Archives for May 2016

Jeremy Grantham GMO 7-Year Asset Class Forecast, Q1 2016

Posted on May 10, 2016 // 4 Comments

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I tend to ignore most market predictions, especially the short-term ones. However, I do keep up with a few longer-term forecasts which seem to offer the best combinations of historical data, logic, and common sense. I definitely don’t assume they are correct, but like learning from their arguments. By saving them here, hopefully I can look back later to see how they end up and learn even more. One of these is the GMO Quarterly letters by Jeremy Grantham and their GMO 7-Year Return Forecasts (free registration may be required).

Here is the most recent GMO 7-Year Asset Class Forecast, as of March 31, 2016:

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They just released a newer one, but here are my notes on the the previous GMO Quarterly Letter, Q4 2015:

  • They are starting to like high-yield corporate bonds again. “At current spreads, high yield seems to be no worse than fair value and probably better than that, even if we assume (as we do) that we are entering a fourth default cycle. In today’s environment, that makes it one of the best available risk assets for investors.” – Ben Inker.
  • Two areas where the U.S. has “documentable advantages”… 1. Americans are more entrepreneurial and willing to take risks. 2. US and Canada are relatively well-positioned to face future climate and food production challenges due to our natural resources (water, arable land, fossil fuels).
  • The low commodities prices right now will have underestimated positive effects on our economy, but they won’t last forever.
  • “As always, though, prudent investors should ignore historical niceties like these and invest according to GMO’s rather depressing 7-year forecast. The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal.” – Jeremy Grantham.
  • “At current asset prices no pension fund requirements can be met. Thus, we should welcome a major market break that will leave us with more reasonable investment growth potential for the longer term, but I suspect that we will have to wait patiently for such a major decline.” – Jeremy Grantham.

My personal opinions and takeaways:

  • Their forecast is certainly depressing. Keep in mind the numbers are inflated-adjusted “real” returns. I am more optimistic long-term, but it is best to be prepared.
  • Enjoy any benefit of low oil prices while they last. Put aside some savings from lower gas and heating oil prices, if you can.
  • Keep your equities diversified internationally. Certainly don’t give up on US stocks but don’t be 100% US either.
  • Even though GMO likes high-yield corporate bonds right now, it is a timing game that I choose not play. I am staying in short- to intermediate-term, high-quality bonds.
Filed Under: Investing //

Infographic: New York City Median Rent vs. Subway Stop

Posted on May 9, 2016 // 8 Comments

rh_nycsignWe all know that the longer the commute from where everyone works, the lower the rent. In many cities during the housing boom, the saying went “just keep driving until you can afford something”. But what if the relationship between commute time and rental price wasn’t steady? What if a few minutes of extra commute time would save you several hundred dollars a month?

There are indeed some great relative values in New York City, according to the results of a study by apartment listing site Renthop, via This Is New York. Here are the median rents for one-bedroom apartments nearest every subway stop in New York City:

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Highlights from their analysis:

The extra few blocks from 66th St to 72nd St could save you $845 per month. Granted you might really like the Lincoln Center area, but that’s enough extra dough for a trip or two to the NY Philharmonic, the Met Opera, or even dinner at Jean-Georges.

A good rule of thumb is that each stop is about two minutes apart (except express stops and when crossing a bridge), assuming there’s no “debris on the track” or “train traffic ahead”. Consider this when calculating what your time and commute is worth to you. An extra stop on the J/M/Z train past Marcy Ave will save you about $175, and each subsequent stop saves another $100 or more. The same holds true heading into Queens.

Someone should make a similar graphic for all the of the major cities with high usage of public transportation: Washington DC, Boston, San Francisco Bay Area, Chicago, and Philadelphia. From Wikipedia:

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Filed Under: Frugal Living, Real Estate //

Swappa Review: Selling Used Republic Wireless Moto E Phone

Posted on May 8, 2016 // 18 Comments

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I set up a cell phone line with Republic Wireless (RW) in October 2014 for my parents, but they eventually chose to switch over to used iPhones. This meant we had to move off of Republic Wireless and sell their Moto E phone as it wasn’t compatible with their new carrier. As I had heard some good things about buying and selling phones on a new marketplace called Swappa.com, I decided to try them out.

Republic Wireless requires special software on their phones enable their WiFi-calling features, which means that RW users either need to buy a new phone directly from them or buy a used RW-modified phone on the secondary market. You can find phones on cellular forums, eBay, and Craiglist, but it can be a headache to deal directly with individual people with no intermediary assistance.

Here are some highlights of selling on Swappa:

  • Similar to eBay, Swappa is a connecting marketplace. The seller is still taking payment directly from an individual buyer.
  • Swappa relies on PayPal to provide certain protections. Seller gets paid before shipping. Swappa does not provide any escrow-type service.
  • Users can link eBay account ratings to encourage trust from prospective buyers.
  • No listing fee. No fee to cancel listing, as long as it hasn’t sold yet.
  • No seller fee (technically) but there is a $10 sale fee. If the list price is $100, then the seller gets $90 and Swappa gets $10. Featured listings are extra.
  • Standard shipping is also included in the list price, paid by buyer. So that’s another $6 to $7.
  • Depending on your PayPal account, you may have to pay transaction fees at PayPal.

Here’s a brief overview of the selling experience:

  • Your device must meet their requirements (fully functional, clean ESN, and no outstanding financial obligations).
  • You must provide a valid ESN to avoid “bad” phones with blacklisted ESNs. ESNs are kept private from buyers until sold.
  • You must upload a picture with your phone and any accessories, including a handwritten note of your listing number. I just used another smartphone to take a picture and was done in minutes.
  • Depending on the situation, you may have to provide additional verification pictures. I had to provide a photo that included the ESN screen of my phone.
  • You can see the historical selling price of the phone, and then set your own price.

According to their historical charts, the average selling price was $70. I was more interested in a fast sale, so I listed my phone for $65. Here was the pricing history for the Moto E (1st Gen):

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It sold within 6 hours of listing, and was paid via Paypal immediately. I bought our Moto E for $99 brand new in October 2014. My net was $65 – $10 fee to Swappa – $7 shipping = $48. That worked out to a phone depreciation rate of just $3.20 a month. For comparison, the 2nd generation Moto E is currently $129 new and is running about $85 used on Swappa.

In general, as a seller, I was very satisfied with the process. I could have probably sold for roughly the same price on eBay, maybe eeking out a couple more bucks, but I felt the listing process was faster at Swappa. The $10 sale fee may be a little more than the 10% fee that eBay charges on a cheap phone, but much less than eBay charges on an expensive phone (ex. 10% of $400 would be $40). There was a little confusion in the beginning regarding my ESN, but the online support from the staff was prompt and courteous. I would sell my phone using Swappa again.

Filed Under: Frugal Living //

American Airlines Promo: Quick, Free 700 Miles

Posted on May 5, 2016 // 2 Comments

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In celebration of the 35th anniversary of the American Airlines AAdvantage® program, they are running a Miles for Milestones promotion.

  • To get the first 350 miles and enter the 350,000 mile sweepstakes, you just need your name, e-mail, and AAdvantage account number.
  • To get the second 350 miles, you’ll have to share something on your Facebook page, Twitter account, or e-mail them directly.

Screenshot:

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Between my wife and I, we tried the e-mail option and the Twitter option. After sending the e-mail, we got an auto-reply but no direct confirmation of qualification for the bonus miles. After sending the tweet, we got an instant Twitter reply with a link to verify the tweet. The Twitter option felt more concrete and satisfying, but the e-mail option is more private.

This will extend the life of your miles, as AA miles currently expire after 18 months of inactivity. Keep in mind the terms state it may take up to 8 weeks for your bonus miles to post. Ideally, 700 miles for each family member in under 5 minutes.

Filed Under: Deals & Offers //

Navy Federal Credit Union Military Appreciation Month Promotions 2016

Posted on May 4, 2016 // 4 Comments

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navyfedlogoNavy Federal Credit Union has solid bank and loan products, including checking accounts with ATM rebates, competitive mortgage rates, and limited-time 0% balance transfer promotions. Readers have commented on their excellent customer service and the fact that they often keep and service the mortgages and other loans they originate.

Membership eligibility for NavyFed is primarily restricted to Marine Corps, Navy, Air Force, and Coast Guard regular Active Duty and reservists, and Army and Air National Guard personnel, but also includes family and household members of existing NavyFed members and some civilian employees in the Department of Defense.

If you’ve been waiting to sign-up, the special offers available during Military Appreciation Month may help you get yourself motivated (some offers are restricted to active military):

  • Get $50 When You Give Membership. Refer armed forces personnel, DoD civilians and contractors, and their dependents, and you’ll each get $50.
  • Get $50 with Active Duty Checking. Open an Active Duty Checking account with a qualifying Military Direct Deposit and get $50.
  • Get a Special Promotional-Rate CD. Open a 15-month Military Appreciation Certificate with a 3.00% APY and start growing your savings. Receive an additional $10 incentive when you set up a recurring transfer.
  • Get $200 for Auto Loan Refinance. Military members: Refinance your loan from another lender and get $200. Active Duty and retired military members save an additional 1/4% APR on selected loans with Direct Deposit.
  • Get $200 with a CashRewards Credit Card. Open a new cashRewards credit card and get $200 cash back after spending $2,000 within the first 90 days of account opening.

Offers valid between 5/1/2016 and 5/31/2016 and can expire anytime without prior notice. Thanks (again) to reader Charles for the tip.

Filed Under: Deals & Offers //

Mortgages, Imputed Rent, and Early Retirement

Posted on May 3, 2016 // 15 Comments

mcman286In a Quora question What do economists think about buying vs renting a house?, in addition to the previously-mentioned answer by Alex Tabarrok of Marginal Revolution, there was another well-ranked answer by Erik Brynjolfsson, professor at MIT Sloan. One of his three points was about the value of imputed rent (read the other ones as well):

Second, there’s a huge tax benefit to housing which comes from the hidden “dividend” it pays. I’m not talking (just) about the (too) generous mortgage deduction, but rather the fact that you don’t have to pay taxes on the implicit rent you earn on your house since its paid to yourself. A house generates enormous rental value each month — like a dividend. If you rent it to yourself, you take the money out of one pocket and pay it to the other one, and the IRS doesn’t tax that. In contrast, if you earn money some other way and then use that money to pay rent, you probably also have to pay taxes. That can add up.

From the Wikipedia entry on imputed rent:

Consider a model: two people, A and B, each of whom owns property. If A lives in B’s property, and B lives in A’s, two financial transactions take place: each pays rent to the other. But if A and B are both owner-occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.

In other words, as a homeowner you could be considered both the landlord and the renter. Let’s say you would rent your house for $1,600 a month. If you were in the 25% marginal tax bracket, you have to earn $2,133 a month pre-tax to cover that rent (and pay $533 in income tax).

As part of my “rough model” of early retirement, I recommend setting your mortgage payoff date to coincide with your retirement date (for those that choose to buy a home). Part of the reason for that is that you won’t have to generate that extra income to pay your mortgage anymore. This could lower your marginal tax bracket into the next lower bracket, and also the tax rate on your capital gains.

For example, $1,600 in monthly rent equates to nearly $20,000 a year in after-tax expense, or nearly $26,000 in gross income at the 25% tax bracket. Here are the 2016 federal income tax rates (source):

2016taxschwab

Ideally, I would target my household expenses to stay in the 15% tax bracket for married joint filers in retirement. Being able to reduce my taxable income by over $25,000 would definitely help someone stay in the 15% tax bracket range. Also, if you are the in 15% ordinary income tax bracket, your tax rate on qualified dividends and long-term capital gains becomes zero!

Now, the idea of imputed income could be extended further. When I cook at home, I save the money from eating out an Applebee’s. Let’s say a dinner out costs $40 for the family. To reach $40 after-tax, I’d have to generate $53 of income at a 25% tax rate. Same with childcare, housekeeping, laundry, yard maintenance, etc. But housing is an area with significant impact, usually the biggest item in a household budget.

Filed Under: Real Estate, Retirement, Taxes //

Mortgage Rates at 3-Year Lows: Refinance Check Time Again?

Posted on May 2, 2016 // 4 Comments

Mortgage rates for 30-year fixed loans are at the lowest level in three years, according to this Bloomberg article:

The average rate for a 30-year fixed mortgage was 3.58 percent, down from from 3.59 percent last week and the lowest since May 2013, Freddie Mac said in a statement Thursday. The average 15-year rate slipped to 2.86 percent from 2.88 percent, the McLean, Virginia-based mortgage-finance company said.

This is visually confirmed by this historical rate chart from HSH.com:

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Depending on your area, your home value may also have increased over this time period. Combine these two, and it may be a good time to check if a mortgage refinance can save you some big bucks over the term of your loan. You may lower your interest rate, shorten your term into a 15-year mortgage, and/or get rid of private mortgage insurance.

Comparison shopping mortgage rates. There’s average, and then there is what is actually being quoted for people in your situation. The Consumer Finance Protection Bureau (CFPB) has a nice Owning a Home resource page including a new rate data tool that takes into account your credit score, state of residence, house price, and down payment size to see what other interest rates people are getting. I like they show an actual distribution of rates and the number of lenders offering that rate:

cpfb_april2016

You can try the big networks like and Quicken Loans, or you can ask around for a referral to a reputable local broker. The CFPB recommends that you get quotes from three or more lenders. You should get an standardized 3-page form called a “Loan Estimate”. That way you can compare and even negotiate one off the other.

Get quotes from three or more lenders so you can see how they compare. Rates often change from when you first talk to a lender and when you submit your mortgage application, so don’t make a final decision before comparing official Loan Estimates.

Depending on your situation, you may face a lot of paperwork during the mortgage approval process. But hopefully the money saved will be worth it.

Think mortgage rates might go even lower? I don’t recommend playing such guessing games, but you could keep an eye on 10-year Treasury rates. Here’s an interesting chart comparing the 10-year Treasury yield and 30-year mortgage rates from Calculated Risk:

mort10ust_april2016

Filed Under: Real Estate //
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