend of 10.5 cents per share for the quarter. [link] [comments]  |
| Do you compare your returns to the market? If so how? Posted: 27 Apr 2020 04:08 PM PDT Since I started investing a bit on my own, I've been trying to compare my investments to just investing in the SP 500. Anyone else do the same? If so any tips on an easy way to do this? It's been a very manual process for me. Or is there another benchmark you compare yourself against? [link] [comments]  |
| Live Nation is up 10% in the last week - what gives? Posted: 27 Apr 2020 03:54 PM PDT Anyone have an interesting perspective for why Live nation is surging? The ceo acknowledged recently that concern and live events wouldnt take place until 2021 at best. Whats driving the surge? [link] [comments]  |
| Negative effective bond yields - What does this mean? Posted: 27 Apr 2020 09:07 PM PDT I know there has been speculation as to if the US treasury yields will go negative, but there is something I've been contemplating: the effective yield of them already has *been* negative for some time. The fed's stated policy goal is an inflation rate of 2%; it usually hits between 1%-1.5%. There were many times even in the last decade where the 10 year T-bond yield was below the stated inflation goal rate, and now it's around 0.6%, implying a return of -1.4%. What I am wondering is, why are people investing in these securities which are going to lose money after inflation happens? Is it simply because of an oversupply of dollars? Or is it an undersupply problem? If the demand for these bills are in high demand, ie US dollars are in short supply, and the yield falls below the inflation rate, then that is effectively pulling dollars out of the system, no? Less dollars in the system means the yields will fall lower, and inflation will pull even more out. In the last recession in 2008, inflation hit around 5.5%, with the 10 year bond yield sitting around 3.5%. If inflation hits between 5%-6% again, the spread between that and the yield is going to be much larger. Does this mean that we shouldn't expect inflation as high as 5-6% this time around? Or does it mean that the markets are so volatile right now that traders would rather take a 5% loss on their investment than be exposed to the stock market? [link] [comments]  |
| How come the managers at VGENX don’t start investing more into alternative energy? Posted: 27 Apr 2020 07:43 PM PDT Wouldn't they have the foresight to see sustainable/alternative energy is the future? Exxon Mobil, Chevron, total sa, eni, bp etc probably have a lifespan that's as limited as the United States postal service (Both are industries in a secular decline). [link] [comments]  |
| How do you measure someone authenticity in the finance world? Posted: 28 Apr 2020 03:51 AM PDT Just surfing on some site for news articles and this guy pops up Eric J. Fry he compares himself to billionaire hedge fund managers on Wallstreet like bill-Ackman and many other. claims to beat them. [link] [comments]  |
| Tesla stock falls as extended shelter order dampens hope for California factory Posted: 27 Apr 2020 06:19 PM PDT Already I predicted Tesla will get hit even the market continues to fly. Now Expect Tesla to fall like rock tomorrow : - Tesla stock falls as extended shelter order dampens hope for California factory https://www.marketwatch.com/story/tesla-stock-falls-as-extended-shelter-order-dampens-hope-for-california-factory-2020-04-27 [link] [comments]  |
| Impact of TSLA entering the S&P500 Posted: 27 Apr 2020 05:57 PM PDT Assuming the stock is going to enter the index at some point and that it could already be one on top of the list, does this drag lots of cash from the money already invested in index etf to the stock? Creating lots of demand and driving the prive up? Trying to firure the mechanism out.. [link] [comments]  |
| Tips for using Margin on Interactive Brokers Posted: 27 Apr 2020 08:18 PM PDT Hi all, I'm pretty happy with my normal brokerage (Schwab) but am young and am interested in opportunities to take more risk. I opened an IBKR account and my plan is to invest a modest sum (maybe 5k) in some index funds using margin. According to my math, if I transfer 5k into my account and buy an additional 65% of that - $3250 on margin, I can sustain a 20% loss before dipping below the 50% equity requirement ( (.8*(5000+3250) - 3250) / (.8*(5000+3250)) ~= 50%) I'm still kind of unclear on some of the other details like how the interest is paid, maintenance margin, etc but that's part of why I'm creating the account - just to get familiar with the process. Are there other things I should be concerned/thinking about? Have you had generally favorable experiences using IBKR margin in the past? Thanks [link] [comments]  |
| Is there a trailing effect time bomb that's going to kill retail CRE over the next 6-18 months? Posted: 27 Apr 2020 09:01 AM PDT Commercial real estate is generally valued using a cap rate on net operating income. Deals are financed over 5-7 years with a much longer amortization period. Some loans are interest only, but even those that aren't are very interest heavy, thanks to amortization. The average cap rate in CRE for retail the past few years has been quite low (~5%). We're now at the point where a massive number of retail businesses have been closed for 30-60 days, with a large number of those businesses likely paying no rent at all or a discounted rate. It seems likely that a large swath of those businesses will fail, unfortunately. It also seems likely that even when things re-open, you'll have (1) Consumers who are wary of public places like restaurants, etc (especially older people, who also have more disposable cash) and (2) people who can't afford to shop or eat out as often because they haven't been working for 2 months. All of the above means an unavoidable drop in NOI and therefore value, that's going to force some owners to pay out of pocket to cover the loss when they refinance, at which time we can assume some owners will just walk away (especially those with vacancies due to businesses failing). This will have a cascading affect that'll push cap rates up, driving values even lower across the sector. Just a thought: I'm going to see if there are any REIT ETFs that may be exposed and see what puts are doing. [link] [comments]  |
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