Forum Mailbag: Factor Investing, Roth IRA Question, Shorting AGG, And More!

There is so much great information on personal finance forums. I regularly participate on the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.

1. Bogleheads: Factor Investing

Question: Matjen wanted the thoughts of the Bogleheads community on a recent Economist article on factor investing.

WSP’s Take: I understand the appeal of factor investing. In short, factor investing involves weighting your portfolio to certain factors that have been shown in academic papers to have beaten the market historically. The most commonly used factors are small-cap stocks and value stocks. It appears to offer above-average returns, albeit at higher risk.

However, factor investing does not do better than the general market every year, and can underperform the total stock market for years. I have no problem with using factors for investing, as long as you stick with an asset allocation that includes those factors. The worst thing to do is to invest in factors when they are doing well (for example, in a bull market), only to abandon them during a bear market when they would be expected to do worse (because of its higher volatility).

2. White Coat Investor: Roth IRA Question

Question: Johnny RN’s wife just finished fellowship last year and did not invest in a Roth IRA in 2017. He was wondering whether he could invest $5,500 into his and her Roth IRA for 2017 into VTSMX, another $5,500 each for 2018, and then convert the $11,000 in each account to VTSAX (which has a $10,000 minimum investment)?

WSP’s Take: The Roth IRA contribution deadline is tax day (usually April 15) of the following year. So for the 2017 tax year, the deadline to contribute to a Roth IRA is April 17, 2018. Therefore, he could probably contribute simultaneously to a Roth IRA (or likely backdoor Roth IRA in this case, as he and his wife may be above the income contribution limit) for 2017 and 2018. This would mean he would have $11,000 in each account to invest, which would exceed the minimum investment for VTSAX.

3. Bogleheads: Shorting AGG

Question: Broslami makes the case for shorting AGG, arguing that in a rising interest rate environment, bond prices would be expected to fall.

WSP’s Take: I would strongly recommend against shorting a total-bond fund such as AGG, especially as a long-term trade. Remember that current bond prices have already priced in the expected Fed rate increases, and future movement in bond prices (and therefore your return) will be based on changes in those interest rate expectations.

In addition, shorting shares requires you to borrow shares from your broker to short, and your broker will charge you an interest rate to do so. This makes the hurdle to beat the market by shorting AGG even higher.

4. White Coat Investor: Physician Versus Standard Loan

Question: Vee Tee wants to know whether it would be better to take out a physician loan in 1 year and refinance when he has enough money to pay 20% equity, or to save for a few years and take out a standard 20% down mortgage.

WSP’s Take: Physician loans enable doctors and some other high-income professionals to take out mortgages without a 20% down payment. Interest rates are generally higher than standard mortgages.

Physician loans are most commonly taken out by new attending physicians who have enough income to buy a bigger home, but do not yet have enough money saved up to make a full 20% down payment.

In this case, the doctor needs to ask himself or herself whether it makes sense to buy a home in the first place. Are they certain they will stay in this home long enough to justify the transaction costs involved with buying and selling a home? If this is a starter home and he is planning to upgrade to his dream home in a few years, perhaps it makes more sense to just rent the “starter” home. In a few years, he can use a standard mortgage to buy his dream home when he has saved enough money.

Wall Street Shares: 5 Articles To Read This Week

1. Doctor Of Finance MD: Why Did I Decide To Retire… — Hatton1, a frequent commenter on this blog and others, has decided to start her own blog. She is a former OB/GYN who recently retired and plans to blog about her journey from private practice medicine to retirement.
2. Passive Income MD: Creating a Safety Net For Your Life — There are more types of safety nets than just financial safety nets.
3. Financial Samurai: It’s Time To Start Worrying About The Housing Market Again — I’m not sure investors can predict the real estate market any better than they can the stock market, but Sam cautions against too much enthusiasm for real estate, especially in his red-hot Northern California market.
4. Mustard Seed Money: Is the Stuff You Buy Worth Your Time? — You trade your time for money, and money for stuff. Is the stuff you are buying worth trading in your most limited resource, time?
5. Diverse FI: Financially Independent or Addicted to Money? — A thought-provoking piece by DocG. Why do people still work and earn money when they have “enough”?

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?