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Investment Portfolio Asset Allocation & Performance Update – December 2011

Saturday, 24 December 2011

Investment Portfolio Asset Allocation & Performance Update – December 2011

It’s time for a end-of-year checkup on the ole’ portfolio, as I’m afraid that I’ll forget about it between Christmas and New Year’s. There isn’t much change to my investment portfolio itself, the target asset allocation is the same, and the specific fund holdings are pretty much the same. I’m closer to 70% stocks and 30% bonds now. With only about 7 trading days left, I wanted to see how the various asset classes that I own performed in 2011.
My portfolio is similar to the David Swensen model portfolio, which uses low-cost index funds to gain exposure to specific asset classes. Here is an implementation of the portfolio using actual ETFs in a recommended 70% stocks / 30% bonds breakdown.
30% Domestic US Equity (VTI)
15% Foreign Developed Equity (VEA)
10% Emerging Markets (VWO)
15% Real Estate (VNQ)
15% U.S. Treasury Bonds (IEF)
15% Inflation-Protected Securities (TIP)
The chart below shows the growth of $1,000 invested this way (eMAC) at the start of 2001 until the end of November 2011, as compiled by the financial advisory group ETF Portfolio Management for benchmark purposes.
I have also taken the liberty of updating their annual returns table to including 2011 year-to-date total returns (see highlighted) using Morningstar data as of 12/19/2011.
The weighted year-to-date return of the overall model portfolio is 0.35%, essentially zero for 2011. But from the table, you see that each individual asset class may have moved a lot. European and Emerging Market stocks performed quite poorly (in case you don’t read the news), the S&P 500 looks like it will more or less go nowhere for the year, REITs (Real Estate) did okay, and Treasury bonds did very, very well considering this low-yield environment. Inflation-Protected bonds (TIPS) were the superstar in my portfolio, they saved my bacon.
Another year, another reminder that predicting short-term market movements is way beyond me. :) I continue to be happy with owning various asset classes with long-term expected positive returns, but which tend not to move in sync and thus smooth out the ride.
Next year, I intend to learn more about an income-oriented portfolio as that maypotentially work better – at least psychologically – for the early-retirement set. My secret crush, the Vanguard Wellesley Income Fund (VWINX) was up 7.91% in 2011 YTD. It’s a income-oriented actively-managed fund with about 35% in dividend stocks and 65% in corporate bonds – but with a tiny expense ratio of only 0.28% for investor shares, 0.21% for admiral shares.

Mobility vs. Geography: Percent Born In State of Residence Map (2010)

I can’t stop posting map infographics! They’re just so pretty. :) Richard Florida ofThe Atlantic shared the map above, which shows the percentage of residents of each state that were born in that state. He then goes one step further and concludes that this map backs up his theory that America is being divided into two economic classes – the stuck and the mobile:
The mobile possess the resources and the inclination to seek out and move to locations where they pursue economic opportunity. Too many Americans are stuck in places with limited resources and opportunities. This geography of the stuck and mobile is a key axis of cleavage in the United States.
If mobility was once considered to be a quintessentially American attribute, it is now one that only an elite sliver of the population can lay claim to. It is both a significant shift and a sobering one. (source)
He cites the fact that fewer Americans are moving now than before, ostensibly because they are stuck in underwater homes. Still, using this particular map as proof of such a class divide seems like a stretch to me. There are many reasons why someone may or may not end up living in the state they were born. This map is the result of decades of complex interactions, not just what happened the last few years.
Just to throw out some examples, perhaps some states simply created significantly more job openings than could be filled by existing residents (DC Metro area, Alaska, Nevada). Some are retirement havens (Arizona, Florida). Also, I can’t tell if this map excludes residents born outside the US. Hundreds of thousands of immigrants came from around the world to settle in America – they were often both poor and mobile. Immigrants also tended to settle in coastal areas, which would affect the results above as they obviously weren’t born in the state they currently reside in.
In the end, I bet this map would have looked very similar even before the housing crash. A quick look at the same US Census data from 1990 confirms that states like Ohio, West Virginia, Kentucky, Pennsylvania, Mississippi, and Louisiana also had “low mobility” over 20 years ago, and states like Alaska, Arizona, Florida, and Washington DC had “high mobility”. I’m afraid I don’t see the evidence that mobility has been limited to an “elite sliver of the population”.

Goal Update: Home Equity Historical Chart – Nov 2011

We closed on our mortgage refinance about a month ago, the old loan has been paid off, and we are just about to make our first payment on the new loan. Still, I always seem to go back and forth between different possible scenarios of paying down the house quickly or according the “minimum payment” as I call it. Technically, I could just about pay off the house now, if I chose to liquidate my taxable investments and empty out my emergency fund reserve.
I decided to go back and reconstruct a chart of our home equity over time, and compare it to a couple of alternate scenarios.
The red line represents our actual home equity, as a percentage of our purchase price. We use the purchase price because our home is currently worth about the same as when the bought it. An appraisal done for our refinance last month came in at 6% above our initial purchase price. Before the big refinance, we did a haphazard combination up of throwing in a few hundred extra bucks each month and one big lump sum prepayment. Currently, we’re right at 35% home equity.
Just for fun, the dotted red line is an exponential trendline of the red line. It has the loan being paid off somewhere around 2020.
The blue line represents our theoretical home equity if paid according to the normal 30-year payment schedule of our initial 6% fixed mortgage, starting from when we bought the house in the start of 2008. This would have had the loan paid off in 2038.
The green line represents our theoretical home equity if paid according to the normal 15-year schedule of our new sub-4% fixed mortgage, starting from this month. This would have the loan paid off in 2026.
I definitely still want to pay it off in under the current 15-year term, but as usual I like the flexibility. If children come into the picture, we’ll probably cut back on work and slow things down. But for now, I’m still hacking away. We hit the 401k cap already for 2011, so we have some extra cashflow.
By the way, I am only a proponent of paying extra towards your mortgage if you are maximizing your available tax-advantaged accounts like 401ks and IRAs as well as have a nice cash cushion. Although now I do think everyone should consider 15-year mortgages. Who wants to take 30 years to own a home? Most other countries don’t even offer 30-year mortgages, and the government support of 30-year mortgages here simply inflates property prices.

Percentage of New Mortgages Backed By US Government = 90%+

Wednesday, October 12th, 2011Last week, the average rate for a 30-year fixed-rate mortgage fell below 4% for the first time in recorded history. Why? The Federal Reserve and the US Government.
Check out this chart that breaks down the source of new mortgage originations for each year from 1990 to 2011. Blue is Federal Housing Authority (FHA) or Veteran’s Administration (VA), Red is Government Sponsored Enterprises (GSEs) including Fannie Mae and Freddie Mac, and Green is Other, presumably private sector mortgages held by banks and credit unions.
This is a fascinating and telling chart. In 1990 FHA/VA and GSE loans made up roughly 50 percent of all loan originations. This remained the story for the entire decade. The private sector got incredibly hungry with their toxic loans in 2004, 2005, 2006, and 2007. But look at 2008 up until today. For the last three full years, government backed loans made up over 90 percent of all loan originations.
Credit to Dr. Housing Bubble, found via AFM.

15-Year Mortgage Refinance Experience and Thoughts 2011

Monday, September 26th, 2011Over the weekend, we signed the closing documents for our refinancing into a 15-year fixed rate loan. It’s hard to believe that less than four years ago we bought our first house with a 30-year loan at around 6%. Thanks to additional principal prepayments and lower interest rates, our new monthly payment is actually lowerthan the payment from our original loan. Our lender sounded swamped with loan applications, and we basically closed on the 45th day of our 45-day interest rate lock. Here are some thoughts about the process.
Mortgage Rates Still Dropping
Here’s a chart of the historical mortgage rates, courtesy of It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable. I’ve stopped trying to predict future rates, and just try to take advantage of what happens. National averages since 2010:
Since 1986:
It may be hard to believe, but the new appraisal for our house actually came in at 6% above our purchase price in late 2007. We have made several improvements to the house, including adding a small amount of square footage. But the main reason is simply that the prices in our neighborhood have held up well during the national price declines. Real estate is definitely local. As a percentage of our original purchase price, we have 35% equity.
Closing Documents
The new final HUD-1 settlement forms seemed to be clearer than what I remember last time. Charges are broken down more clearly, and the form compares side-by-side what was presented on the Good Faith Estimate (GFE) and what you were finally charged at closing. You can view a copy of the form
Mortgage Offset Account
Some people prefer 30-year mortgages because borrowing at low rates for a long period can act as a hedge against higher inflation. I personally would rather minimize my interest costs now and worry about higher rates if and when they come along. When the day arrives where I can invest in safe bonds or bank CDs that pay higher rates than my mortgage rate, then I plan on creating a mortgage offset account where I buy those CDs instead of paying down my mortgage. But either way, I’m still not satisfied with a 15-year payoff, our goal is to pay it off in 5-10 years.
Compare rate quotes from LendingTree Mortgage Loans and Quicken Loans.

Rising Rents, Flat Home Prices, and Owning REITs In My Portfolio

Monday, September 19th, 2011The NYT Economix blog points out that rents are rising again according to inflation data from the Bureau of Labor Statistics. The chart included doesn’t have zero on the y-scale, but a value of 100 corresponds to rent from 1982-1984. Rents nationwide are about 40% above their values in 2000. I recently saw the last house I used to rent on Craiglist and the rent was up 15% from 4 years ago.

Credit: NY Times, Bureau of Labor Statistics, IHS Global Insight
There is definitely an increase in the number of renters, and perhaps there is also an overall psychological shift in that less people think homeownership is a part of the American Dream. Perhaps this means it’s a better time to be landlord? Home prices are still hanging around 2003 levels:

Credit: Marketwatch, S&P/Case-Shiller Home Price Indices
Although I know many successful people who are landlords, I don’t now if I’m cut out for it. However, I do like buying real estate investment trust (REITs), which allows me to collect rent like I collect stock dividends. (Not familiar with them? Here’s a post all about REITs.) I even did a comparison post of rental property vs. REZ, a residential ETF. I see REZ has done quite well recently.
Now, I’m not pushing REZ, and don’t own it myself. I continue to get my real estate exposure through the low-cost, passively-managed Vanguard REIT Index Fund, available both as a mutual fund and ETF. It tracks the MSCI US REIT Index and includes all kinds of real estate, currently holding 20% in residential ETFs that own things like apartment complexes. It like the diversification of this fund, even though it can be a rough ride, and in a struggling economy things like commercial properties will be harder to rent out.
Here’s the growth of $10,000 chart of both the Vanguard REIT Index Fund and the S&P 500 index, from mid-1996 to today. This type of chart accounts for total return, including dividends.
The REIT fund has done better than the S&P 500, which some may find surprising (or not) given the housing bust. As you can also see, they don’t always move together, which is good. Including REITs and rebalancing has offered a way toachieve better returns even if you like a simple buy and hold portfolio. I can’t guarantee that this type of helpful diversification will continue in the future, but I’m happy with my current portfolio right now, and am glad to be a lazy “landlord” in this manner.

Mortgage Comparison: 30-Year at 4.75% vs. 15-Year at 3.75%

Monday, August 15th, 2011After the interest rate drama last week, I managed to lock in a refinance of my current 30-year mortgage (with 26 years left) which had a 4.75% fixed rate into a new 15-year mortgage at a 3.875% fixed rate. You’ll probably see lower rates in ads and elsewhere, but it did come with negative points that offset my closing costs completely and then some. Anyhow, I wanted to run the numbers to see the potential financial benefit.
To simplify the numbers, I am just going to assume a new mortgage with a loan amount of $300,000. First, we have a 30-year fixed rate with a lower payment, but higher interest rate and longer period of paying interest. Now, we do have the option of making extra payments toward principal and making the loan end early. Alternatively, we have a 15-year fixed mortgage with lower interest rate but higher mandatory monthly payment. There are many calculators out there, but I still like the simple and familiar ones at Dinkytown.
The 30-year at 4.75% would have a monthly payment of $1,565, while the 15-year would have a monthly payment of $2,200. Now, what would happen if we simply paid the $2,200 towards the 30-year mortgage? Using the calculator, we would enter an additional monthly payment of $635. That tells us the 30-year plus extra mortgage would be paid off in 16 year and 5 months, requiring an additional 1.4 years and $36,000 in interest. However, the 30-year does allow me the flexibility to reduce my payment by $600 a month if needed.
A note on interest paid. Lots of people simply look at how much interest is paid on a 30-year and compare it to a 15-year. It’s a big difference! However, you have to remember that you could have done something the money saved each month from a lower monthly payment. Theoretically, if you went out and bought a bank certificate of deposit paying the same rate of interest as the mortgage, there would be no real difference. For example, currently Discover Bank has a 10-year CD yielding 2.50% APY (see CD Rates & Calculator tab). This makes the true interest gap less than what it may appear. Still, there isn’t anything available at anything higher than 4.75% or even 3.875%, so I’m still happy to pay off this house in 15 years.

Interest Rates Staying Low For A While – My Action Plan

Thursday, August 11th, 2011In their most recent attempt to try and control the economy (notice I said try), Ben Bernanke and the US Federal Reserve made another carefully-worded psuedo-commitment earlier this week:
The committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
Usually they don’t talk about firm dates, so many analysts that spend their lives parsing these FOMC statements take this to mean that interest rates are very likely to stay low for a while. Low interest rates are usually bad for savers and good for debtors. Since I am both due to my mortgage, here are my action plans in response:
1. Buy more flexible, longer-term CDs. If interest rates on savings accounts will be low for a couple of years, any kind of “bump-up” CD like the Ally 2-Year Raise Your Rate CD is unlikely ever to be triggered. Instead, I still like the Ally Bank 5-year CD that currently yields1.79%APY with a 60-day interest penalty. The rate on this CD has been dropping regularly since I bought some initially at 3% APY and more at around 2.40% APY. But this way, I keep earning the higher rate as long as rates are low. More details here. 2. Refinance my mortgage.Every time I think rates won’t go any lower, they do. Even though I am currently at a 30-year mortgage at a 4.75% interest rate, I am seriously considering a 15-year mortgage at 3.75% that will actually leave me with a nice cash-out. This will be a commitment to continue my extra principal payments, but saving thousands of dollars a year in interest is a good incentive. Check out the major loan match/FHA/VA comparison sites likeLendingTree Mortgage Loansand Quicken Loans, but also compare with credit unions like PenFed and NavyFed if you are eligible. It’s a good time to explore your options.

Updates: New Financial Status Bar & Goals

Tuesday, July 12th, 2011I’m making another step towards a more ratio-driven way to track our financial progress towards early retirement. This is just a quick recap/explanation of the new status bar.
Emergency Fund
Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss or other unplanned costs, and allows us to take a more long-term view with our investment portfolio.
Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. See here for our most recent breakdown of cash investments.
Home Equity
I don’t think everyone should buy a house. I don’t necessarily think it’s a very good investment over time. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.
There are many ways to define home equity, and I admit I am using a rather generous method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). I just enjoy having continuous progress without worrying about my home’s exact market value. See here for my most recent mortgage payoff calculations.
Investment Portfolio
The goal of my investment portfolio is allow withdrawals to support my expenses (minus the mortgage). Again, income and expenses are not the same thing. I expect our required expenses to be less than 25% of our current income. I like to assume a simple 4% safe withdrawal rate, which means for every $100,000 saved, I can generate $4,000 a year of inflation-adjusted income. This may be too optimistic, but again it does provide a quick estimate of progress. My target asset allocation remains pretty much the same as here.
(The actual implementation of my plan will probably require more flexibility. I plan on using some of my money and invest in an Immediate Annuity, as well as vary my exact withdrawal rates a bit with market conditions. Once I reach 67 or so, Social Security will kick in something. No, I don’t think it will disappear, and I don’t expect to be so rich as to not get anything. Finally, I expect to continue my low-demand freelance work and thus maintain a low level of income indefinitely.)

Mortgage Down Payment Size vs. Delinquency Rate

Thursday, June 30th, 2011As part of new reforms, the government is debating what downpayment size should be required for a “qualified” residential mortgage. If a mortgage doesn’t meet the new standards, the lending bank would have to retain 5% ownership even if selling the rest to investors. The initial proposal is for 20%, but of course the mortgage industry wants the required down payment to be as small as possible. They want to keep the good ole’ days from being able to offload the risk entirely onto others.
Honestly, if banks can’t handle keeping even 5% ownership of the loans they originate, why would I trust their underwriting at all? Their track record for determining creditworthiness hasn’t exactly been stellar. Of course, their public argument is that a low downpayment keep homes “affordable” for everyone.From the Washington Post:
“Why, in a law intended to fix the mistakes that caused the credit crisis, would you mandate a certain down payment when low down payments were not the problem?” said Kathleen Day, spokeswoman for the Center for Responsible Lending.
Actually, they are a problem. Felix Salmon points out how the mortgage industry is trying to influence people with misleading statistics, saying that “boosting down payments in 5 percent increments has only a negligible impact on default rates.” After some wrangling, Salmon got this clearer chart showing delinquency rates as a function of downpayment size for the period 2002-2008:
When the mortgage industry starts complaining about the 14 million people who would be denied the chance to buy a qualified mortgage if they don’t have a 5% downpayment, it’s worth remembering that qualified mortgages for people who don’t have a 5% downpayment have a delinquency rate of 16% over the course of the whole housing cycle. (You can be sure the numbers were much higher still in 2006 and 2007, which is why Guarino didn’t give them to me.)
And you can see too why the 20% downpayment limit was put in place: it’s the point at which delinquencies fall to less than 5%. If you take one group of loans with a 20-25% downpayment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first.
The fact is, downpayment size does matter. Imagine what the chart above would look like with data from 2006 to 2009. It should serve as a reminder that giving anyone with a pulse a mortgage loan because it’s the American Dream was a bad idea.
A 20% downpayment was the standard when banks actually kept 100% of mortgage on their books. I’m not saying every single person should need 20% today; A bank should be able to create a mortgage that requires less, but in exchange it should have to have some skin in the game. If a lender won’t even keep a mere 5% on their books, doesn’t that just show the mortgage is too risky in the first place?
More reading: NY Times, ChicagoMag

Debt, Debt, and More Debt

Wednesday, June 8th, 2011After seeing this household debt bubble chart, I’ve been especially sensitive to news about consumer debt. Here are some recent stats from across the spectrum:
According to real estate data firm CoreLogic, 22.7% of US homes with a mortgage had negative equity in the first quarter of 2011, meaning the outstanding mortgage amount was greater than the value of the property. That’s 10.9 million of them, and another 2.4 million had equity of 5% or less, which means with any further drops they’ll be in danger as well.
Nevada was the state with the biggest share of homes underwater, at 63% of all mortgaged properties, followed by Arizona (50%), Florida (46%), Michigan (36%), and California (31%). Goodness.
Home Equity Loans
The same report also found that a hefty 38% of borrowers who took cash out of their residences using home-equity loans are underwater. By contrast, only 18% of borrowers who don’t have these loans were underwater. Check out all the home equity extracted up until 2008, which is slowly being paid back now.
Is there some good data about what all this money bought?
401(k) Loans
Human-resources consulting group AON Hewitt reports that nearly 30% of 401(k) participants currently have a loan outstanding, the highest in recent history. On a purely interest-rate level, these loans can actually be a pretty good deal. (Don’t listen to the double-taxation myth perpetuated by Suze Orman and others.) However, you have the potential penalty of losing the preciouis tax-deferred benefit plus a 10% penalty if you don’t pay it back in time (and if you lose your job, it’s due even sooner). Still, having nearly a third of all people dipping into their retirement money can’t be a good thing.
Sources: ConsumerAffairs, LA Times, WSJ, SmartMoney

Home Price Index Update Shows Double Dip

Wednesday, June 1st, 2011The S&P Case Shiller Home Price index was updated yesterday with data through March 2011, or 2011 Q1. Here is the press release [PDF]. Here is the chart:

Click to enlarge. Sources: S&P Indices
Nationally, home prices are back to their mid-2002 levels. This means that any run-up in home prices between 2002 and the 2006 peak has been erased. On average home prices are selling at the same value they were nine years ago and are 34% below their 2006Q2 peak.
I feel like this whole thing is still going to take a while to fully unwind.

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