Warren Buffett Charlie Rose Interview 2022 (Berkshire Annual Meeting)

Posted on April 21, 2022 // 1 Comment

The 2022 Berkshire Hathaway Annual Shareholder Meeting will be held in-person in Omaha, Nebraska on Saturday, April 30th. It will also be streamed live via CNBC webcast starting at 8:45am Central Time (6:45 Pacific).

As a sort of promotion for the annual meeting, Warren Buffett recently did an interview with Charlie Rose, embedded below.

In a wide-ranging conversation, Warren Buffett, the chairman and CEO of Berkshire Hathaway, talks to Charlie about the company he created, his friends, his values, and life at 91.

 

If you aren’t very familiar with Buffett, the hour-long interview serves as a good overview of his advice and observations. As a long-time follower, I didn’t notice any new insights (he’s probably saving the good stuff for the annual meeting). Certain media latched on his comments about Elon Musk, which didn’t sound unreasonable to me:

“That shows what America produces. I mean, Elon, didn’t–he’s taking on General Motors, Ford, Toyota, all these people who’ve got all the stuff, and he’s got an idea. And he’s winning. That’s America. You can’t dream it up. It’s astounding,” Buffett said.

Buffett has done a great job keeping his daily life focused and simple. He doesn’t write emails (which means he doesn’t have to sift through spam everyday like me!). He doesn’t check social media. He doesn’t have a huge car collection, watch collection, art collection, or house collection. He just tells his support team if he wants to make a stock or bond trade, and they handle it for him. He can focus on talking to the right people, absorbing important information, and making big decisions in a swift manner. I wouldn’t do the same things myself, but he does what he finds purposeful.

Finally, he is happy that he has earned the trust of millions of people regarding the stewardship of their hard-earned money. Teaching is all about making a complex subject easier to understand. Warren Buffett likes to teach, and that is what makes him special to a DIY investor like me.

Filed Under: Investing //

Know What You Own: Real Estate Investment Trusts (REIT) Infographic

Posted on April 19, 2022 // 3 Comments

Often you’ll hear investment advice like “just buy an index fund and forget about it”, but when a severe crisis occurs, it’s really hard to just forget about it. Substitute advice like “sell now and wait for the dust to settle” may start to sound equally wise. It’s harder to maintain faith in an investment if you don’t understand what you actually own.

As an example, I own real estate investment trusts, and Visual Capitalist just published a handy infographic on The World’s Largest Real Estate Investment Trusts. They are all headquartered in the United States, which makes them also the top 10 holdings of the Vanguard Real Estate ETF (VNQ).

In fact, these ten companies make up about 50% of VNQ. Here’s a quick peek at what specific types of real estate properties these companies own.

  • Prologis. This industrial REIT manages things like warehouses and distribution centers. Their largest customers are Amazon.com, Home Depot, and FedEx.
  • American Tower. This communications REIT owns communications infrastructure like cellular towers. Their largest customers are AT&T, T-Mobile, and Verizon.
  • Crown Castle. This communications REIT owns communications infrastructure like cellular towers. Their largest customers are AT&T, T-Mobile, and Verizon.
  • Public Storage. This self-storage REIT is the largest self-storage brand in the US.
  • Equinix. This data center REIT manages internet connection and data centers. Their customers include Amazon, Apple, AT&T, Meta/Facebook, and Nokia.
  • Simon Property Group. This mall REIT manages shopping malls, outlet centers, and community/lifestyle centers. The largest of their 200+ properties all around the country is King of Prussia in Philadelphia.
  • Welltower. This healthcare REIT owns senior housing (independent living, assisted living and memory care communities), post-acute care, and outpatient care centers.
  • Digital Realty. This data center REIT owns “carrier-neutral data centers and provides colocation and peering services” for hundreds of large companies.
  • Realty Income. This commercial REIT specializes in free-standing, single-tenant commercial properties that work on triple net lease agreements (the lessee handles property taxes, insurance, and maintenance on the properties). Largest tenants include Walgreens, Dollar General, 7-11, and Dollar Tree.
  • AvalonBay Communities. This residential REIT invests in apartment complexes.

REITs own a wide variety of real estate that touch our lives every day. You may live in or drive by an apartment complex, shop at a Walgreens, have your Amazon order shipped from, connect your phone to 4G/5G from, or be browsing a website that pays rent to one of these companies. When the next crisis inevitably occurs, you should remember that your investment in REITs owns a part of all these physical properties. Yes, their stock market price may drop for a while, but you are still owning critical infrastructure for the economy that isn’t going anywhere.

With a market-cap weighting, you will always own the most successful REITs. Would I have invested in data centers on my own? Cell towers? Public storage? The good news is that I don’t need to know.

Here is the historical chart for the Vanguard REIT ETF (VNQ). $10,000 invested at inception in 1996 would be worth $130,000 today with dividends reinvested. A traditional rental property would have also appreciated a lot over the last 25 years, but there are also several variables in the mix (leverage via mortgage, interest paid, repair/maintenance costs, time spent, taxes, deprecation, deferred capital gains, etc.) I am still fascinated by the idea, but for now owning real property via REITs suits my lifestyle and personality much better.

Filed Under: Investing, Retirement //

INVEST: New American Express and Vanguard Co-Branded Robo-Advisor

Posted on April 18, 2022 // 7 Comments

I had to double-check the date when I received the press release for this product to make sure it wasn’t April 1st. 🤯 INVEST is a new partnership between Vanguard and American Express, but Vanguard provides all of the financial investment advice. More accurately, Vanguard is paying a credit card company to find new customers and charging those new customers higher prices to cover the marketing costs. Yes, the same Vanguard that made its brand by putting its customers first, selling direct, and not paying sales commissions to financial advisors though big upfront loads on mutual funds. Somebody please create an animated GIF with Jack Bogle shaking his disappointed head. 😞

Another step towards the “New” Vanguard(TM). I wonder how many “consultants” were involved. Ah well, I suppose I should take a closer look anyway.

  • Annual gross advisory fee of 0.50%. (Waived for the first 90 days.)
  • Minimum $10,000 to eligible assets to start.
  • Includes Vanguard’s digital advisory platform.
  • Access to a 30-minute consultation where you can talk with a Vanguard advisor.
  • If you maintain $100,000 or more in your account(s) managed by INVEST, you get ongoing access to “an unlimited number of advisory phone calls”
  • Bonus American Express Membership Rewards® points annually based on the average annual taxable assets: 5,000 points for $50,000+, 25,000 points for $100,000+, 50,000 points for $500,000+.
  • Interest boost on American Express High Yield Savings Account. Get $15 for every $10,000 in average daily balance over the last 12 months (up to $50,000) in your Amex Savings account.

We basically have a few add-ons wrapped around the basic Vanguard Digital Advisor Services (VDAS) product (my review). As a reminder, VDAS sets you up with a model portfolio of low-cost Vanguard index ETFs and charges an annual gross advisory fee of only 0.20% and a lower minimum investment of $3,000.

So let’s add on the perks. Everyone gets a one-time 30-minute phone call. Thirty whole minutes! With a real, live human! If you give them $100,000, then you get unlimited phone calls. They don’t promise access to certified financial planners or anything specific. But if you had $50,000 to invest, you could alternatively upgrade to Vanguard Personal Advisory Services (VPAS) which also includes access to human advisors and more complex advice. VPAS charge an annual advisory fee of 0.30% on top of the expenses from underlying investments. Add on the estimated 0.05% from a model underlying ETF portfolio, and you’d have 0.35%.

For the bonus points, using a value of of 1 cent per Membership Rewards point, the bonus works out to a $50 value on exactly a $50,000 balance, or 0.10%. But that’s a little deceiving because you need $10,000 to open an account. That makes the bonus worth only 0.05%. $250 value on exactly a $100,000 balance is 0.25%. $500 value on exactly a $500,000 balance is 0.10%. So $100,000 is the sweet spot, but the cutoff is a bit severe if you miss it.

For the savings account interest boost, you are adding about 0.15% to the interest rate at the most optimistic on the AmEx online savings account. Their current rate is 0.50% APY. That’s about the same as most “high yield online savings accounts”, but comparison shoppers can almost always do much better. I wouldn’t really consider this a worthwhile bonus since 0.15% is not a significant margin when you don’t know if the base rate will stay competitive.

To summarize, the added perks do not reliably offset the higher cost of this product when compared to going directly through Vanguard.

Vanguard, known for not paying commissions to financial advisors…. is paying a commission to American Express. So why are you paying 0.15% to 0.30% more annually than going direct through Vanguard? Well, you should know that up to half of the fees that you pay will go directly into American Express’s pocket.

American Express (Amex) will receive a promoter fee in an amount that is up to 50% of the advisory fee that you pay to Vanguard Advisers, Inc. (VAI) if you enroll in INVEST. The promoter fee Amex receives will be reduced by certain costs, including the cost of your advisory calls with VAI Financial Advisors and other benefits that provide an incentive for you to consider INVEST. This promoter fee will be paid by VAI to Amex for so long as you maintain your advisory relationship with VAI.

Is this the most evil thing ever? No. You can always argue that anything that exposes people to investing is good, even if it’s a bit more expensive than necessary. I’m still disappointed. Vanguard was different because it was boring with little advertising and letting the product sell itself.

Bottom line. INVEST has Vanguard’s robo-advisor at its core but with a higher costs and added perks. The added perks do not reliably offset the higher cost of this product when compared to going directly through Vanguard. The reason for this is that… wait for it…. costs matter. Vanguard has to pay American Express a cut of half of your fees forever for this marketing relationship, which eventually lowers your returns as an investor. I wonder what company taught me that?!

via GIPHY

Filed Under: Deals & Offers, Investing //

MMB Portfolio 2022 1st Quarter Update: Dividend & Interest Income

Posted on April 14, 2022 // 2 Comments

via GIPHY

Here’s a slightly-altered quarterly update on the income produced by my Humble Portfolio. I track the income produced as way to add a different view of performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine them as building up a factory that churns out dollar bills.

Annual income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$46,000 in annual income over the previous 12 months.
  • If I spent every penny of the income every single year instead, today in 2022 it would still have generated ~$36,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has changed.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar, which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 2.51%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 25% 1.30% 0.33%
US Small Value (VBR) 5% 1.77% 0.09%
Int’l Total Stock (VXUS) 25% 3.21% 0.80%
Emerging Markets (VWO) 5% 2.96% 0.15%
US Real Estate (VNQ) 6% 2.78% 0.17%
Inter-Term US Treasury Bonds (VGIT) 17% 1.19% 0.20%
Inflation-Linked Treasury Bonds (VTIP) 17% 4.52% 0.77%
Totals 100% 2.51%

 

Stock market dividend growth over time. Stock dividends are a portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. The ratio of dividend payouts to price also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market.

Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

If you retired back in 2014 and have been living off your stock/bond portfolio, your total income distributions are much higher in 2022 than in 2014. Here is the historical growth of the S&P 500 total dividend, which tracks roughly the largest 500 stocks in the US, updated as of Q1 2022 (via Yardeni Research):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $26,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to over $100,000 a year, even if you had spent every penny of dividend income every year!

Here is the historical growth of the total dividend of the EAFE iShares MSCI ETF, which tracks a broad index of developed non-US stocks (VXUS is a newer ETF), via Netcials.

European corporate culture seems to encourage paying out a higher percentage of earnings as dividends, but is also more forgiving of adjusting the dividends up and down with earnings. US corporate culture tends to be more conservative, with the expectation that dividends will be growing or at least stable. This is not true across every company, just a general observation.

Use as a retirement planning metric. It’s true that during the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest. As an overall numerical goal, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 30 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65).

However, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on. This is your one life and it only lasts about 4,000 weeks.

Filed Under: Goals, Investing, Retirement //

MMB Humble Portfolio 2022 1st Quarter Update: Asset Allocation & Performance

Posted on April 10, 2022 // 2 Comments

portpie_blank200Here’s my quarterly update on my current investment holdings as of 4/8/22, including our 401k/403b/IRAs and taxable brokerage accounts but excluding a side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but just to share an real, imperfect, low-cost, diversified DIY portfolio. The goal of this “Humble Portfolio” is to create sustainable income that keeps up with inflation to cover our household expenses.

TL;DR changes: Both stocks and bonds went down a small bit. Slightly overweight REITs, slightly underweight International Stocks. As usual, collected dividends and interest and reinvested available leftover cash.

Actual Asset Allocation and Holdings
I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation. Once a quarter, I also update my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have snapshot of my holdings dating back many years.

Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account.

Stock Holdings (same as last quarter)
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Avantis International Small Cap Value ETF (AVDV)
Cambria Emerging Shareholder Yield ETF (EYLD)
Vanguard REIT Index (VNQ, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury (VFITX, VFIUX)
Vanguard Inflation-Protected Securities (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index (FIPDX)
iShares Barclays TIPS Bond (TIP)
Individual TIPS bonds
U.S. Savings Bonds (Series I)

Target Asset Allocation. This “Humble Portfolio” does not rely on my ability to pick specific stocks, sectors, trends, or countries. I own broad, low-cost exposure to asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning publicly-traded US and international shares of businesses, as well as high-quality US Treasury and municipal debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. Some minor wrinkles are the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them. Simple as that.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. Usually, whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

Stocks Breakdown

  • 45% US Total Market
  • 7% US Small-Cap Value
  • 31% International Total Market
  • 7% International Small-Cap Value
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 66% High-Quality bonds, Municipal, US Treasury or FDIC-insured deposits
  • 34% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. This is more conservative than most people my age, but I am settling into a more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. With a self-managed, simple portfolio of low-cost funds, we can minimize management fees, commissions, and taxes.

Holdings commentary. I know I sound like a broken record, but really, my best investment decisions have been convincing myself to do nothing during times of stress. Sometimes it was easy, sometimes it was hard. Still, after investing steadily for over 15 years, my results have exceeded my expectations and the fluctuations are now often greater than my annual spending. To make it easier, I try to ignore daily talk about stock movements.

There is ALWAYS something that looks worrying. I am a “buy, hold, and cash the checks” kind of investor. I often wonder how I can teach my children such patience in investing, and that seems to be the hardest aspect.

Performance numbers. According to Personal Capital, my portfolio down about 6% for 2022 YTD. US stocks, International stocks, and even US bonds are all down roughly 6-8%. REITs are the only things that went up. As such, in terms of rebalancing, the portfolio is slightly overweight in REITs and slightly underweight in International Stocks, so that is where the excess cash will be invested this quarter.

I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Best Interest Rates on Cash – April 2022 Update

Posted on April 6, 2022 // 6 Comments

Here’s my monthly roundup of the best interest rates on cash as of April 2022, roughly sorted from shortest to longest maturities (useful for both cash reserves and as possible bond substitutes). I look for lesser-known opportunities available to individuals while still maintaining FDIC insurance or equivalent. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 4/6/2022.

Significant changes since last month: Short-term rates are moving up. Don’t overlook US Treasury bonds, as they are now relatively attractive in the 6-month to 5-year range, while CD rates are still lagging (but may catch up later). 7.12% Savings I Bonds still available if you haven’t done it yet. SoFi 1.25% APY and some short-term CD rate bumps from the banks. Deposit promos are another alternative.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 4% APY on $2,000/$6,000. Current offers 4% APY on up to $2,000 on each of their “savings pods”. Free users get 1 savings pod, while premium users get 3 savings pods. Potential promos include $50 bonus and “Premium free for life”. Please see my Current app review for details.
  • 3% APY on up to $100,000, but requires direct deposit and credit card spend. HM Bradley pays up to 3% APY if you open both a checking and credit card with them, and maintain $1,500 in total direct deposit each month and make $100 in credit card purchases each month. Please see my updated HM Bradley review for details.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000, requires direct deposit and credit card transactions. Porte requires a one-time direct deposit of $1,000+ to open a savings account. Porte then requires $3,000 in direct deposits and 15 debit card purchases per quarter (average $1,000 direct deposit and 5 debit purchases per month) to receive 3% APY on up to $15,000. New customer bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. You must maintain a $250 direct deposit each month for this balance cap, otherwise you’ll still earn 1.20% on up to $5,000. They also pay 6% on USDC stablecoin, but I avoid this as it is not FDIC-insured (and you can get higher rates elsewhere if you did want to hold USDC.) New customer $100 bonus via referral. See my OnJuno review.
  • 1.25% APY (no balance cap). SoFi is now offering 1.25% APY with no balance cap as of 4/5/22. You must maintain a direct deposit each month of any amount. Convenient if you already have a relationship with them. See $25 + $300 SoFi Money new account and deposit bonus.

High-yield savings accounts
Since the huge megabanks pay essentially no interest, I think every should have a separate, no-fee online savings account to accompany your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer, but the lesser-known fact is that the 1% APY is available for everyone. Thanks to the readers who helped me understand this. Unfortunately, some readers have reported their applications being denied.
  • AdelFi (formerly ECCU) is offering new members 1.01% APY on up to $25,000 when you bundle a High-Yield Money Market Account & Basic Checking. (Existing members can get 0.75% APY.) To join this credit union, you must attest to their statement of faith.
  • There are several other established high-yield savings accounts at closer to 0.50% APY. Marcus by Goldman Sachs is on that list, and if you open a new account with a Marcus referral link (that’s mine), they will give you and the referrer a 1.00% APY for your first 3 months (a 0.50% boost). You can then extend this by referring others.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (plan to buy a house soon, just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CFG Bank has a 13-month No Penalty CD at 0.85% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 0.65% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Alternatively, Marcus has a 10-month CD at 1.10% APY and a 1-year Treasury Bond has a rate of about 1.76% (purchase at TreasuryDirect.gov or with brokerage account, details below).

Money market mutual funds + Ultra-short bond ETFs
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). Unfortunately, money market fund rates are very low across the board right now. Ultra-short bond funds are another possible alternative, but they are NOT FDIC-insured and may experience short-term losses at times. These numbers are just for reference, not a recommendation.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.19%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.45% SEC yield ($3,000 min) and 1.55% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.36% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.23% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 4/6/2022, a new 4-week T-Bill had the equivalent of 0.19% annualized interest and a 52-week T-Bill had the equivalent of 1.76% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.22% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit for electronic I bonds is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between November 2021 and April 2022 will earn a 7.12% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-April 2022, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are severely capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore, as I feel the work required and risk of messing up exceeds any small potential benefit.

  • Mango Money pays 6% APY on up to $2,500, if you manage to jump through several hoops. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • Lafayette Federal Credit Union is offering 2.02% APY on balances up to $25,000 with a $500 minimum monthly direct deposit to their checking account. No debit transaction requirement. They are also offering new members a $100 bonus with certain requirements. Anyone can join this credit union via partner organization ($10 one-time fee).
  • Quontic Bank is offering 1.01% APY on balances up to $150,000. May be useful for those with high balances. You need to make 10 debit card point of sale transactions of $10 or more per statement cycle required to earn this rate.
  • The Bank of Denver pays 2.00% APY on up to $10,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $25k. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 2.25% APY on balances between $500 and up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.80% APY ($10,000 min of new funds). Early withdrawal penalty is 1 year of interest. They also have a 15-month special at 1.20% APY and 9-month at 0.90% APY.
    Anyone can join this credit union by joining the National Space Society (free). However, NASA FCU will perform a hard credit check as part of new member application.
  • KS StateBank has a 5-year CD at 2.05% APY ($500 min). Early withdrawal penalty is 18 months of interest.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year CD at 2.70% APY. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 3.00% APY vs. 2.64% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 4/6/2022, the 20-year Treasury Bond rate was 2.81%.

All rates were checked as of 4/6/2022.

Filed Under: Banking, Deals & Offers, Investing //

The Power of the Default: 401(k) Auto-Enrollment, Auto-Increase, and Default Investment Options

Posted on April 5, 2022 // Leave a Comment

Vanguard has an interesting whitepaper called Automatic Enrollment: The power of the default [pdf]. It takes effort to make a choice beyond the default setting. Doing nothing is always easier. Behavioral economics is still gaining popularity and I knew that auto-enrollment was a powerful way to increase participation in retirement plans, but I didn’t know it was this powerful. Here are a few examples.

Much higher participation: After 3+ years, 90% of auto-enrolled employees kept participating in the retirement plans.

You might think, is that really better than normal? Yes! Here is what participation looked like without auto-enrollment.

Higher contribution rates: After 3 years, 90% of employees auto-enrolled with automatic annual increases indeed kept increasing their contribution percentages. Most stayed with the gradual auto-increase even though they could opt-out at any time, but some also increased more on their own (for example to reach the max).

More appropriate investments: After 3+ years, 94% stayed with a mix of the default and other investments and 74% stayed with solely the default investment option. This is usually a diversified Target Date Fund, whereas in the past a significant amount of participants just stuck with a money market or similar cash account.

My takeaway is that I keep underestimating the power of the default. We see the effects all around us. Why do people keep using Google as their search engine? Default. Switch to DuckDuckGo? Hassle. Why do I simply buy the newest iPhone again after a few years? Default. Switch to Android? Hassle. Buying from Amazon? Easy. Input your name, address, payment info and buy from 100 different online stores? Hassle. Why does Netflix auto-renew with zero effort instead of sending you a bill to pay each month? Behavioral tendencies are big component of business success.

The power of the default is also why you can get $300 to open a new bank account and $500 to try out a new credit card. It takes a big fat incentive for people to move beyond their default. Car insurance companies like GEICO, Progressive, and Liberty mutual spend billions just to get you to even compare premium quotes, let alone switch. Getting over this behavioral tendency is a big component of improving your personal finances.

Filed Under: Behavioral Economics, Investing //

Backdoor Roth IRA Contribution 2022: Tips and Vanguard Example Screenshots

Posted on April 3, 2022 // 8 Comments

The official IRA contribution deadline for Tax Year 2021 is April 15th, 2022. However, I choose to use April 15th as the informal deadline for my same-year IRA contributions (Tax Year 2022). By around April 1st, I have usually finished filing my income taxes and thus have handled any expected tax bills. I also have the first quarter of dividends arrive in my brokerage accounts, so I also have funds ready to re-invest. The optimal time would actually be make my contributions on January 1st, but sometimes we just have to settle for “good enough”.

If your Modified Adjusted Gross Income (MAGI) exceeds the limits for a direct Roth IRA contribution ($144,000 for singles and $214,000 for married filing joint for tax year 2022), you may still be eligible for the “Backdoor” Roth IRA. Christine Benz of Morningstar has a excellent summary of Backdoor Roth IRA concerns.

A backdoor Roth is simple enough and should be tax-free in many cases. An investor who earns too much to make a direct Roth IRA contribution simply opens a traditional nondeductible IRA–available to investors regardless of income level. Shortly thereafter–and here’s where the backdoor part comes in–he converts it to a Roth IRA, another move unrestricted by income limits. Assuming he has no other IRA assets, the only taxes due on the conversion would be any appreciation in the investments since he opened the account. That taxable amount should be limited, assuming he converts the money promptly and/or leaves the money in cash until the conversion is finalized.

Here’s my even-shorter version of the tips:

  • First, check if you have other pre-tax traditional IRA assets such as a rollover IRA. Converting to a Roth IRA may subject these assets to taxes on a pro-rated basis.
  • Get rid of these pre-tax IRAs, if possible, by rolling them into an employer 401(k), 403(b), or 457 plan instead. Self-employed business owners can also roll into a Solo 401k.
  • Contribute and then convert to Roth quickly. Make the non-deductible Traditional IRA contribution, invest for a day or two in cash, and then quickly convert to Roth. The IRS has clarified that no waiting period is required, making it better to do it right away to avoid any tax complications.
  • Repeat at the beginning of every year. Just keep doing it every year, as soon as you can, and build up that precious Roth IRA balance that can grow tax-free forever with no required minimum distributions. Ignore news about the option “maybe” going away until it actually goes away.

Here’s our simple three-day process at Vanguard.

Day one: Make non-deductible contribution to a Traditional IRA account. You could fund in various ways, I exchanged from funds within my Vanguard taxable brokerage account. Just put it in Vanguard Federal Money Market temporarily.

Day two: Go to “Balances & Holdings” page and find the “Convert to Roth IRA” link. Complete required steps.

Day three: Your traditional IRA balance is now $0. Invest the funds that are now in your Roth IRA. In this case, I would have a taxable gain of just $0.03, which simply rounds to zero.

Note: There is still some debate about how much time should pass between the non-deductible Traditional IRA contribution and the Roth conversion. Some people believe that the 2017 Tax Cuts and Jobs Act (TCJA) officially signaled acceptance of this move. Others still want you to wait either for a monthly statement or even a full year in between the steps. I’m not a tax attorney and this is not tax advice. This is just what I did and I don’t lose any sleep over it.

Filed Under: Investing, Retirement //

Optimal Target Date Fund Glide Path, Per Deep Learning AI

Posted on April 1, 2022 // 2 Comments

The WSJ article Why Target-Date Funds Might Be Inappropriate for Most Investors (free gift article) discusses new research using “deep learning” artificial intelligence to find the optimal asset allocation over time. There are several interesting insights that also agree with common sense. For example, one size doesn’t fit all. Wealthier investors can withstand the volatility from holding a much higher stock allocation, whereas lower net worth investors need to be more conservative to avoid a hitting zero due to a bad sequence of returns.

Here is how the optimal glide path for the average investor differs between Deep Learning analysis vs. actual Target Date Funds:

Though the primary insight of this modeling is that one size doesn’t fit all, the research did reach one conclusion that does apply to all of us on average: The typical glide path used by target-date funds is too conservative starting at the age of 50. In contrast to an equity exposure level that drops to 50% by retirement age and to as low as 30% during retirement, the average recommended equity exposure in the researchers’ model never falls below 60%.

While I don’t know the details regarding the underlying assumptions of this research, the red AI line caught my eye because I also don’t plan on going below about 60% stocks ever in my lifetime. My reasoning is that I am going for a “perpetual withdrawal rate” scenario where my I just live off a base of growing dividends and interest. (I’m not talking about owning only extreme high-yield products like closed-end ETFs, junk bonds, and leveraged REITs). After reaching the “safe withdrawal rate” number that is based on a very high likelihood of not dying with zero, I wanted even more margin of safety. It can be counterintuitive, but over the long run owning businesses can be “safer” than just own a big bag of cash that is constantly exposed to inflation risk.

Filed Under: Investing, Retirement //

Schwab Starter Kit: $101 in Free Stock (or Cash) For New Customers

Posted on March 22, 2022 // 7 Comments

I’m a old fart now, but if I am going to keep most of my net worth somewhere, I want it somewhere that if I called their phone number, I’d be confident to have a knowledgable human pick up the phone and help me with my problem. That means Vanguard, Fidelity, and Schwab over Robinhood. Still, competition is good. I like trying out new interfaces and features, and the best of those new apps usually flows down to everyone else. The Robinhood era has helped make everyone’s apps more user-friendly. Commissions are lower. And now even the big boys have are willing to pay you cash to try them out!

Schwab has a Schwab Starter Kit that includes $101 in free fractional shares of stock (“slices”) plus some educational resources. The $101 will be split equally across the top five largest companies in the S&P 500 index – currently Apple, Microsoft, Alphabet/Google, Amazon, and Tesla. (If you do not want the stock shares and just want the $101 in cash, see the fine print quoted below for the short window of time when you can cancel the trades.) To qualify, you must be a new customer opening a Schwab account through that page and deposit at least $50 within 30 days. Emphasis mine:

After you enroll in the offer, here’s what will happen:

Two business days after your account is opened, Schwab will begin checking for qualifying deposits every business day. Once your qualifying deposit has been received, Schwab will credit the $101 cash bonus to your brokerage account at approximately 6:00 p.m. Eastern Time the next trading day. (If you make your qualifying deposit after 8:30 p.m. Eastern Time, Schwab will credit the $101 cash bonus at approximately 6:00 p.m. Eastern Time two trading days later.)

Schwab will send you an email about your 5 trade orders the night before the orders are placed.

Schwab will place the 5 orders for you ($20.20 fractional share orders for each of the top 5 stocks in the S&P 500) at approximately 8:00 p.m. Eastern Time the day the cash bonus is credited to your account, provided you maintain at least $50 in your brokerage account at that time.

You will have a short period of time (from approximately 8:00 p.m. Eastern Time until approximately 9:25 a.m. the next trading day) to cancel the orders.

To cancel the orders, you will need to go to the Order Status page on schwab.com or on any of Schwab’s other trading platforms or call a Schwab representative at 800-435-4000.

If you cancel your orders, you will keep the $101 cash bonus and can save or invest it however you want.

If you take no action, the orders will be executed shortly after market open the next trading day. You will then see the stocks reflected in your account and Schwab will send you trade confirmations for the trades.

Filed Under: Deals & Offers, Investing //

Historical Asset Class Correlations: Stocks vs. Bonds, International Stocks, Commodities, Gold

Posted on March 20, 2022 // 5 Comments

Morningstar has published their 2022 Diversification Landscape (direct link?, but free with email), another useful whitepaper for DIY investors that looks closer at the correlations between different asset classes. The first three sentences quoted below are important:

The problem is that correlation coefficients shift over time, so what worked in the past won’t necessarily work in the future. In addition, adding asset classes to reduce volatility can also drag down returns, sometimes over multiyear periods. Moreover, correlations between many assets spike during periods of market crisis—in other words, exactly when you need diversification the most. The catalysts for crisis periods that lead to equity-market declines can also vary dramatically. Macroeconomic stress can drive declines (as it did during 2008 and early 2020), but so can rising interest rates, geopolitical uncertainty, and so on. Those underlying conditions can have an impact on which diversifiers fare best.

In this paper, we dig into the diversification benefits of adding various assets to a U.S. equity portfolio, including taxable bonds, municipal bonds, international equity, commodities, alternatives, sector-specific indexes, investment styles, factor indexes, and cryptocurrency.

I’m not very interested in correlations over a recent 1-year timeframe, but I am interested in stepping back and seeing how asset classes behave over longer periods of time.

The lower the correlation between asset classes (the less they move in the same direction), the greater the reduction in volatility you get by combining assets. As long as you combine asset classes with correlations below 1, you get some degree of volatility reduction.

Here are a few selected charts from the research paper, along with my quick takeaway.

Takeaway #1: In terms of diversification benefits, staying as safe as possible is still the way to go. The best is still US Treasury bonds. Even the popular US “total bond” indices which include corporate bonds have shown positive correlations with stocks at times.

Takeaway #2: High-quality muni bonds have also kept their correlations negative, but high-yield “junk” muni bonds spike at the exact wrong time (market crashes).

Takeaway #3: International stocks offer a little diversification benefit, but are usually strongly correlated with US stocks. You must have faith that international stock returns will at times exceed US stock returns for periods of time to invest in this asset class.

Takeaway #4: Commodities go through boom and bust cycles as part of their nature, and the correlations with US stocks can also stay high or low for years at a time. I find it all very unreliable and unpredictable.

Takeaway #5: Gold has shown a consistently low correlation with US stocks. For myself, it’s not the correlation I’m concerned with, but the long-term returns.

Filed Under: Investing //

S&P 500 and Global Stock Market Dividend Yield 2000-2020

Posted on March 16, 2022 // 3 Comments

Here is an article about dividends by Capital Group. I didn’t really find the analysis very actionable, but I did like their chart that tracked the historical yields of the S&P 500 index, the MSCI ACWI index, and 10-year US Treasury bonds from 2000 to 2020.

The MSCI ACWI Index is a global stock index that tracks ” large- and mid-cap stocks across 23 developed and 24 emerging markets.”. Basically, a world stock market index that includes US and all other global stock markets.

I know that the total performance of international stocks has underperformed the S&P 500 for a while now, but holding international stocks does seem to consistently boost your overall dividend yield. In addition, I don’t see a strong direct relationship between dividend yields and interest rates.

Filed Under: Investing //
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