PeerStreet Review: Real Estate Backed Loan Investments, My 22-Month Experience

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Updated June 2018. I’ve now been investing in various real-estate crowdfunding platforms for over 3 years, with $30,000 currently invested. Over $25,000 of these funds are invested in real estate-backed loans at automated real-estate loans from PeerStreet (which recently passed $1 Billion in loans). For this type of lending, you have to be an accredited investor. Here’s my review after 22 months of being an investor.

The basic premise of PeerStreet is simple. Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property (I keep LTV under 70%), so they are highly incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and things in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. A few will go down to $2,000 but there is not a steady supply. At PeerStreet, $25,000 will get me slices of loans from 25 different real estate properties.
  • Greater availability of investments. Amongst all the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. Otherwise, you’d want to pick and choose. After doing this for a year, I stopped wanting to pick and choose. I want to just sit back and let them choose for me. We’ll see if it works out.
  • Strong venture capital backing. PeerStreet just closed a $30 million Series B round in April 2018. Andreessen Horowitz did a $15 million Series A round in November 2016. Michael Burry was an early seed investor, using $6.1 million of his own money according to TechCrunch. You may recognize this name from The Big Short.

Here’s a screenshot of the automated investing customizer tool:

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(Tip: Even if you plan on investing only in $1,000 loans, once you are fully invested you might change later to a higher minimum like $1,250 in order to more quickly reinvest your idle cash. For example, if you have $78 in interest and then a $1,000 loan is paid off, then you could invest $1,078 automatically into your next loan.)

What is a potential PeerStreet drawback? In my opinion, slightly lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and so the net yield to the investor feels lower than other sites. This “con” is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), and so I am willing to earn lower interest rates for the added diversification and convenience of automated investing.

Here’s the 1-minute video pitch from PeerStreet:

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

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What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party “special member” will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? In general, unless you use a self-directed IRA, the interest earned will be taxed as ordinary income (like bank account interest). For tax years 2016 and 2017, I received 1099-INTs and filed it alongside my other 1099-INTs from bank interest. Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My investment performance. I started with a $10,000 investment in August 2016, and then added another $15,000 in October 2017, for a total of $25,000. This way, each of my loans is less than 5% of the total portfolio. Everything is set for automatic reinvestment whenever a loan in paid back or the interest adds up to $1,000.

As of this writing 6/20/2018, my total account value is $27,138.26 invested across 24 different active loans ($1,000-$1,250 each). I have already had 26 loans paid off in full, with no loss in principal. A few had late payments, but they eventually all caught back up. Nothing has gone into foreclosure yet. My interest to date is $2,138.26, which works out to an internal rate of return (IRR) of 7.35% annualized net of all fees and taking into account the short periods where my cash was idle. Here are screenshots of my paid-off loans and a chart of cumulative interest earned.

Now, I don’t know what the default rate across all their loans, but I know that sooner or later I will experience one. (In October 2017, PeerStreet stated that they originated $500 million of loans with zero investor losses. They haven’t made the same claim when they reached $1 billion, so I’m assuming there have been some losses since.) This will require patience as it will take a while for the foreclosure process to play out. In my experience, this is a critical difference with private real estate loans. You can’t make a few clicks and get your money back. I may have to wait a year or longer if the loan requires a property takeover and sale. I try to counter this by diversifying across 25+ loans.

Bottom line. PeerStreet offers high-yield, short-term loans backed by private real estate. As compared to traditional “hard money lending”, accredited investors can diversify with $1,000 minimum investment per property, automated reinvestment, and steady nationwide loan volume.

If you are interested and are an accredited investor, you can sign-up for free and browse investments at PeerStreet before depositing any funds or making any investments. PeerStreet charges a servicing fee between 0.25% and 1%, taken out of the interest charged to the borrower. The returns you see in the listing are net of their fees.

RealtyShares Real Estate Investing: Default and Foreclosure Example – June 2018

Updated June 2018. One of the new “marketplace” (aka “crowdfunding”) real estate investing sites that I have put my own money into is RealtyShares. Although I have invested over $30,000 across different RE sites over the last 3+ years, this is my first investment to go into foreclosure proceedings. There are risks in every investment, and my potential loss is your learning opportunity!

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Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months with 6-month extension option.
  • Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan secured by the property in first position. Personal guarantee from borrower.
  • Stated goal to rehab, stabilize, and then either sell or refinance.

Subsequent summary of events.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
  • January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
  • February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
  • April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
  • June 2018. Property is under contract for sale. Price not disclosed yet.

Payment history. I invested $2,000 and got paid $210.84 of interest before the payments stopped. Based on the fact that the total loan amount was $168,000 and the property was only listed for $134,500, it looks like I will definitely lose some money on this deal. Including interest paid, I hope to exit with somewhere around 80% of my original investment.

Thoughts and takeaways. Well, I have made close to 50 different real estate-backed loans now, so it was only a matter of time before I got a full default. The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar.

Real-estate backed debt is backed by a hard asset, so in the end at least you get the property to sell off. Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

One takeaway is to be careful about based your loan-to-value ratios on optimistic appraisals or BPOs (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018.

Another takeaway might be to be careful about investing in struggling local economies. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City. Many of the properties mentioned in this book were literally down the street from this unit.

Finally, sometimes you just get bad luck. This is my only Realtyshares loan and it went into foreclosure. There are other with multiple loans and perfect payment histories. Realtyshares has since shifted their investment focus onto commercial properties and not residential ones, so perhaps they are stronger in that area. In turn, I have shifted my residential debt investing to PeerStreet as they have $1,000 minimums and a slightly different model.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. This post will hopefully serve as a useful example of the foreclosure process from a marketplace real-estate investment site. I haven’t seen any other similar resources. If you are an interested accredited investor, you can sign-up for free and browse investments at RealtyShares before depositing any funds or making any investments. Current opportunities include office buildings, retail space, and large apartment complexes.

I also have active investments in these other real-estate sites: PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt). Closed investments include Patch of Land.

Age-Sensitive Safe Withdrawal Rate Strategy? Age Divided By 20

Should a person who retires at age 70 withdraw the same amount of money from their portfolio as someone who is age 40? You’re talking about a retirement period that is likely twice as long as the other. In an article titled The “Feel Free” Retirement Spending Strategy [pdf], Evan Inglis of Nuveen Asset Management and a fellow of the Society of Actuaries proposed a safe withdrawal strategy that adjusts for age.

To determine a safe percentage of savings to spend, just divide your age by 20 (for couples, use the younger spouse’s age). For someone who is 70 years old, it’s safe to spend 3.5 percent (70/20 = 3.5) of their savings. That is the amount one can spend over and above the amount of Social Security, pension, employment or other annuity-type income. I call this the “feel free” spending level because one can feel free to spend at this level with little worry about significantly depleting one’s savings.

You can think of this is as a lower bound. He also proposes an upper bound:

At the other end of the spectrum, divide your age by 10 to get what I call the “no more” level of spending. If one regularly spends a percentage of their savings that is close to their age divided by 10 (e.g., at age 70, 70/10 = 7.0 percent) then their available spending will almost certainly drop significantly over the years, especially after inflation is considered.

Therefore, the lower and upper bounds for a person retiring at 70 would be 3.5% and 7%. The lower and upper bounds for a person retiring at 40 would be 2% and 4%.

Note that he also admits that spending 3% of your assets each year is an even simpler rule of thumb:

Even though there are lots of things to think about, for the vast majority of people, very simple guidelines will be most useful. My simple answer to the questions “How much can I spend?” or “Do we have money enough saved?” is that if someone plans to spend less than 3 percent of their assets in a year (over and above any Social Security or other pension, annuity or employment income), then they have enough money saved and they aren’t spending too much. This is a fairly conservative estimate, but people tell me they want to be conservative with their retirement spending. They would rather feel safe than spend a lot of money, and I think that is very appropriate in our current economic environment.

Another idea to add to your knowledge banks. Basically, if you are young you have to be sensitive about permanently damaging your portfolio early on with the double-whammy of negative returns and high spending.

Others will say that you should spend more when you’re young, as you’ll be able to enjoy it more. That may be true if you have long-term care insurance. I know lots of people who are still quite active and traveling at 70. I’m also at that age where I have checked out some of those “nice” assisted-living facilities for my parents, and they cost serious bucks.

My Money Blog Portfolio Income – June 2018

dividendmono225When it comes to making your portfolio last a lifetime, you may be surprised at how long that might be. According to this Vanguard longevity tool, for a couple both age 40 today, there is a 50% chance that one will live to 88. That’s 48 years.

For a young person making a plan to reach financial independence at a very early age (under 50), I think using a 3% withdrawal rate is a reasonable rule of thumb. For someone retiring at a more traditional age (closer to 65), I think 4% is a reasonable rule of thumb.

In addition, I track the dividend yield of my portfolio. This is not necessarily my spending target, but more of a very safe benchmark number. Having lived through a crisis like 2008, I know that it can be hard to appreciate “very safe” things until the poo hits the fan. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.

Specifically, I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my most recent portfolio update (66% stocks and 34% bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 6/11/18) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.69% 0.42%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.82% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.75% 0.69%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.42% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.48% 0.21%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
17% 2.86% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
17% 2.64% 0.45%
Totals 100% 2.47%

 

Our overall plan is still based on a 3% withdrawal rate. This calculation tells us that 2.5% will come out as income “naturally”, and we would have to take the remaining 0.5% by selling shares. Living off a portfolio is an area of ongoing debate, so don’t let anyone convince you that there is a “right” answer. I’m not a financial firm convincing you to let me handle your money. I’m not here to pitch you an easily-achievable dream lifestyle. Even if you run a bunch of numbers looking back to 1920, that’s still trying to use 100 years of history to forecast 50 years into the future.

Your life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.”

Stock Market Game: Buy & Hold vs. Market Timing

Here’s an interactive “game” at Engaging-Data.com where you can test out your stock market timing skills based on actual historical returns. You’ll be given a randomly-selected 3-year period of the S&P 500 from 1950-2018. You start out fully invested, but you can sell or buy at any time. The simulator tracks your returns vs. just holding on through the entire period. Can you consistently pick the right times to jump in and out?

I like the WarGames reference. The only winning move is not to play.

While the game is interesting, I think a crucial thing missing is the emotion of the moment. (Not that this is the fault of the programmer.) In my experience, casual investors tend to get caught up in market timing due to one of two emotions: the fear of missing out (FOMO), and the fear of losing everything. The housing bubble was all about FOMO. The “smart” move was to get on that property ladder at any price, with any time horizon, with any loan terms. Then in the 2008 stock crash, I was getting every variation of the “why not sell and wait for the dust to settle???”. The “prudent” move became sitting it out. As of early 2018, things have been pretty comfortable for while, and “buy and hold” looks both smart and prudent again.

I think buy and hold is a valid strategy, but simple is not easy. It will be hard again soon enough. When the next crisis eventually occurs, I hope that I can be a boring example of buy and hold. In the meantime, hopefully this game will at least keep you on your toes.

Personal Capital Review 2018: Automatically Track Net Worth and Portfolio Asset Allocation

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Updated 2018. Personal Capital is free financial website and app that links all of your accounts to track your spending via bank and credit cards, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites. Personal Capital’s strength is in investments, including portfolio tracking, performance benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.

Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is pretty accurate, and if it isn’t you can change it manually. However, it isn’t quite as advanced as Mint.com, where you for example you can make a rule to always classify “Time Warner Cable” as “Utilities” and not “Online Services”.

Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. If you’re like me, you have investments spread across multiple custodians. I now have investments at Vanguard, Fidelity (401k), Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture. They can also analyze your retirement accounts fees to see if you are quietly getting charged too much.

For comparison, Mint did not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity. Their smartphone apps are compatible with Touch ID/Face ID on Apple and mobile PINs on Android devices.

In terms of the big picture, my opinion is that by making it more convenient, I am able to keep a closer eye on all my account and thus actually make myself less likely to be affected by a security issue.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via an optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers tend to have money to manage…) They are a hybrid advisor, combining their online tools with real human access. Their management fees are 0.89% annually for the first $1 million, with slightly lowered pricing as you go past $1 million in assets. As an SEC-registered RIA fiduciary that now manages over $7 billion, I think this improves their credibility as a company built to handle sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. Or you could ask them your hardest financial question and see how they respond. However, if you simply ignore the phone calls, they will keep calling. Now, you can keep using the portfolio software for free no matter what happens. But, if you aren’t interested, I would highly recommend simply being upfront with them. A simple “no thank you” and you’re good.

If you’re upfront with them, they’ll be upfront with you. I’m still a DIY guy when it comes to my money, and they have been happy to keep monitoring my accounts for free, without any additional phone calls over the last 5 years.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software by Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).

Jack Bogle Profile & Vanguard Historical Chart in Barron’s Magazine

barr_boglecoverThe Barron’s magazine cover article* this week is a profile of Jack Bogle, founder of Vanguard. It covers a lot of things that Bogle fans may already know (origin story, dislike of ETFs), but there were several bits that were new to me. I look forward to reading his last book that includes an “anecdote-rich history of Vanguard” and personal reflections.

(*Barron’s has a paywall, but usually allows limited access to Google search visitors. Try searching “Jack Bogle’s Battle” in a private window.)

Here’s a chart of how Vanguard has changed since 1974:

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The article brings up the argument that index funds are becoming too popular and now bad for the world. I don’t worry about this at all. If inefficiencies become easy to take advantage of, things will naturally swing back. The loudest complainers always seem to be high-fee managers who are getting paid less lavishly for their services:

His favorite punching bag remains the mutual-fund industry. He likes to point out that closet indexing is pervasive with actively managed funds, and that traditional funds haven’t passed along economies of scale until pressured by Vanguard’s fees. There have been few casualties yet among asset managers, even as active stock funds suffered outflows nine of the past 10 years. And the industry has surely improved: Investor outcomes are better, costs are lower, information is better, thanks in part to Bogle.

Says Bogle, paraphrasing Martin Luther King Jr., “the arc of fiduciary duty is long, but moving in the right direction.” Bogle intends to see that it keeps doing so. “I have no corporate power,” he continues. “But I believe I still have more ethical and intellectual power. And that is good enough for me.”

Bogle is one of those rare authentic voices who say what they think and don’t care if others agree (even the rich and powerful). The adjective “cantankerous” is used – I hope to be called that eventually!

Principles by Ray Dalio – YouTube Summary For Short Attention Spans

dalioPrinciples: Life and Work by Ray Dalio is a bestselling book by the billionaire investor and founder of Bridgewater Associates. The book outlines both his personal development and investment philosophies and has been on my reading list for a while. If you’re like me and haven’t quite gotten around to reading it, you might be in luck.

Mr. Dalio just released a series of animated YouTube videos where he breaks down his “Principles for Success” into 8 videos at about 4 minutes each. Instead of reading a review or even paying for an “executive summary”, you can get a 30-minute version straight from the source. Here’s the trailer (embedded below) and first episode:

The YouTube channel also contains a few other longer videos dealing with the book content.

Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts

brkpodcastFully updated for 2018 with new sources. Berkshire Hathaway’s Annual Shareholder Meetings are held in Omaha, Nebraska every May. Although most of my portfolio is in a diversified mix of index funds, I also own individual shares of Berkshire Hathaway and respect the rational and clear advice given out by Warren Buffett and Charlie Munger. I’ve been reading through transcripts from past meetings, but in 2018 Buffett gave CNBC a bunch of complete tapes from old meetings.

I’ve wanted to physically attend a meeting for several years now, but things haven’t worked out. (Time is running out, I know…) In the meantime, here is a big list of ways you can watch, read, or listen to past shareholder meetings. Please let me know if you have something to add.

Full Videos

  • Yahoo Finance Livestream. Yahoo Finance is the exclusive online host of the Berkshire Hathaway 2018 Annual Shareholders Meeting that occurred May 5th, 2018. View the entire Q&A session in its entirety on demand.
  • CNBC Warren Buffett Archive. Footage of shareholder meetings from 1994-2017 (VHS tapes!) were converted to digital videos, which you can view in their entirety for free. Additional material from CNBC including interviews, highlights, and short-form videos is also available.

Transcripts

Liveblogs

Podcasts

  • Yahoo Finance also makes the BRK meeting available as a podcast, so you can listen in parts during your commute or chores. Right now, the 2017 meeting podcast is still available. 2018 should be up shortly. iTunes. Player.fm.

Books

Reminder: This post is about the live shareholder meeting, and is separate from the annual shareholder letters (which are also great).

Barron’s Best Stock Brokerage Rankings 2018

barrons2018Barron’s has released their 2018 online broker rankings. The considerations include trading experience/technology, usability, mobile trading, range of offerings, research tools, customer service, and cost.

The Barron’s list always comes from the perspective of their subscriber base – high-net-worth active investors – which may or may not describe you. The overall winner this year was Interactive Brokers. Last year’s winner Fidelity Investments was pushed back to #2. Thankfully, Barron’s also supplied separate rankings for novice investors, long-term investors, and those that value in-person service:

Top 5 Brokers for Novice Investors

  1. TD Ameritrade.
  2. Fidelity
  3. Merrill Edge
  4. Charles Schwab
  5. Ally Invest

Top 5 Brokers for Long-Term Investing

  1. TD Ameritrade.
  2. Fidelity
  3. Charles Schwab
  4. Merrill Edge
  5. E-Trade

Top 5 Brokers for In-Person Service

  1. Merrill Edge.
  2. Charles Schwab
  3. Fidelity
  4. TD Ameritrade
  5. E-Trade

Commentary. A few thoughts on the rankings and other overlooked brokers:

Interactive Brokers is hard to argue against for very active traders. Their average account made 476 trades last year! However, they have a minimum commission of $10 a month for accounts under $100,000, or a minimum commission of $20/month under $2,000. You must pay them $120/$240 a year no matter what. That doesn’t work out for me, as some months I don’t trade at all. IB is not for newbies.

TD Ameritrade recently showed a lack of commitment to their commission-free ETF list and went for quantity over quality. The free ETF list is still decent, but that move didn’t scream “long-term” in my book. I think the customer service is solid, and some people may feel better knowing that they merged with Scottrade and their physical branch network. (E*Trade ate OptionsHouse. Schwab ate OptionsXpress. TD Ameritrade ate Scottrade. Ally ate TradeKing, now Ally Invest.)

Vanguard was included this year for the first time in recent memory, and they were promptly knocked to the bottom for being the most expensive broker due to their high trading costs on non-Vanguard ETFs and mutual funds. Vanguard doesn’t court active traders, and active traders probably won’t like it at Vanguard.

Robinhood was ignored again this year, despite the fact they have free trades and recently added a web interface for trading and free options trading. They probably would have also ranked low due to limited feature set.

M1 Finance is another free investing app that just popped on my radar. It lets you pick a customized basket of individual stocks (or ETFs) and then lets you buy them with zero commission. I used to worry that Robinhood was alone, but now there is competition. Maybe Barron’s will notice one day.

I keep most of my long-term assets directly at Vanguard along with a Solo 401k at Fidelity. My (much more modest) individual stock trading is done through Merrill Edge. I’m happy with them so far. If you have $50,000 in assets across Merrill Lynch, Merrill Edge, and Bank of America accounts, you get 30 free trades per month. That’s already more trades than I need, but $100k in combined assets gets you 100 free trades per month.

Savings I Bonds May 2018 Interest Rate: 2.22% Inflation Rate, 0.30% Fixed Rate

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Update 5/1/18. The fixed rate will be 0.30% for I bonds issued from May 1, 2018 through October 31, 2018. The variable inflation-indexed rate for this 6-month period will be 2.22% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in May 2018, you’ll get 2.52% for the first 6 months. Not bad. See you again in mid-October 2018 for the next early prediction.

Original post 4/11/18:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as a replacement for cash reserves (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2018 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. September 2017 CPI-U was 246.819. March 2018 was 249.554, for a semi-annual increase of 1.11%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.22%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2018. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.1%. You will be guaranteed a total interest rate of 2.58% for the next 6 months (0.10 + 2.48). For the 6 months after that, the total rate will be 0.10 + 2.22 = 2.32%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2018 and sell on April 1, 2019, you’ll earn a ~2.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you held for three months longer, you’d be looking at a ~2.10% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of April 2018.

Buying in May 2018. If you buy in May 2018, you will get 2.22% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS, which has been rising a bit. The current real yield of 5-year TIPS is ~0.56%. My best guess is that it will be 0.20% or 0.30%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (minimum floor of 0%).

So, which one? Buying in April 2018 would lock in a 11-14 month return equal to the top 12-month CD rates, which isn’t bad (plus the interest is exempt from state and local income taxes). If inflation picks up in the next year, you could still keep the bond and have potential upside. I would choose this option if I was treating savings bonds as short-term CD alternatives. However, if you buy in May 2018, your (real) fixed rate may be higher. This helps in the long run if you intend to keep these savings bonds indefinitely. I am a long-term holder (see below), so I am waiting until May.

Unique features. Due to their annual purchase limits, you should still consider their unique advantages before redeeming them. These include ongoing tax deferral (you don’t owe tax until redemption), exemption from state income taxes, and being a hedge against inflation (and even a bit of a hedge against deflation). There are also potential benefits when using the proceeds for college.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Betterment Review 2018: Customized Asset Allocation, Human Financial Advisors

bment1707_0Updated April 2018 with custom ETF allocations. Betterment is an independent hybrid digital/human advisor that will manage a diversified mix of low-cost index funds and help you decide how much you’ll need to save for retirement. (By independent, I mean that they are not tied to a specific brand of funds like Vanguard or Schwab). Betterment is also an RIA, which means they have a legal fiduciary duty to keep client interests first. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Large Value, US Mid Value, US Small Value, International Developed, Emerging Markets, US Corporate Bonds, US Total Bond, Inflation-Protected Treasuries, Muni Bonds, International Bonds, and Emerging Market Bonds. For the most part, Vanguard and iShares ETFs are used.

The traditional Betterment portfolio has a more pronounced tilt towards the size premium and value premium than the cap-weighted indexes. You could argue the finer points of whether this will really create higher risk-adjusted returns, but overall it is backed by academic research. Betterment has also added a Socially Responsible Investing (SRI) portfolio option.

In April 2018, Betterment added Flexible Portfolios which lets you manually adjust the percentages of each asset class. As a DIY investor with assets spread across multiple accounts, this customization has been something I’ve been waiting for. This option is currently available only to clients with $100,000+ in assets.

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Both the SRI and Flexible Portfolio options will work with Tax Loss Harvesting and Tax Coordination features (see below).

Free access to human advice for everyone. In July 2017, Betterment announced that all of their customers can message a licensed financial experts. Digital members (0.25% annual fee) can ask questions any time via their mobile app. Digital members should expect an answer in approximately one business day. Betterment Premium members (0.40% annual fee) have unlimited e-mail and direct phone access to “Certified Financial Planner professionals”. From their press release:

Our experts can assist with deciding which funds to move to Betterment, setting goals (like saving for college, a house, or retirement), and identifying which Betterment tax features may be right. They can also help you make important investment decisions, like choosing risk levels, amounts to invest, and types of accounts.

Reading between the lines, Digital members get “licensed financial experts” while Premium members get “Certified Financial Planner professionals”. This suggests that while Digital members will still get fiduciary (client-first) advice, Premium members will get priority access to the more-experienced advisors in exchange for paying their higher fee.

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Retirement planning software with external account balances. RetireGuide is Betterment’s retirement planning software, first launched in April 2015. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your balances without having to manually input them. According to their methodology guide [pdf], they don’t analyze your transactions to estimate savings rate, they are just pulling in balances.

Example questions: How much do I have invested elsewhere? Am I saving enough money? How much estimated income will I have in retirement? Your future Social Security income is estimated for your based on your chosen retirement age and birthdate. You can change many of the variables as you like.

Account types. Betterment now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, SEP IRAs, and Inherited IRAs.

Tax-efficent asset location. Tax-Coordinated Portfolio will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. In addition, if you have multiple types of accounts at Betterment (i.e. both IRA and taxable), it will manage multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs). Note that this only works across accounts that are held at Betterment. It does not adjust for non-Betterment accounts. This is called their Tax-Coordinated Portfolio (TCP).

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Daily tax-loss harvesting. Betterment’s Tax-loss Harvesting+ (TLH+) software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Betterment side of things in their whitepaper. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Invest your excess cash automatically. Automatic contributions are good, but perhaps you don’t want to commit to a set amount each month. (Ideally, you do commit to a set amount, and this service invests more money on top of that.) Called SmartDeposit, you link your checking account and choose your Checking Account Ceiling and Max Deposit amount. If your checking account balance goes above the ceiling, Betterment will automatically sweep over money and invest it for you. Betterment will account for future scheduled deposits so you don’t over-contribute.

Fee schedule. Betterment has a fee structure with two tiers.

  • Betterment Digital. No minimum balance. Digital portfolio management and guidance. Unlimited access to “licensed financial experts” via mobile app with ~1 business day turnaround time. Flat fee of 0.25% of assets annually. The management fee on any assets over $2 million is waived.
  • Betterment Premium. $100,000 minimum balance. Digital portfolio management and guidance. Unlimited access to “CFP professionals” financial experts” via e-mail or phone. Includes more in-depth advice on investments outside of Betterment. Flat fee of 0.40% of assets annually. The management fee on any assets over $2 million is waived.

In my opinion, the main concern of any outside advisor is the same: you are handing over control to someone else. Betterment could change their investment philosophy, their pricing structure, and feature set in the future. Digital advisors are constantly changing, and some of their new features could be great or it could just be a fad.

Bottom line. Betterment is an independent digital advisory firm with nearly $10 billion in assets, which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Wealthfront review) are (1) access to human advice available to all customers and now (2) the ability to customize your target asset allocation ($100k+ in assets). Other notable features include: Retirement planning software that syncs with external accounts, tax-loss harvesting, tax-coordinated portfolios (when you have both IRA/401k and taxable at Betterment), and SmartDeposit which automatically invests excess cash from your checking account.

Special offer. Open a new Betterment account and you can get your management fee waived for up to 1 year, depending on how much you roll over or deposit within 45 days of account opening. Here’s the breakdown:

betterment_bonus2018a