Being a TSP Millionaire is not as hard as you would think. One of the big problems with the TSP is how confusing it is. It has different funds than a 401k or IRA. But that shouldn’t confuse you. It is easy to follow these three simple (but not always easy) steps to ensure you … Read more
What do I know about long distance real estate investing?
As a military member:
I’ve moved every 1 to 3 years while investing in real estate
I currently have 20 paid-off single family homes
I’ve self-managed and used management companies
I bought 16 properties while living overseas
I read a blog post this morning that said investing long distance requires a slightly different approach than normal real estate investing.
It’s a different ball game altogether.
The secret to mastering long distance real estate investing is getting these 5 things right:
The Importance of Boots on the Ground
The Best Real Estate Agent for Long Distance Investing
Choosing a Property Manager from Long Distance
Choosing the Right Property from Long Distance
Managing Contractors from Long Distance
The Importance of Boots on the Ground
This is where I feel a lot of new investors make their first mistake.
They are neglecting the importance of having boots on the ground.
There have been good books written about long distance real estate investing and how easy it can be done using video, pictures, docusign, and aligning yourself with a great “team.”
This all sounds great, and might work for an experienced investor.
I can tell you from a practical standpoint, however, that nothing replaces the importance of having boots on the ground that you can trust in the location you are investing.
Whether it is a contractor trying to rip you off, tenant trashing a house, or just a need to respond quickly to an emergent situation at your property, there is nothing like having someone you trust that can tell you what is actually going on with your property.
This post was originally published on August 8, 2018. I updated, lengthened, and added a table of contents to it.
Investing in rental property with VA Loan is a tricky subject. There are many rules that dictate how a VA should be used. Investing with a VA loan, even in multi-family, is possible. I will show you how to do it so you can get rental income.
The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.
You can’t just buy a home and make it a rental property without living in it first. There is an occupancy rule I’ll be discussing.
You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.
Another possibility for investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units for a short period of time. When you move on to your next assignment, you’ll be able to turn the entire property into an rental property legally.
Let’s start digging into the details!
The first thing we need to understand is the occupancy rule.
The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.
HOW IT WORKS
When you borrow the money, it comes out of your actual TSP account. It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions. It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions.
As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account. This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it. You lose the opportunity for that growth. More on this later.
Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you. The interest, however, is not tax-deductible.
To be eligible for a TSP loan, the following must apply:
Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
Charles Schwab index funds fees are certainly among the lowest.
There is a fierce battle waging between the big firms for the lowest index fund management fees.
We can thank Vanguard for low fees overall. I think they started kicking too much ass and taking too much market share, so Fidelity and Charles Schwab index funds took notice and started slashing their fees.
This has been nothing but good for investors. I’ll have to keep this and other similar posts constantly updated, as prices are slashed among the big three often. I’ll summarize the recent changes later.
INTRODUCTION OF INVESTING AT SCHWAB
When you buy Charles Schwab index funds, here’s some of what you get:
Mutual Fund OneSource service funds and other No Transaction Fee funds are $0 for online trades
All other mutual funds cost up to $76 to buy and $0 to sell
Online stock trades are $4.95 per trade
Online Schwab ETF OneSource trade are free
Other ETFs can be purchased for $4.95 per trade
If you are going to buy Schwab index funds outside of the Schwab mutual fund family, definitely invest somewhere else. Their fee for other mutual funds really makes it cost prohibitive (that means way too damn expensive!)
WHAT’S AWESOME ABOUT CHARLES SCHWAB INDEX FUNDS?
$167 billion under management in mutual funds and ETFs
3rd largest provider of index funds (behind Vanguard and Fidelity)
No minimums to invest (This is an issue at Vanguard)
CHARLES SCHWAB INDEX FUNDS
I’m going to talk about the features and fees of the three most popular and competitive mutual fund categories. Here we go!
S&P 500 INDEX FUND
Aaa yes, the benchmark of all index funds in my opinion. It has a dear place in my heart as my main investment during most of my military career.
It is Warren Buffett index fund recommendation of choice.
Maybe you’ve made some of these mistakes military members make.
I made a few of these mistakes myself, but I’m still here today doing relatively well.
Let’s see how you measure up.
1. GOING INTO DEBT
I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.
It’s living large when you haven’t made that money yet.
Spending money you haven’t earned. Otherwise known as… Keeping up with the Jones’s.
The funny thing is, the Jones’s are going into debt to keep up with you too!
Here are some things that will really put you into debt:
Buying or renting much more house than you need…
I see it time and time again in the military. A married couple with one newborn buying a 4000 sq ft property. Not sure what they will do with 6 bedrooms and 4 baths!
You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)
Having a new house custom built…
But it’s so nice to have a big house built to your specifications. You deserve it!
Big houses need lots of things to fill them up. They just don’t look right without expensive furniture and nice cars. They are also expensive to heat and cool. Good luck!
New or expensive cars…
Whatever you do, don’t buy a new car. On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales. You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.
I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.
Vacationing while overseas…
You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one. You are in Japan, and it’s the perfect gateway to Southeast Asia. Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas.
Don’t overdo it. Take advantage of existing geography and vacation in areas around you that you. Try to drive there instead of flying, and try to Airbnb instead of hotels.
I’m sharing several TSP allocation strategies for 2020.
The strategies I talk about in this article are:
S&P 500 Index Allocation
Total Stock Market Index Allocation
Warren Buffett TSP Allocation
Dave Ramsey TSP Allocation
Paul Merriman TSP Allocation
Total World Stock Market TSP Allocation
Balanced Index Fund Allocation
My Rich on Money Personal Portfolio Allocation
The Thrift Savings Plan (TSP) is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services.
It is the rough equivalent of a 401k for military and civil service employees.
I’m not here to tell you which TSP investment strategy is best, that’s a fool’s errand. Giving this type of TSP advice is impossible.
The only way to do that is to go into the future, see how things turn out, and then tell you which TSP allocation would have been ideal.
I will, however, give you the tools to make an informed decision about the best TSP strategy for you with some food for thought.
Several of these TSP investment strategies are recommended by well-known money gurus such as Warren Buffett and Dave Ramsey.
The Dave Ramsey TSP allocation recommendation is a widely-searched google term.
I’ve also added every TSP investment option I could find that will work with the available funds.
TSP ALLOCATION OPTIONS 2020
Below is a list of different potential TSP allocation strategies for this year you could use. I’ve pulled these from various sources and as I discover new ones, I will update this. Please send me your recommendations with supported documentation.
By the way, did you know the TSP recently drastically changed it’s withdrawal rules?
Learn how to master your money by reading my TSP guide. Don’t miss out on tens of thousands in your retirement!
Maximize all your TSP benefits.
The S&P 500 Index
This is the asset allocation I used most of my working life.
When I opened a Roth IRA in 1999, I called my bank and asked to put it in the S&P 500. At the urging of an investment advisor (I’m not a fan of most), I put it in an aggressive growth fund instead. In 2000, it lost half its value.
From that day forward, I decided S&P 500 would be the way I invest. I had read before that Warren Buffett said something to the effect of, if you don’t have time to look at stock charts and read finance news all day long, you are better off investing in the S&P 500 index and never touching it.
Actually, here’s exactly what he said in 2013 in his letter to shareholders:
“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power…I have good news for these non-professionals: The typical investor doesn’t need this skill…In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
Additionally, instead of investing his wife’s inheritance in Berkshire Hathaway stock, he plans to invest it in the S&P 500 index.
That should tell you something.
If it’s good enough for Warren, it’s good enough for me.
To mimic a full investment in the S&P 500 index, just invest 100% in the C fund.
Instead of just investing in the largest companies that make up the S&P 500, you invest in those plus mid and small cap companies as well. This index encompasses the entire U.S. stock market (as the name suggests!)
Financial Independence Retire Early (FIRE) enthusiasts will swear to the superiority of this index to the S&P 500, and to suggest considering anything else is heresy!
It’s clearly more diversified than the S&P 500, and small caps have been known to outperform large caps over the long term, albeit with potentially a little more volatility.
Over long periods of time, the total stock market index fund and S&P 500 had similar performance, and it would be hard to say for sure which will outperform in the future.
In my opinion, you are doing great with either one.
80% C and 20% S will closely mimic this popular index.
The Warren Buffett TSP Allocation
Image from moneycrashers.com
While I mentioned earlier I got my idea for an all S&P 500 index allocation from something Warren Buffett said in a newsletter, he actually has more specific instructions I want to address here.
I talked earlier about how he had a plan for how the money left for his wife would be invested. I said he would invest in S&P 500 index instead of Berkshire Hathaway, but that’s only part of the story.
He also has a plan to throw bonds into the mix to smooth out the ride a little bit, which is a common investment strategy. The amount of bonds you throw into the mix will dampen the volatility, but will also limit your upside potential during booms as well.
In the same newsletter in 2013, he talked about his specific advice to his trustee on how to invest the remaining money that will be left to his family:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
As luck would have it, this is easy to mimic with the funds offered in the thrift savings plan. 90% C fund and 10% G fund.
Dave Ramsey TSP Investment Advice
I’m a huge fan of Dave’s book Total Money Makeover. His baby steps for getting out of debt are legendary!
He also has TSP investment recommendations on how to invest in the thrift savings plan. His caveats are typical of Dave’s approach to money.
In typical Dave fashion, he suggests that you first pay off all your debt besides your primary residence before you begin long term investing and have an emergency fund of three to six months of expenses as well.
He has two sets of recommendations. One slightly more aggressive than the other.
Paul Merriman is a successful advisor on mutual fund and index fund investing. He’s an accomplished author, speaker, and is well known for the ultimate buy-and-hold portfolio.
This portfolio is comprised of index funds and has an amazing track record. Unfortunately, due to the various types of funds held in this portfolio, it is impossible to mimic with the TSP funds available.
If you are curious, I wrote an article about this how to invest in this portfolio:
He explains that most notably what is missing from the TSP funds is value funds, which is a key component of his strategy to boost typical index fund returns.
He does make specific recommendations for TSP owners using what is available to us.
He has 3 separate recommendations based on your risk tolerance, conservative, moderate and aggressive.
With all three of these portfolios, the equity part of the portfolio is split the same way:
50% in S, 25% in C, 25% in I.
With the aggressive portfolio, the entire amount is invested this way. The conservative and moderate portfolios have a portion of the total invested in the F and G funds. This portion is not exposed to the risk of the stock market, as the C, S and I funds are.
His advice is that, generally, younger investors can afford to be more aggressive, and as you get older, you become more conservative, but this is a generalization and everybody’s situation may differ.
The conservative portfolio is 18% G and 42% F, and the rest in S, C and I at 50/25/25.
The moderate portfolio is 12% G and 28% F, and the rest in S, C and I at 50/25/25.
Attached is a graphic from his website outlining exactly how to do this strategy.
Here is the link to his article on TSP recommendations:
This portfolio mix is a TSP investment strategy modeled loosely after the Vanguard Total World Stock Index Fund (VTWSX).
It will allow you to have exposure to stock markets around the globe, including the United States and developed foreign markets.
The weakness of this portfolio compared to the Vanguard one is exposure to emerging markets.
The I fund currently only has developed economies, and not emerging markets. There supposedly is a plan in place to change the I fund in the future to include emerging markets, but it hasn’t happened yet.
This matters, because the I fund isn’t as diverse as it could be, and that could affect returns.
The Vanguard fund I am modeling after has roughly 60% of the portfolio in U.S. stocks, and the rest are international. To model this portfolio, use 48% C and 12% S to make up the U.S. stock market, then use 40% I for the rest.
The 48/12 mix comes from splitting 60% into an 80/20 mix to achieve the Total Stock Market Index.
Balanced Index Fund Portfolio
This portfolio is meant to mimic the Vanguard Balanced Index Fund Admiral Shares (VBIAX).
It is a way to have access to the entire U.S. stock and bond market. It has far less volatility than the Total Stock Market Index by using bonds to smooth out the ride. The balance of this portfolio is 60% stocks, and 40% bonds.
This can be accomplished through 48% C, 12% S, and 40% F.
Obviously, you could adjust the stock/bond ratio to meet any level of risk that you would like.
Three Fund Portfolio
This is a favorite among Bogleheads (Those who love Vanguard and its founder Jack Bogle).
This fund is comprised of 1/3 each of the following:
Vanguard Total Stock Market Fund
Vanguard Total International Stock Market Fund
Vanguard Total Bond Market Fund
This fund is broadly diversified, but heavily weighted in large cap stocks. Remember, the I fund lacks the exposure to emerging markets that the Total International Stock Market Fund has, so the thrift savings plan version won’t be identical until the I includes more countries and emerging markets.
To mimic the Total Stock Market fund, I split the 33% in an 80/20 C/S split. This is where I get my weird percentages from.
A way to closely mimic this portfolio is: 27% C, 7% S, 33% I, 33% F.
Make sure you use these recommended allocations correctly!
Most people screw this up.
My Current TSP Allocation for 2020
There are literally thousands of people who google “Rich on Money TSP Allocation” every millennium.
Until now, nobody has ever known how the brilliant mind of a master invests.
I like the idea of being a little heavier weighted on the mid-cap stocks as opposed to being just all S&P 500. Of course, I’m going against Warren Buffett’s philosophy.
Not sure how wise that is!
I used to have international sprinkled in there at 10%, but I gave up on it. There is enough international exposure between C and S IMHO.
Here it comes…
The Rich on Money worldwide dominance TSP portfolio:
50% S / 50% C
I know, I know. I should be charging for revealing my personal portfolio. I just have too much love and altruism in my heart (and no one reads this blog).
Best TSP Fund for 2020
Now this is the important part. I reveal secrets here that nobody else knows…
Well, maybe not.
The question of what is the best TSP fund for 2020 gets asked all the time.
It’s a fundamentally flawed question.
If you are asking which TSP fund is best, you may think that jumping between funds at the right times depending on cycles, economic data, politics, etc. will yield you superior returns.
You may also believe that experts scouring the market for data and gifted chart readers have some way of knowing which funds should outperform in the near future.
I’m here to tell you, people with those abilities do not exist.
There are many posers that make a fortune on Wall Street writing blogs and doing news segments claiming this unique gift. When they are right, they get huge kudos and bonuses.
When they are wrong, they explain why the market didn’t do what they thought, and make a new prediction. Eventually, they stop getting away with this, fall out of favor, and get canned.
Their successful predictions, IMHO, are largely attributable to luck. Just because they were right this time, doesn’t mean they’ll be right next.
This concept is difficult to explain in a few paragraphs. If what I’m saying makes a little sense to you and you’d like to know more, read the following article:
There is no best TSP fund in 2020 or any other year. There are great TSP allocation strategies that should work if you follow them consistently over a long period of time (that means decades).
That’s what I gave you in this article. Options for great TSP allocation strategies.
Changing strategies or funds often is a recipe for low returns.
Most of these TSP investing methods should work well if you regularly contribute to your thrift savings plan, ensure you are getting matching if it’s offered, and stick with the same TSP investing strategy over the long term.
I would caution against jumping back and forth between strategies every time you find something bright and shiny. Many people erode their long term returns by “dancing in and out of the market.” (Warren Buffett)
To understand all this TSP advice, it helps to know the five core funds inside the TSP and what they consist of. This is important in understanding how they are used in building TSP investing portfolios.
TSP INVESTING GUIDE – THE FUNDS
The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market
The F fund is an index of world-wide government, corporate, and mortgage-backed bonds
The C fund is equivalent to the S&P 500 index.
The S fund is an index of mid and small-cap stocks not included in the S&P 500.
The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.
The L funds are professionally managed investment funds tailored to a specific time horizon.
Now we dive into each one a little more in depth before going into our TSP investment strategies:
The G Fund – The Government Security Investment Fund
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low
This unique investment is only available for TSP investing. It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.
The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.
I’ll tell you how I’ve invested most of my career.
S&P 500 index fund. That’s it.
But, shouldn’t I be able to do better than that?
This post will show you a data-proven way to boost your index fund returns.
Paul Merriman is a believer in index fund investing. Additionally, he is a nationally recognized authority on mutual funds, index investing, asset allocation, and ran his own investment advisory firm since 1983. Paul has been on Wall Street since the 1960’s.
He’s been preaching something called the ultimate buy-and-hold portfolio for the past 20 years. His ideas aren’t revolutionary. It’s very similar to Larry Swedroe’s research on small value stocks and their superior performance over long periods of time. Moreover, he believes in the work of Dr. Fauna and Dr. French in regards to diversification to increase returns without adding risk.
With the ultimate buy-and-hold portfolio, we are going to keep the S&P 500 index, but only 10% of the portfolio, and then give 10% each to 9 other asset classes.
Most people say nothing outperforms the S&P 500 index over the long term. Well, that’s not exactly true.
Over the long term, 8 of the 9 asset classes we’ll be diversifying with have outperformed the S&P 500. Consequently, the risk is also roughly the same.
So the main ingredient in this portfolio is still the S&P 500 index. According to Merriman’s research, it has compounded at 9.3% between the years of 1970 to 2016.
Personally, that feels a bit high, but we’ll stick with his numbers today. I’m more comfortable claiming a historic 7% rate.
THE ULTIMATE BUY-AND-HOLD PORTFOLIO
For the sake of explaining this portfolio, think of the S&P 500 index as Portfolio 1. To start, we will invest $100,000 into our portfolio today between the dates of 1970-2016 to illustrate the growth that would have occurred with each step of diversification over that period.
At 9.3%, $100,000 would have grown to $6.5 million. No way I can live off that! We’ve got to do better!!