[2020] A little stock market sense

[TolmiePeak]

So how do you decide what to buy ?

Bill

I just buy the index funds that have a < 0.05% maintenance fee.

 

[Ralph Sir Edward]

The one thing rental properties have that stocks don't is monthly cash flow. While stocks beat real estate in value over time they don't create as large of a monthly income stream from what I see. Comparing $1,000,000 of stocks @ 10% or $100,000 earnings in a year and $1,000,000 worth of real estate making about 22% in rent or $220,000 a year then adding the inflation driven values of real estate of late, the rental properties seem to be a better choice for those who know about real estate.

I haven't even added in the tax benefits which are below zero regarding stocks. Every time I sold stocks I paid taxes. With real estate there is very little tax when doing a 1031 trade up. I haven't sold anything but some flips in which I did pay capital gains tax, but even with the taxes the profit was pretty good.

Bill

What about taxes, maintenance, and vacancies? Also the one advantage of stocks is that they can be bought in small dollar amounts.

 

[TolmiePeak]

What about taxes, maintenance, and vacancies? Also the one advantage of stocks is that they can be bought in small dollar amounts.

With my luck someone would stop paying the rent and it would take a year to kick them out for non-payment. The backlog in renters court is 9 months currently.

 

[letsgobobby]

there is nothing wrong with real estate. but claiming there is a 22% rental return and neglecting the costs of real estate - maintenance, repairs, taxes, vacancies, insurance, utilities, etc - doesn't seem in good faith.

I get that you don't really understand or trust the stock market. I think you should just leave it at that, and stick with real estate which you trust, rather than directly compare them in inaccurate or misleading ways.

If you've read much by Bogle, Swedroe, Ferri, Bernstein, etc, you would understand that buying every stock vis a vis broad low cost stock index funds and balancing them with broad low cost bond index funds is the most efficient, low cost, high performing portfolio available to investors. this simple approach also outperforms most hedge funds, university endowments, public pension funds, and certainly stock picking schemes and "systems".

 

[easyrider]

What about taxes, maintenance, and vacancies? Also the one advantage of stocks is that they can be bought in small dollar amounts.

Yes, there are costs. These are paid by the renter for the most part but occasionally money has to be spent on improvements or repairs which become tax write offs. Vacancies are rare.

Yes, we bought stocks in small dollar amounts. I can say the same for real estate in a way. I've bought with nothing down on short sales but did pay the seller a bit of their equity.

When buying real estate, usually a 20% down payment ties up the equity. This is called a mortgage loan and is low risk because if you default they take the property back. If you try this with stocks it is a margin loan and about 50% of the investment can be borrowed and for most small investors this is risky because you have to pay it back whether you gain or loose.

Bill

 

[ScoopKona]

What about taxes, maintenance, and vacancies? Also the one advantage of stocks is that they can be bought in small dollar amounts.

1) Comes directly off the top.
2) Comes directly off the top.
3) All improvements to make a place tenant ready are even more favorable.

Besides, the rental property can be insured for value, replacement AND loss of rental income.

It's definitely not for everyone because it's a lot of work. But for the right sort of person it's the best investment scheme of them all. Every single one of my rental properties yielded more than a decade of very positive cash flow, and then sold for at least three times what we paid (during the bottom of the great recession.)

But, as attractive as it can be, most people have no business buying investment property. They don't have the temperament.

 

[easyrider]

there is nothing wrong with real estate. but claiming there is a 22% rental return and neglecting the costs of real estate - maintenance, repairs, taxes, vacancies, insurance, utilities, etc - doesn't seem in good faith.

I get that you don't really understand or trust the stock market. I think you should just leave it at that, and stick with real estate which you trust, rather than directly compare them in inaccurate or misleading ways.

If you've read much by Bogle, Swedroe, Ferri, Bernstein, etc, you would understand that buying every stock vis a vis broad low cost stock index funds and balancing them with broad low cost bond index funds is the most efficient, low cost, high performing portfolio available to investors. this simple approach also outperforms most hedge funds, university endowments, public pension funds, and certainly stock picking schemes and "systems".

I understand stocks and that is why I don't have much faith in it as a main retirement income. The costs for the rental properties are not that much and all of the costs are tax write offs with most being paid for through the rents. Unexpected improvements and repairs can be a bummer but it's a rarity.

I don't think I have misled anyone regarding my comments on real estate. It's pretty accurate. What I consider misleading is not disclosing what stocks you guys are into while saying they do so well.

Bill

 

[TolmiePeak]

The vast majority of us have no clue what stock to buy. The people who claim they do have even less clue. Just buy the index fund.

 

[letsgobobby]

I understand stocks and that is why I don't have much faith in it as a main retirement income. The costs for the rental properties are not that much and all of the costs are tax write offs with most being paid for through the rents. Unexpected improvements and repairs can be a bummer but it's a rarity.

I don't think I have misled anyone regarding my comments on real estate. It's pretty accurate. What I consider misleading is not disclosing what stocks you guys are into while saying they do so well.

Bill

we have told you over and over. all stocks. index funds. I own VTI and VXUS and their mutual fund equivalents. VBMFX (all bond index). expense ratios like 5 basis points. except for some tax loss harvesting in 2008-09, I have never sold.

I also own real estate. about 15% of our net worth, 9 doors excluding our home. I get real estate but think it's a seller's market now anywhere near me. real estate takes work and has concentration risk index funds don't.

 

[Talent312]

So how do you decide what to buy ?

I'll bite on this one. For the equity portion of my portfolio...
I divide investments roughly equally among each of the following 5 categories (per Morningstar). (1) Large - Dividend Oriented (typically value style), (2) Large Blend or Growth, (3) Medium (all styles), (4) Small (all styles) and (5) Foreign. I use ETFs for #1-4 and a Mutual Fund for the Foreign category (I think active management helps there).

Within each category, I list 8 funds ranked according to my own formula that weighs Morningstar's overall ratings for return & risk, and actual performance in each of the previous 5 years & the current Y-T-D, and their expense ratio. I'll stick with a fund, even if it's not at the top of the list, but if it underperforms several years in a row, it gets booted.

Unnecessarily complicated? Yeah, but it keeps me off the streets.
.

 

[Ralph Sir Edward]

Yes, there are costs. These are paid by the renter for the most part but occasionally money has to be spent on improvements or repairs which become tax write offs. Vacancies are rare.

Yes, we bought stocks in small dollar amounts. I can say the same for real estate in a way. I've bought with nothing down on short sales but did pay the seller a bit of their equity.

When buying real estate, usually a 20% down payment ties up the equity. This is called a mortgage loan and is low risk because if you default they take the property back. If you try this with stocks it is a margin loan and about 50% of the investment can be borrowed and for most small investors this is risky because you have to pay it back whether you gain or loose.

Bill

High leverage. If the real estate market goes bad, you end up owning more than you put in. 2007-9 was all about over-leveraged real estate going bad. The unit cost of real estate before leverage is high. A house for example, costs well into 6 figures for one house. A share of stock can cost as little as a few dollars.

 

[Ralph Sir Edward]

I understand stocks and that is why I don't have much faith in it as a main retirement income. The costs for the rental properties are not that much and all of the costs are tax write offs with most being paid for through the rents. Unexpected improvements and repairs can be a bummer but it's a rarity.

I don't think I have misled anyone regarding my comments on real estate. It's pretty accurate. What I consider misleading is not disclosing what stocks you guys are into while saying they do so well.

Bill

My main core stock holding is in Altria (the old US portion of Philip Morris), purchased at a average cost of around $39-40. Current dividend is $4.08 a year, giving a yield on capital deployed of 10.41%. But back in the 2020 "crash", I could have bought Exxon or Chevron at 13% (Chevron's dividend has gone up since then). My next capital deployment will be during the next recession, whenever that will be. I'm patient. . .

 

[rapmarks]

I understand where Easyrider is coming from. some brokers will not give advice As far as recommending anything but managed products.
We had a lot of trouble with a Merrill lynch advisor that was assigned to us after our original broker left. Not only would he not give us advice, he sold us a product that we are stuck with thirty five years later or pay big taxes if we pull it out. He actually kicked us out Because he insisted we have their credit card. It was not a credit card, it was a debit card and anything we used it for came out of our brokerage account. That was not what I wanted.
i transferred everything to another firm and we have done very well. My advisor does not hesitate to recommend investments and to warn us off some investments.
Unlike most of the advice here, I no longer invest in mutual funds. I got too many nasty surprises in December with what I call phony capital gains distributions . call them phony because the portfolio does not increase in value by the amount of the distribution but share price is diluted. When my husband died, I used the date of death valuation to unload my mutual funds.
but one thing I discovered when I attempted to diversify by buying a rental property was that you are not able to deduct real estate losses if your income is above certain threshold when it not a major source of income.

 

[letsgobobby]

I understand where Easyrider is coming from. some brokers will not give advice As far as recommending anything but managed products.
We had a lot of trouble with a Merrill lynch advisor that was assigned to us after our original broker left. Not only would he not give us advice, he sold us a product that we are stuck with thirty five years later or pay big taxes if we pull it out. He actually kicked us out Because he insisted we have their credit card. It was not a credit card, it was a debit card and anything we used it for came out of our brokerage account. That was not what I wanted.
i transferred everything to another firm and we have done very well. My advisor does not hesitate to recommend investments and to warn us off some investments.
Unlike most of the advice here, I no longer invest in mutual funds. I got too many nasty surprises in December with what I call phony capital gains distributions . call them phony because the portfolio does not increase in value by the amount of the distribution but share price is diluted. When my husband died, I used the date of death valuation to unload my mutual funds.
but one thing I discovered when I attempted to diversify by buying a rental property was that you are not able to deduct real estate losses if your income is above certain threshold when it not a major source of income.

Brokers are not fiduciaries.

If your financial advisor is not a fiduciary then they are a timeshare salesman.

Is your current advisor a fiduciary?

There is a lot of misunderstanding of financial markets in this thread.

 

[letsgobobby]

Actually the chart you showed makes the point with regard to secular bull and secular bear markets. Not to be confused with the commonly termed bull and bear markets that we hear on the news shows. A secular market analysis has to do with PE ratios over time. The average cycle is about 20 years on average but it can vary. Secular bear markets are characterized by volatility and by declining macro PE ratios during the time period - PE ratios start out very high and decline to lows during the defined time period. Secular bull markets are characterized by upward PE ratios from low high.

Let’s look at the chart you shared with this in mind:

From 1910-1929 - the roaring 20’s as they were known - secular bull market.

1930-1950 - secular bear market
1950-1965 - secular bull market
1965-1980 - secular bear market
1980-2000 - secular bull market
2000-2010 - secular bear market
2010-???? - secular bull market

The last couple of decades don’t fit the pattern - but then again we had a major financial crisis and with the massive bailout by the Fed and massive QE we artificially propped up the markets and have caused bubbles to form that are unprecedented in history. So the pattens may change as a result. Past performance does not always predict future performance.

That said, we are near all time high PE ratios prior to the start of this latest shock. Why do secular markets matter? Because many people don’t really have a 40+ year investment horizon. Many realistically have 20 good years for their investments. Say you did what you were told and exercised “buy and hold” primarily in stocks from 1965-1985 - what was your total return over that 20 year time period? Zero. Same with pretty much all of the secular bear market time periods listed above.

So while the street will say it’s best to always be invested, and they will say that historically the market returns 10% per annum over the long term, and technically that may be true, the data teaches us that the timing and duration of your investments as it relates to secular markets is very important. Especially if you have a limited duration during which your retirement savings is invested in the stock markets.

If you are investing at the start of a secular bull market - buy and hold is everyone’s friend and index funds work best. If you are investing at the start of a secular bear market then buy and hold doesn’t work and index funds do not work well. Zero returns is often the result during secular bear markets since PE ratios are declining during that period of time. Therefore capital preservation during secular bear markets is especially important.

How can we validate that this all has some truth to it? Look at what accredited investors can access. One of the major advantages of hedge funds is that, unlike most mutual funds, hedge funds can employ leverage, shorts, options, really anything, and can go to 100% cash without any oversight. Mutual funds always must have a certain amount of their capital invested and can only invest based on the fund charter. This is in part why the rich get richer and the poor stay poor. The rich have accredited investor status and literally have access to hedged investments that the vast majority of normal investors cannot ever use. So when normal investors are losing money in a secular bear market, hedge funds are making money. In this respect, at least based upon my experience - there are two Americas out there - especially when it comes to investments.


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this is fatuous logic

I've been an accredited investor for twenty years. I've never once invested in a hedge fund, or a private offering, or venture capital. 99% of my market investing has been in vanguard and fidelity index mutual funds and ETFs. I've been 65-75% stocks and 25-35% bonds for 25 years. I never sell. I just keep buying more.

The vast majority of hedge funds actually underperform their benchmarks. They enrich only the hedge fund manager.

You are right, there are two investors in America, but they are not "rich" and "poor". There are those who have read about index fund investing, why market timing doesn't work, and how to construct a portfolio using MPT that takes into account one's risk tolerance; and those who have not. The first group will end up rich. The second group is a crapshoot.

 

[WaikikiFirst]

vast majority of hedge funds actually underperform their benchmarks

They chose the wrong benchmark
But seriously, have you ever looked at buying into a HF and actually thought hard about what its benchmark was? if so, what was it?

 

[WaikikiFirst]

There is a lot of misunderstanding of financial markets in this thread

YOU THINK!?!?!?!?!??! It is a perfect example of the world at large, most of the financial press included. I am constnatly struck that ...
For the large majority of people who have ever posted on this thread, there is more MISunderstanding about the stock mkt (yes, financial mkts in general, I guess) than there is understanding. I won't try to pin-point "large", but it is well above 50%.

But, the stock mkt is the #1 thing in the world that adults seem to love to talk about while having mostly MISunderstanding. It is often like a bunch of people who eat mostly McDonald's burgers & fries sitting around debating the merits of the recipes in a Michelin-starred restaurant. Not even debating the TASTE, but the actual RECIPE.

 

[ScoopKona]

2007-9 was all about over-leveraged real estate going bad.

I disagree on your timeline. The slide didn't start in earnest until 2008. We all saw it coming in 2007. But the wheels didn't come off until later -- when homeowners en masse decided on "strategic default" to deal with being underwater on their mortgages. 2010 was the best year in our area to be a buyer.

And that's when we bought. (2009-2011.)

We had just finished paying our mortgage. The bank asked if we wanted to buy more houses. "Sure! How many will you underwrite?" We agreed on a number and went shopping. Bought rental property, each less than a mile from our residence. That way if the phone rang at 4am, I didn't have to travel far.

 

[WaikikiFirst]

Current dividend is $4.08 a year, giving a yield on capital deployed of 10.41%

Do you not care about inflation? When was the capital deployed?

 

[WaikikiFirst]

saw it coming in 2007. ... 2010 was the best year in our area to be a buyer.

I forget what the starting date of the film The Big Short is. (looked it up. appears to be 2005. Yes. That early.) I'll look up when NOOF went bankrupt. That was maybe 2 years, maybe 18 months after I put my CA home up for sale? ... google giving me nothing on NOOF bankrupt. Maybe I have the ticker wrong?

seems Bear Stearns went under in March 2008. So, I put my home up for sale 24 months before that, and sold 18 months before that.

Bernanke was already being asked about "housing bubble" in fall 2005. He was famously blind, as Fed-heads tend to be, with too many technocrats between them and reality

 

[ScoopKona]

It is often like a bunch of people who eat mostly McDonald's burgers & fries sitting around debating the merits of the recipes in a Michelin-starred restaurant. Not even debating the TASTE, but the actual RECIPE.

I'd counter that food is far more misunderstood than financial markets. Not everyone invests. In fact, most people don't invest at all. Only the well-off citizens of developed nations typically have investment portfolios.

But everyone has to eat. Or they die. And because of that, everyone thinks they're an expert on food. The fact is that the average US consumer has a relationship with food that is somewhere between pedestrian and toxic. They're eating poison, getting sick because of it, and then demanding that the problem is some minor component of the food landscape, and not their overall diet and lifestyle.

"It's gluten that did it! Not a lifetime of eating nothing but ultra-processed food."

is the same as saying...

"These fiberglass filters made me sick. Not the 40 years of smoking cigarettes!"

 

[easyrider]

My main core stock holding is in Altria (the old US portion of Philip Morris), purchased at a average cost of around $39-40. Current dividend is $4.08 a year, giving a yield on capital deployed of 10.41%. But back in the 2020 "crash", I could have bought Exxon or Chevron at 13% (Chevron's dividend has gone up since then). My next capital deployment will be during the next recession, whenever that will be. I'm patient. . .

While I haven't invested in dividend stocks exclusively for the dividend yet, I actually think that it's a good way to produce a steady income stream during retirement.

Bill

 

[WaikikiFirst]

average US consumer has a relationship with food that is somewhere between pedestrian and toxic. They're eating poison, getting sick because of it

True. I'm an outlier. Defintiely pedestrian, never seem to get sick. I do wonder "Imagine how healthy I'd be if I actually ate well" Well, I'll start tomorrow.

 

[easyrider]

"Imagine how healthy I'd be if I actually ate well"

It's kind of interesting that eating processed junk food does provide calories. I bet if you added a one a day vitamin to a junk food diet you might be on the verge of a healthy diet. Maybe add in an energy drink with creatine and amino acids like Monster and you are eating like many endurance athletes.

Bill

 

[rapmarks]

Brokers are not fiduciaries.

If your financial advisor is not a fiduciary then they are a timeshare salesman.

Is your current advisor a fiduciary?

There is a lot of misunderstanding of financial markets in this thread.

at the time I was with Merrill lynch he was a broker, not a fiduciary. I moved account in 2000. The broker recommended whatever Merrill lynch told him to push, like Rainforest cafe. Never heard of it? It went bankrupt. And unite a few other busts.
I have no idea what I actually invested dollar wise with new firm, I moved things in, I reinvested dividends, I bought and sold , but over 24 years I stand at 65% of portfolio in unrealized capital gains.