New purchases & ARM rate expectations

I've been seeing a number of new purchases backed by ARMs that are something like "1.75% rate for now, resetting to index + 2.75% later". A 7/1 ARM, a 5/1 IO ARM, etc. I imagine part of the low up-front rate was bought with points. But on the face of it, the rate one pays now is (say) 1.75%. If we stay in ZIRP forever, it'll reset to 2.75%. If we look at forward index rates in the market (i.e., you can trade/hedge this), it'll reset to 3.75%.

I'm wondering how the current low rates plays into the purchase decisions of people. Perhaps people here, and recent purchasers in particular, can comment. Is it:

- My purchase makes sense to me regardless of mortgage rates.

- My purchase makes sense at 1.75%; I'll worry about the reset when the time comes.

- My purchase makes sense at 1.75%, and I expect to be able to roll it into another 1.75% mortgage later. Or else, I'll sell by then and someone else will be able to roll it at that rate.

- My purchase makes sense at 2.75% / 3.75%, but I'll take the free money while I can.

- My purchase wouldn't make sense at 2.75% / 3.75%, but I expect price appreciation / higher rents will make it make sense if / when those rate increases happen.

- Something else?

I bought with a 7/1 ARM a 4 years ago.

In my mind, ZIRP is a long term trend driven by demographics in developed countries.
That is - we are all turning Japanese (aging society, low growth rates => low interest rates).

So I'm probably closest to
"My purchase makes sense at 2.75% / 3.75%, but I'll take the free money while I can."

So I went into it thinking:
a) Post 2008 ARM terms are clearly disclosed and understandable
b) If I had to pay the rate today that is what my "max reset" is in 7 years I'd be fine
c) If rates were to go up - how many years after 7 would I have to hit max reset for me to regret this?
d) Could sell within 7 years, and quite likely in the 10+ years it would take for the max reset worse case scenario to make my rate decision regrettable
e) Rates haven't been that volatile and seems just as likely to reset close/down as it is to reset up

At the end of the day rates in the 1.75-3.5% range all feels like arguing over pennies given where rates were in 90s-00s, not to mention 80s.

Thanks, steve123. I think I understand why you did an ARM rather than fixed. Are you also saying that you would have been fine paying the price you did, when you did, had your ARM rate been 1-2% higher?

How come you haven't refinanced, BTW? On the face of it, ARM rates seem to be ~0.75% lower than they were ~4 years ago.

Does mortgage recording tax apply to refinancings in NYC? That could prevent people from taking advantage of the low rates. Except coops.

I could not figure out how long I would stay in my place and what would make sense, so bought with a 30 year fixed at ~2.9% Probably left money on the table, oh well.

Krolik, I have often seen refinancing packaged as agreements / reconsolidations / etc. of an existing mortgage, as recorded in ACRIS, with no additional mortgage recording tax. I have assumed this is a way of getting around it during a refinancing, but as a person with a life goal of never owning any real estate, much less financing it, I wouldn't actually know from practice.

How much did the availability of ~2.9%, rather than (say) ~3.9%, affect the price you were willing to pay?

Never re-financed for a few reasons that made it not a slam dunk
A) condo so refinancing costs are on the higher end
B) probably appraise flat or likely even down from purchase price
C) 30yr rate never got much more than about 0.25 or so below my ARM rate, and the closing costs vs number of years to break even wasn’t looking great

Also I misspoke, had logged into mortgage site to get my numbers for the refi calculators and..
I got a better deal than I remembered actually a 10/1 ARM @ 3.25
So I still have 6 years until the first reset which pushes out the calculus on how many years until max reset would hurt me …

Nada, So we have till 2022 end, fed funds basically zero. Will they take it above 1 percent till 2025? I think it will be hard. 10y can naturally go up.

To answer your question looking backwards, my purchase 10y back made sense to me at 3 percent even though average I have paid is appx 2.5 percent and have a lock for 6 more years at that level.

But I have a coop with mortgage tax BS.

But I have a coop with no mortgage tax BS.

BTW, for condo refinancing, you only have the pay mortgage tax on the incremental mortgage amount.

@ionada yes, the mortgage rate affected the price I was willing to pay. I did two calculations:

1) Return calculation. Figure out expected return on down payment capital. Sensitize around few assumptions. Compare to alternative investment opportunities.
- Low mortgage rate helps juice up returns of buying RE (although presents a risk that prices might fall when rates rise, addressed below)
- Alternative investment opportunities are lackluster right now with most stocks being overpriced. Honestly I just could not figure out where else to put my money to earn a return. Any recommendations in this department highly appreciated :-).
- Based on my estimates, my apartment has a cap rate of ~3.1%, and since mortgage is at 2.9%, I should earn some return just by levering up.

2) Cash flow calculation. Compare monthly cash flows between buying and renting. Like @Mouse and others, I am only comfortable having no more than a certain share of my income going to housing per month.
- Low mortgage rate helps lower monthly cash outflows when buying.
- Availability of 30 year mortgage helps lower outflows as well. A 15-year fixed would fail this test, for example
- ARM would be even more attractive from near term cash flow perspective, so I probably left some money on the table

Price risk associated with rising rates:
- Manhattan has been trading at similar or even higher prices when mortgage rates were much higher
- Therefore, I figured the market could probably tolerate some rise in rates
- There are also many rich/irrational cash buyers in Manhattan that are probably not as sensitive to mortgage rates
- I bought with a bit of a COVID discount, not as much as some other sales that happened in my building, but probably enough cushion to smooth some of that price risk.

ARM vs. Fixed.
I know historically and over the long term variable rates are better for the borrower than fixed rates, therefore fixed mortgage is suboptimal from point of view of maximizing return. Such is the price of complexity. I did not have any clear plan for staying in the apartment or leaving after a set amount of time, and not enough brain space to think through break evens and comparisons between fixed and variable + swap. Normal people are not studying forwards and swaps when shopping for mortgage. I am clearly not normal, but this was not worth the headache even for me (or was it? i guess i don't know).

@krolik great break down, my process when I purchased was definitely a bit simpler : )

Because I was buying significantly under my means (whether buying or renting that was always my MO), and the ultimate goal was to find a long-term stable home that I would pay off sooner than later, 1 percentage point was of no consequence. I wound up paying off my home in about 4 years. On a relative basis it was a decent enough chunk of my net worth at the time. But then I double downed on savings and it worked out well. Sometimes I'd rather be luckier than smart, the real estate market tripled, and the stock market went on a tear...

@nada I understand your quest to never own real estate. One part I don't understand is why the big spend on rent? Let's say you rented a place for half what you're paying, that would be a significant amount of money that could be going to other investments, rather than simply keeping a roof of your head (although it is an extraordinary roof!)

So what drives you? It's obviously not just about the money on a relative spend basis.

Perhaps it's the thrill of the hunt? Renting an insane home at a significant discount to what it cost some billionaire to buy it?

Look at the great return you can generate with ethereum. However it doesn't have much of a view....; )

Ha. My guess is thrill of a good deal!! And at the very high-end $25k plus there really are some good deals for rent vs buying.

Thanks, all. I’m trying to understand how different people think about future rates & uncertainty therein in formulating prices they are willing to pay for assets. I don’t know what the right answer is really, but the “guaranteed to rise” nature of these ARM financings I’m seeing shine an interesting light on it.

Krolik, thanks for your detailed explanation. Honestly, I’d probably be in a similar place to you were I not looking at much lower yields (1.2%) and better investment alternatives.

Keith, it’s a matter of scale.

Suppose your after-tax earnings from work, investments, etc. is $1.00. Suppose you spend $0.25 on housing and $0.25 on other stuff. So you save $0.50, and that becomes some amount larger for future-you. Future-you can spend it, give it kids, give it to charity, use it as a big pile of cash for a funeral pyre, whatever. No judgement. If you double your spend on housing to $0.50, then you only save $0.25 and future-you will only have half as much.

On the other hand, imagine you only spend $0.01 on housing and $0.01 on other stuff. You’re saving $0.98 for future-you. If you double your housing spend to $0.02, then you’re saving $0.97. While the aggregate amount of that $0.01 may be large sum in the future, it only represents a 1/98th hit to future-you. So what? Future-you isn’t gonna care about a funeral pyre that is 1% bigger or smaller.

I’m closer to the second situation than the first. Now you might ask, “Why not simply spend (say) $0.04 via buying rather renting following the same logic — what’s the difference between saving $0.97 and $0.95 to future-you?” Thanks answer is an irrational but necessary quirk: absolute reverence for the value of money. I didn’t get to the penny regime by spending $0.04 when $0.02 gets me the same, investing some fraction in low expected return assets because it felt comfortable, working on lower-dollar-value projects because they seemed more interesting than higher-dollar-value projects, etc.

Twelve years ago, mr front_porch and I needed a bigger home. We did not run an "alternative use of assets" calculation (which I would do now, having gone to nada school)

But we did go apartment shopping. We were in the lower end of the market. which meant two things:
1) given housing monthly nut X, the quality of what we could buy was SIGNIFICANTLY better than the quality of what we could rent (I understand that's not the case for many people on this board) and
2) we couldn't get the "best possible" mortgage rates, because we didn't have zillions of dollars parked at Acme Big Bank to encourage them to roll out the red carpet for us.

So with those lenses, rather than get a thirty-year-fixed, we bought using a 5-1 ARM, figuring the cheapest money is the cheapest money, and even if rates rose 500 basis points, as they could technically do, we could tolerate that. (I'm of a certain age, so the idea of 8-10% mortgage rates is not historically inconceivable to me).

Rates actually dropped, of course... I think we were a skim below five in 2009 and I now think we're around two-and-a-half, though I'm not at my desk to check.

ali r.

Nada -- I think an element of thinking is driven by people's experiential environment -- I bought a 2nd home in the very early 00s, coming off what are now viewed as exceptionally high rates. My timeline for expected ownership was long (remainder of my life -- 40+ years), and a plan to be debt free before retirement (25 yrs at the time). I took a 20 yr fixed, with the idea that I could refi if rates dropped -- but my experience was that rates could just as likely head back to their previous levels. The alternative to re-fi was to just accelerate the principal payments. I preferred the certainty of the fixed rate, and the optionality of pre-payment (which I did a bit every month, ultimately paying off the loan 6 yrs before the initial end date). I probably could have saved a few $$ by various re-fi schemes or other products, but other than remembering to write the monthly check, I didn't have to put any more mental energy into the topic -- I had more important stuff to worry about.

Thanks for sharing that, FP & Aaron2. The experiential aspect is interesting. Does anyone recall this sort of thing we are seeing: 1.75% now, increasing by 57% to 2.75% if the Fed keeps rates 0%, and 114% to 3.75% if Fed the Fed increases rates to 1% as the market is currently expecting?

Perhaps it's a situation about zillions of dollars at Acme Big Bank, or unusually large usage of points. But it reminds me of 421a tax abatement discussions from a decade ago, whereby buyers were looking at the immediate cash flow and sweeping concerns about future cash flow under the rug. E.g., "By that time, rents will be 60% higher, prices will be 60% higher, etc." despite realistic expectations (IMO) about the cash flow: inflationary rent increases would be far lower than tax increases as the 421a abatement goes away.

My understanding is that the current environment is likely an anomaly, so I wanted to lock in the rate, since I am not sure how long I will live there. I got the most regular mortgage possible, no relationship discount of any kind, but really good rate for 30 years I think, considering historical rates.

In terms of returns today, it appears that leverage is almost the only thing that works. @nada, why are you opposed to buying RE with leverage? What am I missing?

On the original topic, I think people buying with ARM are taking a view not on the future credit market trend, but on the amount of time they expect to stay in the home before they sell it.

I took an ARM to take advantage of the lower rate and the current market. But I did so knowing if it rose unexpectedly to nadas 3.75 or more scenario I had enough dry powder to pay it off.

Similar to Aaron, I wanted to be free of mortgage debt sooner than later. No sophisticated financial thinking led me to this decision, just felt good not to have that debt to take care of every month.

@nada I always liked the saying, "I don't want to be the richest guy in the graveyard".

If people are primarily setting a budget based on monthly cash flow much does the premium/discount for coops based on maintenance expense change with rates?

Is there a bigger penalty for excessively high maintenance when mortgage rates are low since $1 of interest buys you more?

Don't forget with most Coops you get a 2nd mortgage (the Coop underlying) and the majority of those are 5 years with a bullet.

Krolik, not sure why you think I’m opposed to buying RE with leverage. I’m just asking about how future interest rate expectations play into peoples’ willingness to pay a certain price for an asset.

>> But I did so knowing if it rose unexpectedly to nadas 3.75 or more scenario I had enough dry powder to pay it off.

Keith, that 3.75% reset is not my scenario. That’s the market’s expectation (roughly) of where such an ARM would reset. I’m not saying the market will be right, but if you’re calling it “unexpected” then it means your expectation and the market’s are quite different. Do you actually think you know better than the market on this? (Not saying that you shouldn’t, just want to understand if you meant it that way.)

I don't know anything about the market or what it's going to do. Just in my simple language I was saying if rates were to go much higher I would go to plan b and pay the mortgage off. I happened to pay it off anyway.

Didn't mean to imply that was your personal prediction.

My goal has always been to have as little housing cost as possible whether that was renting or owning. Just a personal thing.

Got it, Keith. It was your use of the word “unexpected” that piqued my curiosity. You sit between a lot of deals, hear from a lot of buyers, etc. The fact that you used “unexpected” makes me think that buyers aren’t thinking “I expect ARMs to reset / become 3.75% in 5-10 years.”

Sure, 30, but those co-op underlying loans are often fairly small... I just checked my notes to an Upper West Side buyer of a 2-BR/1 BA in a nice building, and his share of the underlying was $36K.

The almighty market is notoriously horrible and forward curve projections. This is one of my favorite all-time charts of forward Fed funds reality vs expectations (couldn’t find one more recent but of course the market was wrong going into covid too):

https://1.bp.blogspot.com/-oEovSaRmps0/XP5q7HWatvI/AAAAAAAACfY/4CE7_ZfTkO4lA6TjpkxDs0UrQo7mvwHZQCLcBGAs/s1600/image001.png

I wouldn’t put much weight into forward rates 10yrs down the line. A cursory glance at the fiscal position of the US makes it quite clear that rates either can never get that high again unless we have some sort of “great reset” scenario in the aftermath of a high and sustained inflationary period, in which case everyone sitting on a mortgage denominate in pre-inflation dollars will be happy anyways. The only other option is a quick spiral into US Treasury default if the Fed actually allowed rates to go that high, so of course they won’t and the release valve is likely the dollar. Until that outcome hits, no worries on mortgage rates.

I purchased with a 7yr IO ARM just below 3% and just did a refi to a 10yr IO ARM just above 2%. I've seen reports of similar paper coming in the high 1's but that seems to require all of the stars in alignment.

For me, the numbers would have made sense up to around 4% with a typical amortizing loan.

The "guaranteed to rise" nature of a 10yr ARM does not bother me in the slightest.

@nada you wrote: "as a person with a life goal of never owning any real estate, much less financing it" I took this as you being anti-mortgage. I am very pro-mortgage and anti-paying off cheap mortgages (except in retirement), so was curious if you had a different view there. This is pretty much the cheapest loan a consumer can get.

On the original rates question, personal observation from speaking to friends and family is that people take a view on how long they will stay in the space, and don't think about rates beyond that horizon. If consumers are not sure about the time period they plan to stay, they get a fixed mortgage. Lower earning consumers in my surroundings are more risk averse and are more likely to get a fixed rate mortgage.

Personally, I probably would have been wiser to take an ARM, as this is hopefully not a forever home, but I am just way too risk averse.

Also on allocated coop mortgage - I allocated mortgage for most coop units I looked at (primarily 2/2s and some 3/2s), and most had attributable mortgage of 25k to 45k, except a couple of tax abated Harlem units one of which had 120k of allocated coop mortgage!

Ah, I now see why you got that impression, Krolik. I was mostly trying to say that I have no experience actually financing a purchase, nor thinking about how I'd finance it. I don't have a specific stance on financing vs. not, and I think a lot depends on circumstances.

If I were to purchase today, I'm unsure whether or not I'd get a mortgage. Maybe, but probably not? On the one hand cheap money, etc., etc., like you say. On the other hand, anything I'd purchase would likely require 35% or so down. That, IMO, makes the likelihood of default low: I'd have to be underwater, while principal payments have been amortizing during the interim, and be inclined to hand over the keys and walk away. Not likely, but nevertheless a mortgage is charging me a ~2%/year credit spread over risk-free rates for this possibility of default. I don't think any of that spread is going to prepayment risk: these days, the embedded option to refinance at lower rates isn't worth much because lower rates are unlikely. In addition, mortgage interest is taxable (in my world).

To be more concrete, suppose Option A is to get a (say) 3% loan with 50% down. Option B is to pay cash, meaning I "earn" 3% after-tax on that 50%. I look at Option B as a risk-free 3% after-tax investment of my cash. The best equivalent the market is offering me otherwise is below 0.x%. So that makes Option B a form of free money, and I'd be inclined to reposition my net worth to take the free money. Free money is better than cheap money, and the true cheap money (0% short-term and 1.9% 30-year) is easily accessible elsewhere if you have enough net worth to back it.

That said, that sort of thinking requires a significant net worth, and a viewpoint on net worth that is willing to look at it as a big pile rather than as separate silos. So, it is very circumstance-specific.

The general impression I'm getting from this thread is a combination of "I don't think interest rates are ever going up" and "Even if they do go up, I can handle the payments". Very little in the way "Have interest rates been engineered to make it appear cheaper today than it really is?" and/or "What does this mean about how I should think about the price I'm paying?"

Ali,
A number of Coops have zero underlying. Then there's the last Coop I lived where my pro rata share was close to $300k. In the middle you've got buildings like 250 Mercer St where the average unit has about $125k. A 2% increase in the interest rate would necessitate about $200/month maintenance increase on top of whatever increase was needed due to operating increases, RET, etc. In an environment of downward pressure because of those same increasing interest rates I think that hit would not be inconsequential.

UWS_er>> The almighty market is notoriously horrible and forward curve projections. This is one of my favorite all-time charts of forward Fed funds reality vs expectations (couldn’t find one more recent but of course the market was wrong going into covid too):

Here is the updated chart:

https://www.chathamfinancial.com/technology/us-forward-curves

I think you have a misunderstanding about the fundamental nature of markets. A market, by construction, must necessarily be wrong about the future. If there was any degree of certainty about the value in question, then there'd be nothing to trade and therefore no market. I can make a similar plot of the market's expectation of the level of S&P next month/year/etc. (which tends to be flat-ish) alongside what actually occurred (usually up or down; rarely flat). So what?

Now, it is true that the past decades have seen future rates undershoot expectations repeatedly as rates have steadily declined. Is that structural? How much of it should we expect it to continue indefinitely? By the same token, if you plotted the same thing for S&P over the past decade, you'd see that reality overshot expectations by ~15% each year. Is that structural? How much of it should we expect to continue indefinitely?

I guess you are saying that you think we'll either sit at 0% indefinitely, or we'll be in some hyper-inflationary spiral at 10%/year upon which the Fed will act belatedly only after it has lost control. But no middle "ordinary" scenario where the Fed sees sustained inflation at 2.5% or 3.0% and nudges interest rates up.

What do you make of the $4.5T expansion of the Fed's balance sheet over the past couple of years, now sitting at $8.35T? The Fed has been doing it to push down long-term rates, in their own estimation. They now hold 25% of every US bond outstanding, every mortgage outstanding, etc. Their recent buying in the mortgage market (~$1T) is on the order of all new mortgage purchase originations, and their aggregate purchases probably exceed all mortgage originations (i.e., including refinancings).

Presumably, all this buying has been pushing down mortgage rates. At least that was their intention. So perhaps they've had a big hand in "1.75% now, but 2.75% later even if interest rates remain at 0%"? I've seen articles about how the Fed may be the only participant in the MBS markets these days because no one else has an impetus to buy. E.g.:

https://www.bloomberg.com/opinion/articles/2021-05-11/the-fed-should-get-out-of-the-mortgage-market

In your estimation, does this continue indefinitely? I.e., the Fed keeps buying indefinitely until / beyond the point where it holds 100% of all debt, in a bid to sustain the lower long-term rates. Or will the long-term rates remain low because others will step in and buy at levels only the Fed is currently willing to do?

I have no clue what the world will be like next year, much less 7 or 30 years from now. All that I know is that I am highly unlikely to own this property with the same mortgage in a decade, so a 30 year fixed is stupid for me. And I have a lot of good uses for cash at more than 2.375, so I should pay down as little as possible. Buy, borrow, die.

I'm on Team George here.

In addition to being able to get a better return than 2-3% in the market ..

I started my career only a few years before GFC and dealt with simultaneous loss of bonus / no raises / portfolio losing 40% / high risk of job loss.. I would rather have low interest debt outstanding and liquid assets in market/bank. This is also why I was so bearish last year, and remain truly shocked at how K shaped this recovery ended up and we quickly started working about inflation of all things.

So on the + side I'd rather earn 8% in equities than pay off 2-3% debt.
On the (-) side I'd rather not have all my cash tied up in home equity that I need to try to claw back out with a HELOC in a down housing market / potentially while jobless.

George, what are your other good uses for cash?

Steve123, why do you think you’ll earn 8% in equities?

(Note I am not disagreeing with what anyone here is saying, just trying to understand each person’s thinking.)

I have insured muni bonds yielding 3.5 to 4.5 tax free which I hold to maturity or call, which is my most conservative investment. I can invest in friends' hedge funds at low correlation for a 6-8% return net of fees. I can invest in friends' private companies for who-knows-what returns.

The idea of paying off a house is a distinctly middle class American mindset and something that keeps them from generating serious wealth since it ties up their assets in an asset class that historically has underperformed equities.

George:The idea of paying off a house is a distinctly middle class American mindset and something that keeps them from generating serious wealth since it ties up their assets in an asset class that historically has underperformed equities.

How many middle class Americans do you think are paying off their home before the mortgage matures in 15 or 30 years, I would say very few. They probably used maximum leverage to buy it in the first place. The question is are they investing with discipline in the market year after year?

Thanks, George.

I thought munis yield 1.0-1.5% these days. Where are you finding munis that yield 4%-ish? Or are these munis whose coupon/yield at the time of your purchase was 4%, but now would yield 1.x% if you were to simply sell them at market price & take the cash?

On your friends’ hedge funds yielding ~7%, how would you characterize the risk relative to (say) stocks — lower, same-ish, or higher? Also, does that remain 7% after-tax or more like 3.5% for you?

I’m asking all this to see how you relate it to the 2.375% interest you are paying, and what degree of extra risk you are willing to take for what degree of extra yield. Like I said above, if I were to buy then this yield would be effectively risk-free and after-tax to me. Is it the same to you?

@inonada - Part performance does not predict future performance, however 8% has been a more conservative long term figure I've seen used in pension planning / etc industries, with some going super conservative at 6% and some trying to pretend they don't need to sock away more cash by using 10-12% (which is insane).

If anything recent decades have been well above 8% with the once per decade ~40% drawdown
https://www.macrotrends.net/2526/sp-500-historical-annual-returns

Arguably the last 2 times stocks crashed hard, housing did too.. and at least you can liquidate your stocks quickly, partially (not whole house or nothing), at different price levels at stop loss, etc.

Likewise you buy into stocks at different price levels over time as you invest, rather than housing where you have a single price entry point so you are implicitly timing the market (with leverage!) in housing.

Thanks, Steve. I hear you on liquidity of stocks vs. RE. Remember, I'm the guy who was here a decade ago explaining why he was buying stocks in place of RE.

Recent decades have indeed had solid stock returns. E.g., I calculated total S&P 500 returns for past 40 years at 9.0%. However, I also get total returns of 9.2% for long-term treasury bonds. What should I make of that? I guess I'm not a fan of blindly using past performance.

Predicting the future is obviously hard, but have you seen any well-motivated analyses (i.e., actually based on current market fundamentals & conditions) coming in at 8%? Vanguard's model expects 3.4% over the next decade:

https://advisors.vanguard.com/insights/article/marketperspectivesaugust2021

I haven't studied the methodology in detail, but as the largest-ish asset manager in the world at ~$7.5T, I figure they'd be axed to put out something rosy for the _only_ model they publish. But no, it's a sober 3.4%....

I hope they're wrong.

Not a new purchase, but I'm in process of refinancing a 10/1 ARM into 30 yr Fixed. The ARM isn't resetting for another 7 years so there's no immediate issue there. I simply figured the chance to lock in 30yr money at these rates won't last forever. Maybe the window is a year, maybe 3, I can't call that. I'm in a position where I could pay the whole thing off if desired, but over a 30 year horizons the invested assets will with near certainty return more than the cost of the mortgage.

But, what if I sell the place sooner than 30 years from now? (This is fairly likely, I'd admit, but I expect to be here for more than 15). In that case there's more risk that the return on the assets which could have repaid the mortgage will underperform the the cost of the mortgage, but I'd still say the risk of that scenario is low. As to the difference in the cost of new mortgage alternatives: the cost of the new 30 yr fixed was (for me) 0.25%/yr higher than the fixed rate period of a new 10/1. So if I sell in 10 years I've "wasted" that 0.25% but hey, I can live with that.

Not saying any of this thinking is right or wrong, just sharing. And BTW, where are these muni bonds at 3.5% - 4.5%? Sign me up.

BTW, re-reading this, I'm using the word "cost" loosely/sloppily in the second paragraph. I mean something more like coupon in comparing the 30yr vs the 10yr fixed rate period. Also, regarding decision of whether to invest cash or repay mortgage debt, I of course recognize there's going to be a risk-mismatch on the asset side versus the liability side. I stand behind it. If the time horizon is 15 years or longer that's a risk I'll take, personally, when the cost of the debt is sub 3% fixed rate (and that's before any tax deductions).

Keith>> I hope they're wrong.

They actually have a distribution of possible outcomes, so they can’t really be “wrong”. The 3.4% is the average of the distribution, and I would guess the 5th/95th percentile range is something like -3% to +10%. You can get an idea for the distributions from page 10 of this presentation, which shows the model’s predicted distribution for 10-year global equities outlook in June 2010 (average ~10%) vs Dec 2018 (average ~6%):

https://www.cfasociety.org/nebraska/Lists/Events%20Calendar/Attachments/237/Donaldson-Vanguard's%20Market%20Outlook%20and%20Implications%20for%20Portfolio.pdf

What are you “hoping” for, and why?

Blackrock is rosier at 6%:

https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions

I was just being cheeky, as the English like to say. I think my dry humor is sometimes lost here : )

I thought maybe I was missing something so I didn't point out the 3.5/4.5% muni bonds, is Detroit paying these returns?

I've been pretty vanilla with investing over the last 15 years, Russell 2000, Dow, spx ETFs, probably 70% in SPX. I did take cues from a market timer who's had a pretty good track record since the early 60s (Dan Sullivan). Now the Burkhardt fortune (more cheekiness) is in the hands of a wealth management team at JP Morgan, this year they've kicked the S& Ps butt. I'm rooting for them to continue, but who knows.

Besides some curious, minimal investing in crypto (chain link), I've explored investing in triple net lease properties, and crowdfunded farmland. I have yet to do anything other than read up on it.

I have 2 real estate investor clients that rely on triple net lease properties to provide them with a large part of their income. That said I don't really have the money to purchase the quality properties, and one of my former clients, whom I would call a friend now and is in his late seventies, said he looks at about a thousand properties before finding one that's suitable to purchase.

The crowdfunded farmland scheme seems intriguing. One company I've followed is acre invest. Long-term investments, 5 to 10 years with what appear to be decent yields in the present moment.

'acretrader'

Everybody wants in on George's 3.5-4.5% munis!

Keith, you have to dig deeper. I think Detroit is only paying 1.9% for 10yr and 2.5% for 30yr:

https://www.bondbuyer.com/news/investors-swarm-over-junk-rated-detroit-general-obligation-bonds

I think the impact of rates on price level is fairly efficient. Therefore:

- I would've been a buyer of that property at that time regardless of rate posture, though I would've expected to pay different prices

- I think the Manhattan Covid dip was larger than most people appreciated, because it happened to coincide with rates bottoming out. This becomes more obvious if you look at Manhattan price levels as a spread over generic suburbia rather than an absolute value.

Forward rate outlook is thus a separate question. In terms of behavior, it doesn't affect my rent vs buy calc much, but it does affect what term I choose. My gut agrees with the "we are all Japan now" sentiment, but 30 years is a really f'n long time to forecast; I'm happy to pay a small premium to ensure continued access to ultracheap money thru 2050. So I got the vanilla Uncle Sam Special at 2.375%, and just pay the minimum like a normie. If my fixed rate was higher, or if I saw negative rates on the horizon, then I'd be more inclined toward ARMs and/or prepayment.

I think the impact of rates on price level is fairly efficient. Therefore:

- I would've been a buyer of that property at that time regardless of rate posture, though I would've expected to pay different prices

- I think the Manhattan Covid dip was larger than most people appreciated, because it happened to coincide with rates bottoming out. This becomes more obvious if you look at Manhattan price levels as a spread over generic suburbia rather than an absolute value.

Forward rate outlook is thus a separate question. In terms of behavior, it doesn't affect my rent vs buy calc much, but it does affect what term I choose. My gut agrees with the "we are all Japan now" sentiment, but 30 years is a really f'n long time to forecast; I'm happy to pay a small premium to ensure continued access to ultracheap money thru 2050. So I got the vanilla Uncle Sam Special at 2.375%, and just pay the minimum like a normie. If my fixed rate was higher, or if I saw negative rates on the horizon, then I'd be more inclined toward ARMs and/or prepayment.

@Richard - I'm inclined to agree.
I know someone who really caught the COVID bottom in Manhattan and ended up in a 3Bed/2Bath UES coop for ~5-10% less than what I paid for a 2Bed/2Bath BK condo 4 years ago.. plus locked in a better fixed rate.

I couldn't have locked in that rate myself with a re-fi as re-fi rates are higher and at the time we probably would have appraised -20% from our purchase price.

Granted coop vs condo / unrenovated vs new build, but still quite a purchase.

And to your point of expressing it as a spread against generic suburbia, this was with Manhattan being possibly 20% down from ATH while nearby burbs were +10-20%..

RB, the zeitgeist seems to more be “we are half Japan now”. You take what you like (assume ZIRP & QE forever), discard what you don’t (0% inflation, -1.3% RE prices, 2% stock returns over the past 25 years), and ignore the underlying differences (Japan’s massive population decline vs the US’s slow growth).

Re George's munis, these are the current yields. I loaded up on munis some time ago when Puerto Rico was yielding 17%. It became the conservative part of my portfolio. Benjamin Graham said never to be under 25% equities nor under 25% fixed income, and munis held to maturity are my fixed income of choice.

Thanks, George. What do you estimate the annual probability of default on those to be — 5% chance a 1/3rd haircut or something like that?

Given the choice between 2.5-3% after-tax on an effectively risk-free low LTV mortgage and 4% on muni bonds from an issuer dancing around bankruptcy, the former looks awfully attractive to me. You are right, the former won’t lead to “serious wealth”: it’d take 70+ years to double your wealth on a real, after-inflation basis. But neither will the latter: it’d still take 35 years, assuming no default. So I’d take advantage of the free money of 2.5-3% risk-free after-tax relative to 0.5-1% in risk-free bonds. I prefer to fire my risk ammo at something that can actually lead to serious wealth.

Stated another way… Maybe 4% Puerto Rico munis are a good buy, I dunno, but I’m not sure why I should be funding it with 2.5-3% risk-free money when I could be funding it with 0.5-1% money, like the rest of the market is doing & pricing it.

I can’t imagine owning a bond right now. Even your old 3.5% munis are now negative yielding on a real basis, and of course you can’t get rates like that anymore in the fixed income markets for any sort of decent credit. Bonds were a great 40 year trade from post-Volcker shock through covid, but that trade is over with real yields negative across the entire treasury curve. Treasury yields are also now de facto set by the Fed, not the free market, so you won’t see yields above inflation for a long time. The treasury staying solvent actually depends on this.

UWS_er, I believe George's Puerto Rico munis are currently yielding ~4%. Take a look at this index of bonds with ~20yr maturity (change"Performance" to "Yield to Maturity"):

https://www.spglobal.com/spdji/en/indices/fixed-income/sp-municipal-bond-puerto-rico-index/

I also wasn't aware of the fact that Puerto Rico bonds are triple tax exempt to any resident of the US regardless of residency. So thanks to George for teaching me about both those facts.

At 4%, assuming no default, these bonds are indeed positive yielding +2% on a real basis. No idea what the default risk, and therefore the default-adjusted expected yield, looks like. That's why I'd like to hear from George on the default risk, as I figure he has a better-informed view than since he's risking his dollars on it.

PR hasn't issued a Muni since 2014, and they've since defaulted and reached an agreement so all of the bonds have been marked down by around 60%:

https://www.wsj.com/articles/puerto-rico-rides-muni-bond-rally-to-bankruptcy-deal-11614085482

Not so great of a deal after all. And, of course, your 2% 20y inflation breakeven assumes that the Fed can continue to only expand their balance sheet in a linear fashion, which will not be the case. They will have to exponentially grow their balance sheet to keep treasury yields under the rate of inflation in order to monetize ever expanding fiscal deficits and keep the US Treasury out of a growing debt spiral.

I have no opinion as to whether these are a great deal or not: these are George's munis, not mine.

On inflation, you brought the word "real" into the conversation. I thought you were talking about what the economic / investment community regard as "real", which is CPI and completely subject to a direct hedge via bonds / TIPS at ~2%. Doesn't matter what the Fed or Treasury do with their printing presses & debt, really. So if you want to convert your nominally-denominated position into a real-denominated position, you can, and the differential is currently ~2%.

What is your definition of "real"? I'm not saying it has to match that, just trying to understand what you mean when you say it.

Well 10y TIPS are currently yielding -1.04% and haven't traded above zero since March 2020. They will not trade above zero for many, many years. When I say real yields are negative across the curve, I mean that current TIPS yields from 2y-30y are all below zero. 30y TIPS are at -0.32%. The spread between TIPS and nominal yields is the "breakeven CPI inflation" rate.

Now, for the market CPI is obviously the standard bearing inflation measure and, despite its deep flaws which causes it to systematically understate real inflation through fraudulent hedonic quality adjustments and the "owner equivalent rent" substitution for home prices, it is serviceable as a market index.

For an individual investor, however, you need to actually account for your own personal inflation basket. There isn't a single person on this board who has only seen 5.4% CPI over the last year. If your basket of future consumption includes financial assets, real estate, college for your kids, etc., your dollars are getting inflated away at a considerably higher rate than the reported YoY CPI. There are really three types of inflation, which is monetary inflation (increase in the money supply), asset inflation (increase in asset prices), and consumer inflation (increase in consumer prices). The BLS only reports on consumer inflation and the Fed only focuses on consumer inflation, however if you want to grow real wealth you can't only focus on consumer inflation.

Ultimately, monetary inflation feeds into either asset inflation or consumer inflation, or both. In QE 1-3 coming out of 2008, we didn't see *broad money* grow significantly despite the Fed starting to bloat its balance sheet because the Fed wasn't monetizing increased deficit spending from the Treasury, they were just creating bank reserves to swap with treasury assets at the commercial banks, and then that money flowed into financial assets. So you saw asset inflation but not consumer inflation. Today, we are getting unprecedented QE to monetize deficit spending, so we are seeing the broad money supply growth and that's flowing into both consumer inflation and asset inflation. I would expect the deficit spending to only grow going forward, which means the Fed will have to keep monetizing debt to keep the Treasury out of default because interest rates need to stay below inflation (artificially) to stave off a growing debt service spiral. This is more commonly understood as "monetary repression", which is a form of capital transfer from savers (bond holders) to debtors (the government & retail debtors), and is not an environment where you'd want to own bonds. It was the exact playbook run coming out of WWII and it is being done plainly again today.

George described his muni bonds as “insured.” Does that mean he is insured against default risk? I am too lazy to look it up. Frankly this whole thread gave me a headache, but I, too, am intrigued by George’s munis.

But I am also intrigued by UWS-er comments on PR municipal bonds. The finance and banking education and perspectives I get on SE always keeps me coming back.

Also always intrigued by inonada’s perspective, but I always have to read it more than once to understand it. It has been interesting to watch his efforts to understand others’ financial decisions. FWIW, I don’t think the typical buyer analyzes much beyond looking at maximum they can afford at moment they are looking and choosing what is available at that moment in time. Little to no thought about interest rates relative to past or future.

MCR, that’s because I suck at explaining myself. Also, my constant edits that lead to garbled sentences don’t help either.

Thanks for the added datapoint. Beyond making for interesting conversation, I find others’ perspectives very valuable in understanding what’s driving a market and incorporating that understanding into my own decisions.

UWS_er, thanks for the detailed explanation. I guess we can agree that these bonds can be hedged to yield CPI + 2%, but they cannot be hedged to yield (your personal measure of inflation) + 2%.

I like your idea of a personal inflation basket. Mine actually deflated over the past year. Something to the tune of -20% to -25%. I don’t think “consumption” of financial assets makes sense, FWIW.

You seem to have strong conviction about the Treasury / Fed hidden inflation scenario. You’re borrowing at 3% or so to fund buying RE, right? Are you also taking on similar but cheaper to fund positions elsewhere? E.g., borrow at 0% to fund buying gold, or corn, or stocks, or whatever.

“Consumption” is the wrong word for financial assets, sure, but if you aspire to own more shares of the S&P or more shares of high dividend stocks or income producing assets or whatever, then you are getting inflated away at far higher than 5.4% for the year ended July 2021. In theory its really no different than residential real estate. Call it consumption or ownership or whatever you want, but it can fit in your personal inflation basket just as much as a year of college or a new car or a week of groceries can.

I borrowed a jumbo loan against real estate at 2.625% in 2020. I have because of a specific circumstance a very low amount of leverage out on some income producing assets, however I generally stay away from leverage on marked-to-market assets because the nightmare scenario is getting margin called in a high vol scenario and not having liquidity to sure the position up in time, and then owing the tax man on forced liquidation. That’s just outside of my risk box even if it theoretically is a good trade. Works for hedge funds with privatized gains and socialized losses.

I am long equities, real estate, and bitcoin/ethereum. No bonds, no exceptions!

https://www.marketwatch.com/amp/story/the-stock-markets-rally-to-start-2020-means-it-will-take-the-average-worker-a-record-114-hours-to-buy-one-unit-of-the-sp-500-2020-01-02

Here’s a great way to think of how financial asset inflation fits into your own basket or the basket of an average American. Average hourly wages continue to be depressed vs. the S&P, so if anyone aspires to own stocks in the future their labor and in turn the dollars they receive for their labor are being deflated at a rapid pace on average. The Fed is the main driver of this, of course, but doesn’t consider it In their policy decisions. The social consequences of this and other unconsidered effects of their policy decisions are immense.

Can't believe my munis have become such an object of attention. I believe Benjamin Graham's view in the Intelligent Investor that one should never be less than 25% fixed income. So several years ago, I shifted my fixed income allocation to munis that I'd hold to maturity. At current rates/spreads, they are yielding 3.5-4.5% pre-tax. I stocked up on munis when PR was going bananas, but they aren't NY state tax exempt, so it's not what I bought.

Disclaimer - this isn't investment advice, just an anonymous thought about why I'm as levered as I can be in my real estate. Would rather leave the $$ in the munis at that yield than sell them and pay down mortgage debt at 2.375.

UWS_er, inflation is about the price level of consumption goods & services. Financial assets are not goods & services, they serve as investments. People hold them in the interest of increasing future consumption capability, but they are not consumption themselves. That said, some assets lie somewhere in between: e.g., RE and gold have both consumption and investment aspects to them, which makes extracting the consumption piece tricky.

That said, how would do we know how much a financial asset has "inflated" in your measure? For example, here are values of S&P 500 price level, their backwards-looking earnings yield using TR PE/10 (a preferred metric from Robert Shiller), and Fed fund rates for at various points in time:

Jan 1st, 1990: 349 / 4.9% / 8.2%
Jan 1st, 1995: / 4.3% / 5.6%
Jan 1st, 2000: 1429 / 2.1% / 5.5%
Jan 1st, 2009: 878 / 6.0% / 0.15%
Aug 24th, 2021: 4480 / 2.3% / 0.10%

How would I compute "financial asset inflation" in your measure across those dates? And what portion of that should I attribute to "monetary policy" vs. good ol' fashion market dynamics?

Woops, missed the price for 1995. Corrected here:

Jan 1st, 1990: 349 / 4.9% / 8.2%
Jan 1st, 1995: 455 / 4.3% / 5.6%
Jan 1st, 2000: 1429 / 2.1% / 5.5%
Jan 1st, 2009: 878 / 6.0% / 0.15%
Aug 24th, 2021: 4480 / 2.3% / 0.10%

George, Berkshire Hathaway is down to $20B in fixed income currently, with about half at durations less than 1 year and the other half at durations less than 5 years. This is on $479B of equity, so 4% (skewed towards short maturities and AA or better). Cash is at $141B, so 29%. What do you make of that vs. what you said about Benjamin Graham and at least 25% in fixed income?

FWIW, Buffett seems not to be a fan of high-yield bonds these days either:

"Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim."

https://www.livemint.com/news/world/never-bet-against-america-full-text-of-warren-buffet-s-annual-letter-to-shareholders-11614434698818.html

I'm not really interested in semantic arguments over what does and doesn't constitute "inflation" - again the asset price inflation and consumer price inflation are different buckets that are effected by different government policies. As described earlier, there's a reason we saw significant asset price growth in a low GDP and labor market growth environment in the aftermath of 2008 without significant consumer price growth, but are seeing both today.

It's impossible to scientifically pinpoint exactly how much of growth in asset values is due to Fed policy and how much is natural growth. However, I find the thought experiment of "how much would stocks fall tomorrow if the Fed announced one surprise 25bp rate hike" to be a helpful way of evaluate it. Or even, "how much would they fall if the Fed simply announced they'd stop making treasury and MBS purchases tomorrow". My colleagues on my desk have debated the second point as it relates to 10y yields extensively, and the general consensus is that 10y yields would likely increase in the range of 100bps or so over a week or so if the Fed announced an immediate end to QE tomorrow. That sort of pop likely dumps stocks in the ~30% range. If the Fed were to do a single rate hike, I'd imagine a swift ~50% or so drop in the major indices. The S&P is 32% higher from this point last year, so if you attribute between 30-50% of that gain to monetary policy, then you've got between ~10-16% "asset inflation" over the past year that can be attributed to the Fed. That number passes the smell test when you compare it to home price growth as well, which is running at around 20% YoY for existing home sales. Taking 10-16% out of that leaves 4-10% natural appreciation on average which feels relatively in line with reality.

There's not always a perfect scientific method to this, but when defining your own investment risk baskets in context with your goals, it's imperative to benchmark correctly. If you're losing money relative to assets you aspire to eventually own every year, then you need to either push further out the risk curve or readjust expectations. This monetary environment and stock market certainly requires that.

Got it, thanks UWS_er. It sounds like you think current stock levels are highly dependent on continued Fed policy, to the tune of ~30% from QE and ~50% from rates, but that the risks of those actions are so small that you continue to hold equities and are willing to (effectively) pay a 2.625% rate to leverage your net worth into it so long as the leverage is not subject to margin call.

I think I get your delineation of "natural" appreciation as what "should" happen. I guess I split the remainder between what's happening in interest rates, which is controlled by the Fed, and the risk premium demanded by investors. Fed policy hasn't really changed in the past year, so I tend to think that component was already priced in last year and attribute the rest to a reduction in the risk premium demanded by investors. For that matter, Fed policy today doesn't seem a whole lot different to me than Fed policy a decade ago. So I attribute most of the change to the reduction in risk premium demanded by investors.

Given the corporate tax rate, it's not surprising if companies don't own muni's. My combined income tax rate is close to 50%, so the tax benefit is valuable to me, whereas most companies are at 20% or below. In any event, The Intelligent Investor was directed at individuals rather than corporate Treasurers.

Huh? I’m asking about the disconnect between what Graham wrote about “at least 25% fixed income” and his most successful acolyte (who is broadly more well-regarded). Buffet runs an investment holding company, not a corporation, crediting a lot of his investment approach to Graham. The investment portfolio is not a corporate treasury side-project, it’s a main course: its cash, bond, & stock assets are the same size as its shareholder equity. In 2000, its fixed income position was 53% of shareholder equity, and now its 4%. That’s the disconnect I’m asking about.

How do you see the default risk on the two stacking up? Earlier, you said you were happy to pay 2.375% mortgage interest (after-tax, I am presuming) to collect 4% junk muni yield on the other side. What do you think is the annual probability of default & haircut in case of default that makes the 1.625% spread worthwhile to you? I'm not saying it shouldn't be worthwhile, I don't know, but if you've thought of it in those terms then I'm interested in hearing about it.

I get using leverage to build wealth, but here is a question for those in that mode: Is there any level of wealth at which you would stop using leverage to get even more?

Well, last year, the worst year for municipalities since 2009, the default rate on muni bonds was 0.05%. The biggest default was some kooky project in California (of course) that turned rice husks into Ikea furniture boards, which issued unrated and uninsured bonds.

Again - not investment advice - just explaining why I try to maximize my mortgage.

Thanks, George. That is both totally useless and useful at the same time. Aren’t only something like ~1% of all munis high-yield, where the defaults tend to happen? Mostly, it sounds like you haven’t thought about quantifying it in the terms I posed.

Are your motivations for financing the position with 2.375% ARM money rather than 0.0% T-bills or 0.75% 5yr Treasuries the same as UWS_er? I.e., concerns about margin calls and liquidity.

Vanguard's NY muni fund (VNYUX) is paying 2.44%, >99% investment grade, duration ~5 years.

I would assume that for most people going through this exercise it's more a function of asset allocation than arbitrage.

MCR, that’s somewhat of an ill-defined question. Are you asking whether one would apply leverage directly or indirectly?

Many investments a person could make have underlying leverage. This is easy to see for alternatives such as private equity / LBOs (it’s in the name) and hedge funds. But even most run-of-the-mill stocks employ leverage. Just look at any balance sheet, and you’ll notice a good chunk of liabilities in the form of loans and other forms of leverage. It’s not just REITs, where you could expect to find them, but even AAPL.

Personally, I’m fine with using leverage both directly and indirectly regardless of level of wealth. I’m more concerned about efficient allocation of capital towards risk-reward and sizing the risk taken appropriately. I wouldn’t leverage a position to simply amplify expected gains to some desired level. Say some equal-risk investment has (in my estimation) expected returns of 4% or 8%. I’m more inclined to increase my position (perhaps even applying leverage) if/when it’s yielding 8% rather than 4%.

That said, it is useful to set aside some non-recourse amount of wealth. I.e., even if everything I’m invested in blows up, I’m still left with $X, which is plenty to live on without worry.

@Inonada - You answered my question, but I already knew your perspective. You are a special case where you love and are talented at a lucrative game that many play for solely for the money. One member of my family is not half-bad at the game, does it solely for the money, admits/complains that it is “work,” but also admits (with an endearing self-awareness) that he could never have enough. “Enough” is not a concept he understands. I am fascinated by those types; they are like aliens to me, but I encounter more of them in NY than I do in the other cities where I spend time.

flarf>> Vanguard's NY muni fund (VNYUX) is paying 2.44%, >99% investment grade, duration ~5 years.

Shouldn't we be looking at the SEC yield of 1.08% or yield to maturity of 1.2% rather than the distribution yield of 2.44%? I.e., the former are forward-looking while the latter includes payout of yield gains already realized via a drop in interest rates (or something like that).

@mcr, that's true. I certainly feel like I have enough, and although I'm not sure I'm particularly talented at it (could be a long run of luck), I sure seem to love it (as demonstrated by the leanings of my posts here over the years). I don't endeavor to spend / invest wisely for the money; I just feel (irrationally) that the money demands it of me. Honestly, the "never enough" types seem more rational to me.

I'm curious to hear others' perspectives on your question. What is your personal perspective?

@flarf nailed it on asset allocation vs arbitrage.

With respect to VNYUX, you can look at whatever you'd like. The YTD monthly distributions have been between 0.025 and 0.026, which is a pretty tight range. (0.025 * 12) / 12.29 = 2.44%.

Just like I don't plan on paying my 10yr ARM over the 30-year amortization period, I don't think all VNYUX investors plan on holding that fund through maturity (2069+, by which point my almost certainly decomposing self won't really care).

I personally prefer to have zero debt, have never 'knowingly' bought securities with leverage.

I don't agree that 'never enough' mentality is rational. Although I would agree that type of attitude in general tends to be more the norm. Being satisfied with what you have takes a certain level of consciousness, rather than trying to fill that bottomless pit with stuff that never seems to bring sustainable happiness.

That said I feel a lot of this conversation is beyond my grasp regarding investment strategies, perhaps more relevant to you big ballers. Until I recently began using an investment team, I primarily used three ETFs: Spx, Dow, Russell 2000 and consistently poured money into them. Certainly luck had a good deal to do with my accumulated wealth of the last 13 years, which is when I began the fourth chapter of my life. In this chapter I began a somewhat legitimate career / business and as it grew and I invested, I had favorable winds to grow that money and it didn't require a lot of complicated calculations.

Guess I would tend to agree with the Oracle, for the vast majority of people just putting their money into a low-cost S&P 500 ETF or mutual fund should do the trick over the long haul.

I'm also very cognizant of the fact that this small group of people chatting here is probably less than 1% of what the rest of the population is dealing with regarding finances. I have a friend out in the Midwest, works for a large shipping company, think he makes about $175k a year? His job also requires him to travel throughout the Middle East and Asia, meaning it's quite a grind. Based on conversations with him he's considered pretty big time in his neck of the woods.

But I can only imagine by the time you make the car payments, mortgage/ housing expenses, there's not much left to grow 'great wealth' if you also want to treat yourself to a few of the niceties of life...

“Enough” for me is a thing and definitely basic/pedestrian/middle class. That is not a conscious choice; I think I was just born with some sort of anti-social lack of ambition/conventional preferences that made my first studio apartment in SF the perfect life-long apartment for me. It was 476 square feet of adorable in PacHeights. I just want to get rid of stuff.

And +1 on Keith’s sentiment that much of this conversation is beyond my grasp. I love my VBAIX index fund.

That made me laugh MCR and reminded me of a story (of course ; )

I remember sitting in my friend's very small but charming studio apartment on 21st Street between 9th and 10th, was probably 1987 or 88. He had been staying with us around the corner. This place was probably about 350 ft with a little fireplace in a brownstone. And I remember him telling me this is all I'll ever need....

Fast forward he became a very successful agent at CAA and now lives in a large home in Beverly Hills ( :
But he's still a great guy and more or less the same friend I had when he was in that little studio or crashing in one of our rooms on w. 22nd Street!

@flarf, I think you misunderstand what's happened. It goes something like this. You used to hold bonds that yielded ~1.9%. You now hold bonds that yield ~1.2%. So over the past year, you had a gain of ~3.5% on your bond holdings ((1.9% - 1.2%) * 5 years average duration), plus ~1.5% on the average yield over that period. That's ~5.0% in total. Vanguard paid you half of it in the form of dividends (~2.5%) and retained the other half (~2.5%) by keeping the more-valuable bonds, which shows up in the NAV as a ~2.5% increase. Looking forward, however, the yield is now only ~1.2% (assuming the yields don't change). Vanguard may continue paying you dividends at ~2.5%, but then the NAV would drop (again, assuming yields don't change).

Does that make sense?

*head explodes. Lol.

It doesn't make sense at all. Why would Vanguard be paying me anything when I don't own any of their products?

I try to provide a topical reference point to help the conversation move along from Puerto Rican junk bonds and I get a sanctimonious, assumption-filled lecture in return.

Sorry, didn't understand you were trying to help move a conversation about rates along by throwing out random rates. Unfortunately, rates are the topic of this thread. The other active topic seems to be of door levers.