Aug 20, 2014 260 comments

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

The 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)

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.

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Want More?

5 O'Clock Shadow Jeff August 21, 2014, 9:28 am

The link to the Vanguard study brings me to “Page not found”.

Great article. Personally, I might dollar cost average into the stock investment and then buy more on days when the stock market dips substantially.

Reply
Even Steven August 21, 2014, 9:50 am

I’m curious for the reason to sell the house and not rent it out other than time. Is it a simple I prefer the stock market to real estate at this point or real estate takes time investing in index funds does not?

I ask because my early retirement plan heavily focuses on real estate rental income and the monthly income that it will provide. For example if the house is able to be sold for 400K and invested elsewhere like your plan above or the house can create rental income of 40K/year. Thanks for any response from the group or MMM.

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- Huxley August 21, 2014, 1:59 pm
  
  You’re renting out a house for $3,300/month? But they only cost $400k? Where does this work? Around here houses cost that, and rent of under $2K. And with mortgage, maintenance etc the profit is maybe $100/month.
  
  That’s why I have no interest in rentals.
  
  Reply
  - Even Steven August 21, 2014, 2:28 pm
    
    Thanks for responding. I use the 1% rule on rentals, so to keep it simple if a home is valued at 400K, you should get 40K total for the year, to make it even more simple I’m not counting on a mortgage payment because the home would be paid off and any management would be handled by the owner, you know DIY. So 40K is a rough estimate to get you started, but taxes, insurance, etc aren’t part of your initial 1% rule.
    
    Reply
    - Huxley August 21, 2014, 2:35 pm
      
      Thanks.
      Yeah I’ve heard of the 1% (or 2%) rule, I just can never make it work for any decent property. Except maybe a $30k house in gang-infested part of baltimore..
      
      You say you should get $40K/year, but could you?
      
      Reply
      - jestjack August 21, 2014, 5:47 pm
        
        That’s just it…the 1% rule hasn’t worked in quite some time. And unfortunately I feel after 35 years in the rental business this is the “new normal”. The “ceiling” in this neck of the woods is $2500-$3K MAX a month for a outstanding property….average 3BR $1500-1600 a month but this would cost $300K and up to buy. It is a struggle here in the “trenches” as applicants have no reserves, sketchy employment, high car payments, student loans and cell phone bills that bogle the mind. The truly intriguing thing is what if you take that $400K and put it in a diversified mutual fund…i.e. Vanguard, Fidelity, TIAA-CREF and the like….and say you only get an average return of 15%…that’s $60K. .$60K and you haven’t swung a hammer, painted a wall, interviewed a prospect or went to Rent Court to collect the $5K a month. Add to this the new demands and regs and being a landlord is not what it’s cracked up to be in Baltimore or elsewhere.
        
        Reply
        
        Vickie August 21, 2014, 7:05 pm
        
        You are right. It makes no sense to invest in those parts of the country where home values are very high relative to the rental income. Try investing in the Midwest, instead. I purchased 4 houses this month for a combined price of $122,000. The monthly combined rents are $2745. Even after all expenses, this should be profitable. Since the houses were all foreclosures we scored some instant equity (they have been appraising for double what we paid) and since the market is recovering, I also hope for some appreciation in the next 2-5 years. You might consider investing in real estate somewhere besides Baltimore. Midwestern courts are less tenant friendly too.
        
        Mr. 1500 August 22, 2014, 2:17 pm
        
        Vickie, those are pretty awesome numbers.
        
        I agree that the 1% is definitely attainable. Here in our little pocket of Northern Colorado, they are few and far between, but they are still there. People seem to do better with multi-family dwellings though. Very hard to get 1% on a single family.
      - Even Steven August 22, 2014, 7:25 am
        
        @Huxley I think that’s a great question? My answer would be two fold. I would not buy the house unless I was able to get 1%. The second part would be can you get 40K and I’d go back to see rule my first answer, but I think it is known as the higher value of a SFH the more difficult it would be to get your 1% ie 1mm home prob not getting 100k a year. I bought a house where we live in part of it and rent the remaining units so there is a certain advantage to that part and much easier to get the 1% rule.
        
        It sounds like then people believe investing will return/appreciate more for less work from the reply’s to my original response.
        
        Reply
    - Krishanu September 12, 2014, 2:09 pm
      
      1% of $400K is $4K, i.e. $4000, not $40K. Do you mean you expect $4K in MONTHLY rent for a $400K house?
      
      Reply
LeisureFreak Tommy August 21, 2014, 9:53 am

Your post’s timing is perfect. I am in a similar situation sitting on dead money in my credit union savings account earning squat. As someone who is an early retiree living off of my portfolio I have been worrying about the market being on the edge of the cliff but I think you bring up some excellent points and this money is for a medium-term retirement funding bucket so if the worst happened there are some years to recover. Your post is a reminder for me to get up off of my gluteus maximus and start looking at investment funds and just pull the trigger already.

Reply
- slay August 22, 2014, 7:58 am
  
  what’s your current allocation? firecalc has worked to lower my stress levels. with windfalls i both diversify –equity, long term bond, short term bond, foreign currency, hard asset –and also make the puchase over a couple of months. then everything is DRIP until i want to use the income. i just average the interest rate/div % from each allocation so i get the total portfolio’s income so i can plan for income matching expenses and know how many shares i have to buy before that’s met– and then can sleep at night knowing i’m somewhat diversified save physical and market catastrophe.
  
  Reply
Rex August 21, 2014, 9:56 am

Hello MMM! Have you thought about using a service like WealthFront to do tax loss harvesting? It is estimated to increase returns by around 1% annually (or even 1.4% in some cases) over the long run. Tax loss harvesting is the selling of securities to realize a taxable loss, while reinvesting the proceeds from the sale into a highly correlated asset class. WealthFront and others automate the process. Assuming you’ve got a $200k+ taxable portfolio, you could be foregoing $2,000 annually of risk and hassle free return ( in the long run).

Reply
- Mr. Money Mustache August 21, 2014, 10:19 am
  
  I must admit I still have much more to learn about tax efficiency, because the original plan involved retiring on a low enough level of income to make taxes irrelevant: http://www.mrmoneymustache.com/2012/06/04/the-lovely-low-taxes-of-early-retirement/
  
  As your income and life complexity increases, it can make more sense (for some) to pay a specialist who can stay on top of the laws, as long as the money and time savings they provide are worth it. Hopefully they save you more than they charge in fees, which makes it a really easy decision. This is the reason I’m outsourcing all taxes to an accountant from this year onward.
  
  I haven’t looked into the details of Wealthfront, but I hear they are similar/competitors to Personal Capital, which I reviewed about a year ago, article right here: http://www.mrmoneymustache.com/2013/10/11/personal-capital-the-investors-version-of-mint/
  
  This is very much a personality-dependent issue. Hardcore Mustachians will laugh at me for even suggesting anything other than Vanguard with self-managed accounting, rebalancing, and taxes. But in my increasingly complex life, I am quickly realizing that I have finite brainpower and attention and there are some activities that have even higher leverage than managing money and taxes.. so I suddenly benefit from paying others to help out. This would definitely not have been true just 4 years ago.
  
  Reply
  - Rex August 21, 2014, 12:33 pm
    
    Definitely agree with the brainpower and personality issue! Wealthfront charges a 0.25% fee for re-balancing a portfolio of essentially vanguard ETFs and layers on the additional service of tax loss harvesting. As I see it, for $250 a year on a $100k portfolio, I don’t ever have to think about how many shares of which ETF to buy or sell (dividends are automatically reinvested etc). Plus, I should theoretically benefit from improved returns from tax loss harvesting that cover the 0.25% fee 4x over. For someone who wants to do right financially, while doing as little work as possible, this works great.
    
    Other companies like Betterment offer substantially similar services. Looking forward to seeing how competition forces these new players to get better!
    
    For more on tax lost harvesting see:
    -Video: https://player.vimeo.com/video/81158529?player_id=tlh-video-player&api=1&title=0&byline=0&portrait=0&color=5e9b00&autoplay=1
    -White Paper: https://www.wealthfront.com/whitepapers/tax-loss-harvesting
    
    Reply
  - Ted Hu August 21, 2014, 1:07 pm
    
    Such management does not yield superior results. By doing nothing yourself and delegating it to another entity, you are doing something – most notably wasting more money, more than likely for underperformance. Incidentally, I happily pay taxes as cost for outsized returns.
    
    Considering long term capital gains is 0% for the first 72,500 or less of a couples income, and even short-term capital gains is a blended 7% for the first $72,500, a MMM with a smart investment outlook really shouldn’t have much problems with taxations.
    
    I’ve delved into Betterment, Personal Capital, to Wealthfront myself. They simply are behind the times, projecting pseudo high end wealth management for the masses, when reality it is automation at scale to collect outsized fees.
    
    Further, their insistence investing money into the international market rather than be more aggressive stateside is more a cop-out than a strategy.
    
    Any macroeconomist or market strategist worth their salt will tell you, the US is the strongest market in the world right now. Internationally, there’s all sorts of institutional problems that will take years to sort out, with exception of Japan. If one ‘lump and dump’ their monies into conventionally minded investment entities like these, you will find yourself with a decade of mediocre returns while cumulatively paying well beyond 1% for, which further erodes your returns by a huge margin, which makes such a strategy break even at best.
    
    The problem with these offerings is that they presume the past will continue into the future. For ex., again, international emerging markets have been fruitful in the past, thus they will continue on that trajectory going forward. Uh no. What’s in store has been volatility and many years of subpar returns relative to USA. As they say, the past does not assure future returns of the same ilk.
    
    With the iPhone or web today, there’s simply few excuses to NOT spend *more* time figuring this stuff out. I feel just the opposite to you where I choose to spend my time. I can easily make $30-50,000 a quarter by spending more of my time figuring out macro trends, digest earnings season (seekingalpha.com, market watch, yahoo finance, iPhone stock apps are indispensable), and focusing my efforts on the fewest holdings that will yield maximum returns. I don’t day trade, I trade by quarter or at most once a month because I focus on long investing, at most tweaking my money pot to ensure I am maximizing secular trends – e.g. content anywhere anytime is king, international growth via US multinationals, surge in long-run (alt) energy demand, social advertising, all the while ensuring I’ve solid aggressive market-basket high leveraged (3X, 2X also available) ETFs like TQQQ-nasdaq 100 and UPRO-S&P500 to store the rest of my holdings.
    
    I invest internationally by virtue of globalized domestic US companies with mature business practices, founded on rule of law and American institutions, and economies of scale that can safely diversify and penetrate foreign markets rather than hope some Chinese or Indian companies have figured it out somehow, minimizing volatility and corruption in the process.
    
    In any event, we are talking order of magnitude difference in results that if I were to spend less hours doing, would take me 10X more work cost-cutting to achieve. The tradeoff is pretty stark. I read economics in college, worked in tech for two dozen years, and retired this year at 39. At this rate, investing is as, if not more important, than frugality. Particularly as an environmentally, economically minded citizen who conserves and invests accordingly. The latter also happens to give me more leverage to impact the world.
    
    Reply
    - Andrew August 21, 2014, 8:48 pm
      
      There is lots of research to support the idea that you, ted hu, are not beating the market by you whit. Rather, if you are beating the market it is by random chance.
      
      For every trade there is a buyer and a seller. Both think they are correct, and every time you trade, you are trading against goldman sachs and all the other investment banks who do this as a business and surely have loads of inside information.
      
      Reply
      - Darkseas August 23, 2014, 9:15 pm
        
        Andrew,
        
        You have misunderstood the research. While the vast majority of individuals underperform the market both short term and long term, not all do. The most well-known example is Warren Buffet, of course. Ted Hu may certainly be another.
        
        One reason that most individuals underperform is that they tend to buy high and sell low, taking money out of the market at the worst possible time to sell and putting it back in at the worst possible time to buy . Another is that they don’t devote much, if any time, to learning about investing and studying potential investments. I’d tell you that a good investor will spend at least an hour every day doing those things. And that doesn’t count doing one’s own taxes, else how do you know how various decisions will affect the tax that you will have to pay?
        
        Reply
        
        Mr. Money Mustache August 25, 2014, 11:52 am
        
        An hour a day or more? Definitely a great idea for active or professional investors. But for index fund holders who just want to be retired, it’s not necessary or even productive to do that much investment work. Heck, if had to work an hour every day for pay, I could support my family on the income with no investments at all, which would not feel quite like retirement to me :-)
        
        Darkseas August 25, 2014, 6:45 pm
        
        All true, but the sequence is reversed.
        
        First, consider how much time you’re willing to put into managing your investments. If you’re not willing to devote the time, then absolutely get a whole market mutual fund or ETF and let it ride.
        
        I say the sequence is reversed because this is a process that needs to start the moment in your life when you start saving money. Saving is nice, but if you invest successfully a time will come when your earnings on investments will be greater than the amount you can save. The better you are at investing, the sooner that time will come, and the sooner you can retire. It’s not everyone who earns a huge salary at an early age and can put aside large chunks of money.
        
        I definitely agree that if you hate spending time on investments, an individual can (but probably won’t) come very close to earning the market return, and that’s fine.
        
        But it wouldn’t surprise me to know that pretty much everyone wastes and hour a day in one way or another that they could easily put toward increasing their financial acumen.
      - Ted Hu August 24, 2014, 1:01 am
        
        It’s a matter of perspective andrew. and understanding of economic history. Let data be your friend instead of cliches and confirmation bias, going forward.
        
        Morningstar: http://s.wsj.net/public/resources/MWimages/MW-CR118_image1_NS_20140820172302.jpg
        
        Reply
  - Tim August 22, 2014, 6:54 am
    
    When life starts to get complex and unmanageable , three words of advise simplify , simplify, simplify. That is what this blog is all about for me being FI and living the life you want to lead.
    
    Reply
- Fandre August 21, 2014, 1:45 pm
  
  Its such an easy thing to do yourself . Why pay a quarter percent or so in extra fees for wealthfront to do it ?
  
  Last week I saved myself about 1K in cap gains tax by shifting some lots with losses of VEU to VXUS. Not exactly the same thing but they correlate strongly and I also wanted to broaden my international exposure to include more international small stocks anyway. Domestically you could swap VTI with Schwab’s total market ETF or you could buy VOO and VXF together in the right proportion for your desired asset allocation. The key is to swap between things that are highly correlated but different in kind enough that the IRS doesn’t consider the sell a wash sale. It leaves your portfolio allocations unchanged and defers cap gains to later.
  
  If you buy the VG funds in ETF form its so easy to do a quick market order sell/buy to do your own harvesting. (Only do market orders for securities with razor thin bid/ask spreads though) If you contact Vanguard they will convert mutual fund shares into ETF shares for you with no tax implications since they are just different share classes of the same underlying fund.
  
  This is my first post, BTW. This is a wonderful life optimization site with a great community!
  
  Reply
  - Mr. Money Mustache August 23, 2014, 8:28 am
    
    Exactly, Fandre! It is such an easy thing to do for yourself, IF you have the right personality and inclination to do those things. For others, the knowledge behind those paragraphs you just typed would take a lifetime to master.
    
    For me, it was ‘easy’ to buy a 1959 ranch house, redesign it, get a structural engineer and building permit lined up, and then rip off the roof and rebuild it into an entirely new place that meets my needs, while making over $100,000 in equity. Why does anyone put up with a bland suburban house made by a builder who doesn’t even know which direction is South?
    
    Oh yeah, because not EVERYONE is interested in construction. A 60-year-old acquaintance of mine does not even own a drill, and is defeated by the task of putting a large screw into a 2×6 because the required torque is too great with a hand screwdriver. This person will never rebuild a house.
    
    Similarly, many people find investing confusing, so they do none of it at all. This decision may cost them $500,000. Better to pay for some handholding and reap at least $450k of it, than to remain afraid forever!
    
    Reply
    - Ted Hu August 24, 2014, 12:54 am
      
      Finding the right investment advice isn’t all too easy either. But at least it’s getting cheaper.
      An Emerging Price War in the World of Investment Advice
      http://www.nytimes.com/2014/08/23/your-money/financial-planners/an-emerging-price-war-in-the-world-of-investment-advice.html?src=me&ref=general&assetType=nyt_now
      
      Reply
    - Kirsten August 25, 2014, 12:38 pm
      
      Well said. I think this blog sometimes gets taken over by the finance-obsessed and its’ a little offputting. What first appealed to me was that this was something that I, as a literary-minded person, could do. Save and simplify. I don’t want to learn how to spot macro trends or whatever it’s called. I want to swim, read my books, maybe try to write, plant some berries, spend time with friends and family because life is too short to spend doing something for someone else (unless you WANT to).
      
      Reply
Debbie M August 21, 2014, 10:43 am

On lump sums versus dollar cost averaging:

If you have the money now and the market is going up, lump sum investing is best. If the market is going down, dollar cost averaging is best. Since the market usually goes up, you don’t need a study to say that usually lump sum investing is best.

If you don’t have the money now (because, say, you are collecting it from paychecks) and the market is going up, dollar cost averaging is best (this is the rule of thumb we always hear about since the market usually goes up). But if the market is going down, a lump sum later will be best.

In 1995, the market was at an all-time high and there was a clear internet bubble. That bubble did not pop for FOUR MORE YEARS. Dollar cost averaging over any reasonable amount of time would have been a mistake. In 1929, the bubble popped and did not recover to its former level, not even counting inflation, for a QUARTER OF A CENTURY. Investing a lump sum then would have been a mistake.

I just try to diversify. Things tend to plummet at different rates, so you lose a little less by rebalancing a bit on the way down as well as on the way up. I also graph lines showing how much money I would have if my investments all made a steady 8 or 11% interest (two figures I’ve heard for historical growth rates), and if those lines are lower than my current ownings, realizing that long term, they are probably a better indicator of what I can count on in the future.

Reply
- SB August 21, 2014, 11:09 pm
  
  Here is an eye opener about “QUARTER OF A CENTURY”.
  
  http://www.joshuakennon.com/it-did-not-take-25-years-for-the-stock-market-to-recover-from-the-peak-of-the-1929-crash/
  
  Reply
- Michael August 21, 2014, 11:36 pm
  
  Another interesting note – in Siegel’s book, The Future for Investors, he notes that it took from Oct 1929 to the mid 1950s for the “Market” to have zero price move – but why buy the “market”. However, if one reinvested their dividends over the 25 years, the period in which the DJIA was flat (indexes don’t count dividends) had you invested in the stocks that made up the index and reinvested your dividends you actually compounded your money at over 6% annually. When the DJIA was back to par after 25 years, the dividend reinvestor actually had over four times the money as when they started
  
  Reply
  - Mr. Money Mustache August 23, 2014, 8:43 am
    
    Exactly! Many critics of the stock market conveniently neglect the fundamental reason it exists: the fact that you own a portion of real companies, which means a share of future earnings in the form of dividends. All stock return calculations should include reinvestment of dividends, and that will be part of the next article.
    
    Reply
Chris August 21, 2014, 10:55 am

VGTSX. Why even bother? I know most financial planners recommend international exposure but they’re just running down a checklist like they were trained to do.

James Collins has made the argument that you don’t need international exposure and I agree with his reasons. My own taxable portfolio is stuffed with international exposure and yet I only own shares in U.S. companies. How is this possible? Because companies like Apple, Google, Netflix, Priceline and Starbucks generate significant revenue overseas and will continue to do so as they expand globally.

I think VTSAX or VFIAX, although domestic, have significant international exposure built-in just due to the global economy.

Reply
James August 21, 2014, 11:35 am

There was another lump sum vs. dollar cost averaging study done recently by Alliance Bernstein that came to the same conclusion. Lump sum was the better strategy on average.

The New York Times did a write-up of the lump-sum vs. DCA “debate” recently, and I found this particular passage interesting. Talking about what the worst case scenario for lump sum investing would have been historically, they write:

For example, the worst 12-month period since 1926 began on July 1, 1931, during the Depression: The stock index lost 67.6 percent, including dividends, in those 12 months. Yet it would have taken only 39 months — 3.25 years — to erase all your losses, assuming that you had stayed in the market.

In recent decades, Bernstein found, the worst 12-month period began on March 1, 2008, when the market’s return was minus 43.3 percent. Many people bailed out of stocks then and never went back. But if you had stayed fully invested in the market, you would have recovered all of your losses within 22 months — and would be sitting on enormous gains today.

So they are saying, worst case so far is that you just sit on your stocks for a maximum of 3 years to regain the value. Indeed, for someone with a long investment horizon, that isn’t much to ask.

On another note, I’ve been tempted to make some strategic moves lately, but being honest with myself, I recognize that it is mostly greed, not risk aversion that motivates these kinds of thoughts. The idea of pulling out of the market right before a major crash, almost doubling my money and cutting years off my working career is very very alluring.

Thanks for the reminder that timing the market, even in subtle ways like dollar cost averaging, isn’t usually a wise choice. Congrats on the sale, also, btw.

NYT link – Hesitating on the High Board of Investing – http://www.nytimes.com/2014/08/17/your-money/hesitating-on-the-high-board-of-investing.html?smid=tw-share

Alliance Bernstein Link – Is Dollar-Cost Averaging the Cure for Market Jitters? – http://blog.alliancebernstein.com/index.php/2014/07/24/is-dollar-cost-averaging-the-cure-for-market-jitters/

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- MichikoMustache August 21, 2014, 6:21 pm
  
  Wow. Thank you for your response. That does relieve the stress of investing and make it very clear that sticking around for the long term is the way to go. Thank you.
  
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lee August 21, 2014, 11:44 am

MMM, congrats on the successful sale and the pile of cash. With a 4% distribution you’d be able to count on $16K/yr of the $25K you usually spend–but you have to be careful. If this market gets hammered short term you’d be sunk (gets to the sequence of returns discussion made earlier.) How about dropping about 2/3s of the windfall into safe and boring stuff (Money Market Funds, CDs, laddered short term bonds, TIPs) and then use your formula on the remaining 1/3d? This should last you about 15 years and give that investment pool time to run. Sexy? No, but you’ll probably sleep like a baby.

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Tawcan August 21, 2014, 11:49 am

Congrats on selling the house. It’s comforting to see that you have the same opinion as me on overall stock market. It’s never the “right” time to buy. If the stock market is high people think it’ll crash too; if the stock market is low, people think it’ll continue going down. The human minds are strange. Having said that the market P/E ratio is close to the historical average so one might argue the market is not overvalued.

In today’s low interest rates environment it just makes no sense to put the money in the bank and collect the interests. Very glad that you pointed that out. Some people do it though because they feel collecting 1% in GIC is “safer.” This is great for people like me that invest in bank stocks.

Are you investing the 10% REIT in regular account? Not sure how US taxes work but here in Canada holding REIT in regular account means you don’t get the full advantage of dividend tax rates.

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Dennis August 21, 2014, 11:51 am

I completely agree with you that real estate can be a great way to invest. You bring up a good point about residential real estate which is that it is time consuming for the busy person. I respectfully disagree with you about REITs. I think REITs have their place, but being a paper asset, they are highly correlated with the stock market. Much like the stock market, they also have a high degree of volatility. So if the goal for real estate investing is portfolio diversification, low volatility, and tax advantages, then there are better ways to passively invest in real estate and avoid the hassles of property management.

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Paul August 21, 2014, 12:04 pm

What you’re saying makes sense considering that you don’t plan to use the money for 30+ years. But what would should I do with a large sum (over $100k) that I plan to use in the next year or two as a down-payment for a house? I feel bad letting it sit in a savings account (at least it’s with Ally, growing at 0.84%). But putting it in VTSAX or another index fund for such a short period seems like too much of a risk.

Any advice would be appreciated.

Thanks,
Paul

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- Tim August 22, 2014, 7:04 am
  
  You may want to consider a short term tax exempt municipal bond fund. Vanguard has two the short term tax exempt bond fund and limited term tax exempt bond fund. Any interest is tax free however if you sell them and they have capital gains that is taxable.
  
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  - Tim August 22, 2014, 7:39 am
    
    Just to add a bit more. Money that you need in the short term you should not expose to risk. Maybe you should just leave the money where it is. Muni bonds and bond funds do have some risk , if interest rates rise they can go down in value, short term bonds have a lower risk than higher term bonds, but you could still lose some money. Is tax free interest on those bonds worth the risk ? Only you can decide that. If it was me I would leave the money where it is in the bank, but you asked for another option and that’s why I suggested the short term muni bond funds.
    
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Jon August 21, 2014, 12:09 pm

To be clear, money doesn’t actually do anything to put groceries in your fridge. It doesn’t lift a finger or sweat. In a capitalist society what money does is it buys you property rights. Property rights grant you the power to take the fruits of the labor of another person. They work and are paid a wage and benefits. This compensation is less than what they produce. The difference goes to those with property rights, who by and large are people that aren’t contributing. This is why using the 4% rule you can perpetually never work, yet you are able to acquire things. Real people are creating the value that you are consuming, it’s just they don’t get to keep the value they produce because they aren’t wealthy enough to have property.

I don’t say that to criticize people who save in a 401k because I do the same. I don’t see realistic alternatives. But I think it’s important to recognize what’s actually happening. Money doesn’t work, people do. The poorest Chinese peasant is not allowed to keep the full value he creates, we get it because we own the stock.

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- Early Retirement Extreme August 21, 2014, 12:41 pm
  
  It’s also important to realize that every time anyone invests (instead of consuming) they are increasing the amount of money companies can spend on capital. In a capitalist society, it is the capital in the form of buildings, machines, computers, … that allow other persons to work in the first place or at least capital increases other persons’ productivity tremendously. Few people are capable of being nearly as productive by themselves working in their own living room using their own resources as they are when they have access to capital. Capital is the difference with a job in an office with an annual $30,000 salary and selling knit-ware on etsy for $600 per year. In other words, investing is what allows those “fruits of labor” to be much larger than they would otherwise be. It’s the difference between having 100% of 600 bucks and 96% of 30000 bucks.
  
  I should also add that a structural problem appears once people have access to so much capital that the workforce becomes so productive that not everybody needs to work anymore. If people do not agree/desire that everybody should reduce their work hours, the consequence is that a few will live off of capital, some will be employed, and an increasing number will be chronically unemployed.
  
  Which is what we see.
  
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  - mysticaltyger August 21, 2014, 1:41 pm
    
    I think that last statement is true but also somewhat of an oversimplification. The chronically under and unemployed often are incentivized to not work because of government subsidies.
    
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  - Even Steven August 21, 2014, 2:34 pm
    
    Doesn’t this kind of go into what if everyone retired early talk? Which is further away than the sun in terms of everyone becoming frugal, saving tons of money, and calling it quits. I would say we are closer to everyone buying a big car, bigger house, and taking on a little more debt to make it happen.
    
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    - Early Retirement Extreme August 21, 2014, 2:46 pm
      
      Not really. With yields getting lower and lower as asset prices get higher and higher relative to the underlying values, it’s getting harder to get into the capital (“retired”) class. With productivity getting higher and higher (technology/automatization and outsourcing/colonizing), fewer and fewer people are needed. Furthermore, real wages are stagnating (because capital holds the upper hand—it’s all about maximizing shareholder value now), so aside from a few specializations, increased wage growth is not the way. The only way to bigger houses and bigger cars are, as you say, debt(*). This was attempted for housing in the mid-late 2000s. It’s being attempted for cars now. The outcome will probably be the same.
      
      (*) Alternatively, less brainless consumption. However, wise spending is certainly far from the standard mode of financial behavior.
      
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  - Jon August 21, 2014, 3:17 pm
    
    It’s also important to realize that every time anyone invests (instead of consuming) they are increasing the amount of money companies can spend on capital.
    
    Not every time. Sometimes when you invest that money is used for things other than tools to make people more productive. It can be used for instance to move production to China where environmental regulations are more lax and workers are more isolated and less able to negotiate a decent wage. This is the kind of profit that keeps our Vanguard funds climbing, allowing us to perpetually not work. It can be used to fund politicians that enact policies that make it more difficult for workers to get a larger share of what they produce. This can mean higher investment returns.
    
    Also it can be used to gain access to tools that are already in existence. My right to the property is the right to tell one person he can use the tool and another he cannot. Or I can tell a person that he can use a tool in one way but not in another. For instance where I work I have access on my computer to many powerful SW programs, but I’m not permitted to use those tools for other purposes on my own time that could lead me to make money.
    
    What’s really generating high returns these days I think has more to do with chronic unemployment that is the result of high productivity that you mentioned. Higher unemployment strengthens the bargaining position of corporations. People will work for less because of fear even if their productivity is rising. Dollar bills made of cloth don’t do anything, people do, and what they do is what is putting food on your table. Usually if they are poor their children will do the same. You can pass your wealth on to your children. The children of the poor will serve your children forever.
    
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    - Early Retirement Extreme August 21, 2014, 5:00 pm
      
      I did say CAN spend on capital.
      
      As a rough estimate, the current market P/S is about 1.2, so for each $100,000 you invest, employees create $83,000 in sales on average. The current earnings yield is about 5%, so 5% of the 100k goes to you, the investor, which leaves $78,000 to be paid out to various workers in the form of salaries all the way through the market EACH YEAR. So for every $100k that you invest you’re supporting 1-4 full time positions which otherwise wouldn’t be there.
      
      Whether creating and maintaining 1-4 jobs is a fair exchange for taking 5% of their productivity is a political discussion which I’m not going to get into.
      
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      - Jon August 21, 2014, 5:46 pm
        
        I did say CAN spend on capital.
        
        I apologize for misreading you. You are right that they can invest in equipment that makes workers more productive. But I assume you would agree that they can do the things I mentioned, and they do that to a large degree. The things I mentioned do often generate large profits, and they power the investment returns that allow owners like us to collect the revenue without working forever.
        
        My point being that if investors didn’t get a cut from handing their money over they wouldn’t hand any money over.
        
        True, but many societies have developed arrangements that allow them to develop without requiring investors. Chile for instance pursued that path. The result was a CIA backed coup backed by major US corporations that led to concentration camps and the reinstatement of investor rights. Investors get a cut without lifting a finger, so you can understand why if a society pursues a path that leaves them without their cut the major investors see to it that this is brought to an end, violently if necessary. After 1973 in Chile investors were back in business, so wealthy owners were able to continue to collect the money without working.
        
        Cuba is another example. They don’t pay investors anything. They say they get to keep the fruits of their labor without sending it to stock holders. For taking that stance they’ve had to endure a lot of attacks, a crippling embargo. Life is pretty tough there, but still better than many of their neighbors. Countries that have been compelled through violence to retain the rights of investors. Haiti, the Dominican Republic, Honduras, Guatemala, many others. You can imagine that if poorer people are able to keep what they produce, rather than sending the bulk of it to non-working already wealthy people, this means their lives can improve relatively quickly.
        
        So I don’t think it’s correct to say that people are free to quit and pursue a path that leaves investors without their cut. Vietnam, Latin American countries, and others have tried that, and they are met with military might that serves to retain the rights of investors. Violence is winning and the result is that you and I can collect money without working.
        
        Like I said earlier, I’m not saying that to criticize people that pursue FI. I am pursuing FI the same way. I just think when you say “money works for you” you paper over what’s really happening. There’s a long bloody trail that’s been blazed to keep money flowing to the non-working owners.
        
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        Andrew August 21, 2014, 9:05 pm
        
        There is always an investor class.
        
        In a complete communist state, the investor class is simply the whole population as they own the whole production chain collectively through the government.
        
        The whole population then benefits at the expense of those in that population who work.
        
        The difference is that in the capitalist society you typically have to earn the capital. In a communist society you are given the capital at birth.
        
        Joe_P August 22, 2014, 4:58 pm
        
        Even in a communist society there are those who “own” more of the capital that the average “partisan”. The military and the ruling politburo certainly get to enjoy a bigger piece of the pie.
        
        Frugality and enlightened self interest will always be the best way to pull everyone out of poverty while preserving our planet in my humble opinion.
- Huxley August 21, 2014, 2:38 pm
  
  Someone else came up with this idea a while ago. He had a big beard, and was called Karl something..
  
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- raven15 August 22, 2014, 8:42 pm
  
  That is the most Marxist thing I’ve read since I read Marx! I’m sure by the time my reply appears it will by far down the list!
  
  Understand that the Chinese peasants are not being taken advantage of, they are taking advantage. Twenty years ago famine was a real possibility in many parts of rural China. Today, it is only a memory. Every body is rich compared with the Chinese past, if not the US present. They have cars, phones, TV’s. An economy that grows at 10% compounded annually creates mind boggling wealth, even starting from nearly nothing. Sure the environment sucks utterly, but I think most Chinese people call that acceptable. In the mean time, people in the US are no worse off. Sure we aren’t improving like we used to, but with no competition that would still inevitably have happened sooner or later. In fact we are at the point where we have it so good we don’t know what to do with ourselves, as Jacob/ERE has pointed out.
  The point is, it seems clear to me that capitalism has created an expanding wave of wealth around the world. We have work to do to make this sustainable, but it is happening. The world is rapidly approaching a Marxist-style “utopia” where everyone can live a healthy, wealthy life by only working a few hours per day, leaving the rest free to contribute to personal, family, and social achievement. The *minor* difference is it will be achieved by enabling capitalism, not destroying it. Notably, the Chinese peasants were starving because of communism, but they are now profiting because of capitalism. My wife was born a Chinese peasant farmer and is a current member of the Chinese communist party, so I know!
  
  As an after note, I will say again that a lot of work needs to be done to make this sustainable. And also that “utopia” means people will be able to live great lives, not that they will choose to. People will be people.
  
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  - Jon August 25, 2014, 9:44 am
    
    I’ve never read Marx, but I’ve heard it said that he likewise marveled at capitalism’s ability to rapidly extract people from poverty and bring them to prosperity. S Korea is perhaps an even more dramatic case than China. This is not the “free market” variety of capitalism though that you see in places like Haiti or most of Africa. This is capitalism with heavy government involvement, like the US had during WWII, which was our period of most rapid growth.
    
    While China has had some success resisting the the pressure to do capitalism the way many investors in the US prefer (government out of the way, limited public service, etc) many other places have been too small and weak to resist such pressures. They have capitalism in what could be called the more “free market” form. Haiti for instance has almost no taxation, property rights vigorously protected, investors free to move capital on a whim, often with devastating consequences. These are the kinds of behaviors that feed our returns. Unlike China it’s not getting better in Haiti.
    
    I regard this notion of capitalism vs what was called socialism in China or the USSR as a false choice. There are plenty of alternatives to that. The fact remains though that “money” does not work, people do. People in Haiti make 30 cents an hour sewing underwear together, and when they try to increase it the Obama administration, on behalf of Hanes and Levi-Strauss, intervenes to block it. They’ve deposed their government in the past in an effort to block this sort of things all so the needs of investors are served, not the needs of the people. This is how you and I get to retire. Likewise our children needn’t work if we do it right. The children of peasants in Haiti will serve our children. Because money isn’t sweating, people are.
    
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Syed August 21, 2014, 12:39 pm

Great article and a great problem to have. I liked how you used the money to pay off some debt immediately that is the same attitude I have with my student loans. I look at it as a guaranteed return based on the savings in interest payments and once the loan is paid off I can use that money to turbocharge my current investments without missing a beat. Awesome post and wishing you continued success!

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Ree Klein August 21, 2014, 12:50 pm

Wow, this addressed an issue I’ve been personally struggling with. I rolled my 401k out from my employer plan about a year ago. That $360k is sitting in a money market fund over at Vanguard doing squat. I want to pull the trigger and invest it but I just can bring myself to do it because, for some unexplainable reason, I am certain that the minute I make the transfer the market correction will begin and it will be a doozie!

All of your rationale for investing immediately makes so much sense and in hindsight, it would have been spot on. However, now my fear is even stronger. I never pulled out of the market or stopped investing when the economy started crumbling in ’07. I suppose it’s the size of the lump that makes is so scary.

Ugh, what to do?!?!??!

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- jestjack August 22, 2014, 5:45 am
  
  Wow $360K sitting doing zip….that’s crazy. I can understand your angst but think for a minute…when will you actually need the money and what will be the purpose of the money? And if the market did correct…would you have the will to go against the tide and considerate an opportunity and buy? Most folks do not have the will. I would suggest “dipping your toe in” by coming up with a plan to commit so much per month from your $360K that you are going to “put to work”…say $10K and increase it if and when you feel more confident. You may even want to look into individual stocks that pay hefty dividends and have proven track records. My favorites are telecoms AT&T and Verizon…good dividends and EVERYONE has a cell phone which is where the growth is. And now folks want access to the internet ON their phone….more money. I recently interviewed a rental applicant and her cell bill was $200+ per month. Or you may want to look at utilities Duke and Southern Company…solid companies with good dividends…and everyone needs electric…I do worry a bit about the indes fund and mutual funds in general because a large portion of their success has been from Apple and it’s price gains. If they quit coming up with pricey gadgets that folks HAVE to have ….”the bloom is off the rose”…
  
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  - Ree Klein August 22, 2014, 9:31 am
    
    Thank you for the bucket of cold water and the suggestions, JJ! I do know it’s crazy but for some reason I just can’t pull the trigger. Your suggestion of periodic/regular investing until it’s all invested is probably the strategy that will work best for me.
    
    As for picking stocks, I have done some of that but hold very little in individual stocks any more. I have profited by doing so, but I think mutual funds are a better fit for me.
    
    Thanks again for the insight and prod!
    
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  - MarciaB August 22, 2014, 1:40 pm
    
    And for heaven’s sake at least put the cash into a savings vehicle that earns at least a little something! Ally Bank pays 0.87%, MySavingsDirect pays 1%…you get the picture. It still ain’t much but it’s probably 5-10 times more than whatever the VG money market is paying you.
    
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- slay August 22, 2014, 8:25 am
  
  i follow a preset allocation (find your own) that allows me to sleep at night–some long term bonds, short term bonds, some stocks and the rest in real estate/hard asset with either paper or direct investment. your comment shows you’re probably not comfortable going all-in into one investment, so break it up into an allocation you’re comfortable with then use jestjack’s advice and ease in. the allocation means not everything moves in the same direction at the same time and you’ll have some dividends and interest to reinvest or live off of.
  
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Heather August 21, 2014, 12:54 pm

I heed your warning that cash in the bank is bunk. But here’s my question: What about if you’re saving up for a downpayment on a house? We will probably want to use this money in 2 years or so. In that case, isn’t the bank the best spot for it? I looked into Betterment and was told by a kind financially minded cousin that I shouldn’t even bother investing our nest egg if I wanted to use it in 2 or 3 years. Do you all agree with him?

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- slugline August 22, 2014, 7:06 am
  
  MMM had a blog post that should address your question:
  http://www.mrmoneymustache.com/2011/06/07/where-should-i-invest-my-short-term-stash/
  When I was saving up my house downpayment, I used a short-term bond fund.
  
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  - mschaus October 26, 2014, 10:29 am
    
    An extra trick on CDs that MMM didn’t mention is using a 5-year CD even if you only need the money in 1-3yrs. Often the higher rate of return outweighs an early withdrawal penalty if you keep the money for at least ~6-18months (be sure the check the math for your bank), and you come out ahead compared to a savings account or 1yr CD. Ally Bank is really good for this, though a little less now that they have increased the penalties; there may be even better deals out there.
    
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Marco August 21, 2014, 2:38 pm

MMM Can you take a screenshot once you have invested the lump sum?

I am in almost the exact same situation as you and am very bullish long term on equities. However, I just cannot make myself pull the trigger and invest in a lump sum.

I have put the order in and got as far as the last click button to put in the order but have backed down several times.

Please, please let us know if you if you have second thought and back out of lump summing it!

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- sobezen August 29, 2014, 3:50 pm
  
  Agreed! Really appreciate the news and articles MMM.
  
  Hoping you can share what your final investments elections are with the rest of us Mustachians. Thank you ad congratulations.
  
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Christophe August 21, 2014, 3:20 pm

What about Japan circa 1988 ?

http://www.forecast-chart.com/historical-nikkei-225.html

This is what really worries me : stocks doesn’t always go up. Sometimes, seldom, it really is different/bubble popping. I hear you, but I can’t get Japan out of my head. Any comment on that graphic / Nikkei stock index?

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- Jason August 22, 2014, 8:56 am
  
  I’ve had the same thought about the Japanese asset price bubble. You’re right, the Nikkei has been the exception to all the standard trends and predictions. Had you been Mr. Money Mustache in Japan in 1988, none of the “rules” about buying and holding would have worked and you’d be in trouble. I’m sure that’s exactly what the pessimists among us think: that the USA is about to cease being the world power it has been for so long and that we’re the equivalent of the Dutch in the 1600’s or the British in the 1800’s: that our heyday has come to a close.
  
  They may be right. But probably not.
  
  -If a permanent depression is right around the corner, then we’re all in trouble. There’s not much you could do about it right now anyway. If you REALLY want to behave as though it’s Japan in 1988, then pull everything out and put it all into Treasury bills or gold. If you’re wrong, you will lose a LOT of money you would have made investing instead.
  
  -I favor a three index fund portfolio as outlined in the Bogleheads philosophy. If you’re worried that putting all your eggs in the USA’s basket is too risky, buy more Vanguard International Index Fund (VTIAX) and less of the domestic. Returns haven’t been quite as high historically, but dividends are higher and it’s probably more diversified.
  
  -Very rare catastrophic events could happen to anyone, anywhere. I think some other horrible thing befalling someone (an illness, an accident) is probably more likely than a permanent economic depression. You can’t live your life in constant fear!
  
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- Michael August 22, 2014, 9:52 am
  
  The thing about indexes as a measure of performance is that the index is a basket of stocks. A basket of stocks going down on average does not mean that all stocks went down or that a simple bit of research would not have greatly increased your performance.
  
  When you hold an index you HAVE to hold losers unless or until the people that decide what stocks are in an index decide to make changes. Take GM when it went bankrupt – it was in the DJIA until it had lost almost its entire value. However, had you owned each Dow component individually you could have cut that loss way earlier which you then end up out performing the index just by trimming losers much earlier.
  
  The Nikkei, much like the DJIA, is a price weighted index. For those that do not know what this means – it means that the higher the price of a stock’s shares the more influence it has on the movements of the index itself.
  
  In 2013 the divisor for the DJIA pricing worked out in such a manner that a $1 change in the price of a stock moved the index by 6.42 points.
  
  Think about that for a minute – take Visa (V) trades at $217 as I type this. If Visa makes a $2 move higher and nothing else in the DJIA changes at all, the price of the index moves up by 12.84 points. That $2 move in Visa is 0.9% of a change in price.
  
  Now, if Visa has a 4:1 stock split and the price changes to $50 per share and then the price moves up $2, or a 4% move, the DJIA overall still moves 12.84 points.
  
  Does it make any sense that one stock can barely change in price and greatly move the index while another stock with a lower price would have to make a huge move in order to have the same impact on the index pricing?
  
  The indexes are an indicator at best, but often a poor one. Imagine if Google was in the DJIA. It trades at $582 per share as I type. A 1% move in Google would drive the Dow to move 37.36 points. A stock like Pfizer, $29 per share right now, would have to change in price by 20% to have the same impact on the DJIA. The Nikkei has similar problems including a review and possible changing of constituents once per year along with a change in their divisor.
  
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- SB August 23, 2014, 12:36 pm
  
  Valuations do matter. At peak of Japan bubble P/E was nearly 70 (link below). From US stock market point of view, imagine DOW going from 17,000 to 60,000 but earning stays same as where we have today!
  
  http://www.forbes.com/2010/05/21/comparing-financial-bubbles-personal-finance-japan.html
  
  I guess, it’s good to diversify internationally and if US market starts going that crazy, rebalancing to other markets would help.
  
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freedom52 August 21, 2014, 4:30 pm

Having felt the sting of losing money in the stock market, I have become risk adverse. Watching the value of your portfolio go down for months and even years is very difficult. So buying in one lump sum and just letting time do its thing is easier said than done, at least for me. Now I would rather forego losing potential gains than losing real, earned money. I will buy on dips and sell when I meet a set %. In the meantime I will hopefully collect some dividends. It’s not a timing game, it’s a waiting game. I look forward to the next market correction, only because it will create larger bargains.

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Mike August 21, 2014, 6:41 pm

What if you used your $400k as security on an offer to buy VTI at $103 per share on Sept 20 2014 in return for $0.95 per share? In other words, VTI is at 103.16 as of right now, so you offer to buy 3,883 shares at $103 per share 1 month from now in return for a cash payment of $0.95 per share or $3,689. If VTI is over $103 in a month, you keep the money and if it’s under $103 you buy the shares at $103 and eat the loss. If you like VTI at it’s price now, $$103.69, you gotta love it at $103 flat. I’m talking of course about selling put options against the Vanguard total stock market ETF. If you get exercised you buy/hold your shares and if you don’t you make another offer on September 19 to buy in October, in return for another cash payment. What do you say?

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- Goodwalkspoiled August 21, 2014, 8:27 pm
  
  You have described the sale of a cash secured Put option, or naked Put. Remember, if the market falls, you would be obligated to pay $103 which could be far more than the market price of VTI when the buyer ‘puts’ his stock to you.
  
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  - mike August 22, 2014, 6:00 am
    
    Yes. But if your intention is to buy and hold, you don’t care.
    
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tim August 21, 2014, 8:33 pm

if i were you id diversify into things like bank loan funds, maybe high yielding BDC’s. one thing i would do and i know youre going to hate this but i’ve been reading a lot lately on technical analysis and fibonacci levels and eliot wave theory type stuff and i would set stop losses on anything i bought. i would give myself a wide berth though.
im no expert on it but it does look like s&p can get to 2140-2160 range.
i know this stuff goes against the bogle heads and buffet and others however on further review i can also tell you that many more people follow technicals and there is a lot of validity to them. if you choose to ignore them which i do with some of my money my favorite investment over the last 10 years has been FPA crescent fund. over time it out performs the indexes and its unique in that its manager can invest in anything he wants. he has owned stocks, bonds, hotels in south east asia, farmland in america. he has short and long positions as well. the mangers name is steve romick. he has beat my vanguard total stock market index over the time i have owned it. again i know it goes against basic investing principles to some degree but i consider having a portion of my portfolio protected and a portion allocated to try to gain some greater returns all part of diversification. but investing is an individual thing. just sharing whats done well for me and what allows me to sleep at night.
congrats on all your success and thanks for sharing it all. you are inspiring.

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Scrnplyr August 21, 2014, 10:41 pm

Not only are we all in on this market but we’re ready to ride it out for at least the next 10 years be it bull or bear. Why? Because we’ve been investing for 20 years and we’ve never once been able to time the market. Whenever we thought it had topped out we lost out on substantial gains and we never got back in in time to enjoy the bounce back.
The only consistent gains we’ve made have been on the buy and hold tax deferred accounts and those numbers will be the foundation of our retirement.
The US stock market is the only game in town and that alone guarantees consistency of gains.
BTW I couldn’t be more thrilled w the last few months of this market!!

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- tim August 22, 2014, 2:37 pm
  
  most of my holdings are in vanguards total stock market index and will continue to be but to think that guarantees gains to me is short sighted. IMHO i think its wise to have a plan should the landscape change. for the first time ever we had government intervention of massive proportions the results of which are unknown. im not selling anything at the moment but i do have a plan in place to protect my money. i dont scrimp and save and sacrifice to leave it all out there without an escape plan. this time may prove to be no different than any other time in the past but we dont know that yet. we may crash, we may not, i dont pretend to know but i do know that for me i have a plan in place for any ugliness that may occur or for any period of prolonged stagnancy. i think its a must have for any and all portfolios.
  also conssider not only the end results of all the QE nonsense but the world is vastly different from now than and any other time. the results of technological changes going on now are also unknown and those changes are incredibly rapid. dont panic but lets be careful out there.
  
  Reply
Michael August 21, 2014, 11:14 pm

Just put it all to work in equities. Pretty easy to build a portfolio of 3.5% to 4.5% yielding stocks that will also give you capital appreciation. Even if prices are high, as many people believe, most stocks don’t suddenly cut or stop a dividend because the market goes up or down.

High quality mid to large cap stocks and you could have an ever rising income stream that could start off at $16,000 per year. If you don’t spend it, just pool a bit of cash and buy most equities or pool it for another rental in a few years.

People get too focused on price when, in the long run, you can really miss out due to time out of the market. Plus, any supposed “worst time ever” are quickly forgotten. The 2009 lows are but a mere speed bump today. Obviously it would have been nice to buy at or near the bottom.

However, pretend you instead bought at the 2007 highs with the same $400,000. If you built a nice 3.5% first year portfolio that gave you 6% annual income increases (none of those two things are hard at all), your first year income would have been $14,000. Your income this year would be around $21,000 plus any capital appreciation or gains from reinvesting those dividends into more stocks or even other investments including another property. Or, you could have just increased your family’s lifestyle (more recreation) or given more to charity or the local community. Your cash out in the form of dividends assuming you did not reinvest, would be around $125,000 over that period of time. Lots that can do for your family or charity or just more savings for any unforeseen life circumstance.

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- bradley August 23, 2014, 9:45 am
  
  agreed.
  
  many, if not most, look only at the capital value of their portfolio and judge success accordingly. this might explain why so many erroneously compare the market to a casino, or claim it is rigged. (of course it is–but you too can be on the winning side.) i too check the current value quite often — human nature is always powerful and big numbers are fun.
  
  what i have learned, however, is to judge success by looking at the income stream, which is far less volatile, influenced far more by hard-nosed business people (deciding to pay out dividends) than the average clueless stock market moron. i have no idea where the capital value of my portfolio will be in 1 month or 12 months, but i can predict with a fair degree of certainty what the level of income will be–and over the 20 or so years i’ve been doing this, that has always risen very predictably.
  
  for example, on the last day of july my investments ‘lost’ close to $25k of value. my income, however, went up because some bonds paid interest (re-invested) and some dividends came in (also re-invested), increasing my annual income by $20-30 on that day alone. now (mid-august) the portfolio has ‘gained’ most of the ‘lost’ value back (no one could predict that), but over the past few weeks my annual income has increased by another $50-100 due to more dividends coming in (re-invested) and more purchases on my part. in fact, due to the decline in value, the dividends i have received over the past few weeks have purchased even more shares, entitling me to incrementally more income.
  
  this is dead simple, and anyone can do it. all it requires is a bit of a perspective shift.
  
  most of my portfolio has been built over time, through regular saving, essentially DCA. earlier this year i received a significant windfall, however, so was faced with the lump-sum dilemma. within a matter of weeks i had figured out where i wanted to put it, and did so, even though all the dumb shits on marketwatch, et al., were worrying about the over-valued market (as they always do) and calling for the inevitable correction ‘any day now’.
  
  Reply
Happyback August 21, 2014, 11:25 pm

Congrats you two! What a smart move! Thanks for being brave enough to share…you KNEW others would question your choices, eh? ;)

I did this last month…sold the house, took the equity and paid off all debt. Then chose what to do with the difference. EVERYONE has an opinion.

I’m just happy for you two. Great team work. Great celebrating that you’re done with a massive project-success!

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Moving into my Van August 22, 2014, 12:15 am

Thank you for this post. I’m in the process of selling my house (with a potential $250K tax free profit). I’ve been wrestling with the DCA/Lump Sum thing and this post has swayed me to just take the plunge. I plan on leaving the money in there for decades so it really does make sense to just buy now and rest easy.

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Ben August 22, 2014, 7:46 am

Question to the masses. What if, say, you sell your house and make $30K profit. Your plan is to move to a new city, rent for a year to test the waters, then buy another house when you find the best neighborhood. What do you do with a large sum of money that you are planning to use in the next year, or 5 years for that matter?

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- Happyback August 23, 2014, 8:29 am
  
  I would keep that $30K in an interest bearing CD or highest yield Money Market (no fees). It won’t earn much, but it’s going to be avail when it’s wanted, and it won’t be sitting totally idle. A Money Market allows you to get to it faster if you find a great place sooner than you think you might.
  Nice job making money on the house!
  
  Reply
  - tim August 23, 2014, 7:11 pm
    
    i like that idea happyback. cash IS a position within a portfolio. that is often forgotten
    
    Reply
- sobezen August 29, 2014, 3:53 pm
  
  Why not buy more VTSAX, let it grow and sell only what you need in the future?
  
  Reply
Mary August 22, 2014, 11:35 am

I’d love to hear more about MMM’s thoughts on a naked put for the fund he likes.

I’m also wondering if diversifying some by perhaps just buying some land would be a good idea? We’re struggling about putting more money into the stock market. We pretty much “have” to with DH’s 401k that comes with his job. But anything over and above (and we have some thankfully) – it just feels dangerous to have everything in the stock market with the country’s policies of more and more debt. I wouldn’t invest in a company that runs its business like the government and unfortunately much business, is tied to how well the US economy is. It seems like a house of cards to me.

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- Jeff Carr August 22, 2014, 4:36 pm
  
  Land is a nice long term bet but land prices seem to be sky high right now. Especially if you want to buy tillable land. Farm land is Iowa is selling for 8k-9k per acre. It is kind of crazy. Land is a good long term play if you think inflation is going to be high. Also, they aren’t making any more of it.
  
  Reply
Rick August 22, 2014, 11:58 am

For a good book the benefits of diversifying your investments and regular rebalancing try “Unconventional Success” by David Swensen. It’s a bit dry though. He recommends the following index funds S&P 500, Developed international, Reit, US Treasury, US Treasury inflation, and emerging markets.

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bericm August 22, 2014, 1:48 pm

I sympathise; I had the same conundrum last fall. Sold house, had bags of money and market was topping out (everyone said). I decided to fall back on what I knew well: a 17 year history of a variation on the Dow Dogs theory applied to the TSX60. It served me well through the 2008 debacle and, although past performance is no indicator of future performance, I decided that this was still my best bet. I’ve got 80% spread across the 5 top-yielding TSX60 issues (excluding recent income trust conversions and gold miners) and the rest across 5 Dividend Aristocrats I like. Why? Because I understand it and it is uncomplicated, and it works.

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Dorf August 22, 2014, 4:26 pm

Great post.

I am in a similar position. I recently retired and have 175K of drop money that I need to invest and I won’t be able to access without penalty for 13 years. I had planned to divide the money in half and invest half in ETF SDY plus another half in ETF MOAT. Then I used the excellent link: http://apps.finra.org/fundanalyzer/1/FA.aspx

When I compare SDY and MOAT to MMM’s VTSAX, I find that my strategy of two complimentary ETF’s do not gain as much as the single Vanguard ETF. And to make it worse, I will pay more in fees!

Can the collective Hive mind comment on the above?

SDY is an ETF that is a collection of dividend producing stocks who have only maintained or increased dividends over the past 25 years.
MOAT is an ETF whose stocks have built up a competive advantage in their industry that will be difficult for others to overcome.

Curious

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Emily August 22, 2014, 5:37 pm

This is my first time commenting on this forum. I have been an avid reader of Mr money moustache for over 3 years. Firstly I’d just like to say an incredible thank you for your wonderfull forum, it has helped me to keep on track when everyone around us has been spending on non income producing assets. We’re in Aus and my partner and I met 7 years ago today with no assets, 22 and 26 yold respectively. When we first got our home my partner had limited knowledge of savings but was willing to try. when i first suggested putting an excessive amount onto our mortgage about half our income then she said ” you and your haired brain schemes!”In that time we have managed to own our home outright worth 400k, have 150k in our super (401k), 100k in shares(40k cap gains) and built up an investment portfolio of (750k) bringing in 43k net after allowing for all rental expenses including someone else to manage. Our total investment debt remaining is 250k. Our aim is to get out of the rat race in 4 years when we will hopefully be able to pay off our investment debt. We will be going to 1 income due to first baby due next week. We are now aged 29 and 33 respectively.

Just wanted to share my story as so many young people say the market weather it be property or share market is overvalued and that they didnt have a fair go. We have worked hard, saved hard and hav FI in sight. We only invest in property or shares. Personally I like a mixture of both. Property I feel that I have more control withe the purchase of, we are not after capital growth only income. We have done extensive research on areas first, traveled round nz looking for good areas, not good properties. Then when we returned to aus with our chosen area we looked for properties we have 7 out over 4 years of looking, 5 great deals came in one year and one just purchased. There is a lot of looking with no result and every time we have purchased we had to move fast with purchase after 3 days of listing. Still a fan of shares and ours are a mixture of blue chip dividend paying and small shares.

Best of luck to the moustache family and I look forward to reading your blog. Ps for disclosure reasons we had a windfall gain of 100k from an inheritence in 2012 which we put mostly into property. (We also gifted 15k of this to my partners sister to get them into their first home)

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Andre August 22, 2014, 10:11 pm

The normal stock chart lay people look at is scary…there’s a STEEP increase in the 90s with seemingly huge swings in the 2000s. But what people fail to realize is that businesses don’t run in the absolute numbers shown in stock charts. Revenues, bottom lines, expenses, etc all change by a percentage.

So doesn’t it make sense to look at our stock charts in percentages as well? A lot of traders think so too and use a logarithmic stock chart. Check it out…look up the Dow Jones Industrial Average on Google Finance and set the time range to “All”. On the lower left hand corner, click “settings” and change it to logarithmic. Suddenly things don’t seem so precarious do they? You see a nice, even, and steady trend up.

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Joe August 23, 2014, 6:41 am

I am planning to sell my place in the spring of 2016. Can anyone share their experiences “selling by owner” rather than “by realtor.”

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Darin August 23, 2014, 2:38 pm

Markets can be interesting. Using investment as a way to essentially spread out earned income over a larger time period and avoid high marginal tax rates as well as taxes on earnings is great, but in and of itself, a market can take a while to rebound and not pay proportionally higher dividends during that time.

I think (and someone can correct me if I’m wrong), the DJI did this from ~15 years, from 1965 to 1980.

http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

http://observationsandnotes.blogspot.com/2010/03/valuation-price-dividend-ratio-history.html

The real value declined by ~70% while the dividend yield only increased by ~40%, which meant an investor was out the difference until the market recovered during the next 15-year period. Bond/CD yields were I think much higher during the same time period.

Of course this doesn’t mean people shouldn’t invest, just that a particular market doesn’t always go up. Some times it goes up, sometimes it goes down. The sames goes for bond, real estate, and most other markets in the aggregate. A well balanced portfolio of well balanced investments is probably the best bet.

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Slowpoke August 24, 2014, 9:22 am

The value investor in me says “Ignore the noise of macroeconomics when making investment decisions” and while CAPE has a reasonable track record of predicting future returns, individual valuations of whatever you plan to buy are much more important. The Geologist in me say “Peak oil (& other resources too) scares the shit out of me” and unless we can get population & per capita consumption under control, we are in for a long & sustained period of declining standard of living/quality of life.

Anyone who thinks growth in anything tangible can go on forever should really see this: https://www.youtube.com/watch?v=eOykY2SMbZ0

If you’re convinced that over the long haul, the stock market will go up forever, please explain to me what has happened in Japan over the last 25 years and why that’s not a relevant to the US.

I am in no position to predict how technological advancements will change our future, but I do know that some things CANNOT be substituted for. Water is one, Phosphorous another. Food production per capita is declining. Oil production per capita is declining. If it takes more and more resources and labour per person to provide food and shelter for ourselves, that means there is less available for everything else. These patterns will almost certainly get much worse before they get better.

Anyone can draw a trend line on the S&P or DJIA over the past 100 years and extrapolate that line into infinity. But before you do that, stop and think about what has enabled the growth we have seen. One of the answers is cheap, abundant resources which are quickly becoming scarcer. The investor party will not continue indefinitely.

Economic theorists are probably the most dangerous & powerful breed of people in our world today. Their theories control mainstream thinking and policy decisions, but are built on models that are shaky at best and rely on unrealistic assumptions which completely ignore the physical limitations of our planet.

Check out Jeremy Grantham’s interview on Charlie Rose. Few people are as well-informed and realistic about what’s going on than he.

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- Mr. Money Mustache August 25, 2014, 12:13 pm
  
  I hear you, Slowpoke, and ending the trend of grinding up unsustainable amounts of our own planet in search of cheap GDP thrills is actually the secret reason this blog exists.
  
  But I maintain my outrageous optimism on economic productivity. Think of all the business opportunities to be had in converting the entire world off of fossil fuels, and to a nearly all-reusable suite of products and materials? And what kind of boost will we experience as gradually shift to cheaper, inexhaustible solar energy and continue to gain overall efficiency through the still-barely-tapped power of the Internet to put our best minds to use more effectively?
  
  Still at least 100 years of solid growth to go, AND paired with rapidly declining environmental destruction and a stabilized and eventually declining world population of humans. You heard it here first ;-)
  
  Reply
  - Slowpoke September 6, 2014, 12:25 pm
    
    All who come here are extremely grateful for your blog, and I’m sure most have made changes to consume less, save more and live better. Your blog is probably the best thing I’ve encountered in the internet, period!
    
    We’ll just have to agree to disagree about growth, as for how to allocate investable capital? It shouldn’t really affect decisions on that. It might just be prudent to assume lower returns going forward than have been seen in the past.
    
    Reply
dave August 24, 2014, 12:39 pm

hello

Maybe do like the late great investor John Templeton did. He liked to buy stocks that everyone including the highly paid hot shot analysts hated. He would look for stocks that are 90-90% off their recent highs. That way if the overall market goes down they won’t go down as much. He would buy a basket of these and his thinking was a few would go to zero but the others bounce and recover sometime 200% off of their already beaten down rock bottom price. It’s called the bad to less bad investing and can be protective in this kind of market. A lot better than buying high flyers that everyone already loves and have purchased. Of course, you don’t invest your entire portfolio this way just a portion.

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Wade August 25, 2014, 9:17 am

Congrats on the sale of the previous house.

As a few mentioned, no bonds? At 43, we have 35% in a mix of tax-exempt and taxable bond index funds. I keep hearing that bonds are dead, but they serve a valuable purpose in our portfolio.

It isn’t much fun to play the bond side of things during this long bull market.

Thanks for all the good information.

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George Burdell August 25, 2014, 1:31 pm

Studies indicate that lump sum investing (LSI) has produced higher returns (over dollar cost averaging) 66% of the time. So to help with the psychological impact lump sum a portion and DCA the rest. Of course your investment should go to a well diversified asset allocation.

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Daniel August 25, 2014, 3:45 pm

Great article, as usual. There are 2 things that I disagree with:
1) Article assumes over the “long term” the stock market will go higher. As Japan shows, that’s not necessarily the case. The Nikkei was around 39,000 in 1990 and now,34 years later it’s at 15,600. I am not stocking cat food, gold and guns. But one can’t guarantee that stocks will only go up. Same was said about the housing market.
2) The article doesn’t look at asset allocation, it seems to assume one invests 100% in stocks. If so, investing lump sum or over time in stocks both make sense and it can be debatable which is better and when. But if one has a certain target allocation in stocks and the rest in other investments (bonds, real estate etc.) maintaining that target should be the goal, rather than the timing of investment.

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Robert August 27, 2014, 6:55 am

Dear MMM and readers,

in finances it is often dangerous to make decision only based on historical data and general assumptions. With respect to the stock market optimism, in particular in a ripe economy, I recommend to study the Nikkei index since 1990:

http://en.wikipedia.org/wiki/Nikkei_225

The picture is a bit brighter if throwing in dividends, but still nothing to write home about:

http://www.wallstreet-online.de/diskussion/1177704-1-10/durchschnittliche-dividendenrendite-nikkei-225

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Dragline August 27, 2014, 12:06 pm

Rather than allocating the whole thing as if it were a stand-alone investment, wouldn’t it make more sense to balance it out with what you already own?

Other than tax issues, I don’t see any reason to treat this new chunk of change any different from the old chunk of change.

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blackomen August 28, 2014, 5:11 pm

I work in the investment industry.. our of the many portfolios our firm managed, the one that performed the best was a variation of the 60/40 stock/bond portfolio. We bought 2 Etfs and it has outperformed everything else we’ve got with a fraction of the effort.

I’m a firm believer in passive investing and not trying to time the economic cycles. I also believe sticking with a somewhat fixed asset allocation and gradually adjusting it over time to reduce risk as you age is a more sustainable and less stressful strategy than constantly trying to time the market or finding the next best thing (although there’s nothing wrong with allocating a small portion of your net worth to do the latter.)

Here’s a great article on a few popular asset alocations:

http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/

I personally use the permanent portfolio for my own investing from that page but it’s important to find one that will provide decent returns for the level of risk you and your wife are willing to take.

It may take some work to research the right asset allocation but it’s magnitudes easier than timing the market and reading economic cycles.

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Eric August 29, 2014, 2:15 pm

The belief that “the stock market always goes up” most recently became popular in 90’s. It was also popular in the 60’s before the market spent 15 years going nowhere (accounting for inflation). In fact, if you look at other stock markets e.g. Japan there are MANY examples of going nowhere for 10, 20, or more years.

Check out http://www.multpl.com/s-p-500-price/ and tell me you want to be the guy who invested a lump sum in 1968 and didn’t see a inflation adjusted (read: real) return until 1992!

I’m reading Shiller’s “Irrational Exuberance” now and it is pretty mind blowing.

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A.N. September 3, 2014, 4:51 pm

Those total index funds are market capitalization weighted, resulting in the majority of assets being allocated to large company stocks (currently about 72% in VTSAX and 80% in VGTSX). While (depending on your definition) that accurately represents the whole market and certainly isn’t bad investment, you may want to consider increasing the proportion of small and mid cap stocks as they tend to produce somewhat better returns in the long term at the cost of somewhat higher volatility. See http://www.morningstar.com/products/pdf/MGI_StockResearch.pdf

At Vanguard, check out VSMAX and VFSVX, for example. Working with these four indexes only, a 55% total vs. 45% small cap allocation will bring down the ratio of large cap stocks to roughly 40% according to the latest Morningstar data.

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Daniel September 5, 2014, 3:39 pm

Ever heard or considered Betterment or Wealthfront? They typically invest in Vanguard ETF’s and diversify the portfolios well. Some leaning away from home front bias, which makes some people uneasy. I can see the benefit in automatic rebalancing based on percent drift and risk adjusted return optimization. These items and convenience may offset the small .15 to .35 fee.

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Dustino September 12, 2014, 3:21 pm

MMM,

Why only 10% in Lending Club? According to your Lending Club Experiment page, it looks like you’ve been invested in notes there for almost 2 years now, and are seeing 13.09% returns. I’m surprised you still consider that an experiment; IMO that is proven.

BTW, love your blog. Keep doing your thing!

Thanks,

Dustino

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Mike October 17, 2014, 1:31 pm

FYI, VTSAX (Vanguard Total Stock Market Index) has about 4% exposure to REITs already so you are actually exposed at 14% with a 10% REIT fund.

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Federico August 4, 2015, 1:43 pm

Hello,
I’ve been reading through your blog (super interesting) and I found out that you started recommending VTI ETF very strongly in the older posts but now are recommending other funds like VTSAX.
I am new to the whole investing in stocks thing so the question is, is this a good time to invest in VTI (which I would love because it sounds deadly simple and it is available through my bank, I am european) or should I investigate more into the Vanguard funds road? Thanks for the help!

Best

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Jay January 6, 2017, 8:05 am

Question hopefully someone can answer.
I could sell my house for a profit of 23K and move closer to work. Would it make sense to sell it from a mustachian point of view?

Reply
Trevor M April 7, 2017, 8:35 am

The Vanguard study link does not work. FYI.

Reply
Ken April 13, 2017, 3:47 pm

Just a follow up on how your investments did since you posted.
Best,
Ken

Reply

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