We Sold the House! Here’s How I’m Investing the $400,000.

014061788_640x480The good news is, we sold our old house shortly after moving into the new one. The bad news is that the net proceeds (just over $400,000 after all related costs) are on the way to the bank account, where they will immediately become a sea of donut-munching, water-cooler-gossiping Idle Employees doing no useful work for anyone other than the bank.

If you’ve been reading here for a while, you know that I view this as a bit of an emergency. Financial independence and early retirement are built on the concept that your money can work harder than you can. Money invested into productive assets begets more money, which pays for my groceries as well as rolling itself into still more productive investments. This cycle allows the MMM family to ignore money entirely and instead focus on living life how we see fit.

But money in the bank today earns under 1% interest, which means it is shrinking after accounting for inflation, and not benefiting me at all unless I want to start draining away that precious principal instead of living off of the returns. So I always try to keep all available money at work.

This brings up a big question. How do we put such a large batch of money to work in today’s financial environment? Checking and savings accounts are no good. Bonds are paying very little as well. Stock Index funds like my own favorite VTSAX are at record highs, and everybody and their barber is forecasting a crash in the near future, so we have to hold out and wait for the crash before we buy, right?

The best time to invest in stocks was long ago. The second best time is today. The basic reason is that on average, the stock market always goes up, and it pays you dividends all the while.

This is the mental game that holds many of us back. But it tends to be a losing one, because it involves trying to predict the unpredictable movements of the stock market. When you wait for a crash, you are betting that you can guess when the market will drop, even though we all know that it tends to go up over time.

For an example, let’s take one of my own proclamations of ‘high’ share prices. Way back in March 2013, I wrote a post called “How About that Stock Market!?“. At the time, the S&P500 index teetered at a dizzying 1450, and we were all sure it was done rising until the next 50% haircut. The graph looked like this:


1974 to 2013: surely a crash is coming, right?

But now as I take a  peek at Google Finance, I see that same index is at 1981.60, not even counting the dividends that have been paid in the meantime. A further 37% rise in just 18 months.

In fact, when you look at a graph of any bit of exponential growth, you tend to see a mountain just at the right hand side that proves you are in an unsustainable bubble. If you don’t believe me, take a look at this graph:

Ahh, it must be a bubble! (1993 edition)

Ahh, it must be a bubble! (1993 edition)

Here we have backed up the time machine by exactly 20 years to look at the spring of my final year of high school.  What an unsustainable stock market we thought we had those days. If only we could have invested in stocks back in 1954, instead of this ridiculous high we have here in 1993. We’d be rich.

But what if the market crashes right after I invest my life savings?

There are two ways to respond to such an event: kicking yourself because you failed to predict the timing of the crash, or patting yourself on the back because you still own a bunch of stocks and you are now collecting dividends on them, which are rolling back in to buy more of the low-priced shares.
Seriously: what do I care about the sticker price of some shares I just bought? I am investing this money for the long haul, and the shares I buy today won’t be sold for 30 years or more. By that time, I’ll happily place my bet that they will be worth much more. Stock market crashes mean nothing to long-term investors, other than perhaps a reminder to buy a few more shares if you have any idle money.

Investing can easily become a psychological head game. Even I feel it, with this large stock purchase looming in my immediate future. But if I would delay a lump-sum purchase in current market conditions, would I also cancel regular 401(k) contributions if I were still employed? Would I go even further and sell all my shares and wait until the market drops to reinvest? Precious metals anyone?

No, of course I wouldn’t – to me, these are easy questions to answer and thus the answer to whether to make a lump-sum investment is also an easy “Yes.”

Shouldn’t I buy small lumps of shares over time instead via Dollar Cost Averaging?

This can be a good compromise for those still not willing to take the plunge with a single investment. As long as you realize that on average, the historical odds are that you’ll do better with a lump sum purchase according to this Vanguard study*.

With all that conventional stock wisdom out of the way, I will admit that I’m not putting the whole $400k straight into VTSAX. My own investing picture includes domestic and international index funds and real estate, as well as a preference to be absolutely debt free except in a few rare exceptions. So here is where it’s going:

Paying off debt: Your ‘return’ on this is equal to the interest rate on the loan. I happen to have a line of credit that I used to partially fund the new house we moved into (the rest was paid with cash). The credit union has been charging me 3.5% on the $160k balance, which is about $466 per month. In this case, I paid it off, which accounts for the first chunk of that $400k. The reason: I value safety and stable cashflow above higher returns, so I only used this loan as a temporary measure to bridge between the two houses.

Maxing out the Self Employed-401(k) for the year: As semi-retired/self-employed people who now find ourselves in a higher tax bracket**, Mrs. MM and I have the opportunity to contribute up to $51,000 per year(!) of pre-tax money to a separate Vanguard retirement account we created for this purpose. This is a powerful way to defer taxes, especially since we don’t expect to need this surplus money before age 60. But if that expectation proves wrong, you can always withdraw from a 401k early without penalty if you’re in a pinch.

Investing in Rental Properties: this is a profitable and adventurous field for many, and I have enjoyed it myself for almost 10 years (we still have one rental house left in the collection). But with this blog taking more of my time  these days, I’m getting out of this business to free up more time for other adventures. Instead, some of this dough will be allocated to  a Real Estate Investment Trust (REIT) – a passive way to accomplish the same thing.

Lending Club, Prosper and other alternative investments: These have grown into promising new asset classes that I am hoping will be around to benefit investors for decades to come. Returns of over 7% seem very easy to achieve (mine are sitting at 11.3% on a loss-adjusted basis after two years). This type of investment is essentially just a high-risk/high return junk bond. But it’s fun and performance seems promising, so I do plan to put at least a chunk of the idle cash into this class, perhaps in an IRA account. (You can read more about my ongoing Lending Club Experiment here)

So the final distribution might end up something like this:

40% VTSAX (US stocks of all sizes)
40% VGTSX (An even bigger basket of International stocks)
10% REIT fund
10% Lending Club or other bonds

There’s a lot more to say on the subject of investing and the stock market. In the next post, I’ll share a new interactive tool developed by one of your fellow readers which allows instant visualization of historical market behavior, dividends, housing prices, and much more. But for now, I’m off to put some employees back to work.

While I believe the Vanguard study, I’m wondering if the retirement researcher Wade Pfau has done any more advanced calculations on the matter. Given the current P/E10 ratio of the market, does it change the probability of success when comparing dollar cost averaging vs. lump sum? Maybe he’ll get back to us.

** Don’t tell the Internet Retirement Police about that, though.

  • Mr. Frugalwoods August 20, 2014, 7:33 pm

    People hate this stock market. Hate the valuations. Hate the people getting rich. Hate the system. Hate the HFT.

    Shiller CAPE they call! And it’s true. This isn’t a cheap market.

    But here’s the thing. All of these folks were saying the same thing a year ago, and most were saying it two years ago. Heck, I was nodding along last year. Yet here we are.

    Are we due for a correction? OMG Yes! But there’s no telling if it will come tomorrow or two years from now. And if someone gets out of the market now and misses two years of gains…

    The worst is when people get out because of fear, and then jump back in at even higher valuations once they are convinced “this time is different”. They inevitably do this right before the correction, missing out on all the run up gains and experiencing 100% of the correction pain.

    I’m a fan of using CAPE and other valuation metrics not as buy or sell signals, but more as guidance for what a Safe Withdrawal Rate could be if one was to retire in the current market. If the market appears expensive (as it does now) then maybe you stick to a conservative 3.5 to 4% rate. If the market is cheap, like in 2009, then there’s good wisdom in thinking you can play a little more aggressively with your rate of withdrawal.

    • Andrew August 21, 2014, 7:54 pm

      I think you have it backwards.

      If the market is expensive you should consider taking more out.

      If the market is cheap you are better off staying invested (like in 2009 after a crash)

      • Zoe August 22, 2014, 5:53 am

        Andrew, if you are thinking of your stocks as a retirement, then an expensive market is a potentially inflated market. That means after a correction, you would have a smaller sum with which to go the distance. So to conserve, you treat it like the smaller sum it might become, and withdraw less.

      • lurker August 22, 2014, 7:33 am

        don’t forget taxes…..in a taxable account the market would have to drop a lot to make up for what you will pay to the government if you sell, right?

        other problem is timing the bottom. you need to be right twice when most folks are consistently wrong…….I usually get it half right but that hurts my returns long term

      • Mr. Frugalwoods August 22, 2014, 10:02 am

        I’m talking about avoiding sequence-of-returns risk. Here’s a great read on kitces that goes into more detail:


        Basically, there is nothing more terrible for your success rate in early retirement than calculating a 4% SWR, hitting your number, retiring, and immediately seeing a dramatic market pullback.

        • Dividend Growth Investor August 26, 2014, 5:20 pm

          If I received a lump sum of $400,000, I would invest it over a period of 12- 24 months. I would probably put money in dividend paying stocks, which pay me to hold them, and grow dividends over time. That way, I would have time to research companies, and avoid putting all my money all at once.

          • John August 28, 2014, 11:24 am

            Another option that I’ve been using is Motley Fool’s Rule Breaker service. I used to do my own stock research and when that got too time consuming I switched to only buying index funds. I still had a diverse portfolio but I knew I was missing out on great stock picks like Tesla, Baidu, Priceline, etc….With RB they recommend, I read their report, and then choose to buy or not. All their picks are for holding long term or 5-10 years. Even if you already know what you’re doing they have a great community of traders on the discussion boards and you can also follow along and monitor other’s stock picks through CAPS.

            • TomTX August 29, 2014, 9:03 pm

              You’re paying a lot of money for gambling tips.

          • Kevi n August 28, 2014, 9:35 pm

            The data show you’re operating under two logical fallacies here. There’s a ton of evidence that you (and the professional stock pickers) are almost certainly never going to be good enough at researching companies to beat an index fund in the long run. You’re simply fooling yourself that you can do enough research to make this effort pay off.

            More importantly, the concept of investing a lump sum over time, to safely avoid a crash, doesn’t work out mathematically in the long run. If you get a lump sum, the smart play is to invest it in an index fund like VTSAX, and don’t worry about it until you need it a few decades later.

            • Darkseas August 29, 2014, 12:12 pm

              Kevi n,

              You might want to look up “logical fallacy” because what John has written is not one. The logic of “spend more time doing research and learning about investing and you will do better” doesn’t violate the rules of logic.

              In fact, it is you who have created the logical fallacy with your argument which I take to be “data shows that, as a group, individual investors underperform the market. John is an individual investor. Therefore John underperforms the market.” Do you see the problem with this?

              I agree that most individual investors don’t outperform the market, but most is hardly all. Further, the “most” who underperform include most of the index fund investors, particularly if they’re doing any selling and buying of the index fund or funds.

              We’ll leave aside for the moment the questions of what index is the best reflection of the market. If you’re interested in this, you might look at the difference between funds that are market cap weighted vs. equal dollar weighted and how that relates to holders of individual stocks.

              In my experience, investors with lump sums to invest are often (but not always) those who are new to investing. An experienced investor anticipates the lump sum and knows roughly where the money would go based on his or her experience with various investments. The new investor will buy something and, when it goes down at some point, sell it all and buy something else. And then do that again. And again.

              But let’s really be honest here. How many investors are going to buy something and hold it for a few decades? Real life gets in the way, and people need to put downpayments on houses, send their kids to college, or finance their retirements. The shorter the holding period for an index fund, (or for a portfolio of stocks) the less likely it is that it will produce a great return. For an individual, the point is a good return. Beating the market is of little relevance to most investors if the market has gone down like a stone and their investments have gone down slightly less. I’m sure you’ve read the stuff on aversion to loss.

  • Guillaume August 20, 2014, 7:41 pm


    It is true that there is a small voice in most of our heads telling us that putting a large lump sum in the market is too risky, especially when the market is at record highs. Even though statistically you may end up better with a one time investment, because obvioulsy the market will go up most of the time in the medium and long term, I always tell my clients (I’m a CPA) that they should go with the solutions that makes them sleep at night. If putting 400K in the stock market in one go makes you want to throw up in fear, don’t do it. If you’re MMM and you are already FI, I guess it is easier to sleep at night after putting hundreds of thousands of dollars in the stock market today.

    • Kevi n August 28, 2014, 9:43 pm

      I went through exactly this a little over a year ago. Sold a house in California, and had a big pile of cash to deal with. I put half of it into VTSAX (actually, VTSMX) and held the rest waiting for the ‘correction’ everyone was sure was soon to come. A couple of months later I put another quarter into the market, and a couple of months later the rest, when I finally committed to investing with my logic and not my gut instinct. I’m sure a correction will come, but my hesitation cost me a few thousand dollars in solid gains in the market. I know for certain I won’t need this money for at least 10 years, and I knew the math does not support the ‘dollar cost averaging’ method, but I skewed my decision based on emotion, not knowledge. Now I sleep better at night knowing I’m not trying to time the market, and that in the long run I’ve almost certainly made the right decision to stop waiting for the perfect moment to invest.

  • Natty Greene August 20, 2014, 7:42 pm

    REITS and perhaps Lending Club are the least tax efficient of your 4 investment choices and I assume will be the first to go into your tax advantaged space(s). After allocating those 2 funds and assuming you still have leftover space in your self-employed 401k and IRA, would you reserve your leftover tax advantaged space for the Vanguard Total U.S. Stock Market fund or the Vanguard Total International fund? Conventional wisdom says to put the VG Total Intl into a taxable account for the foreign tax credit, but its dividend is currently almost double that of VG Total U.S. Better to shield the higher dividend from taxes? Or gain the foreign tax credit? I’m sure there are lots of factors at play, such as tax bracket, but I’m curious!

    • Doug August 21, 2014, 8:53 pm

      REITs and preferred share ETFs are climbing up again after being on sale last year, but many still pay a good yield and aren’t up to the level they were before the correction last year. Another option is high yield bond funds, like AHY.UN listed on the TSX. If you invest this money, put it into different kinds of investments and keep some in cash. Sooner or later some class of investments will go on sale. Another option to consider is European Equity funds. They have dropped recently and may be worth looking at.

  • wineshlub August 20, 2014, 7:54 pm

    Good article, though being the cautious type I do prefer a DCA type of strategy in this situation. It’s a hedge – you will probably lose money in the long run but will avoid the low, but non trivial, possibility of a catastrophic hit shortly after you invest. I do have a couple of questions:

    1. Technically speaking, at the end of the day that 401(k) money you reference is going to be invested in the market as well, correct?
    2. Why are you using a 401(k) instead of a Roth? I am certainly suspicious of the government’s promise to never tax your Roth money, as I suspect you are, and my instincts tell me to take a certain tax benefit today vs. a promised tax benefit tomorrow. On the other hand, if you have a mix of tax sheltered and Roth money, you potentially have a lot more flexibility in managing your taxable income when you reach retirement age and have to start drawing down your retirement accounts..

    • mary w August 21, 2014, 12:13 pm

      Presumably he is using the 401k rather than Roth IRA because the limit is much higher for the 401k. Also with his income (not his spending) he can use the tax deduction.

      • Amy K August 22, 2014, 9:18 am

        And depending on income, it might be too high for a Roth IRA.

    • Huxley August 21, 2014, 1:47 pm

      “..but will avoid the low”

      nah-uh. no guaranties of that either. The market could drop the second you do your last DCA.

      And why give in to irrational fear? Realize it, conquer it, and overcome it with reason and data.

  • Retire@53 August 20, 2014, 7:55 pm

    I believe the maximum SEP contribution for 2014 is $52k, but check with your tax advisor.

    • Ms Leverage August 21, 2014, 12:41 pm

      You’re right, but he’s referring to a Solo 401K, not a SEP. The max is still $52K in 2014 for a Solo, but I think it’s important to point out the distinction since they are technically different types of plans, and with the employee contribution aspect of the Solo, generally much more advantageous to use if you can qualify.

  • Ricky August 20, 2014, 7:56 pm

    What?! Exiting from physical property? You were so bullish in 2011. Have things changed that much? I would think you would get a much better return from leaving the money where it is than moving it around into a REIT.

    For you, I suppose I can’t blame you though. The added peace of mind in exchange for a lower return is probably the best move for you. But isn’t the blog pretty much on auto-pilot now?

    • Wes August 21, 2014, 2:36 pm

      I don’t think he’s exiting physical property. He will still own a residence and a rental property. He’s just investing future real estate $$ into REITs rather than taking the time/effort to identify actual properties.

    • Maxim Ч. August 21, 2014, 6:23 pm

      The REITs provide *much* better diversification. And if one takes in to account one’s time…the returns are damn close. The same return with better diversification? Sounds like a win.

    • Mr. Money Mustache August 21, 2014, 6:46 pm

      Blog on Auto-pilot? Only because I’ve been so busy doing things as a side-effect of having this blog, that I have temporarily run out of time to do the actual writing. Trips, meetups, presentations, and little experiments in various fields. Dropping the rental houses is a start at simplifying life to allow more time for the fun avenues this writing has opened up.

      • Andrew August 21, 2014, 8:00 pm

        Thank you for this post. I subscribe by emails and just received it today.

        Just this morning I was speaking with a friend and telling him I was scared to invest about $50k in cash I had sitting around. The email with this post popped up a few hours later, and by the close of the market today I got fully invested into Canadian Vanguard ETF’s

    • Michael August 21, 2014, 11:17 pm

      “You were so bullish in 2011. ”

      Much can change in four years or even four days.

  • Catherine Jean Rose August 20, 2014, 7:56 pm

    Awesome. Congrats! We sold our rental property and cleared $200,000 last October. I purchased VGSLX which is the Vanguard REIT index fund. Also bought VTSAX and VDADX.

    On a whim, I purchased a small amount of SLV (about 5K worth) paid $19.50 a share. Today it closed at $18.72/share (was $38 about a year ago –doh).

    I still have $50K sitting in a lousy 1% savings account. Can’t seem to make the leap and invest it – yet – so I give you lots of credit for pulling the trigger with that much cash all at once!

  • Val August 20, 2014, 7:58 pm

    Congrats on selling your house! Just bought ours last week in Louisville just a little south of you neighbor. :)

  • Ron Byrnes August 20, 2014, 8:11 pm

    Maybe you should go all counter-intuitive and eschew the index funds for AAPL. Dig this sentence from Wednesday’s Wall Street Journal. “As of Monday, a $10,000 investment in Apple 10 years ago would be worth $456,347.03 today.”

    You’re younger and more brave than me. I couldn’t invest that heavily in equities at today’s prices. I’d rather wait out the correction in tax-free intermediate munis. Not sexy, but steady 4-5% returns. Yes, they’ll get hit hard when interest rates begin to rise again, but that doesn’t seem imminent and by “hard” I mean not earning anything. . . like cash today.

    • Danny August 21, 2014, 1:49 pm

      If you have a time machine that lets me see which companies have meteoric rebounds and which ones go out of business, then I agree with your investing philosophy.

      Otherwise, I’m going to invest in index funds. Because I’m not a magician who can predict the next AAPL.

      • Ron August 21, 2014, 4:33 pm

        Wise. I like the 5% max in any one company principle. 95% of my equity holdings are Vanguard index funds.

    • Freetobelee August 27, 2014, 12:05 pm

      Oh man… that Wall Street Journal quote really depressed me…
      When i turned 21, my father handed me the keys to a Charles Schwab investment account with ~$25k of Hewlett Packard stock in it. I sold a little of it and bought some Nokia stock, knowing that mobile phones and smart phones were the future. Having just purchased an Apple notebook for school, I knew it wa a far superior product than anything HP offered, but although I considered it many times; I never sold the HP stock to buy Apple. HP went down as I sold most of it off for living expenses (times were tough), and Nokia tanked when the iPhone was announced… oh well. Live and learn…

    • Anita August 29, 2015, 5:23 pm

      Hi Ron, what intermediate munis do you recommend? Would love to research them… 4-5 percent steady gains sound great

  • Andres August 20, 2014, 8:13 pm

    Timely post, thanks for the reminder.

    We sold our condo back in 2012, and sat on the cash while we rented because my partner’s employer planned to move “any day now”. After getting tired of living in moldy, drafty houses while rental prices skyrocketed and her bosses jerked us around, we finally dove in and bought a place (her employer still doesn’t know where they’re moving; they’re basically going to wait at least another year). So now we have the leftover cash from the purchase that I’m kicking myself for not having invested 3 years ago.

    I hesitated about buying stock indices in this weird crazy market, but didn’t have any better ideas and didn’t want to sit on cash any longer. This post makes me feel a bit better.

  • debt debs August 20, 2014, 8:19 pm

    Congratulations on selling your house and downsizing. Is that picture of your old place?

    The thing I don’t get about the Vanguard funds is everyone is so bullish on them. Doesn’t this give them a monopoly if everyone moves their money from other funds to these ones? Won’t the whole thing collapse like a house of cards at some point when there is no competition of competing funds to invest in? Maybe it’s just in the PF community that Vanguard is like a God, but all I hear is Vanguard this, Vanguard that. What’s wrong with other index funds out there? #stilllearning

    • stachethis August 20, 2014, 8:54 pm

      Definitely not an expert here, but from what I’ve read, they basically created the concept of an index fund way back when and continue to have the smallest expense ratios (basically what they charge for creating such awesome products). Low ERs and appropriate asset allocation probably most important aspects of returns with index investing.

      Also, I inherently mistrust anyone who says they are looking out for my best interests (especially when they make money doing so). For whatever reason, I never feel Vanguard is trying to trick me or scheme me out of my money (like other online brokers I’ve used in the past). I eventually switched when I realized I kept choosing Vanguard ETFs and I might as well switch to Vanguard funds for the lower ERs.

      Timely post MMM – we just recently read the Vanguard study you mentioned and decided to plow the returns from our very own home sale into Vanguard funds! Congrats!

      • AT August 20, 2014, 11:31 pm

        Yeah, it’s not “Vanguard” that everyone is bullish on – it’s index funds. Vanguard just happened to be the first to do it, and Vanguard is still popular (I just switched recently after a lot of research – their site is great, easy to use, and low fees.) But you can buy index funds anywhere.

        The idea of an index fund is that it’s made up of stocks to mirror an actual index, like the S&P 500. They rarely sell stocks out of the fund, only buying. This keeps the expenses low, vs a managed fund where they constantly buy and sell stocks within the fund. A managed fund would be one like “Retirement 2050”, for example. John Bogle (founder of Vanguard) wrote a brilliant book about the topic – “The Little Book of Common Sense Investing”. It’s a pretty short book, and totally manageable for the new investor. He shows (with a lot of proof) why investing in index funds will earn you more than managed funds (or trying to manage your own portfolio). Warren Buffet even recently came out and said after he’s gone, the money left to his wife should be put in an index fund.

        • debt debs August 25, 2014, 1:54 pm

          Thanks for responding, AT. Interesting to know that they are mostly buying stocks into the fund and not selling.

      • debt debs August 21, 2014, 5:42 am

        Thanks for responding. I’m wondering what are the comparable ETF’s to Vanguard?

        • Mr. 1500 August 21, 2014, 6:45 am

          Vanguard does off ETF versions of most of their funds. As far as I can tell, they are the same as their mutual fund counterparts except that they trade like a stock and have minimums

          • Mr. 1500 August 21, 2014, 2:02 pm

            I meant to say the the ETFs do not have minimums.

        • CitizenFree August 21, 2014, 6:57 am

          I believe that VTI is the ETF of the vanguard total market index. It’s what most of my standard brokerage money is in.

        • nyxst August 21, 2014, 7:25 am

          Someone else posted this link a while back and I use it all of the time to compare offerings from different companies. For example, I have found that Schwab has some index funds that are very comparable to Vanguard, but it is hard to look at the American Funds (which my is my employee sponsored plan) compared to Vanguard… it makes me sad to think of what could have been….

        • Green Money Stream August 21, 2014, 3:46 pm

          I like to stick with Vanguard myself. I like the ETFs when they are offered since e fees are usually lower than their mutual fund counterparts and there are no investment minimums. Also, Vanguard ETFs trade fee-free through a Vanguard brokerage account.

          MMM – do you have a chosen REIT? I like VNQ. Vanguard’s REIT ETF.

      • ervinshiznit August 21, 2014, 6:35 am

        This is because the only way to own stock in Vanguard is, because of its special structure, to own its mutual funds. Hence, we as the customers are also the shareholders. The company’s interests are our interests. No other mutual fund company is set up this way.
        Also, if somebody signs a fiduciary pledge, then they are legally obligated to look out for your best interests. One of the best ways to drive away “financial advisors” that claim they know what’s best for you.

    • CitizenFree August 21, 2014, 6:59 am

      Debt debs–

      ETFs/funds don’t work quite the way you say. It’s more like an investment club that buys other shares of stocks, and it’s value is tied to the underlying securities (such as the S&P500). Whenever someone puts money into the fund, the fund buys more shares, so it really doesn’t “go up” in value as more money piles in (unlike the stocks themselves, which get more expensive).

      ETFs are a little different, but most brokerages will show the difference between what you’re paying and what you’re getting, and that difference is usually no more than .01-.02%–pretty acceptable given the lower fees.

      • debt debs August 25, 2014, 2:00 pm

        Thanks, and thanks to all those who responded above.

  • Chris August 20, 2014, 8:26 pm

    Congrats on the new chapter of life MMM family! Any plans to profile the new house in a future post?

  • insourcelife August 20, 2014, 8:51 pm

    We just went through a similar decision making process but on a much smaller scale. We got an unexpected windfall of $9,000 and wanted to use it to fund our son’s 529. I was cheering the market dip recently but that didn’t last too long. I pulled the trigger today putting everything in a Vanguard fund heavy on stocks. Of course market will crash tomorrow now that we’re all in, but that’s what I was saying a year ago. Either way we won’t be touching this money for 16 years so who cares?

  • Mike August 20, 2014, 8:52 pm

    I like your thinking about investing with Vanguard even if the market were to correct. I too look at the long term and have faith in market returns being better than bonds.

    Perhaps in my 70s or 80s I’ll get into bonds, but your thinking appears to align with Warren Buffett’s.

    Also being able to save up to $51K tax deferred. Live off your taxable investments, all the while earning points for social security.

    I have a small percentage in GLD. I look at it as a balance to stocks, instead of bonds. Even if I were to lose money in that investment, I don’t care. I’d rather that than bonds at this time.

    • Kurt August 21, 2014, 6:19 am

      What’s left of Buffett’s estate (after his massive charity donation) is being left to his wife. He has said that he has let it be known that her money will be allocated as such: 90% into Vanguard S&P 500 and 10% into Short-Term Government Bonds. The bonds providing the living expenses if the market crashes/emergencies, while living off stocks during the “normal” periods.

      There is a interview on YouTube where he actually says the above, specifically mentioning Vanguard no less.

    • Pruden August 21, 2014, 5:51 pm

      Well, you should abandon faith for facts: Bonds have returned the same as stocks since 1998.


      The expected 10-year return on stocks is 2%,, and that’s being optimist. Not even widening the time horizon takes expected return higher than 7%. This is not timing, but statistics, the same that say that stocks return 10% on average.

      Stocks don’t return 10% from valuations like the current ones. And you”re not missing on anything by staying out: A bear market wipes all the gains from the latter half of a bull market, and we are already nearing the end of this one (5.5 years vs 3.75 average lifespan). Please MMM, be the calculating mind we know you are and stop recommending stocks at these prices. With less return and more risk than bonds, you know what the risk/reward ratio of both look like.

      • Michael August 21, 2014, 11:27 pm

        Bond prices will drop when rates rise. The reason bonds have done well over the last decade or more is 1) rates dropped 2) people’s irrational fear.

        Interest rates cannot really go lower without you paying to own a bond (beyond inflation risk and rate risk). Once rates were near or at the lows, demand for bonds drove pricing and that demand came from fear. Look at a 10 year treasury – around 2.4%, or about the inflation rate. So unless one sits on all the coupon payments you will basically end up with zero growth assuming the inflation rate doesn’t increase.

        Just be careful with bonds for anything but short-term monies.

        • Pruden August 23, 2014, 9:43 am

          If you buy a bond and hold it to maturity, you don’t mind its fluctuations in value. And bonds have never lost half their value in a 5-year span, while stocks regularly do it.

          That’s why I would propose, in currently overvalued, low-return market, to buy 3-5 year bonds and, when they mature, invest their returns in stocks that will by then be surely cheaper than now. The historical trend of stocks puts current “fair” value of S&P500 at 1000 (that’s half the current value) by simple extrapolation of this 2005 calculation by John Hussman: http://www.hussmanfunds.com/wmc/wmc050912.htm

          The exponential trend of stocks everyone loves is FAR below current valuations. Future returns are already here, there is nothing to do in this market.

          • Michael August 23, 2014, 11:13 am

            If you do hold a bond to maturity, assuming you actually buy individual bonds which most people do not as they use mutual funds and ETFs, then you lost to the risk of inflation.

            In the case of an individual (not a zero coupon bond), you buy one for $1,000 face value. Five years from now you get exactly $1,000 back. With 2.5% inflation you actually received $884 of spending power so you lost money. Even assuming that your coupon rate was the same as inflation, 2.5%, what you gave up was a stream of income that lost purchasing power over time as well. Your first year was $25, the last year the same $25 was eroded by inflation to a purchasing power of $22.10.

            Individual government bonds, like bond funds, have their pros and cons and really the only pro is that there is less volatility. However, the promise to have an income stream that loses to inflation in regards to purchasing power every year and that I only get back the same money that I put in, another promise to have less in the future, does not help me sleep better at night.

            • Pruden August 23, 2014, 1:04 pm

              As opposed to the premise of buying something whose historical value would be HALF current value and that tends to revert to the mean in violent and overshooting crashes that put everyone’s nerves to test through a series of dead-cat bounces?

              There is simply no money to be made buying an index at these levels.

            • Kyle October 19, 2016, 9:34 am

              Its funny reading these posts two years later and seeing that the bull market has continued to soar. Granted it could have easily gone the other way but it is always interesting to see how peoples opinions played out in real life years later :)

  • J.R. Bravo August 20, 2014, 9:06 pm

    I love this blog! After starting to read MMM in Feb 2014, I’ve done a financial 180.

    Here is just a few of the high lights:
    Student Loans: was 54000, is 41,000 Nd will have zero debt in May of 2016 (currently devoting 2200/month towards that emergency)
    Sold my car and now bike everywhere
    Became a Engineering all-star and got a hefty raise
    I live off of 22% of my income. I was at 78%!
    Started investing in Vangard (switched from high fee professionally managed funds)
    Most importantly, I’m really happy

    Thanks for being a kickass role model Mr. Money Mustache!


    • AKstache August 21, 2014, 8:38 pm

      “Most importantly, I’m really happy”
      This is so true, especially for my wife and I since we started applying MMM principles to our lifestyle. Cutting down on unwanted crap, living frugally, and focusing on things that really matter has helped us cement our path to achieve FI in about 9 years.

  • Jordan Read August 20, 2014, 9:17 pm

    Congratulations on selling it. We were just having a conversation about the passivity of money making. Great and timely post. Hope you had fun in Ecuador. Look forward to seeing a post on that. Also, now that you are home, how about that thing?

    Thanks again for the great post.

  • mysticaltyger August 20, 2014, 9:42 pm

    For those who are nervous about putting lump sums in the market, a balanced fund that invests in a mix of stocks and bonds can be a good compromise. Vanguard Wellington, for example, has actually beaten the S&P 500 Stock Index over the last 20 years with less volatility than the index. It’s usually about 65% stocks & 35% bonds. The expense ratio is only a shade more than an index fund at .26%. The Admiral Shares for people like MMM (50K minimum) only charge .18%.

    Some other good balanced funds that have been around for at least 15 years that have beaten the S&P 500 for those who aren’t Index die hards, plus their expense ratios:

    Oakmark Equity & Income .77%
    Mairs & Power Balanced .72%

    Dodge & Cox Balanced .53%…..Doge & Cox is the 2nd cheapest fund family after Vanguard. They only have 6 offerings, but all are very solid, long term performers, except their Global Bond Fund…but that’s only because it was just launched this year.

  • Ray August 20, 2014, 9:45 pm

    I also think there is a better way to invest than just letting your hard earned savings blindly ride the stock market up and down, especially if you want to use your money prior to 30+ years from now. By being pro-active and moving money to cash during large down trends, I don’t have to stomach the 50+% down moves (2008) you sometimes see in the market.

    • Ricky August 20, 2014, 10:50 pm

      Sounds good in theory, except no one can predict these down trends therefore there won’t be a point when you say “ok the market is tanking, I’m cutting my losses now”. That’s why you gotta be in it for the long term. But that doesn’t mean you can’t take profits once in a while.

    • mysticaltyger August 21, 2014, 1:23 pm

      I agree with Ricky….selling and buying back in are extremely hard to do because you have to be right not once, but twice. Almost nobody can do this. That’s why I’m always recommending balanced funds. They hold up better in bad stock markets and the better funds in the category have long term returns competitive with the S&P 500 Stock Index.

  • Steve August 20, 2014, 9:55 pm

    I’ve been ploughing money into VUN (the Canadian version of VTI) even though, as you’ve so illustratively pointed out, the market has been going up and up. The emotional and irrational side of me wants to park the money outside and wait to “time the market” for the crash that is “supposedly juuuuust around the corner”.

    Funny little story – back in 2012, just as I was getting ready to invest, instead of committing right away (I had student loans I was paying off as well) to investing, I bought a sample 4 index fund portfolio for $400. In 2013, after a year of growth, the market value of the fund was worth ~$500. I cashed out with my profits and patted myself on the back for my “brilliant” market timing. Lo and behold, the market just kept going up and up and I lost out on all those dividend payments and capital gains. Timing the market? Maybe by the market makers, but not by us mere mortals.

    Anyways, the rational and logical side of you, me, and all of us should understand that we shouldn’t let emotion and irrationality get in the way. Fear of losing money is a HUGE influence on investing behaviour. But as we know, and if we have the right investment time horizon (essentially forever) we shouldn’t worry too much. Just as the S&P can keep climbing and climbing, it could just as well have a huge correction tomorrow. But who knows? I sure as hell don’t!

  • Scott August 20, 2014, 10:02 pm

    MMM, have you read The Intelligent Investor by Benjamin Graham? He’d have words against willingly paying any price for a stock. I know this is a stock index, so it is many stocks, but the principle still generally applies. I think for your particular situation your investment is a fine choice; you have plenty of other income coming from your blog, your construction business, and your rental property. So you certainly would have time to recover any losses incurred from a potential market drop. But for someone who, say, received a windfall of $400k and was looking to retire on it with none of those safety nets, taking this investment advice would be irresponsible. Especially if they invest their “life savings.” Just my two cents. And if you haven’t read the book you should give it a try. It’s worth a read or two.

    • Frank Rx August 21, 2014, 1:04 pm

      The Intelligent Investor is currently sitting on the “Still to Read” section of MMM recommendations so not sure if he has read yet. I have read it and agree with Buffett’s endorsement, “By far the best book on investing ever written.” I agree with you that Benjamin Graham might have words with him over the high price of stocks. As far as I could tell, during the updated editions of the book he would make then current predictions and change his holdings of stocks and bonds accordingly. I do disagree with you, however, that the advice in this article would be irresponsible. As the book progresses, Benjamin Graeme and the commentary by Jason Zweig progressively recommends low cost index funds more and more for the average investor. As Kurt pointed out in a comment above, Warren Buffett will be investing a similar way for his wife when she inherits his estate (90% index fund, 10% bonds). So I think this article doesn’t disagree with The Intelligent Investor. If you were picking individual stocks, then yes, Graeme would roll over in his grave if you paid a high P/E Ratio of today’s market and didn’t do the hard work to find the always present low cost value buys.

      • slay August 22, 2014, 7:41 am

        we’re not trying to get rich by investing. yes we are aiming for some level of preservation but more concerned with dividends and compounding. the wealth already exists at this point. just getting the money to work and allowing it to buy less at these prices and more via DRIP if the market dives will accomplish the goal. an allocation away from stocks into something more income focused should be taken if the nerves don’t allow it all to go into stocks..

      • Steve August 22, 2014, 10:21 am

        Just pointing out — Buffet’s plan for his wife’s finances should have little effect on how we make decisions. It’s much less likely that whatever she would need to take out of the market would affect her overall worth as much as it would someone with fewer assets. She could touch that 10% all day long while letting the 90% recover.

        Someone who has less assets however may have to dive into the stock portion during a down time and an emergency.

      • Scott August 22, 2014, 5:12 pm

        Steve beat me to it, but I’ll reiterate. One of the main points I was raising against MMM’s investment advice here is that his choice is not a one-size-fits all approach. It works for his specific situation for the reasons I highlighted in my original comment. Similarly, Warren Buffet’s wife is in another world altogether, one where that allocation also works. I’m not sure if MMM was intending this article to seem as such, but he didn’t make any comment to the contrary (other than using these words in the title of the post “How I’m Investing”), so the post could easily be interpreted as “you should always buy stock indices at whatever price” and the only ratio he mentions is a 90% allocation in stocks and 10% in bonds. If one is in a similar position as MMM, then this is fine. But if not, coupling such a risky allocation with the additional risk of a highly priced market is not as okay. Indices are certainly the best way of entering a highly priced market as a defensive investor; I know Ben Graham highly advocated them in his later years. So I’m just of the mind (and I realize now I didn’t make this very clear in my original comment) that combining those two forms of risk without some safety margins or any kind of cash position to guarantee that you can invest for the long run is not okay.

        • Frank Rx August 25, 2014, 4:24 pm

          I do have a cash position so I can invest long term with this strategy so I agree.

  • sumeet August 20, 2014, 10:29 pm

    MMM – Could you talk a bit about tax implications? Would there be a depreciation recapture?

    • Corey August 21, 2014, 7:08 am

      There would only be a depreciation recapture if he had depreciated a portion of the house as a home office either for his blog business or construction business. It is not a good idea to take the home office deduction anyway, one of the quickest ways for someone to get audited. Also, since he has lived in the home for more than 2 of the last 5 years the gain on the appreciation of the house is not taxable.

    • cml August 21, 2014, 7:25 am

      If a home is your primary residence for 2 of the previous 5 years you pay capital gains tax on a sliding scale (from what I understand). Since this has been his primary residence until very recently, he will pay ZERO capital gains tax. Also, because it is not a rental property he was probably not able to “depreciate” the property on his taxes (although I am certainly not a tax attorney so I could be wrong).

  • Three Wolf Moon August 20, 2014, 10:30 pm

    Congrats on the sale. I too have recently moved and am in the process of selling the old place, so I understand the good feelings that brings. I am happy to note that I have joined you as a CO resident, albeit a bit further south (Parker). So far, the town seems similar to the descriptions you’ve provided of Longmont – about 5 miles x 5 miles, nice historic downtown area, lots of shopping nearby, and loads of great bike trails. Looking forward to the day my sale closes (Sep 10th if all goes well)!

    P.S. Second the request for an Ecuador trip recap…

  • ervinshiznit August 20, 2014, 10:50 pm

    Which solo 401k provider allows for after tax contributions up to the 52k limit? On Bogleheads, nobody seems to have found one, so if you could share that’d be great!

    Also, in line with your post, I found this to be quite enlightnening: http://awealthofcommonsense.com/worlds-worst-market-timer/
    A hypothetical scenario of a guy who is the worst market timer ever – he buys before every major crash, with his first investment in Dec 1972. However, he never panics and sells. In the scenario, he ends up investing $184k, and by the end of 2013 he ends up with $1.1M.
    There are some unrealistic things about this scenario, such as maintaining a 100% stock allocation from 1972 until today, but that’s not the point – the point is that panicking is a sure way to lose money in the market (and conversely, not investing at all is a sure way to miss out on lots of gains).

    • Jordan Read August 21, 2014, 7:29 am

      Don’t quote me on this, but I believe he’s doing the self employed 401(k).
      Also, I loved that article. Thanks for sharing.

      • ervinshiznit August 21, 2014, 7:37 am

        I know that (solo and self employed 401k are the same thing). I’m asking which provider he is using for his solo 401k, because they are not obligated to allow for after tax contributions to the $52k limit

        • Jordan Read August 21, 2014, 10:04 am

          Gotcha. I missed the ‘provider’ part of that question. My mistake.

          • Neal August 21, 2014, 3:47 pm

            Both Fidelity and Vanguard have solo 401(K) options. I have mine with Fidelity. You can’t go wrong with either company IMO.

            • ervinshiznit August 21, 2014, 5:15 pm

              I know they do. But to the best of my knowledge, they do not allow for after tax contributions up to the $52k limit. They only allow for the standard $17.5k employee and 20% profit sharing employer limit, not the after tax $52k limit. MMM specifically said he’d be contributing $51k (which really should be $52k), so that’s why I asked.

            • SAK August 21, 2014, 5:28 pm

              The $52K limits is a pre-tax number and is the max contributed by employee (17.5K) plus employer (34.5K). Your 401k has to be set up to allow for this level of contributions and if you can’t find an off-the shelf product your adviser should be able to steer you to a third party administrator to set one up. The investment of a little bit of money to set these up can generate significant tax savings. You always want the contributions to be “optional’ (employee and employer) in case you have a cash flow issue or other need for the money. This works when you are a small business – basically self-employed or with a partner or two (spouse or otherwise). The additional 5.5K possible is an employee contribution if over 50. Hope this helps.

            • Neal August 21, 2014, 8:46 pm

              The limit would be 52k whether it’s a standard solo 401K or a Roth Solo 401K; In order to max it out, business earnings would need to be in the neighborhood of around 170K. The only way to max it out is to have a business generating strong cash flow so your 20% profits can make up the difference.

              Etrade offers both traditional and roth solo 401Ks.

              I hope that helps.

            • ervinshiznit August 21, 2014, 9:04 pm

              Neal, for some reason I can’t reply to your last comment, but that is not what I am talking about!!!

              The IRS allows 401k providers to allow for after tax (not Roth, but AFTER TAX) contributions to 401k’s up to the $52k limit. A solo 401k provider that allows for this is my question.

            • John August 21, 2014, 10:02 pm

              Nope they allow up to the max. I have a solo 401k with vanguard and have put $30,000+ in some years.

            • ervinshiznit August 21, 2014, 10:11 pm

              John, you and I are still not on the same page. If you have at least 17500 in self employment income, after FICA is taken out, 100% of that can be contributed as an employee contribution. Then, 20% of employer profits can be contributed as an employer contribution.

              What I am talking about is after tax contributions AS AN EMPLOYEE. This means that IF a solo 401k provider allowed for after tax contributions, as long as there was $52k in self employment income, after FICA is taken out, then ALL of it could be contributed to the 401k. To reach the $52k max with 17.5k employer and 20% employee would require far more self employment income!

  • Mira D August 21, 2014, 1:16 am

    Why not direct stocks, MM?
    I must tell you about a study a brokerage did with stocks in India. He looked at the CAGR of the top performing stock from 2008 to 2013, and identified the top performers. Seems like a smart starting point to me. If you split between the top 10 stocks then the risk would be lesser as well.

    For what its worth, out here managed funds have completely outperformed the indices.
    Good luck with the new house!

    • Erich August 21, 2014, 7:14 am

      It’s not possible that “managed funds have completely outperformed”, because the majority of the money in the stock market is in managed funds. Therefore, half of those funds are underperforming the index, and half of them are outperforming. Buying broad indexes results in achieving the average returns of all the money in the stock market, which is primarily managed funds. You may find funds that recently have been outperforming, but can you find one that’s outperformed for 50 years consistently? It’s a common trick of mutual fund companies to keep releasing new funds, and cancelling ones that underperform, so that their remaining funds appear to outperform all the time. Don’t be fooled, eventually every fund will underperform. Can you predict when that will happen?

      • RJ August 21, 2014, 2:22 pm

        I know the index echo chamber is strong here, but keep in mind Mira’s talking about India…

      • Darkseas August 23, 2014, 8:27 pm


        I saw this same argument in the WSJ today. I’m sorry to say that you’re both wrong. It is certainly possible that the majority of managed funds CAN outperform the market. Here’s how.

        Let’s ignore for the moment the huge amount of money in index funds that underperforms the market. In theory, index funds should equal the market performance, but in fact they don’t because of their various expenses. Market averages don’t take expenses into account. So right away, this changes the game from zero sum to positive sum. And if individual investors also underperform the market (as they usually do by a large amount) that makes the game even more positive sum for managed funds. But for the sake of argument, lets ignore all of this and suppose the market consists only of managed funds.

        Without these two factors, let’s assume that 80% of the managed funds outperform the market by a small amount, say .5%. All you need to make that possible is that the remaining 20% of managed funds lose spectacularly. Let’s say the market is up by 10%. 80% of managed funds are up 10.5%. The other 20% lose 40 %.

        Here’s another way it’s possible. The firms that outperform are the smallest 75%, and the firms that underperform are the largest 25%. In dollar terms, the game is zero sum, but the majority still outperforms the market because the big investors do so poorly.

        There are lots of other externalities. The amount of money in the market isn’t a constant. If money comes and goes, the money that was in the market in January may outperform the money that came in in July, or vice versa. It gets ugly.

        Now I’m not a fan of managed funds, but a zero sum gain doesn’t describe what is possible and what isn’t. It’s correct to say that it’s not often that over half of managed funds outperform the market, and certainly not long term. But a lot of the reason has to do with reasons internal to managed funds, particularly what they can buy and how they have to invest to make their business model work.

    • Huxley August 21, 2014, 1:54 pm

      Because it’s stupid, that’s why. And MMM isn’t stupid.

  • Ted Hu August 21, 2014, 2:12 am

    Finally a topic other than scrimping pennies. Yay. By connecting real assets to stock values that is tobin’s Q ratio, the market is not overvalued. http://marketrealist.com/2014/08/must-know-are-market-valuations-stretched/

    A quick tip for those that want real solid returns (and volatile dips to boot) : invest in leveraged 3x funds. Conceived Feb 2010, its cumulative 4.5 year return is Tqqq’s 727%. Averaging 161% a year derived from 3x Nasdaq 100. Upro for S&P and Udow for Dow. Costs 0.95% for their troubles setting up contracts to maintain 3x returns daily. You’ll find it’s more than 3x over time thanks to compounding.

    Being in tech now retired at 39 to care for our son, that is what I invest with direct stock picking. Tqqq is my holding fund and baseline return that I expect. Spending time understanding investing with leverage and reap returns that will accelerate your time to FI way faster than cost cutting alone.

    • Ted Hu August 21, 2014, 4:00 am

      Morningstar chart linked gives a good economic historical perspective. Just keep in mind post Ww2 boom gave USA an edge rest of world has whittled away Thanks to inevitable globalization.
      Investors, don’t freak out! How to make money in the long run — http://on.mktw.net/1rmz3Hj

    • dude... August 21, 2014, 6:49 am

      3x funds for long term investing? Are you out of your mind? These things suffer from decay, just by virtue of the leverage… if the market drops 10 percent then rises 11 percent, the overall move is approximately zero. Your 3x funds would drop 30pct and rise 33pct for a net change of approximately minus 7 pct in two days where the market didn’t move.

      Numbers clearly exaggerated for effect, but in a sideways market, those tenths and hundredths of a percent per day quickly add up. Better to short the 3x bear fund over long term, or better yet stay completely away….

    • electriceagle August 21, 2014, 10:51 am

      Good god man, have you never heard of contango?

      If a leveraged fund goes down 20% and then goes up 25%, it won’t land you back where you started because variations in the ways that leveraged funds have to trade futures and options result in extra losses in times of volatility. These losses are beyond the 3x that you signed up for and are not balanced by a positive counterpart.

      Back in my more adventurous days, I made money by buying long-term puts on leveraged funds. If the underlying index went up and down, the value of the leveraged fund plummetted. (Even if the index went up overall, the leveraged fund would still fall.)

      Avoid leveraged funds like the plague.

    • Ted Hu August 21, 2014, 1:37 pm

      The single most important video you can watch as a long investor.

    • Adrian M August 21, 2014, 5:15 pm

      I guess even MMM has pump and dump scammers in the comments.

  • Interestingreadinglist August 21, 2014, 4:59 am

    Lending club (or zopa or funding circle here in the UK) isn’t a bad way to go. The only problem being it isn’t a liquid investment if you decide you want to put your money elsewhere. That’s probably a good thing really. Best to stick with your investments.

    Private investing, if you have the time and discipline, or index investing are also a good way to go. Depends what you’re preference is really. The most important thing has to be to put your money somewhere to grow, so it’s not just sat around gathering dust.

    • slay August 22, 2014, 7:34 am

      you do get principal back every month though along with interest. so your entire principal isn’t locked up the entire duration of the loan.

      • Interestingreadinglist August 23, 2014, 11:39 am

        Fair point Slay. Peer to peer funding seems to be a pretty good way of having an income generator of sorts.

  • Nicola August 21, 2014, 5:44 am

    Congrats on the sale! What are your thoughts on direct stocks that pay dividends? You could diverse in terms of companies and then get regular payouts so it still produces an income. There are lots of people online who are a massive fan of this approach so I just wondered what your thoughts were on it?

  • EarlyRetirementGuy August 21, 2014, 5:49 am

    Congrats on the house sale and congrats on being super-badass with the stock purchasing! I know i’m guilty myself of watching the value of my funds too much when i should be instead of thinking about their value in 30 years time instead.

  • Jayadeep Purushothaman August 21, 2014, 6:29 am

    Have you thought about buying a farm or creating one where you can produce good amount of food that you consume ? I feel very uneasy about depending on stock market which is in a way the root of many evils of consumerist world!

    • lurker August 22, 2014, 7:52 am

      still think the new yard is prime for a Permaculture Project…..MMM can take the cult to a whole new level with the Permaculture way of living…..yum.

    • Gbone August 24, 2014, 3:16 pm

      I know! MMM needs an introduction to the badassity of growing his groceries. Wall Street Doomsday predictions aside, gardening/farming/ homesteading pays! Not really as a career, but as a side venture I have been able to save a good amount of money with vegetables, trees, rabbits, chickens, and bees. I even have an offer on my house pending right now and another offer on ice at 20k greater than we bought it for primarily because of the attractiveness of the lifestyle that comes with the property after the additions of gardens etc. We didn’t even use a realtor, just posted a homemade website to the farm and garden section of Craigslist.

  • Mr. 1500 August 21, 2014, 6:49 am

    I learned about Realty Mogul a couple months ago over at Brave New Life. They offer peer loans, but for real estate ventures. I’d like to hear your take on this service some day. Similar to a REIT, I like the idea of having exposure to real estate without the hassles of direct ownership.

  • Dee18 August 21, 2014, 6:51 am

    Enjoyed the post….but hoping we will soon get a photo tour of the new house. Can’t wait to see it!

  • EL August 21, 2014, 7:04 am

    Seems like you have made great choices to invest your money. I am interested as to which REIT you end up picking. Will it be a mutal fund or individual stock REIT? It’s interesting you didn’t consider the 1030 exchange to buy another property and avoid all the taxes on this one. It seems like everyone goes that route when they sell property. Good Luck.

    • mary w August 21, 2014, 12:23 pm

      The house he sold was his former primary residence not a rental. He couldn’t do a 1031 exchange and didn’t need to anyway since up to 500K of gain is sheltered.

  • Erich August 21, 2014, 7:05 am

    Your article last year pointed out that the p/e was at its historical average. From my re-reading of the article, I don’t think you were claiming the market was at its peak and sure to drop. I disagree with people saying everyone was sure the market would drop last year. Average P/E does not mean imminent drop, nor does a new historical market PRICE high (the market must reach many new highs continuously to continue rising over time). The difference this year, is that now we’re near historical P/E high! There have been a grand total of 9 times in HISTORY of the market, where p/e went higher than it is currently, and most of them extremely brief periods:

    I’m still not saying a crash is imminent or guaranteed, the market could instead stay stagnant for an extended period for example for earnings to catch up to price. The stock market is a numbers game, and it’s actually reasonably predictable based on p/e, as MMM has even pointed out. The historical odds of having great gains from buying indexes at today’s p/e though, are quite low.

  • Kenneth August 21, 2014, 7:06 am

    I’m facing the same issue, as I have recently done an indirect IRA rollover from Betterment. I’ve put 1/3 into Vanguard, and am putting in another 1/3 next week, and the final 1/3 3 weeks later (you have 60 days to finish your indirect rollover).

    The reason I left Betterment, is their mix of stocks and bonds is set in concrete at 50 percent US, 50 percent foreign. I’ve talked to them about this to no avail and they are not going to change their minds. It’s my personal opinion over the next few years that the US will outperform Europe and Japan at least, if for no other reason than we are greatly reducing the drag of imported oil costs, by the astonishing growth of (like it or not) fracking. Vanguard blended funds I’ve looked at (blended stocks and bonds) are set at about 75 percent US, 25 percent foreign, which is much more to my liking.

    Since I am 16 months from retirement, my risk tolerance for my stash is getting smaller and smaller. So I’ve settled on the Vanguard VTINX Vanguard Retirement Income Fund which has a 30/70 stocks/bonds mix, and 75/25 US/foreign mix. Perfect for me. With a fund like this, if we have “the big one” drop of 50%, the fund should be down about 15%, which I can tolerate. Yes, the growth is much slower than just being in VTSAX, but should be enough to sustain a 4 percent safe withdrawal rate.

    I am 64 years old, so 30/70 works great for me. Younger people should be 80/20 or 90/10 stocks/bonds. JMHO.

    MMM – you’ve probably added $200k or so to your working stash, by swapping homes – your hard work has increased your family income forever, good job!

  • Stan August 21, 2014, 7:10 am

    Wow, you are a gambler. I split my retirement between 4 groups: growth, Naz, S&P and international. International did the worst so I ditched it and went for small stock growth. REIT I avoid like the plague because of the housing bubble being cyclical and bad mortgages being lumped with good ones. As for a lending club or bonds they are even more speculative than stocks due to good mixed with bad. But I have been wrong before and hope you put up a chart from time to time to show your returns.

    • Mr. Frugal Toque August 21, 2014, 1:49 pm

      Okay, but by ditching the index funds that are doing badly, you’re basically selling low and buying high.

      If you have an array of index funds which track the market and are independent of each other, the current wisdom is to rebalance them every quarter or so, to take advantage of an opportunity to buy low ones and sell off the high ones.

    • slay August 22, 2014, 11:46 am

      ‘lc or bonds are even more speculative than stocks due to good mixed with bad…’

      how is that any different than your stock indexes? good stocks mixed with those that will go bankrupt.

      lc has charts of returns, they would appear to be accurate based on my multi year experience as well, with thousands of loans now at this point.

      you’re split groups are also HIGHLY correlated with each other meaning you have not accomplished much there on the diversification front. you really just own a total stock market fund.

      • Stan August 25, 2014, 7:25 am

        My portfolio is spread across hundreds of stocks if not a thousand. Long term in the stock market with dollar cost investing may or may not make one rich. Time will tell.

  • brkr12002 August 21, 2014, 7:20 am

    Curious if you have considered investing straight into individual stocks. In particular, dividend growth companies and looked into or heard of a concept called yield on cost.

  • Jordan Read August 21, 2014, 7:36 am

    It was bound to happen. Another post on index funds, and a lot of questions in the comments section. Instead of trying to reply to them all here, may I suggest that all of you with questions or concerns go visit the investor’s alley section of the forum? A good chunk of these concerns are addressed, and in a more conversational manner.

    • DoItYourself August 21, 2014, 9:34 am

      Good suggestion Jordan. Or go over to jlcollinsnh’s Stock series.

  • ForuMMM August 21, 2014, 7:57 am

    I’ve been trying to figure out how to use the “Self-Employed 401(k)” and other tax advantaged savings vehicles (SEP and SIMPLE IRAs) after “retiring” from my typical full-time W2 job. It’s amazing that each worker can shelter so much income (over $50k for high earners). I guess the biggest hurdle for me is figuring out how to make that kind of money (or any money) having my own business but without making it be a “job”. It would be nice to have some projects that I could work on after quitting typical employment, and get paid for them. But I don’t know what that looks like. I am very intellectually curious and am constantly starting projects to learn everything I can about something. I have so many useful skills–three graduate degrees and experience and understanding of engineering, science, technology, public policy, government, economics, finance, etc. It’s hard to know how to apply those skills to something that’s fun and pays. My mindset is also very oriented around traditional W2 employment. It’s hard to start thinking about working for myself and drumming up business. Any mustachians have tips for this?

  • Big Guy Money August 21, 2014, 8:13 am

    Love your breakdown MMM. We’re way behind your (and many other people around here) pace, having only started investing the last 4-5 years. Obviously during that time the stock market hasn’t taken many breaks, and is WAY up. I’m borderline excited for the next crash for 2 reasons:

    1) We’re early in accumulation, so buying long-term shares at greatly reduced prices sounds like my kind of ‘sale’.

    2) I track everything daily. The reason for this is I’m trying to desensitize myself to the volatility and so far it’s worked. When I first started tracking daily balances over two years ago, I’d notice my mood changing with each day’s gains or losses (not in a non-healthy way, and never sold or bought based on emotions). Now, even though the swings are larger than ever, I’m just entering numbers in a spreadsheet and have no emotional attachment to those numbers. I’m interested to see behaviorally how the next ‘crash’ goes.

  • Chris August 21, 2014, 8:17 am

    Congrats on the house sale. Having that type of cash sitting around is a great problem! Get ready for the onslaught of “there’s a lot better returns in individual stocks!” At least you can point them over to A Random Walk… :)

  • elkbark August 21, 2014, 8:30 am

    MMM, given your stated market opinions in this article, you might want to consider put options. Have you considered selling out of the money cash secured put options on a liquid market index ETF?

    Just as an example, at the time of me writing this, with $97.5K backing the transaction, you could sell 5 contracts of SPY(October’14 expiration) ($195 strike price) for $2.39 premium per share. You would have an obligation for the next 57 days, but you would pocket $1,195 for this. Best case, the market stays flat or goes up a bit, the contracts expire worthless in October for a 7.8% annualized return on your capital. Worst case, the market crashes and you are underwater on 500 shares of SPY, but for a 3% discount on what you would have otherwise paid for them now in your current approach. Note:it is entirely possible that the market will continue to sky-rocket upwardly.. but you would only benefit by the 7.8% annualized.

    The time committment for such an investment strategy is pretty minimal. If you are not already familiar with options, you might need to spend a few hours reading/talking with someone to learn the basics. However, after the initial education, you are probably looking at a 15 minute time commitment once every 1-2 months.

    What do you think?

    • misterfancypantz August 21, 2014, 8:48 am

      Cash covered puts is an extremely smart way to buy large lots of stock for a discount, assuming you intend to buy the stock regardless.

      Here is a link to the Options Industry Council the explains the technique.


      Most discount brokers will give this level of options trading to anyone. To trade options requires a margin trading account with a minimum balance of $2000, each broker might have their own higher limit.

      • elkbark August 21, 2014, 3:23 pm

        This would problably work even better if we did have a little bit of a down move first, since volatility would increase from recent lows and the premium on the puts would be more worthwhile.

        • misterfancypantz August 22, 2014, 8:07 am

          Depending on how anxious you are to buy and your options saavyness you could run the puts further out of the money for less annualized return and do this month after month and most likely beat the S&P 500 in the short term, then when the market does take the minor correction and you to get exercised take the long term buy and hold that was initial intended and use the premiums collected to invest further.

          On the flipside once you own the ETF you can do deep OTM covered calls that are unlikely to get exercised or meant the market went through the roof. This create a buy and hedge compared to buy and hold strategy and collect monthly covered call premiums as well. If you get exercised simply repurchase, this works very well in tax advantaged accounts as there is no tax implication if you get exercised… You have to be a little more OTM and not get exercised to avoid the tax hit in taxable accounts.

          Combined both strategies provide excess returns with no additional risk and can chop years off a dead-end career.

          Options scare too many people, you just need to be educated and not use them as get rich quick schemes, that is when you get into trouble.

  • jestjack August 21, 2014, 8:34 am

    Congratulations!! You must be over the top…. so good when a plan comes together! I hope to do what you have just done after DD2 gets out of college and gets out on her own. Like you I don’t see the point in letting a bunch of equity sit in a “wooden box”. My situation is a bit different/complicated as my home comes with two additional building lots. So if we did sell the lots don’t know if I would be a fan of having new neighbors and all that it brings. In addition, I’m with ya on the rental property. I’ve been a LL for over 35 years and it has become apparent the game has changed. Between constantly new and expensive regs and higher expectations from tenants along with a “shallower tenant pool”….the time might be ripe to divest and invest in some REITS. Unfortunately, Prosper and the like are not allowed to do business in this neck of the woods. So that doesn’t appear to be an avenue for us. In short, you make an excellent point in that there is not a lot to dislike about a large sum of money invested and enjoying returns of 15% or better and not having to get out of bed to get them. I have some money over at TIAA-CREF and the two funds I’m invested in had returns of 34% and 36% respectively last year. It makes a long time Landlord just wonder . Congrats once again on reaching your goal!

  • misterfancypantz August 21, 2014, 8:36 am

    First off congrats on the house sale!!!

    Secondly in 2014 the total max self employment contribution is $52k not $51k, don’t short change yourself the $1k in tax deduction. But more importantly I am sure both you and Mrs. MM involved in your businesses so therefore you are actually each entitled to $52 of contributions which is $104k of tax deductions assuming you have that much income to defer. Do employer side first as it is triple tax free at 25% of gross earnings for both of you then do the 17.5k employee side contributions. Now even if you Mrs. MM is not actually involved directly with the business you are able to make some form of contribution on your spouses behalf. I am not a CPA myself and not currently self employed so I am not as current on the regulations but I am sure someone reading is if you don’t have a CPA helping out already.

    Even if the Retirement police don’t come looking for you the Tax deduction police might :P

    I agree completely on retiring the HELOC debt by the way, it is probably tied to the old house anyway, not that you couldn’t roll it to the new house, I am sure you will get a new line set up anyway, but clearing the debt is the safe play even if the returns are below market.

    So of the $400k, you have $240k left after the HELOC pay back assuming the $52k Solo 401k (or $52k 2X) contributions you actually have much smaller lump sums to invest in the market.

    Either $136k Taxable, $52k MMM 401k, $52k Mrs. MM 401k
    or $188k Taxable, $52 MMM 401k

    How would you break down your asset allocation across the accounts?

  • Green Chiles August 21, 2014, 8:47 am

    MMM, I haven’t heard much discussion of sequence risk–the fact that, all other factors being equal, losses early in retirement are far more damaging than equal % losses later on. This because one must withdraw from a diminished based, thus permanently damaging principle if the losses occur early. Losses later on are easier to take, since you’ve already accumulated way more money than you need anyhow through compounding.

    In any case, sequence risk is especially important for the early retirement crowd, and may argue for the counter-intuitive strategy of investing conservatively earlier in retirement.–the complete opposite of what your strategy seems to be. Avoiding losses earlier on is way more important than capturing gains early on, if there is any question of running out of money,

    I would love to hear more discussion of sequence risk (for selfish reasons; I also have lump of money I’m sitting on)–although I realize that this may not be where most of your readers are at in their understanding of investments. But it does seem like “the” big issue with ER investing today.

    • Andy C August 21, 2014, 4:19 pm

      MMM doesn’t draw on his principle. Rental income and investment income provide all of their loving expenses and more. And moving to a smaller, more energy efficient home will lower those expenses even further.

  • Iron Maiden August 21, 2014, 8:52 am

    Hedge your bets. October is usually a low/crash month (I completely admit I’m using anecdotal evidence/memory on this one). Since we’re so close to October, buy $100K each month over the next four months, at the ends of Aug, Sep, Oct, Nov. A bit of dollar cost averaging here, if the markets do take a dump in the fall, but close enough to be considered a near-lump sum purchase. And Fridays tend to be sell-off days, buy at the end of a Friday, might be worth it with the large sum your investing. Good luck!

    • Eric August 21, 2014, 6:11 pm

      I always buy at 10:53am on the third Tuesday after a full moon and sell when Libra is visiting Pisces during an eclipse after, not before, the Vernal Equinox. If before the Vernal Equinox, then buy instead. Hasn’t failed me yet.

      But seriously, if all you needed to do was to look at the calendar to know which direction the market was heading, you’d be retired already. Best to invest as soon as possible and not try to time the market.

  • SAK August 21, 2014, 8:56 am

    Congrats – lots of good strategies. But on the retirement savings (I just did this exercise for my small business/self-employment entity) – you should actually be able to put away $52K each, $57.5K if over 50, this year. Plus you might want to look at a cash balance defined benefit plan that would allow you to put away significantly more pre-tax. I work in pensions advising companies (think very large plans) – so I’m not selling this product, but set this up for my business partner and I this year. You should talk with your financial planner about it and see how the numbers work for you.

  • Andrew August 21, 2014, 8:56 am

    I considered investing in REITS in the past as I wanted exposure to real estate. Being that I live in the NYC area, owning real estate or rental property would be very difficult, plus the rental would not cash flow….I’d be speculating on appreciation. Recently, I’ve been considering rental properties in other locations and hiring a property manager. I know that creates other issues that I’d have to investigate and I’d have to find someone I trust, but nevertheless I think owning rental properties has certain advantages that REITs do not…mainly the leverage and tax benefits. It seems like many other commenters are not too keen on REITs either so I look forward to hear back from you regarding that.

    • S.G. August 21, 2014, 4:28 pm

      Andrew, REITs are a great way to create a passive income. There are so many of them and so many types that it would be beyond this site. I suggest you check out The Intelligent REIT Investor. Brad Thomas is really good when it comes to evaluating REITs and his web is a great way how to educate yourself on REITdom

    • Darkseas August 23, 2014, 8:55 pm


      There are two basic kinds of REIT. Mortgage REITs invest in mortgages on commercial property. Property REITs own commercial properties themselves.

      Commercial properties are things like shopping centers and malls, office buildings, medical office buildings, warehouses, and apartment buildings.

      Business cycles for commercial property and residential property are different. For example, when everyone is buying homes, apartment buildings struggle and vice versa.

      Because of they way they’re structured as corporations, REIT dividends are taxed as normal income and your marginal rate, not at the 15% rate at which qualified dividends are taxed.

      In short, individual residential rental properties and REITs are not exactly substitutes for each other. You could certainly own both at the same time or decide that neither was a good investment. MMM’s pronouncement that he wants to own property but doesn’t want to have the burden of managing it is something of a non sequitor unless he has purchased on of the very few REITs that invest in residential property.

  • Mark August 21, 2014, 8:59 am

    Congrats on selling the house MMM! I’m excited to hear more about your future plans and more about your investments.

    I love VTSAX for the US Total Market fund. Quick note, as you easily will meet the limit, be sure to use VTIAX (the Admiral lower cost fund) over VGTSX.

    Also, have you considered having the REIT fund be only used in your IRA/401k? The dividend interest is all taxed at your marginal rate, so it’ll save you a decent amount in taxes. I guess the same could be said about Lending Club, but for me it’s a little more of a pain to set up an IRA just for that.

    Regardless, I think this looks like a solid plan, and congratulations again!

  • Eli Inkrot August 21, 2014, 9:10 am

    Great stuff, MMM. I’ve written several articles on a similar topic yet people still want to invest on “a feeling” instead of logic. It seems the problem is rooted in the psychology of loss, but the trick of it all is a lower bid isn’t truly a loss. We buy houses, farms, cars or rental properties and don’t get a bid on them for years. When most buy a stock, they check in the next day (or second) to see if they made the right decision. It’s ludicrous. If someone were to offer you 50% for your house you would quickly tell them to get off your lawn. If someone offers 50% for a stock, many consider it. You’re partnering with a business. As long as you have a long-term mindset, you really shouldn’t care what others may or may not be willing to pay. The focus should be on the cash flow coming in and the underlying business prospects.

  • Bob Werner August 21, 2014, 9:20 am

    No mention of profit or loss on the home sale. Would be interested to see a breakdown.

    What did you pay? What were the taxes? How many years did you hold it? How much money did you put into it? What did the market do in the time you had your cash in the home? What was the sales commission?

    The big question and fun numbers are — What is the total difference that you would have reaped had you had a mortgage on the home vs. having your cash fully in the home?

    This discussion comes up often on the forums. We get the psychic peace thingy but it would be nice to look at some real numbers from a real deal for the mortgage vs. no mortgage debate.

    If you just want to give the purchase price + improvement price, sales price (after commission) and purchase date, there are many folks here that would enjoy running the comparative numbers for you?

    Thanks for you time, Bob Werner

    • Mr. Money Mustache August 21, 2014, 9:57 am

      Yeah, great idea Bob. It was definitely not a profitable home ownership session in monetary terms (I paid $350k in 2006 and then did more than $50k in upgrades if you count the labor!) … But emotionally, it was wonderful and we got a bargain.

      With 20/20 hindsight, it would have been best to rent a nice place for those 8 years, then dump all my money into stocks in 2009 so it would be worth twice as much now :-)

      • Maverick August 22, 2014, 2:16 am

        Couldn’t agree more MMM. Your comment just reinforces my observations for decades, that home ownership is good as a place to LIVE, its not typically the best investment after considering long-term appreciation, interest, mortgage fees, RE fees, taxes, and maintainence costs.

      • Bob Werner August 22, 2014, 12:00 pm

        Thanks for that thoughtful reply!

        On the forum, I encourage people to not buy a house unless they have the cash to do so with lots extra.

        So for a person without the cash to purchase outright, it appears the safe and financially conservative path would make renting a great option.

        My personal experience with renting for over 6 years has really been awesome. Went from apartment to big house, to nice midrange house with an awesome view! Would still be renting if we hadn’t stumbled upon our super discounted current foreclosure/fixer upper house.

        I encourage folks to give serious consideration to renting.

        Thank you, Bob Werner

      • Another Reader August 23, 2014, 8:32 am

        You have no tax issue with your primary residence, but if you are selling the spec house and getting out of the rental business, that could be an unpleasant tax hit. Really interested in how you approach this sale and the consequences. Some of us that have owned rentals for a very long time have resigned ourselves to Nords’ exit strategy, probate, because of the tax hit.

      • Dave August 24, 2014, 8:36 pm

        Not to nit-pick, but this statement contradicts the advice in your article.

        If MMM would have rented in 2006 rather then buying his home – the advice given in the article would indicate that he would have fully invested in one lump sum in 2006, rather then timing the market and buying stocks at the lows in 2009.

        just sayin…..

      • Mr. 1500 August 26, 2014, 11:12 am

        When we bought a home last year, we could have paid cash, but thought it was a better idea to leverage the money and invest it. Rates were so low, it seemed silly not to borrow.

        Our 15 year mortgage payment is less than what people with smaller homes on our street pay for rent (before we did any improvements). This was with 20% down, but I still think I’ll come out ahead.

        Of course, you know what they say about hindsight though.


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