SJBenen Advisory, LLC
Sam Benen is an Investment Advisor at SJBenen Advisory, LLC, a Registered Investment Adviser firm, established in 2016, located in Chapel Hill, North Carolina. Sam and his team are committed to upholding the highest standards of ethical conduct and acting as a fiduciary to serve the best interests of his clients above all else.
Sam has been in the investing business since graduating from Princeton in 2007 with a Bachelor’s degree in economics. He got his start in financial markets right out of college working as a trading assistant at Susquehanna International Group, participating in arbitrage strategies in options and ETFs. Sam worked for nearly 4 years as a trader at a hedge fund in Greenwich, Connecticut called Paloma Partners, where he worked for one of their internal groups called Xaraf Management. At Xaraf, Sam and his team traded in a wide range of derivatives markets, ranging from bonds to stocks to currencies. He worked for nearly 5 years as a portfolio manager at Talpion, a family office in New York City. His focus there was trying to generate absolute return in all market environments, meaning he tried to make returns whether the market was up or down by finding niche pockets of financial markets where he had an edge.
Sam was a top-ranked chess player in the nation, winning 7 individual national chess championships between the ages of 8 and 18. He is an ever-aspiring dilettante at all kinds of strategic games like Scrabble, Boggle, gin rummy, poker, and his favorite of them all, golf. Sam is originally from New York City and now lives with his wife in Chapel Hill, North Carolina.
BA, Economics, Princeton University
Assets Under Management:
SJBENEN ADVISORY, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN
Sam Benen -- SJBenen Advisory, LLC
You can think of paying down your mortgage as akin to buying a bond or a bond fund. Instead of a traditional bond ownership arrangement in which you buy a bond and get a regular coupon payment, in the mortgage paydown example your 'coupon' is the privilege of not paying the bank each month. Reversing a negative cash flow each month is effectively the same as adding a positive cash flow in equal and opposite amount. In this way, paying down a mortgage is like buying back your own bond, from an asset allocation standpoint.
A traditional portfolio of stocks and bonds consists of roughly 60% stocks and 40% bonds. The 10-year rate from the government is about 3.06% and there are several bond ETFs that yield in the range of 3-3.5%. For example, the Vanguard Total Bond Market ETF yields about 3.3%.
So, as you consider how to deploy the $343k, maybe you can construct a 60-40 stock-bond portfolio by putting 60% of it in the stock market, and instead of allocating the remaining 40% to bonds, you simply pay off your mortgage. In this way, you replace the traditional bond component with mortgage paydown. This is a balanced approach, and you are using the mortgage paydown as a bond investment that is superior to the average bond fund out there right now. Naturally you would never want to buy the Vanguard bond fund at 3.3% or the 10-year treasury at 3.06% when you could simply earn 4% by paying back your own debt.
Then, as you save off of your monthly paychecks and allocate your savings to new investments, you can continue to put 60% towards the stock market and 40% toward "the bond market" i.e. your mortgage principal.
Hope that helps you think about it.
Here's a quick guide to ETFs for beginners looking to manage their own money: Look at broad-based index ETFs with a total expense ratio under 0.15%. You can browse around on the websites of Vanguard and iShares for index ETFs with extremely low fees and many holdings. On the information page for each ETF, they will show you the number of holdings (you want very high) and the expense ratio (you want very low).
Do not use leveraged ETFs or anything fancy like that. Those are for speculators and not for long-term investors. Think ETFs with names like "Total US Market," "All-world ex-US," and "Aggregate bond."
Also, look for brokerage arrangements where you can trade ETFs without commissions. For example, in a Vanguard account, you can trade Vanguard ETFs without commissions, and in a Fidelity account, you can trade iShares ETFs without commissions. Paying zero commissions and micro fees (under 0.15%) will help you get to your beach house faster, while paying high commissions and high fees will only help pay for the broker's beach house! In all seriousness, fees are an important component of total return for long-term investing, so make sure to keep them low!
If you do not want to manage your own money or need further help, consult with an advisor or financial planner to discuss personal goals and asset allocation strategies.
Hi, I completely understand the information overload on the internet. I can tell that you want a clear, straightforward answer. So here it is. If you came to me and wanted me to help you start investing, I would turn you away. I would tell you to pay down your debts first and then come back to me for investing help once you were out of debt entirely. In fact, I would read you the riot act and tell you to eat ramen noodles and live a life of total austerity to put every available dollar in your bank account towards getting out of debt. Period. Start with paying down the credit card debt first, since that is clearly going to have the highest interest rate.
Buying in your case is a sound decision if the home can easily be converted into a rental property when you leave. If you buy a home that is difficult to rent out (and difficult to resell for that matter) the bare minimum time you spend there should be 7 years. When I think of homes that are difficult to rent out or resell I think of way out in rural areas, new constructions, bespoke homes, homes with high upkeep costs, etc. However, if you buy a home that you know will be easy to rent out because it is in an area where there is a lot of rental demand (near a major university, lots of transient young professionals, etc.), you can always just turn it into an income-producing asset when you leave by putting it on the market as a rental.
If you don't want the hassle of being a landlord, you can usually hire a rental agency for a modest one-time upfront fee and then about 10% of the ongoing rent. That way, it is out of sight and out of mind, being professionally managed, and you just sit back and collect the check.
You are well-educated young people clearly committed to making smart decisions and growing your assets. Owning rental real estate is a nice diversifying tool as you grow your assets. It's good to own some stocks, some bonds, and some real estate. I think buying a home, living in it for a while, and then turning it into a rental property for income when you move on could be a great play for you.
The financial instrument he used is called a credit default swap. The size of the short position you are referencing is called the notional value of the swap. The reason he needed to speak to the bank up front about doing this transaction is that trading swaps requires an ISDA agreement, which is a document executed between a large bank and a hedge fund that wishes to speculate using complex financial instruments.
The way credit default swaps (CDS) trade is the following: There is an effective life of the contract, usually around 5 years, over which the swap buyer pays a fixed premium every year to the swap seller. The swap seller collects this premium free and clear if the underlying debt obligation does not default; however, in the event of a default, the buyer has the right to swap out defaulted bonds for the full original par value. Like an insurance contract, the buyer is paying the premium for the possibility that the debt defaults, while the seller collects the premium and hopes nothing bad happens.
CDS is quoted in basis points per annum. If a debt obligation is deemed very safe, the CDS on that debt obligation will trade at a low premium, i.e. not a high cost to protect against its default. In 2005-2006, CDS were trading with very low premiums because of a perception that underlying debt obligations, such as mortgages, were very safe and unlikely to default. Because of the low premium, a speculator who wanted to bet on a default could pay a small amount to make a huge multiple of his/her money.
Say Dr. Burry wanted to buy a CDS contract on a basket of mortgages. And say the CDS contract was a 5-year, quoted at 50 basis points (0.50%). And say Dr. Burry wanted to transact $100 million notional. Every year for 5 years, Dr. Burry would be obligated to pay 0.50% of $100 million, i.e. $500k. If nothing happened, the CDS seller would collect $2.5 million in total over the 5-year life. But, if a default happened, and the bonds crashed to 10 cents on the dollar in a bankruptcy proceeding, Dr. Burry would be entitled to a windfall profit of $90 million: $100mm * (100% - 10%), i.e. the notional value times the difference between par and the recovery.
The losses that Dr. Burry incurred initially were due to the fact that he was paying premium for these CDS contracts but no defaults were happening. This can be very painful as a CDS buyer because you have to time it right to win. If nothing had happened until after the life of the contract, or until he ran out of money to make the premium payments, he would have lost it all.
So, if he had a $1.3 billion short position all in all, that was merely the notional value. If the average price of the CDS were 100 basis points (1%), his annual premium obligation would have been around $13 million. That is a lot of leverage - to control $1.3 billion of bonds in a bankruptcy with only $13 million in annual premium. When the bonds went belly-up, he made a mint.
This is not something you can do in your brokerage account. To reiterate, trading swaps with a bank like Goldman Sachs requires an ISDA agreement, which is typically only granted to institutions with at least a few hundred million dollars. Hope this explanation helps.