Cost of Living Portfolio to Hedge rising costs

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JimTaylor33
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Joined: Mon Jan 30, 2017 8:17 pm

Cost of Living Portfolio to Hedge rising costs

Post by JimTaylor33 » Tue Jan 31, 2017 9:17 pm

Thank you to everyone who responded about my questions about bonds and specifically their use in the permanent portfolio. I do plan to put most of my ingestible in the Permanent Portfolio, but I also had an idea for another one stemming from the idea of homeownership. Many people believe that homeownership is a huge benefit because it fixes their living costs and free's them from rising rents. Housing is usually your biggest expense so buying a house hedges these costs a lot. However, these same people don't think anything of hedging food, utility, healthcare transportation, and the rest.

In my particular area I cannot afford a SFR, but barley could a condo. I don't want a condo mainly for the added layer of governance from the HOA. To me that is the equivalent of fund manager risk for non passive portfolios. I would rather have the SFR to be in charge.

My thought was I am better off renting than buying the condo. One day hope to have an SFR, but not at the expense of not having a strong retirement portfolio as I believe owning a house is a luxory consumption item rather than a road to riches.

Under these premises I thought what if I just bought these vanguard sector ETF's in percentage of yearly rising costs. Basically calculate what the rent increase is, utility increase, health care increase each year and then find out what dollar amount of dividends are needed from each ETF. Then buy that amount of shares. Then you are hedged for the rising costs. The more you buy beyond that eventually covers the total cost. So on retirement you just pay your rent, healthcare, ect from the dividends of those sectors.

The money would be invested from most to least in

VNQ - REIT
VDC - Consumer staples includes food companies
VHT - Healthcare
VPU - Utilities
VDE - Energy

I know if I have to buy a car, or a new TV that I don't have that cost hedged or many other things for that manner, but at least the major expenses are. I feel owning REITS gives me the same appreciation potential as owning a home, but the flexibility to move without major costs.

Does this make any sense or is it just gimmicky and I am better served to just put the money in to the permanent portfolio or 60/40. Thanks for reading all that. :sharebeer

randomguy
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Re: Cost of Living Portfolio to Hedge rising costs

Post by randomguy » Tue Jan 31, 2017 11:11 pm

It makes no sense and is gimicky.:) You are assuming that if prices go up, that those sectors will go up by a similar amount. That could happen but the money could also go elsewhere. For a simplified example. Your insurance premiums go up by 1000. Does that help the insurance company? Not really if their expenses go up by 1200. Now they are making less money even though they are charging you more.

JimTaylor33
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Joined: Mon Jan 30, 2017 8:17 pm

Re: Cost of Living Portfolio to Hedge rising costs

Post by JimTaylor33 » Tue Jan 31, 2017 11:41 pm

Thank you for your response. Very good point. I had wondered if my electricity bill goes up, my utility companies stock wouldn't necessarily profit more in that case. Your example is a very striking one and why this stragegy is not a good idea. Thank you. I still wonder about housing though.

Robert Shiller says homes only return 1% long term on average, but my friends seem to think I am crazy for not owing a home and I will forever be poor with rental increases if I don't buy something. I still feel that putting more in 60/40 and then some money in reits would do better than putting every dime I have into a house since prices are so high here. What do you think of this one? Is 60/40 the winner or does tilting heavy exposure to REITS make sense since I do not own a home. Again its probably just gimmicky to make me feel better about not being a homeowner.

avalpert
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Re: Cost of Living Portfolio to Hedge rising costs

Post by avalpert » Tue Jan 31, 2017 11:50 pm

Yeah, I see no reason to think those ETFs will hedge your inflation at all - and aligning dividends to cost is just arbitrary.

As for your friend, tell him he is crazy for owning a money pit of an asset when he could be investing that equity in a diversified portfolio instead.

rukh
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Re: Cost of Living Portfolio to Hedge rising costs

Post by rukh » Wed Feb 01, 2017 4:59 pm

I have a different perspective on this, and it has a couple sides:

1.) If you were able to work out a perfect hedge, such that any increase in your personal costs was almost fully offset by the investment gain (how does that work with the implications of taxes and fund expenses?), I think you would have just defined a terrible value. And it might be possible with an ETF that has well correlated returns against the fuel commodity you personally rely on. Here is my thinking: you have an opportunity cost for the money you invested, and the upside potential brings you to a best case of break even against your personal commodity related expenses. The only way this opportunity cost is justified is if the risk reward analysis says your personal type of commodity related costs have a high probability of increasing for the entire nation at a much faster rate than any investment returns you could likely gain elsewhere. In that case, you should buy an awful lot more than enough to hedge your personal consumption. But then you are on the wrong forum, right? Otherwise, it is like buying really inefficient insurance against one specific low cost life event instead of just budgeting for it. Do you buy the $30 2-year "warranty" on $60 consumer goods?

2.) The market for real estate appears to me to be on a trend of inflation that isn't substantially more than monetary inflation. To me, this makes owning your residence a poor value if you only own it because of the housing hedge factor. But real estate value has substantial market swings that vary by location, type, etc. So, there is risk exposure from that and it is not really hedge-able with an REIT because there is no REIT that will match your local market. The risk is also much more the further above the long term average the market is at the time you buy, and not generally insurable, or average-able over multiple transactions.

3.) Renting costs more than owning. If it did not, very few owners would rent their real estate to others. That said, in a practical sense, owning costs more, long term total real cost than renting for a lot of people. The reason is obvious but generally ignored by everyone I know. People tend to buy a much more valuable space than they rent. If you bought an equivalent space, it would cost less for the same utility. The variable costs of owning are much higher and more unpredictable than renting, so I guess I would say owning is higher risk than renting, and requires more liquidity/access to credit. This can be mitigated by proper insurance coverage (high deductible), self insurance for all items not covered by insurance, and proper maintenance. Since I started home ownership, my repair and maintenance costs have averaged out to my self insurance savings. I chose to save (on paper at least) 1/50th the structure basis per year (not including land or utility access, etc). I advocate that the quick first pass analysis of first time home buyers include that factor as a monthly cost. It may be a terrible, flawed thumb rule, but it is a starting point. People say all sorts of things to justify the pride of ownership and the ability to paint the walls any color they want. With eyes wide open to these and myriad other factors, a degree of reduced operating cost combined with a degree of increased utility/benefit is a primary reason to buy rather than rent.

JimTaylor33
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Joined: Mon Jan 30, 2017 8:17 pm

Re: Cost of Living Portfolio to Hedge rising costs

Post by JimTaylor33 » Wed Feb 01, 2017 8:08 pm

Very good responses from all thank you. I agree a lot about the points just made about housing vs renting. Since I do not want to buy a condo that leaves SFR as my only choice. I currently rent a 1 bedroom apartment. Naturally most of the SFR's for sale will be much larger than I need. Every once in a while something small comes a long, but the land value is so great for investors to tear down and build a new home to sell for profit, so you are right I really can't compare the costs. Right now renting what I have and saving in stocks and bonds seems prudent. If real estate goes down a lot and I easily afford a small SFR I would do it for the non financial reasons discussed. I guess what I am saying is I understand that renting long term is not beneficial to owning, but renting small vs buying big at this time and saving the difference should help allow for me to own in the future. Does this sound like a better plan now?

young-ish
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Re: Cost of Living Portfolio to Hedge rising costs

Post by young-ish » Wed Feb 01, 2017 11:20 pm

JimTaylor33 wrote: what I am saying is I understand that renting long term is not beneficial to owning, but renting small vs buying big at this time and saving the difference should help allow for me to own in the future. Does this sound like a better plan now?


Yes, "renting small" is a great idea!

Just make sure that you are saving the difference. If your rent is $4,000/year less then your prospective home-ownership costs then throw that $4k into a diversified low-cost investment portfolio.

randomguy
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Re: Cost of Living Portfolio to Hedge rising costs

Post by randomguy » Thu Feb 02, 2017 2:02 pm

JimTaylor33 wrote:Thank you for your response. Very good point. I had wondered if my electricity bill goes up, my utility companies stock wouldn't necessarily profit more in that case. Your example is a very striking one and why this stragegy is not a good idea. Thank you. I still wonder about housing though.

Robert Shiller says homes only return 1% long term on average, but my friends seem to think I am crazy for not owing a home and I will forever be poor with rental increases if I don't buy something. I still feel that putting more in 60/40 and then some money in reits would do better than putting every dime I have into a house since prices are so high here. What do you think of this one? Is 60/40 the winner or does tilting heavy exposure to REITS make sense since I do not own a home. Again its probably just gimmicky to make me feel better about not being a homeowner.


Real estate (on average. Locations vary widely. Some of that might be bubbles but a lot is that in areas where growth in constrained (i.e. SF is a pennisula, NYC is an island) demand is going to grow. If it grows enough to justify higher prices is another story) has returned 1-2% real for the past 100 years or so. But real estate is normally leveraged up 4-5x or so. So that 1% becomes 4-8% real. Or about the same as stock market returns.

It is important to understand that REITs are more mangement companies than investments in actual real estate. It is like buying Exxon to invest in oil. They are in the same markets but they are slightly unrelated. And the real estate is only partially housing. It is also commercial buildings

The average part makes it tough. If you live in SF with real estate going up 8%/year, investing in some real estate fund that includes the places going up 1% doesn't really protect you much. Buy REITs because you think it provides decent diversification and returns. I wouldn't try and justify it with some logic that it is the same as opening a house.

Rent vs Buy is impossible to generalization. In rising markets, you might never catch up (i.e. compare the house you could have bought in 2006 to 2016 in SF) while in most markets (the more normal 1%/year places) you can outsave house appreciation. And obviously buying avoids the problem of rent increases in exchange for the risk of house depreciation.

PandaBear
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Re: Cost of Living Portfolio to Hedge rising costs

Post by PandaBear » Thu Feb 02, 2017 2:23 pm

What is SFR?

PaulF
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Location: Wisconsin

Re: Cost of Living Portfolio to Hedge rising costs

Post by PaulF » Thu Feb 02, 2017 4:12 pm

PandaBear wrote:What is SFR?


I had to google it, but it is evidently "single family residence."

PandaBear
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Re: Cost of Living Portfolio to Hedge rising costs

Post by PandaBear » Thu Feb 02, 2017 4:26 pm

PaulF wrote:
PandaBear wrote:What is SFR?


I had to google it, but it is evidently "single family residence."

Weird. When I Googled it, I got a French telecom company--hence my confusion.

rukh
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Re: Cost of Living Portfolio to Hedge rising costs

Post by rukh » Mon Feb 06, 2017 4:11 pm

JimTaylor33 wrote:Very good responses from all thank you. I agree a lot about the points just made about housing vs renting. Since I do not want to buy a condo that leaves SFR as my only choice. I currently rent a 1 bedroom apartment. Naturally most of the SFR's for sale will be much larger than I need. Every once in a while something small comes a long, but the land value is so great for investors to tear down and build a new home to sell for profit, so you are right I really can't compare the costs. Right now renting what I have and saving in stocks and bonds seems prudent. If real estate goes down a lot and I easily afford a small SFR I would do it for the non financial reasons discussed. I guess what I am saying is I understand that renting long term is not beneficial to owning, but renting small vs buying big at this time and saving the difference should help allow for me to own in the future. Does this sound like a better plan now?


That sounds smart to me, as long as you actually figure out the cost difference and earmark that money. A boglehead first principle is that you can't time the market, but with housing, to a limited degree, you can. It is obvious when real estate is way above it's long term average rate of appreciation that there is more risk than when it is below, all else equal. All I'm saying with this is that if your area is presently in a substantial up market, that adds to the weight on the wait to buy side of the scale.

As a first home, I bought a large house with a small in-law apartment. We moved into the in-law, rented out the large house, and lived there for 9.5 years. Our total costs, not including labor as landlords, came out to very close to living there for free, before the substantial above the line tax deduction and principle contributions were factored in. I thought I was brilliant. I thought it would all be worth the compromise of the tiny living space in the long run. Then one of only two major local employers went out of business. 12 years later living far away, paying for property management expenses and renting both units, we are cash flow positive, but still upside-down on that mortgage.

If you rent in climate with significant heating and/or cooling needs,the sharing of common walls with conditioned spaces can be a substantial housing cost savings as well, presuming this directly affects or indirectly trickles down to you.

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rmelvey
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Re: Cost of Living Portfolio to Hedge rising costs

Post by rmelvey » Mon Feb 06, 2017 4:19 pm

I think you are overthinking this. Just rent and put your money in TSM. If you want less risk, buy some TIPs as well. Trying to track the price of food/shelter with your portfolio is not realistic.

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