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I just looked at a Fidelity short term floating rate high yield fund FFRHX (don't know if that's yours). According to Fidelity's website, over the life of the fund, it's returned 4.12% with a one year return of 2.88%. Currently the highest yielding CDs are around 3.5%. Occasionally, one for 4% pops up. I don't think that .12% is worth the risk, do you? And if, as you say, you lose 2 to 3%, you're really behind.
sure it is worth the risk . if rates hold or come down you can see a nice pop in appreciation . ,most of the increase is behind us most likely so you can see pretty close to coupon .
plus you need to evaluate bond funds correctly , which means if you are looking at a comparison you need to go back to the duration value of the fund and compare cd rates then , not today . today you are comparing less than 3% to 5.04% . . that is the real comparison . not sure what the rates were when i bought this fund years ago but the 3 year average is 4.42% . so what were cd's 3 years ago , less than 1% i bet
but remember rates rose , so the bond funds dip . but over time those lower yielding bonds get replaced so over time you go back up higher and higher
Last edited by mathjak107; 12-29-2018 at 02:01 PM..
Aren't you assuming that the real estate investor is running his 'empire' with debt? Some of us don't do that - we own our properties outright, and maintain them as if they were valuable assets.
Paid for; well maintained; insured; steadily occupied for over 30 years - I can't think of any reason why it will not go on for years and years to come.
Stock market money is different. I know there will be bear markets, but since I am not a trader I keep spreadsheets on my investments (all both of them). I know when earnings will be released, I know what numbers to look for, I know the complete history and I listen to and read the earnings release and 10Q. If something changes, I will sell my holdings, but not until then.
Hopefully I will sell them slowly as I need to take money out. That way they can appreciate silently and I will take advantage of long term income advantages.
Not really.
What I'm saying, warning really, is that it's easy to grow comfortable with real estate purchases because the trends stretch for a very long period of time. The person posting is in the Pac NW. Similar to here in Silicon Valley, anyone owning any property has made a ton of money on it. I haven't had turnover in my units in years. Right now it's easy street because the area has a ton of money being dumped into it, whether via VC infusion, IPO proceeds, deficit spending...you name it. However, the last two downturns have certainly moved the local market because as the area brings in its newest residents who are buying the highest priced property and have the least security in their jobs, they are the ones that get hit in the downturn. New condos are $1M. That's two people working six figure jobs. One loses the job, they're in trouble. Put a whole development sold to the newest in, and you've got a price pressure. If that affects your neighbors who owe money, they suddenly can't refinance and they in turn become forced sellers. One of my wife's neighboring properties was flipped around and ended up becoming section 8 property, with tenants from hell. That's annoying to work through, and it reduces the leverage I could depend upon to acquire the neighbor's property. Locally, we're having a reversal of money from China. Once mass buyers, overseas owners are now selling. The effect on local inventory has been pronounced. Many overseas buyers would acquire new homes and leave them empty. New buyers are more likely to put those to work collecting rents.
It cycles differently, but I'd hardly call it smooth and easy sailing. There's simply nice periods where it is smooth sailing.
And that's assuming you're in a market that gyrates like the coast, where locally all of my properties have at least tripled in value.
If I'm doing real estate in Ohio, or Detroit.....I don't have nearly the margin to work with in order to make calls. It's easy for me to say...copper pipes here, but if I'm fixing up a place in Cleveland, that's a harder call. Well kept and managed properties certainly didn't save anyone with property in Japan in the late 80s.
Finally, one of my units is a condo in an HOA having significant troubles, so now I've joined the Board, rooted out a fraud and am attempting to simultaneously build a records library forensically, prepare for litigation and migrate all accounting and records over while kicking off a rehabilitation plan for multiple buildings in danger of collapsing. I don't get paid because I'm now on the Board. As our Association allows renters, most of the owners don't want to pitch in anything. My rent stream...easy peasy. The tenants are great. The property has no debt. Smooth sailing as the other poster noted. The volunteer work needed to revive the complex on the verge of failing. Tremendous.
I'm not letting the smooth sailors out easy though. I'm hiking HOA dues 20% a year until I can get a full Board. I'm not too worried about finding a way to spend the money. We may even cap new owners from being allowed to rent out. Somewhere, someone will get pissed enough to run for the Board...and when there's enough of them, I can exit. The place will be fixed and on a good enough foundation that they'll hopefully have to work really hard at breaking it again.
What I'm saying, warning really, is that it's easy to grow comfortable with real estate purchases because the trends stretch for a very long period of time. The person posting is in the Pac NW. Similar to here in Silicon Valley, anyone owning any property has made a ton of money on it. I haven't had turnover in my units in years. Right now it's easy street because the area has a ton of money being dumped into it, whether via VC infusion, IPO proceeds, deficit spending...you name it. However, the last two downturns have certainly moved the local market because as the area brings in its newest residents who are buying the highest priced property and have the least security in their jobs, they are the ones that get hit in the downturn. New condos are $1M. That's two people working six figure jobs. One loses the job, they're in trouble. Put a whole development sold to the newest in, and you've got a price pressure. If that affects your neighbors who owe money, they suddenly can't refinance and they in turn become forced sellers. One of my wife's neighboring properties was flipped around and ended up becoming section 8 property, with tenants from hell. That's annoying to work through, and it reduces the leverage I could depend upon to acquire the neighbor's property. Locally, we're having a reversal of money from China. Once mass buyers, overseas owners are now selling. The effect on local inventory has been pronounced. Many overseas buyers would acquire new homes and leave them empty. New buyers are more likely to put those to work collecting rents.
It cycles differently, but I'd hardly call it smooth and easy sailing. There's simply nice periods where it is smooth sailing.
And that's assuming you're in a market that gyrates like the coast, where locally all of my properties have at least tripled in value.
If I'm doing real estate in Ohio, or Detroit.....I don't have nearly the margin to work with in order to make calls. It's easy for me to say...copper pipes here, but if I'm fixing up a place in Cleveland, that's a harder call. Well kept and managed properties certainly didn't save anyone with property in Japan in the late 80s.
Finally, one of my units is a condo in an HOA having significant troubles, so now I've joined the Board, rooted out a fraud and am attempting to simultaneously build a records library forensically, prepare for litigation and migrate all accounting and records over while kicking off a rehabilitation plan for multiple buildings in danger of collapsing. I don't get paid because I'm now on the Board. As our Association allows renters, most of the owners don't want to pitch in anything. My rent stream...easy peasy. The tenants are great. The property has no debt. Smooth sailing as the other poster noted. The volunteer work needed to revive the complex on the verge of failing. Tremendous.
I'm not letting the smooth sailors out easy though. I'm hiking HOA dues 20% a year until I can get a full Board. I'm not too worried about finding a way to spend the money. We may even cap new owners from being allowed to rent out. Somewhere, someone will get pissed enough to run for the Board...and when there's enough of them, I can exit. The place will be fixed and on a good enough foundation that they'll hopefully have to work really hard at breaking it again.
Yeah, your 'empire' is a whole lot different from mine.
We didn't have a real estate bubble, so we never had a collapse. The theory is the same around here, even if the figures are different. We don't have any turnover; don't have a HOA to deal with; property taxes are manageable.
Our properties have tripled in value too, but that took 30 years! We built ours in 85, lived in one side until 98, then bought a home and paid it off in '07.
Even the 08 recession never reached us.
Different numbers, different dynamic, same theory. We're retired now, and not interested in either buying or selling.
sure it is worth the risk . if rates hold or come down you can see a nice pop in appreciation . ,most of the increase is behind us most likely so you can see pretty close to coupon .
plus you need to evaluate bond funds correctly , which means if you are looking at a comparison you need to go back to the duration value of the fund and compare cd rates then , not today . today you are comparing less than 3% to almost 5.50% . . that is the real comparison . not sure what the rates were when i bought this fund years ago but the 3 year average is 4.42% . so what were cd's 3 years ago , less than 1% i bet
but remember rates rose , so the bond funds dip . but over time those lower yielding bonds get replaced so over time you go back up higher and higher
I'm not sure what you mean by "less than 3% to almost 5.5%". As I mentioned, the Fidelity fund I quoted says 4.12% lifetime and 2.88% over one year. Do you have a different fund? It's the same as the fund you describe. Also, as I mentioned, current 5 year CDs are 3.5%, not "less than 3%". By the way, CD rates have been low, but over the past 5 years, it has been possible to get over 3% for 5 year CDs. Penfed offered one for 3.15% five years ago, and currently it's at 3.5%. And remember, we're still comparing an absolutely no risk investment, to one with risk.
you need to go back to the time frame you are comparing to ...
3 years ago cd's were paying crap as an example , well 3 years later ffrhx has returned over 4% ...
you can't compare how bond funds did unless you go back enough years to match their duration value and see had you not bough the fund what were cd's paying back then ?
today the choice is ffrhx at a 5.04% yield or a 5 YEAR cd at 3.50% . the cd stays at 3% if rates fall , if rates fall then your return goes up on ffrhx. the more than 50% more income on ffrhx certainly is worth it to me .
if rates rise , ffrhx drops , however as the bonds are replaced over time the interest goes up getting you closer and closer to the 5.04% you signed on for when you bought it
Last edited by mathjak107; 12-29-2018 at 02:00 PM..
Here's the Fund Overview of FFRHX from Fidelity's website:
"Objective
Seeks a high level of current income.
Strategy
Normally investing at least 80% of assets in floating rate loans, which are often lower-quality debt securities, and other floating rate debt securities. Investing in companies in troubled or uncertain financial condition. Investing in money market and investment grade debt securities, and repurchase agreements.
Risk
Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Floating rate loans may not be fully collateralized and therefore may decline significantly in value. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks."
i am very very familiar with the fund . most of the fund now is BBB TO B . that is a level below A , so not sure what your point is . it is not a treasury , it is not a cd , it pays a rate of 50% more to compensate that fact .
so as an example , WHEN COMPARING , ftbfx fidelity total bond has a duration value of 5.60 years . that means if you bought 5 years ago you got 2.70% as a 5 year average ... know what 5 year cd's paid back then ? 1.78%
so you can't look at the one year which is down 1.45% and compare to todays rates . you need to compare todays rate on the cd to todays rate on the fund then in 5 years compare the two . why 5 years ? because that is the funds duration value to get the rate you got when you bought .
like owning an individual bond you need to hold the duration value , then you get about what you were offered the day you bought in . any comparisons have to be made to back then .
just so you follow along with this duration stuff :
imagine you bought a treasury bond fund with a duration of 5 . lets make it easy numbers .
you paid 10 dollars a share and the day you bought it paid 5% ..
so you bought it and rates jumped to 6 % .
well your fund dropped to 9.50 which is a fall of 5% , but the the fund is now paying 6% not 5% .
so the duration of 5 means that over 5 years the extra 1% interest will offset the 5% drop in value giving you back your original 5% deal .
if you look at the fund prior to 5 years of course it is going to show a smaller return . you did not get the higher rate long enough yet . but if you wanted to compare to a cd you would need to go back 5 years from today and then compare how each did .
FFRHX is currently yielding 5.04% dividends, net of expenses, per year, paid out in monthly increments. That is separate from the return of investment performance
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We built ours in 85, lived in one side until 98, then bought a home and paid it off in '07.
