Making Money

When I last updated my “play money” (Crazy Ivan) account info it was worth $25,953.  As of market close yesterday it is worth $28,174.  Equity and ETF positions have changed slightly. Then now include DTN, INTC, IVV, JNK, PBP, SPLV and XLE.   I like all of these positions, however XLE has been a short-term disappointment.  I hold XLE as only a hedge against rising gas prices.

All in all not bad performance for an account valued at $15,784 in October 2005.  (There have been no deposits or withdrawals  during the whole time.)  This is about 11.2% annualized performance.

High-Tech Portfolios

When I think about the phrase “high-tech portfolio”, I don’t think tech stocks.  Instead I think about using technology to build a smarter portfolio.   Most actively-managed portfolios are constructed, in full or part, using 50-year-old “modern portfolio theory” methods.  I’m working to change this by bringing superior portfolio technology to market.

So, while writing for this financial blog remains a passion of mine, I will likely be spending much more time refining software and building a financial software business.  Much of that effort will be off-line at first.  Occasionally, however, I will provide business and software updates on the Sigma1 Financial Software Blog.

Developing portfolio-optimization software combines two of my long-term passions:  software development and finance.

Rest assured, that I will keep this blog up and going.  I think it contains some hidden gems that are worth discovering.  I will also continue to blog here when inspiration strikes.

Stock Beta Computation, 6 Closing Thoughts

When I wrote about computing stock betas in 2010, I had no idea it would be this blog’s third most popular topic. I wrote a handful of blog posts about stock beta, but my heart wasn’t in them.  Today, driving home from the airport, I was inspired to blog about beta for perhaps the last time.  Previously I held back and focused on the mechanics of beta computation, and the discrepancies I was seeing between various website’s beta values.  This time I provide an example beta-computation spreadsheet and don’t hold back on the math or the theory.  Before I launch into this final word on beta, here a few highlights.

  1. Beta is easy to find online.  Not all sites agreed on value, but the delta seems less than it was 2 years ago.   Why compute beta when you can simple look it up?
  2. Beta is less useful if it has a low R-squared.  Luckily, sites like Yahoo! Finance provide R-squared values.
  3. Even with a high R-squared, beta is not a very useful risk measure.  Standard deviation is better in many ways.
  4. In theory high-beta stocks (>3) should go up dramatically when the market goes up.  In practice this is often not the case.
  5. In theory low-beta stocks (<0.5) should be “safer” than the market.  Again not so true.
  6. In theory low-beta stocks (<0.5) should “under-perform.”  Not necessarily.

If you are still interested in beta, simply click to read the full-beta blog.

Is Investment Real Estate Right for you? (So you want to be a landlord?)

Rental House Income
Investing in Rental Property

I have been a rental property manager (landlord) for just over two years now.   I’ve learned many things; two stand out:

  1. Residential real estate can be a great investment.  Rental real estate can provide steady cash flow, excellent asset diversification, favorable tax treatment… all with modest capital gains potential.
  2. Rental real estate can be a real pain to manage at times.  Both tenants and repairs cause headaches.

I currently own one rental property through my LLC.  Because of item #2 above, I’ve recently turned over the property management to property management company.  This choice will probably reduce net revenue about 10-12%, but will help take much of the stress out of finding and screening new tenants and dealing with repairs and tenant issues.  If things work out well, I will consider purchasing a second rental property.

In my local real-estate market it is reasonable to expect about 5-6% net income on a fully-owned rental property.  And over a 30-year period I conservatively estimate 1.5% appreciation.  Further since real-estate prices are a large competent of cost-of-living and inflation, real estate makes a good hedge against real inflation.  Finally, just as property values tend to go up, so do rental rates.  Simply put, residential real estate is the best long-term inflation hedge I’ve found.

The flip side of rental property is the eventual likelihood of landlord/tenant issues ranging from breaking the lease, to late or unpaid rent, to property damage, to eviction — just to name a few. Vacancies without rent can really take a bite out of your cash flow.  Properties can drop in value, and marketable rental rates can fall dramatically.

Somewhat of a wild card is the tax treatment of rental properties.  In the “pro” side are depreciation of the structure which can be deducted, and the fact that “passive income” like other investment income is not subject to Social Security tax.  On the “con” side is that fact that nothing can offset “passive income” except passive losses (and vise versa).  Owner’s of rental real estate (or at least their accountants) will become very familiar with IRS Schedule E of their income taxes.

Rental real estate is not for every investor.  Personally I wouldn’t recommend buying rental real estate until you have a minimum of $250,000 net worth.  Managing a rental property can be time-consuming and challenging.  Alternately, finding a good property management company is also a real challenge.  And unlike infomercials and “Rich Dad Poor Dad” author Robert Kiyosaki suggest, real estate is not a financial panacea.  However, for some higher net-worth individuals, rental residential real estate is worth considering as part of their investment portfolio.