Entries Tagged 'Investing' ↓

Recently my mom was trying to convince me to buy a house again, and once again I had to tell her that San Mateo is ridiculously expensive and renting costs one half or one third of a mortgage.  I have said this about 10000 times already.  Yes, the median price has dropped over $100k, but it still costs around $640 per square foot in my zipcode.  So I said that investing my savings in the stock market is better at this point, and to this she retorted, “You think it’s easy to make money on the stock market?  There has been no returns on the SP500 for the last 10 years while real estate doubled and tripled!”

Superficially, my mom is right.  According to Vanguard’s SP500 index fund, the returns for the last 10 years is 2.85%, and that doesn’t even beat inflation.  In the same time period real estate prices did double and triple at least in California.  However, this doesn’t mean that the SP500 gave no returns during any of those years.  If you look at Vanguard’s fund record, the return for the last 5 years is more than 7%, and that handily beats inflation.  Most people I know who invest in the SP500 do so through 401ks and IRAs and contribute money as time goes on. So even if the money they put in 10 years ago did not earn money, the money they put in during the lowest years of the market would be earning quite a bit.  The only situation where someone would be earning 2.8% on all their money is if they put in all their money 10 years ago and left it there and that is hardly the case with most investors.

Additionally, investors in stocks are not restricted to buying stocks in the SP500.  In the last ten years international stocks in South America, Europe, Asia, and Oceania have been performing quite well. Investors could have bought REITs which get their dividends from real estate and participated in the real estate boom. The possibilities are endless.  Even in the current down market, it is possible to make money in the stock market.

Ultimately, hindsight is 20/20, and I think my mom is wrong in saying that stocks are the lesser investment because she is cherry picking a decade where real estate appreciated abnormally. Don’t get me wrong, I think it is possible to make money in real estate, too, but worshiping one asset class as the ultimate holy grail is a bit short sighted.  I like stocks for their liquidity and hassle-free nature.  For example, I never have to mow the lawn of my mutual funds or fix their roofs.  If I can get enough return from my funds to come out ahead, then I am happy.  Basically, I still believe that having a diversified portfolio of low cost funds is the way to build wealth.  Eventually I will buy a house, but I will probably be paying cash and the amount of cash I spend won’t exceed 25% of my portfolio.  I would do it this way so I don’t overload my portfolio with real estate.

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Well, I’m reading some panic-inducing headlines lately about the Dow going down 20% and how it is worst June since the Great Depression.  Recently my mom asked if I were selling my investments lately, and I  said no way.  Here are some of the reasons why I am not panicking and keeping my portfolio intact.

1. I don’t need the money  -  The hubby and I have a cash reserve that could last more than a year of our expenses.  So there is no need to touch our long term investments.

2. No reason to sell at a low point – Most mutual fund investors do not get the long term gains as advertised by the funds because of panic selling at low points.  Since most of my portfolio is in funds, I am keeping them still to get the long term benefits.

3. I have gains – Yes, my portfolio has gone down a few percentage points, but overall I still have gains because I have been investing for more than three years.  So if I do sell now, I still have capital gains taxes to pay, and that doesn’t seem to be worthwhile.

4. Volatility is normal - This is an election year, so volatility is to be expected since there are a lot of uncertainties. Additionally, the turmoil in the credit/finance industry has not totally settled yet. I would be more worried if there was no volatility and the markets are shooting straight up because that might indicate another bubble.

At this point, the best thing for long term investors to do is to not look at the market.  A funny story I read at the Vanguard Diehards forums said that a photographer asked one of the Bogleheads  “How’s the market doing?”, and someone answered, “I don’t know and I don’t care!”. I like that attitude.  I think   my portfolio is fairly well diversified and I am comfortable with its long term growth, so I am just leaving it alone.  If I look at it too much, I might be tempted to do something stupid, and that could be disastrous.

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Okay, I am not really at the stage where I am liquidating my investments yet, but my parents soon will be. I have also been hanging around the Early Retirement forums quite a bit so I have been thinking about this since I do want to retire early. When you retire, how do you handle liquidating your retirement funds for everyday expenses?

From what I have read, it seems that these early retirees take the following strategies.

1. Let the nest egg grow as long as possible - Most people advocate letting the investments grow as long as possible and spending other income such as pensions, Social Security, or side income.

2. Keep a cash equivalent reserve of 3 to 6 years - Some early retirees say that they have a big cash fund that could last them for a few years. When they use it up, they sell enough investments to last them for another few years and let the rest grow.

3. Withdraw 4% or less of the entire portfolio per year - The 4% withdrawal rule has been discussed extensively all over the forums. Basically the idea is that 4% is a safe withdrawal rate that gives you the greatest chance of your portfolio lasting for your retirement. It is called a “safe” withdrawal rate based on simulations of portfolio withdrawals during different periods of the stock market. A tool the early retirees love is FIRECalc.

4. Be aware of taxes - One suggestion I read is that in years where you expect to spend a lot you should liquidate the tax-free accounts like Roths, but in the years where you don’t spend a lot you should liquidate the taxable accounts because your tax rate would be lower.

There are also many discussions of annuities but most people seem dismissive of these because annuities cost quite a bit. I think for me I would have a hard time switching from a saving mindset to a spending mindset. I would probably worry if I were spending more than my income, but being retired wouldn’t really prevent me from incoming generating activities like blogging so maybe it won’t be so bad. Anyway, one day I will get there, but for now I just like reading other people’s stories.

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It has been three years since I graduated from college, and it certainly has been interesting. I made quite a few friends, and also picked up a hodgepodge of technical skills from three different companies. Oh yeah, I got married too. So now what? Well, my grand goal is to become financially independent in 7 years because by then I would have served corporate America for a total of 10 years, and I think that is enough. Is this doable? Well..

I know it’s doable because my parents earned enough to retire together in the past 10 years despite having more financial challenges than my husband and I. Ten years ago my parents were more than forty years old and their salaries were much lower than our current salaries even after adjusting for inflation. They had pretty much no savings because they just graduated from grad school and they spent what money they had on the relocation from Hawaii to the Bay Area and bought a car. They also put me through college and weathered the dot com bubble, but they managed to do quite well. If they wanted to retire now, they really could do it. My mom doesn’t think so, but actually the numbers are in their favor. So I really see their success as an inspiration and a mark of certainty that my husband and I can do the same.

My mom once said that I can’t use them as a benchmark because they are much older than us so we need a lot more money for retirement. She also said that I was a very cheap child to raise so maybe we won’t be so lucky with our future kid(s). Additionally, inflation is running wild now and the buying power of their money was greater than ours. Another thing is that their Social Security benefits will be much better than ours. I have considered all of those things and I still think it is possible for me to quit my job in seven years because we are currently saving and investing a very large percentage of our income. Additionally, I will keep on writing so I will have some income and the hubby doesn’t necessarily have to quit his job. Though he did say that if we were financially secure and he did not need to work he would design and program games on his own rather than work for a company where he doesn’t have total control over the process of creating a game. He also loves kids so he said that if he has the opportunity to be home with our future offspring he would take it. So I take those comments as an indication that if we could both “retire”, he would join me.

Don’t get me wrong. I don’t hate my job and I don’t hate working, but I hate the fact that society makes us believe we are supposed to stop working at age 65 or 67. At that age, you don’t have that many years left to enjoy life. I think ultimately retirement for me and my husband means that we can pursue our own passions rather than whoring our talents and adding to someone else’s bottom line.

Seven years is really a stretch goal for our financial independence because we would only be 32 by that time and we would have to support ourselves for many years. I calculated that we probably need at least a portfolio worth $1.4 to $1.5 million with the FIRECalc based on an assumption that we live on around 4% of the portfolio and our side income. Some people think I am a bit crazy, but I really believe that it is possible even with children. Anyway, we will see in seven years, and hopefully The Baglady is still around then so all of you can see if this grand goal has been achieved.

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This story comes from my friend The Retirement Hobo.  He has really finished working and is now traveling around Asia like a retirement hobo should.  He is sending his friends emails and I really liked this story so I asked him if I could post this story on my blog.  He said YAHHH!!! So here it is!
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Just wanted to share one day with you all.

A few days ago, a friend introduced me to his private mountain.  That’s right, a mountain.  He bought it years ago as an investment property but the license fell through and now he turned it into a farm where he and his family can camp out and eat fresh organic vegetables and tropical fruits he grows and barbecue fresh farmed trout from their pond.

We entered the gate that marked the mountain he owned…that’s right, a mountain…and it was so nice.  The weather was semi-tropical, a slight mist in the air, with the sunset beaming the day’s last rays through the myriad of trees, scattering light onto the stone path.  We drove a few hundred meters and reached his man-made cottage and barn.  There was some ducks and geese chilling by the lake and a bunch of vegetables and fruits growing in an orchard.

One of the fruits, when literally translated from Chinese (neither of us knew the English name) is called the “Fire Dragon Fruit” and was named because of its fire-reddish color that mixed in shades of orange and yellow (kinda like a mango) and it’s skin made it seem like it had scales (kinda like an artichoke).  It grew on a huge cactus that vined around and its flower was a huge tropical-looking red blossom (kinda like that plant that kills you in the movie, Jumanji).

His cottage had electricity and running water somehow (I’m guessing magic), and he put on a hot pot of water to boil some organic fresh tea he picked straight up from the garden.  We took a little hike and he pointed out the pond of fish, a waterfall and a creek, and various small reptiles and lizards.

We settle down on his porch and he tells me to get ready for some show that his magical mountain…that’s right, a magical mountain…was about to start.  He turns off all the lights and we wait.  A steady stream of water, frogs ribits, and other loud insects keeps the silence away while we wait.  Then a flicker of light flashes in the trees…too quick and sudden to be the sun, which has already completely set.  Then slowly, a chorus of small flashing lights, like lighters at a P-Diddy concert remembering B.I.G. while he raps “I’ll be missing you”, lights up the mountain.  Turns out, it was mating season for fireflies and his private mountain….that’s right, fireflies….was one of the few places left that had the right amount of water, humidity, firefly food for us to view them in the density that we saw.

Thousands of lights twinkle on and off lighting the forest.  We were able to catch them in our hands and make them flash lights to the music of Kanye West’s “Stronger” bumping from my iphone.  Well….not really, but we were able to catch them and that was kinda cool.

Anyways, that was one of my better days.  I hope the excruciatingly painful details I provided was a good alternative to my usual banter of falling off fences, psychobabble about father and son, and dudes that looks like ladies.  I’ll write some direct replies to your emails now too since I have all day on the internet today.

Until next time, kids.

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