Lets talk Investment Vehicles

[FLBB89]

I'm all about liquidity. If I decide I want my money, I want it when I want it.

That's also a good reason I avoid tying too much up in actual real estate. I like having a nice home, and land in good locations can be a very good thing to own. But I don't like dealing with tenants or having too much $ tied up in things that may take months or longer to get my $ out if I decide to do something else with it or otherwise need to get my hands on it.

You can buy stock in real estate companies and also in better real estate mutual funds, and have your $ available within days or less.

Liquidity is also extremely important to me. My company owns 2 businesses that require about ~25K/month to make money. I don't like being in a situation where my funds are tied up unless I 100 percent believe in the efficacy of the investment (e.g. the way i feel about private equity funds with tech holdings).

Regarding real estate, though. Section 8 real estate has become my next major venture that I am setting my sights on once my company sells off 2 specific assets. Many section 8's bring in a 16-18 percent cap rate so the average ~10% that a property manager would take, would not be too bad to have a passive real estate investment providing an ~8 percent ROI - almost entirely funded by the government.

 

[JR Ewing]

Muni bonds are generally tax-free on the federal level, and also on the state level if issued within your state. These can also be very useful for drawing income prior to retirement age. I'd be careful about putting too much of your nestegg into any one issuer though to mitigate any default risk. Same with taxable higher yielding corporates and emerging markets bonds. Spread out the risk.

There's also at least one insurance company that offers a variable annuity that will pay income before age 59.5 that will be exempt from the IRS penalty. Variable annuities can be good as an additional stream of income now or later (depending upon your circumstances), and can serve as a pension of sorts, paying you a lifetime stream of income - even if the account value is depleted. At least one of these companies also offers options that allow you to continue payments to beneficiaries after death and also offer longterm care benefits. Of course these things are gambles the insurance company takes, and they charge hefty fees to offer these things. And again, these are not products you want to put everything in, and there is generally a period of at least a few years in the beginning where most of the $ is subject to penalty if withdrawn. Just another option among many to consider.

Great point. Most people live paycheck to paycheck and have little to no thought of savings let alone investment. Sad reality.

Also, 401k has pros and cons. My company owns more than one business. 401k means matching full time employees (up to a point). To me, that is a con. Another huge con is you can't take money out until age 55. I'm in my 20s. Thats just not liquid enough for my timeline.

 

[JR Ewing]

It's not an issue just different ways that you can pay for 401(k) related expenses. There are 3 costs that make up most of the expense of a 401(k) plan not including the match:

1) Management expense of running the mutual fund
2) Administrative, record keeping, testing, brochures, website, etc.
3) Investment advisor fee

Usually with small plans (ie total plan assets under $1M) you will see mutual fund expense ratios of 1.5% or more. This is because all three of the above are included in the mutual fund fee and then the mutual fund company pays #'s 2 and 3 above.

What I did was go to a company that provides the admin services (#2 above). They provide an open platform where I could pick virtually any mutual fund. I worked with the investment advisor to select the funds in our new plan. We reduced the mutual fund expense ratio from 1.42% to .26% by being able to get institutional share class funds.

But someone has to pay for the services of #'s 2 and 3 above. So those get direct billed to our company. There are three benefits to doing it this way. First, all of the employees benefit by the 1.16% reduction in expenses. Second, unlike when the other costs are embedded in the mutual fund expense ratio, by being billed directly for 2 and 3 above, they are now expenses of the company which reduces our taxes. Finally, we four owners have 40% of the plan assets. So our retirement savings grow faster.

Hope this helps.

The institutional shares are always best to invest in if possible. Better fund choices and lower fees in general, and also the ability to buy and sell them frequently without being charged additional fees make them the best for everyone.

I remember years ago when I was working as a retail broker, and I was cold-calling this one guy who turned out to be a real nut job who didn't invest with me. He was 60, 5 years away from retirement, and was then able to start moving out about 20% a year from his work plan to another plan via in-service transfer.

The guy had just lost a fortune in the crash, and was determined not to lose more, even though he still wanted to make as much $ as possible. At that time, he was basically day-trading / swing trading the mutual funds in his work account in a very volatile market. He would sell everything when the market would sell off, then buy back in once the market would roar back up - not a very wise strategy.

He was also gung-ho about avoiding fees and not paying me very much, and would poo-poo suggestions I'd make as being too expensive, even though he was paying a fortune in fees in his retirement account. He didn't realize much of this because of the dollar cost averaging and the weekly infusion of more $ from his paycheck, but it was happening. I ended up leaving him alone after we'd had 3 meetings and I realized he was totally unrealistic and short-sighted. I wonder how he's doing now.

 

[JR Ewing]

This is pretty similar to what I had figured as the best allocation. Thanks.

The rest of the money from the sale I am using to buy section 8 units. If you want to slumlord with me, shoot me a PM lol.

Just my opinion, and you should definitely ask your own personal financial advisor about what is best for your own situation, risk tolerance, specific liquidity needs, etc...

BUT...

I'd avoid index funds in general - they are cheap, but there are much better options.

I'd also avoid much in the way of bonds for anything other than income for the time being. If you will be using them to draw income, that's one thing. You could have bonds in your income portfolio.

But in your investment portfolio(s) where you are apparently seeking capital appreciation / growth as a young man with a long time horizon, it's not the best time for buying bonds - particularly longer term bonds and US treasuries. These in particular will get hammered when rates do inevitably go up. I'd even be wary of this in any mutual funds you choose to invest in.

The best time in general to buy much in the way of bonds for any investment purposes is when rates are very high and are likely to be going down soon.

 

[JR Ewing]

I was thinking about going a bit of a less traditional route and putting some between hedge funds and private equity funds but I would want to maintain the nucleus of my capital allocation as mutual funds and municipal bonds.

Regarding mutual funds, my current mutual funds are diversified between large cap global/mid cap global/large cap domestic/mid cap domestic and they performed very well last year (15%).

I actually run a small private investment fund (I hate the term "hedge fund", lol) made up of a limited number of accredited investors who I all know quite well.

With that said, I'd never invest much of my own $ with any private fund or private equity firm who is not VERY well known and respected with a long and very impressive track record, and with very strong tendencies more towards transparency, stability, and risk management than with any emphasis on shooting for huge returns and all that jazz.

Mutual funds, publicly traded companies, and registered broker dealers / IAs have to be far more transparent, and the better ones do quite well over time.

There are just too many scammers out there these days. Be careful - if it sounds too go to be true, it is.

 

[-KB-]

But he still is a 'Super Nice Guy'..

Guys like us have to be when you have nothing else going for you.

 

[tommyguns2]

The main advantages with the work retirement plans are that they're tax deferred (or free with the Roths), there may be some company match ("free" money to the employee), and most importantly IMO is dollar cost averaging.

By putting a set amount into plans each payday, the employee is automatically dollar cost averaging - buying more shares of the investments when they are cheaper, and fewer shares when they are more expensive. This is a VERY powerful tool to greatly increase ROI over time.

I totally agree!!

 

[tommyguns2]

With that said, I'd never invest much of my own $ with any private fund or private equity firm who is not VERY well known and respected with a long and very impressive track record, and with very strong tendencies more towards transparency, stability, and risk management than with any emphasis on shooting for huge returns and all that jazz.

Mutual funds, publicly traded companies, and registered broker dealers / IAs have to be far more transparent, and the better ones do quite well over time.

There are just too many scammers out there these days. Be careful - if it sounds too go to be true, it is.

Yep, this is true. People believe because it's what they want to hear, and end up getting burned.

 

[tommyguns2]

I'd avoid index funds in general - they are cheap, but there are much better options.

I'm not sure I agree with you here. For an unsophisticated investor, an index fund can be a pretty good choice for long term investing. A SP500 fund, a Wilshire 5000 fund, another one or two gives a wide range of exposure and low cost. What percentage of actively managed funds actually beat the market each year? I don't know, but my guess is less than 50%, and you pay higher mgmt fees.

 

[FLBB89]

I'm not sure I agree with you here. For an unsophisticated investor, an index fund can be a pretty good choice for long term investing. A SP500 fund, a Wilshire 5000 fund, another one or two gives a wide range of exposure and low cost. What percentage of actively managed funds actually beat the market each year? I don't know, but my guess is less than 50%, and you pay higher mgmt fees.

Not a fan of index funds Imo.

I want to maximize how much my money is working for me and that means an actively managed account.

I'm not sure statistically how many managed accounts outperform the market, but I prefer paying a professional to do it. Maybe its a false sense of security though.

 

[JR Ewing]

I'm not sure I agree with you here. For an unsophisticated investor, an index fund can be a pretty good choice for long term investing. A SP500 fund, a Wilshire 5000 fund, another one or two gives a wide range of exposure and low cost. What percentage of actively managed funds actually beat the market each year? I don't know, but my guess is less than 50%, and you pay higher mgmt fees.

Index funds are certainly better than doing nothing, and also better than just throwing darts at a board without knowing what one is doing or hiring someone who does know. But I think that for the small / unsophisticated investor, spreading most or all of their $ out among at least a few of the better managed funds is a better option.

Personally, I have no problems paying someone 1+ percent if they've been averaging 15% a year for 30 years with minimal volatility. That tells me that they probably do know better than most what they're doing and aren't just "lucky". And the great thing about investing a few bucks with a number of different great fund managers is that you get the benefit of at least several different firms' research and several different better managers' experience and expertise. There's so much info out there, and so much of it is crap. But there are nuggets of gold among the crap.

I have much of my more conservatively invested retirement account money in funds like BRUFX, YAFFX, SGIIX, MALOX, and FPACX.

I have very little in bonds right now even in my retirement accounts, but I also always keep at least a few bucks in bond funds TGBAX, FEHIX, and TGEIX in the event they become closed off to new investors. I will eventually put more into these.

I also have a few bucks in energy and real estate funds in those retirement accounts - VGELX and a little PURZX.

I recently trimmed my exposure to small and mid cap companies in my retirement account. There are some very well-managed funds that specialize in smaller companies. The Royce family is very well run. I like RYSEX and RVFIX.

Some great fund managers seem to go off in strange directions though. I used to have money in FAIRX, but Berkowitz decided to get too heavily into the financial sector for my taste. Putting nearly half the fund's $ into AIG and another 30% into other financials was not a great idea IMO. It cost him another bad year after 2008 (when everyone was down) - he was down 32% in 2011. He's also held on to dogs like Sears Holdings far too long IMO. His partner split in '11, and many investors followed (myself included).

I have gotten away from metals funds that invest in mining stocks, but I do like ETFs that buy physical metals. I have a fair amount of GLD in my retirement accounts and also in my more aggressive main investment account. I mostly invest in individual securities in my main account, but I do like those commodity ETFs - metals, crude, nat gas, agricultural exposure, etc. I also use options in my main account and do a little speculating here and there on higher risk short term stuff with a limited amount of $. I am definitely NOT one of those guys who takes on so much risk that I could literally lose it all in any one day.


I also have a little of the fairly new mutual fund OSFDX in my main account. It's done very well in the 7 years or so it's been around, but I don't have a whole lot in it because the guy is fairly new to the biz. He obviously knows how to run money though.

 

[JR Ewing]

I agree. There are better options, and if you're not a pro or else well-educated on this stuff AND emotionally suited for it, you're better off hiring one or more competent pros at reputable and stable institutions.

Not a fan of index funds Imo.

I want to maximize how much my money is working for me and that means an actively managed account.

I'm not sure statistically how many managed accounts outperform the market, but I prefer paying a professional to do it. Maybe its a false sense of security though.