Safest way to beat inflation on an after tax basis.

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Lionheart1776
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Safest way to beat inflation on an after tax basis.

Post by Lionheart1776 »

Quick background, I'm twenty-one years old sitting on three years of expenses all sitting in a non-interest bearing savings account. I am now hitting the fastest rate of accumulation ever, about a year of expenses added every four to five months. I always though at his point I would be primed to take more risk, but I've become addicted to the feeling of comfort and security that having the money there provides. My parents lost the house and half their retirement savings in 2007 and struggled for years later.

The market is at and all time high, interest rates on the rise. None of it is confidence inspiring especially with my background. So I am just looking for the safest, least volatile way possible to get a 3% after-tax nominal return (3.75%) gross yield until some kind of recession or crash happens and I feel safe buying Equities for the future.

I've considered: California municipal bonds, Vanguard Wellesley, MUB (All munciptial bonds), II savings bonds at 2.86%, 5 year cd at 2.5% most of these don't quite hit it, Wellesy does but is quite volatile. Is there any investiments that throw off 3.75% a year without flucuating more than 10% in any given year?

Also for equites, I wouldn't be oppsed to buying from a sector that is "on sale" right now even with higher flucation, if it had more general upside because of it's current dis-favor. But have yet to find one, they all seem sky high.

Any guidence would be greatly apprecatied, I am not looking to sponge off anyones hard work and research just a nudge to an area to look into to do my own research.


Thanks,

Bruce

Scott 2
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Re: Safest way to beat inflation on an after tax basis.

Post by Scott 2 »

An investment has to match your risk tolerance.

One option is to save up and buy a place cash. Another is to invest in your earning potential through education or training.

I agree it's tough to get excited about putting money into the current market.

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Chris
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Re: Safest way to beat inflation on an after tax basis.

Post by Chris »

Muni bonds can give you your desired rate, but will be subject to interest rate risk. And generally bonds aren't the best way to beat inflation; for that, you'd need an asset that doesn't have a fixed payout. If inflation goes to 4%, you won't feel too good about holding a bond fund paying 3.75%.

Why are you concerned about volatility? Do you have plans for the money in the near future?

Dragline
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Re: Safest way to beat inflation on an after tax basis.

Post by Dragline »

Lionheart1776 wrote:
Wed Mar 29, 2017 10:55 pm

The market is at and all time high, interest rates on the rise. None of it is confidence inspiring especially with my background. So I am just looking for the safest, least volatile way possible to get a 3% after-tax nominal return (3.75%) gross yield until some kind of recession or crash happens and I feel safe buying Equities for the future.
Some ideas and crazy notions:

1. Peer to peer lending (Lending Club). BUT in order to have low volatility, you must invest in at least 200 loans and stick with higher rated borrowers. I would target nominal interest rates of 6-12% for your purpose and focus on 36-month loans. The other disadvantage of this investment is its CD-like quality as it locks up the assets for 3-5 years and you get them back over time as the loans pay out.

2. A portfolio of diversified REITS, MLPs and similar income-throwing assets: In this "category", I currently own O, ENB, GLPI, MMP, and VTR and try to keep a mix of specialities for diversification. And WY, but I have been selling that. Problem with these is that they can be correlated with the stock market and are better as a small part of a larger overall portfolio. I try to buy these when they are in the lower half of their 52-week range and start exiting when they are making new highs, replacing with something in the lower half of its range. You could add AMT and VZ to this list.

3. A portfolio that is half JNK (high yield corporate bonds) and half TLT (long-term treasuries). These are both bonds and are both volatile on their own, but tend to move in opposite directions -- the former goes with the stock market and the latter goes against. When/if the stock market crashes, TLT will spike upward like it did in 2008. Go look at these two on a 10-year plus chart and you will see what I mean. This portfolio has to be rebalanced periodically.

But caveat emptor -- you must "own" whatever this investment strategy is and not pull out until your trigger or sell signal is reached.

We'll be curious to see what you decide to do. Good luck!

ThisDinosaur
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Re: Safest way to beat inflation on an after tax basis.

Post by ThisDinosaur »

Dragline wrote:
Thu Mar 30, 2017 5:33 am
But caveat emptor -- you must "own" whatever this investment strategy is and not pull out until your trigger or sell signal is reached.
+1
Gold is historically used as an inflation hedge, but its actually overpriced as well if you compare it to the Consumer Price Index. Another option is TIPS, but the gain in price due to inflation is taxed. So they are essentially guaranteed NOT to beat inflation.
Lionheart1776 wrote:
Wed Mar 29, 2017 10:55 pm
The market is at and all time high, interest rates on the rise.
Have you considered non-US equities? When people talk about the stock market being over valued, its specifically the US market (and UK and Japan.)
http://www.gurufocus.com/global-market-valuation.php
That's what I'm doing currently.

Another option is the Golden Butterfly.
https://portfoliocharts.com/portfolio/golden-butterfly/
If you scroll down to the bottom chart, Start Date Sensitivity, you'll see that it had a consistent 5% return in any environment since the 1970s irrespective of start date. For someone worried about preserving their capital, its appropriately agnostic about the future of inflation, deflation, or the direction of the stock market.

Jbate217
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Re: Safest way to beat inflation on an after tax basis.

Post by Jbate217 »

To beat inflation and earn a bit of upside, I'm really liking the idea of a few specific series of preferred stocks right now.

The two series from WFC and BAC are non-callable (WFC-PL and BAC-PL). The article below articulates the points that are most attractive to me. The yields are ~6% at the moment, the quarterly payments are tax-advantaged, and essentially the two institutions are 'too big to fail'. Though both series are non-cumulative, both were issued early in 2008 and paid the entire way through the crisis through today. There was some volatility in the share prices around the election, and the entry price per share is higher than most preferreds (~$1200/share for these vs. $25/share for most).

I've been in and out of the shares since 2008 a couple of times, but intend to hold a portion of my portfolio in these two indefinitely going forward.

http://www.philosophicaleconomics.com/2 ... ed-stocks/

Laura Ingalls
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Re: Safest way to beat inflation on an after tax basis.

Post by Laura Ingalls »

If you don't want to say that's fine but if 3x annual income is less than $25k I would look at credit union checking accounts.

Mine requires one direct deposit per month, 15 debits, and three bill pays. It earns 2.5% interest. I'm not sure if that beats inflation but it beats your current set up.

thrifty++
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Re: Safest way to beat inflation on an after tax basis.

Post by thrifty++ »

Will there be a specific need for all of your money in the next year ? If not it could seem that you are being too risk averse, which comes with risks in itself.

If you dont need all your money within a years time maybe you could look at investing a small chunk of your money in equities and revisit later on down the track. Eg maybe just starting with 5% and dipping your toes in. One way you could look at it is that you are risking maybe 5 - 10% of your money by doing nothing (opportunity costs) so why not risk 5 to 10% of your money by investing that small sum.

I used to be very risk averse but as my stash of money has grown I am prepared to allocate an increasing percentage to riskier investments, because my cash buffer is enough. I started with a very small percentage initially though, like maybe 7% of my net worth.

Eureka
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Re: Safest way to beat inflation on an after tax basis.

Post by Eureka »

ThisDinosaur wrote:
Thu Mar 30, 2017 6:42 am
When people talk about the stock market being over valued, its specifically the US market (and UK and Japan.)
http://www.gurufocus.com/global-market-valuation.php
That's what I'm doing currently.
Thanks for the link, so you put all your money in Russia, China and Singapore? or how do you use the data?

And another beginner question: US and Germany have negative projected annual returns in the table, but so far sp500 and dax did fine this year ...?

ThisDinosaur
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Re: Safest way to beat inflation on an after tax basis.

Post by ThisDinosaur »

@Eureka
I started a thread about how I'm using that info:
viewtopic.php?t=8467

Essentially, yes, I'm putting new money into those "deep value" countries. So far its a small fraction of my total portfolio. If you've read Antifragile or are familiar with the Risk Barbell concept, these would be my high risk bets.

And you're right that stock markets can go up even when every single fundamental data point seems to show they're a bad investment. Its historically likely that this precedes either very low returns or a big crash in those markets. But it could be days or decades before that happens.

Lionheart1776
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Re: Safest way to beat inflation on an after tax basis.

Post by Lionheart1776 »

Funny you mention the WFC and BOA preferreds, I just read that article a few days ago and was thinking the same thing. I've been on a week long Jesse Livermore binge, he is one of the most knowledgeable and enjoyable people whose blogs I read since Jacob's and Joshua Kennon's.

I am thinking of putting 1-3% of my portfolio in each, as for the rest I've mulled it over a lot. And I'm thinking of putting maybe half in Munis and half in a high yield savings account.

I love having the optionality that cash offers, I figure it'll be a good tradeoff to stagnate for a few years and then go all in when a compelling opportunity is found. Private investments is where I'm looking, I've recently read both the Millionaire Fastlane and Felix Dennis's book and the idea of having controlling equity appeals to my control freak nature a lot.

I wonder if the tight control and efficiency that we ERE's are good at/value highly translates well into running a small business. I figure if it takes more time than money and there are no long-term consequences if any of the ventures fail, then they are a good bet to make. To use Taleb speak (limited known downside, high asymmetric upside). Plus sounds like a lot of fun.

The Old Man
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Re: Safest way to beat inflation on an after tax basis.

Post by The Old Man »

http://www.philosophicaleconomics.com
I agree. I think Jesse Livermore has a tremendous understanding of the markets. The best I have come across on the Internet.

Chad
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Re: Safest way to beat inflation on an after tax basis.

Post by Chad »

Dragline wrote:
Thu Mar 30, 2017 5:33 am

2. A portfolio of diversified REITS, MLPs and similar income-throwing assets: In this "category", I currently own O, ENB, GLPI, MMP, and VTR and try to keep a mix of specialities for diversification. And WY, but I have been selling that. Problem with these is that they can be correlated with the stock market and are better as a small part of a larger overall portfolio. I try to buy these when they are in the lower half of their 52-week range and start exiting when they are making new highs, replacing with something in the lower half of its range. You could add AMT and VZ to this list.
This is close to what I do with the portion of my father's retirement that is in stocks. Though, I add in quality dividend stocks to the REITs and MLPs like VZ, T, AAPL, MSFT, CSCO, MET, FLO, etc. when on sale. This way he gets some capital appreciation and a steady dividend. The last time I calculated the average dividend for that portfolio it was slightly above 4%.

I constantly hammer into him that it doesn't matter if he experiences a 20% downturn in these stocks, as he can just wait and collect the exact same dividend (95% of these stocks, MLPs, and REITs never cut their dividend even in 2008-09) he was collecting when they were up 20%.

There is always something on sale (QCOM and GILD right now, but both have potential risks). Though, there is less on sale now than a year or two ago.

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jennypenny
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Re: Safest way to beat inflation on an after tax basis.

Post by jennypenny »

As others have alluded to, keep in mind that you don't have to beat inflation with every investment.

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