bostonbubble.com

[balor123]

[admin]

[GenXer]

Most rewards checking simply have too many restrictive requirements, and you end up losing the interest. If you want a short term investment, consider a CD with a local bank where you can sell the CD (for a small penalty) early. This way you can free up the money when you need it. Probably will not be higher than 2% yield. Honestly, I don't see a big difference in yield for a year or two between 0% and 2%. Even if you had $100k. Just think about it. You are keeping your money safe and are waiting for an opportunity. Who cares what the yield is - it's not as if you will not be getting this yield for the next 20 years!

As far as stocks go, we need to really go back to basics. A portfolio of the type I recommend would have smoked S&P and Dow over the past 10 years. Of course investing 100% in stocks is a problem, and by now everybody picked up on it.

I-bonds, TIPs can easily be replaced by appropriate CDs. A long term CDs yield 4% or more (10 year). Build a big, big ladder (10 years long for example). This type of market will not last forever. The government is making it so, but dont get suckered into grabbing any yield you can - you will miss the opportunity when interest rates climb if you lock your money in for longer than 2 years.

[GenXer]

Just look at CD yields prior to 2008...the government is sucking people in by offering better yields when they themselves are making sure that banks don't offer higher yields. There is major manipulation going on here. Why get into government products which will almost certainly be inferior in the long run? Bank CD rates are actually market driven. However, one added wrinkle is that some banks are going to fail, so one must be careful when buying CDs (tons of PR banks offering higher rates than most is one clue). Keep the cash. One, two or three years, it doesn't matter. Your stock portfolio's daily gain is what your entire cash holding will make in 3 years...just as an order of magnitude comparison.

[admin]

Here are historical rates on 6 month CDs, the longest maturity that I found in ~10 minutes of web searching which covered the last period of great inflation in the US:

http://www.federalreserve.gov/releases/H15/data/Annual/H15_CD_M6.txt

Here is what you would have earned above inflation with CDs and before taxes:

• The average premium over all years was 0.29%.
  
• The average premium over The Great Inflation, which I am taking as 1965 - 1982, was 0.40%.
  
• The lowest premium was -5.1% in 1975.
  
• The premium has been strongly negative for much of this decade.
  

Even at the current paltry premium of 0.3%, I Bonds beat the historic average on CDs ever so slightly before taxes, and they would probably beat it hands down for most tax situations. That 0.3% is also atypically low. I Bonds purchased in 2007 and before handily beat cash even before taxes and blow it away after (for most, probably). Remember, with CDs you are taxed every year on the "gains" attributable to inflation, and that seriously cuts into growth.

Here's another kicker: if CD rates were to rise to the point that they are outperforming I Bonds, it is easy to switch from I Bonds to CDs. The reverse is not true because of the annual purchase limits.

As for playing the stock market, very few people can reliably beat the indexes, so if you can do it, good for you. I, however, don't think that I have the time needed to do that, and quite possibly not the skill either.

- admin

[john p]

I know what I'm saying sounds off topic but we have ownership rich, working rich, worker bees and the rest. The wealth is distributed in a similar fashion.

Take the compensaton within a company that earns a 6% profit margin for instance:

If you're ownership rich you get 6% investing in it.

If you're working rich, you get a nice salary and stock options.

If you're a worker bee with a commodity type skill, you get a cost of living that benchmarks inflation.

The ownership rich are pumping the wealth out of companies at a faster rate than inflation. Some of these investment vehicles that offer 1% over inflation want your capital so they can become "ownership rich" and put that money into something that gets 3-6% above inflation. The beauty for them is that if the economy tanks and that company is now making a 2% profit, they don't care because inflation is zero. If we continue to get Stagflation, you'll see the wealthy complain about how we compute "Inflation" and they will substitute the cost of sawdust for hamburger in the basket of goods.

I think if you've got talent, focus your efforts on being "working rich" and use the excess cash to invest in and become "ownership rich".

I see the TIPs as a short term conservative hedge against a substantial debasement of the US Dollar. I think this is the right play for the money earmarked for a down payment, but I think you want to be in a vehicle that is positioned to catch any upswing in the market.

Here's another one for you guys to consider: What if all these talented guys on this website get hit up with higher income taxes from the State and FEDs? What if they increase Captial Gains or Dividends Gains? You can shelter your mortgage from taxes. I wonder how that might affect the balances of that decision in the future. The Tax Man Cometh. Of course, higher taxes means lower affordability so house prices will most likely come down.

The wildcard that you have to be comfortable is GROWTH. If you think we will have growth perhaps because all this wealth that being pumped into the system will eventually trickle down and we get wage inflation, it is less risky to buy now because incomes rising increases affordability. If you think Stagflation will grip us for another few years, the prices will stagnate or perhaps drop further due to unemployment, withdrawn government subsidies, and an overall weakening economy (Day of Reckoning) deal.

The question is how to plan for both the glass half full and half empty given the purchase decisions is what you guys are hashing out. I think you can make the best of any situation so long as you're not handcuffed to a bad decision. I think if certain events unfold, you take certain things off the table, like say buying a house.

I would focus on having a portfolio of strategies that can game out better than the average. It is a pretty deep dive, which is why many professionals just say screw it, I'll buy a house at the best deal I can get and focus my energies at work where I can grow rapidly and if I overpay, I'll just grow into it. I know a guy who made VP at a very young age and moved to the Miami area and bought a house for like $800k about a year and a half a go. That place is worth in the $400's now. Now I don't think Boston is Miami, but it goes to show you how people are being torn as to how much time they need to dwell on this decision.

[admin]

[Renting in Mass]

[admin]

[GenXer]

6 month CD is not what you want. A better comparison is a 1 year CD. And you really have to consider a comparison to a CD laddering strategy, which is even more powerful.

I'm not trying to beat the indexes. Just trying to get index-like return with less volatility using a standard off-the-shelf portfolio.

Hey, admin, whom are you trying to fool You have plenty of time. Unfortunately this is not about time. Many people spend lots of time on this topic, but not much comes of it.

The reason investment is very hard is because of lack of understanding of what risks are, so when calculating 'risk adjusted' returns, oftentimes the returns are inflated.

The biggest problem comes from lack of good mathematical treatment of risk (or from using the wrong mathematics). One can't possibly understand risk without getting a good overview of the literature, and the question is, what literature should one read on this topic. Anything by Nassim Taleb and B. Mandelbrot qualifies. In particular, I'm currently reading "Fractals and Scaling in Finance", which despite the weird title is all about risk (and the mathematics of stock markets). Even if there was mathematical treatment of risk, you can't make money off of this, but you can help yourself not to LOSE money (which is no less of an important task).

And of course, if you want to see how complicated the WRONG models of risk are, go for Phillip Jorion's voluminous books on risk.

Once you get a good grip on what risk really is (and how not to underestimate it), investing becomes easy, because some things are simply avoided (individual stocks). Market timing is avoided, etc, etc.
When you enumerate all the negatives, you will end up doing better with your portfolio (unless you get seriously unlucky, but even for that you can build some stops, and neither are you depending on luck alone).

Thus, one result of prudent risk management is when trading off liquidity vs. yield almost always go for liquidity.

Mistakes people make when they don't understand risk (or think they do, and really don't) can probably take up volumes. Its all in the little things, but little things add up quickly. Investing is really all about little things, especially if you are going to hold for a long time.

[admin]

[GenXer]

john p: A wrong decision is always a wrong decision, eventually

I think people have unrealistic expectations of almost everything, like keeping their jobs forever and thinking that housing only grows in value.

You can't time the market (graveyard is full of timers).

TIPs are an ULTRA LONG TERM 'hedge'. CDs are short term.

A portfolio that has almost everything will grow in any environment (and if it doesn't, then everything else is hitting 0).

Because it is so easy to spend 1M on a house, people do it. For no other reason. If it was hard (like you'd need to pass a financial literacy exam), I'm sure you'd have a lot less transactions.

[GenXer]

[admin]

[GenXer]

The flu is trying to act tougher than he is. But we have the means to deal with it

Well, if I have time to rewrite my will, I'll be sure to leave a bequest to bostonbubble.com

Sorry for dark humor, couldn't resist.