Friday, February 25, 2022

Short Takes: Laundering Bitcoins, Mortgage Options, and more

Apparently, I’ve got just enough Twitter followers that I’m attracting some trolls.  It’s hard to tell if they’re human or software, but they mustn’t have much to do if they’re bothering to send snarky replies to someone like me.  The mute and block features seem to work well.

Here is my take on some of the big questions that have many people seeking answers:

Big Questions About Investing and Personal Finance

Here are some short takes and some weekend reading:

Preet Banerjee explains the hilarious story behind a couple attempting to launder billions of dollars worth of stolen Bitcoins.  

Robb Engen at Boomer and Echo looks at the various options mortgage holders have right now, given all the talk of rising interest rates.

Kerry Taylor interviews Erica Alini to discuss her new book Money Like You Mean It.

Wednesday, February 16, 2022

Big Questions About Investing and Personal Finance

We spend a lot of time worrying about interest rates, stock markets, inflation, gold, and cryptocurrencies, and how they affect our investment portfolios and personal finance.  Here I explain how I think about these issues.

Are interest rates going up?

I don’t know.  But the answer can’t end there.  We have to make choices about our mortgages and investments, and interest rates matter.  Some will express predictions confidently, but they don’t know what will happen.  

I prefer to think in terms of a range.  Let’s say that we think interest rates will average somewhere between 0% and 7% over the next decade.  This range is wide and reflects the fact that we don’t know what will happen.  Because current interest rates are still low, the range is shifted toward rate increases more than decreases.  The goal now is to balance potential downside with potential upside over this range.

With mortgages, the main concern is the downside: will we be okay if mortgage rates rise to 7%?  We may not be happy about this possibility, but we should be confident we could handle such a bad outcome without devastating consequences.  This is why it’s risky to stretch for a house that’s too expensive.

Bonds and other fixed income investments are a good way to moderate portfolio volatility.  However, long-term bonds have their own risks.  If you own a 25-year bond and interest rates rise two percentage points, anyone buying your bond would want to be compensated for the 25 years of sub-par interest.  This compensation is a drastically reduced bond price.  For this reason, I don’t own long-term bonds.  I stick to 5 years or less.

But can’t we do better?  Can’t we find some useful insight into future interest rates?  No, we can’t.  Not even the Bank of Canada and the U.S. Federal Reserve Board know what they’ll do beyond the short term.  They set interest rates in response to global events.  They do their best to predict the future based on what they know today, but unexpected events, such as a war or new pandemic, can change everything.

If we get overconfident and think we have a better idea of what interest rates will be than somewhere in a wide range like 0% to 7%, all we’re doing is leaving ourselves exposed to possible outcomes we haven’t considered.

Is the stock market going to crash?

I don’t know.  With stock prices so high, it’s reasonable to assume that the odds of a stock market crash are higher than usual, and that a crash might be deeper than a typical crash.  But that doesn’t mean a crash is sure to happen.  The stock market could go sideways for a while.  Or it could keep rising and crash later without ever getting back down as low as today’s value.

People who are convinced the market is about to crash may choose to sell everything.  One risk they take is that the crash they anticipate won’t come.  Another risk is that even if stock prices decline, they may keep waiting for deeper declines and stay out of the market until after stock prices have recovered.

Those who blissfully ignore the possibility of a stock market crash may invest with borrowed money.  The risk they take is that the market will crash and they’ll be forced to sell their depressed stocks to cover their debts.

I prefer to consider both positive and negative possibilities.  I choose a path where I’ll still be okay if stocks crash, and I’ll capture some upside if stocks keep rising.  If we could fast-forward 5 years, it would be easy to see whether we’d have been better off selling everything to cash or leveraging like crazy.  But trying to choose between these extremes is not the best approach.  I prefer to invest in a way that gives a reasonable amount of upside with the constraint that I’ll be okay if stocks disappoint.

Is inflation going to get worse or return to the low levels we’ve had in recent decades?

I don’t know.  Either outcome is possible.  Higher inflation is bad for long-term bonds, which is another reason why I avoid them.  With short-term bonds and cash, you can always choose to invest these assets in a different way without taking as big a hit as you’d take with long-term bonds.

I choose to protect against inflation with stocks.  When prices rise, businesses are getting higher prices for their goods and services.  However, this protection only plays out over long periods.  Over the short term, stocks can drop at the same time that inflation is high.  Some people like to look at historical data and declare that stocks offer no inflation protection.  These people are usually playing with mathematical tools they don’t understand very well.

All of these considerations play into the balance I’ve tried to strike with my allocation levels to stocks, bonds, and cash.  I’m trying to capture some upside from good outcomes while protecting myself from disaster if I get bad outcomes.

Is gold going up?

I don’t know.  You might think my balanced approach would mean that I’d have at least a small position in gold, but I don’t.  I have no interest in investing in gold.  It offers no short-term protections against inflation or anything else.  And over the long-term stocks have been far superior.

Gold produces nothing, and it costs money to store and guard.  Gold’s price has barely appreciated in real terms over the centuries.  In contrast, millions of people wake up every day to work hard at producing profits for the businesses that make up the stock market, and money invested in stocks over the centuries has grown miraculously.

Gold has some inherent value as a component of jewelry, and it has some industrial uses.  However, these uses aren’t anywhere near enough to support gold’s current price.  Governments don’t back their money with gold any more, and if our collective fascination with gold ever fades, it’s price will drop drastically.

Some will argue that there have been periods where gold’s price has risen more than other investments.  This is true.  But most of the time, stocks have been better.  We can’t know when gold will have big gains, so I’d likely have to accept disappointing gains.

As for using gold as a diversifier to limit the volatility of a stock-based portfolio, I find gold too volatile for this purpose.  I prefer to control volatility with an allocation to short-term bonds or cash.

Some own gold as a store of value in case of societal breakdown.  I can’t imagine anyone trading food for gold in such a scenario.  A gun would be much more useful than a lump of gold.

Are cryptocurrencies going up?

I don’t know.  Like gold, cryptocurrencies produce nothing.  You can’t make money on cryptocurrencies unless you find someone willing to pay more than you did.  And there is evidence of market manipulation of cryptocurrency prices.  Many have called cryptocurrencies Ponzi schemes.

The vast majority of interest in cryptocurrencies is as a thing whose price has gone up.  They have little understanding of what they’re buying.  Despite the fact that I spent my career in cryptography, I’m not in the least bit tempted to buy bitcoin or any other cryptocurrency.

I have no doubt that national governments will eventually create something resembling cryptocurrencies to replace physical cash, but this won’t help bitcoin, and it will go against the dream of having a currency free of government interference.

Friday, February 11, 2022

Short Takes: Asset Allocation and Mackenzie All-In-One ETFs

The saga of trying to get a refund out of VRBO has finally come to an end.  After more than a month and about two dozen phone calls to three companies, we got about 98% of our money back.  In the end, we disputed a charge with Mastercard before the matter was resolved, although it wasn’t clear whether Mastercard’s involvement affected the outcome.

I’ve used VRBO before to rent vacation homes, and I always believed that VRBO held my money back from the homeowner until at least the second day of the rental to give me time to alert VRBO to any serious problems.  However, this time it was a property management company called Exclusive Villas Florida that charged the bulk of the rental cost to our credit card.

Although we had entered into a rental agreement with VRBO, we were left to fight with a property manager to get our money back.  At one point, VRBO demonstrated their inability to control this property manager by suggesting that we dispute the charge with Mastercard.  This experience has completely undermined our confidence that our money is safe with VRBO.  What are we getting for the fees we pay to VRBO if they are doing so little to protect our money?

At one point, we thought we’d only get back about 92% of our money, because Mastercard applied their fees to the currency exchange rates on both the initial charge in U.S. dollars and the returned amount in U.S. dollars.  Fortunately, they quickly agreed to just wash out the initial charge and its reversal.  

In the end, we only lost a deposit amount that the property manager writes into their agreements.  We entered into an agreement with VRBO stating that we would get a full refund if we canceled by Jan. 2, but the property manager used a document of theirs to justify keeping about 2% of our money.  We got tired of fighting and gave up on this amount.

Going forward, we will be using a U.S.-dollar credit card, and we plan to look at other ways to book properties.  We’ve learned that there are websites devoted to certain communities that appear to be well run.

Here is my review of a useful book on rental real estate:

Getting Started as a Small Scale Landlord

Here are some short takes and some weekend reading:

Andrew Hallam has an amusing ghost story to explain why you might not want your portfolio to be too risky.

Justin Bender reviews new asset allocation ETFs from Mackenzie and contrasts them with those of Vanguard, BMO, and iShares.

Monday, February 7, 2022

Getting Started as a Small Scale Landlord

Most of what I see about owning rental real estate is breathless cheerleading and come-ons for “real estate courses.”  It was a refreshing change to read John Champaign’s new short book Getting Started as a Small Scale Landlord.  At 67 pages, there isn’t any padding, and he provides solid information to help you determine if you’re suited to being a landlord and how to avoid the many pitfalls.

As someone who isn’t suited to being a landlord, I saw warnings where other people might see opportunity.  “This book is about giving yourself a part-time job.”  I definitely don’t want a job, but others might welcome one.  Landlords must also be able to keep their cool and not back away from conflict.  I can do this, but I definitely don’t want to willingly bring conflict with unreasonable people into my life.  “If you can't say no to a crying, homeless woman, do not go into the business of landlording.”

After the initial self-assessment to see if landlording is a good idea for you, Champaign quickly covers a wide range of topics with practical advice.  “In general, you don’t want to buy a property unless its monthly rent is at least 1% of its purchase price.”  Trying to make up for cash-flow losses with price appreciation “is a dangerous game.”  This seems like a showstopper in my neighbourhood.  With even modest homes selling for well over half a million dollars, a landlord would be looking for more than $5000 per month in rent.  That’s way beyond current rents.

Some excellent advice I had to learn the hard way: don’t “say anything to your [real estate] agent that you don’t want to be relayed to the opposing party.”  Don’t let your real estate agent convince you that your lowball offer would be insulting to the owner.  When selling, “Some agents will try to convince you your property is worth less than it is.  This makes it easier for them to sell or lets them deliver the sweet deal to a friend.”

When buying a property, Champaign likes to let sellers know that if they reject his offer, he will continue through with offers on other properties on his list and will come back with a better offer, but only if all of his other offers get rejected.  I find this an interesting way to be transparent and possibly motivate a seller to take an offer.

“Some [property] inspectors are known as ‘deal killers’ [by real estate agents] because they find problems and prevent deals from going through.  These are the guys you want to hire!”

When hiring contractors for repairs and upgrades, “Throughout the work, you want to always owe the contractor money.”  Otherwise, the contractor may disappear.

Screening applicants “is the most important part of real estate investing and, in my opinion, is what separates people who are successful from those who are not.”  “There is an enormous group of sub-prime tenants who are constantly looking for a rookie landlord who doesn’t do a background check or who will buy their sob story.”

“Real estate gurus will often recommend the use of property managers.  They do this to overcome sales objections.” “Property management companies will often get kickbacks for repair work from the company doing the work.  Some will charge owners for imaginary repairs.”  “A few will rent out units, not report that they’ve been rented, and pocket the money themselves or allow friends and relatives to live rent-free in a unit they’re reporting as vacant.”

An understated warning: “I recommend avoiding Robert Kiyosaki, Carleton Sheets, Robert Allen,” and their “‘free’ seminars.”

People have widely-varying definitions of retirement.  Champaign says that “real estate investing allowed him to retire at the age of 39.”  I don’t think of landlording as a form of retirement, but now that Champaign is no longer a university professor or computer programmer, landlording must feel like retirement by comparison.

Despite the fact that this book is only 67 pages long, I was only able to mention a small fraction of its useful rental real estate investing topics.  For anyone considering landlording, I recommend giving this book a chance to talk you out of this idea and, if you’re not put off by the warnings, help you avoid the worst landlording mistakes.