Investing for Geeks
training.kalzumeus.com
training.kalzumeus.com
I'd add a few things that I've learned over the years:
1) Always be invested in the market. Corollary, don't time the market. This is by far the largest mistake people make.
Investors typically pull money out at the bottom after they've suffered a physiologically devastating loss, like at the end of 2008 and hence they miss the rebound, like 2009-now. This isn't quite the same but it shows what missing the top 25 days in the market over the past 45 years does to your returns.
http://www.marketwatch.com/story/how-missing-out-on-25-days-...
If you are an investor you need to be in the market, period.
2) Accept that you will lose money some years. If you are buying index funds then you will get market performance, ex fees. Markets go down sometimes. Stay the course.
3) Don't look every day or you will go nuts.
Keep in mind that the largest draw down (top to bottom) will be larger than what the returns look like if you just look year over year. Ie if you look and see the S&P lost 28% in 2008, understand that if you watched the S&P every day of 2008 then it probably lost more than 28% from its top to its bottom but rebounded slightly at the end of the year to make the year over year loss less than the maximum loss.
4) Have some exposure to outside of the US markets. Consider the scenario of investing all your money in the company you work for. In a rough time for your company you get the double whammy of losing money and possibly your job at the same time.
Similarly to how you are told to not invest all your money in the company you shouldn't invest solely in the country you live in, same principle.
EDIT see child comment, I mangled the English language in point 4
Since that phrase is somewhat ambiguous, let me clarify for anyone who misunderstood it on first reading, like I did. :-)
I'm pretty sure you don't mean "It may be a good idea to invest all your money in the company you work for."
But rather "Consider this very bad thing that may happen if you invest all your money in the company you work for."
Yep, I really mangled that sentence. Sorry to everyone who just invested their life savings into the company they work for.
I guess I really meant...
> Consider the scenario of investing all your money in the company you work for.
This is the part that kills my ability to "set it and forget it". So many things bother me about this. I know I have to do it (because Japan), but how much and on what markets?
* I don't like the idea of investing in emerging markets. Having grown up in one, I know how shady those can be and how cooked the books are. Growth is often an illusion. If an emerging market is "promising", I'd rather wait until it achieves developed status.
* Developed market indexes are dominated by Japanese stocks, which have gone nowhere in almost 3 decades. You have to accept that a good chunk of your money is going into a no-growth sink.
* I don't know what to expect from Europe. Or even Canada for that matter. When I look at those countries from a distance, I see that 1) their large corporations have been established looong ago (i.e. no new ones are created) and 2) heavy taxation and regulations in those countries doesn't seem to leave much room for profits, at least not as much as in the US. I'm probably wrong though, so please educate me.
I know home bias is supposedly wrong, but the American market is well studied, well known, highly liquid, and there's a cultural aspect to its growth in that its part of the general population's mindset to invest in it for long term goals. I don't think that's the case in all (or even most) countries.
Part of me wants to go full jlcollinsnh/Bogle/Buffet, folks who say you don't need international diversification. Another part of me wants to go as blind as possible into it and just invest in a "world index" ETF like ACWI or VT. And yet another part of me wants to do something in between but has no idea what to do :)
Invest into multiple emerging markets, chances are they won't all do bad at the same time, especially if they are in different parts of the globe (take India, Brazil and Indonesia for example), put some into an european index fund, etc.
You seem to be most comfortable with the US market, so the bulk of the assets you decided to invest in equities go there, say 70% and to make things easy put 15% into Europe and 15% into emerging markets. Now you have some diversification, but could still feel comfortable enough to not be worried about your money disappearing over night.
Put your money into it. Walk away.
[0] https://en.wikipedia.org/wiki/Variance#Sum_of_uncorrelated_v...
You can investment just like Buffet if you Berkshire Hathaway Class B (BRKB). Currently ~$145 per share.
I got that from the introduction to an investment book about Buffet.
FWIW Vanguard has about 35% allocated to international for me, so it's surprising to see that Bogle wouldn't recommend international exposure.
The risks can be higher but so are the rewards. The most important thing is to not just invest in a market blindly. Try your best to understand that market and keep tabs on that market.
You don't have to diversify for the sake for diversification. You can invest domestically and diversify by industries.
Yeah, this is an over-generalization. There are plenty of index funds for European companies at a variety of risk levels, just like in the U.S.
Also, there are worldwide funds too. Capital World Growth and Income Fund (CWGIX) [0] is one example that covers the U.S., Europe, and Asia. Note that this is a mutual fund, not an index fund.
Edit: Perhaps the downvotes are because this is an actively managed fund. The point of giving the example was trying to counter the specific concern OP stated. For passive, a specific Vanguard fund that's similar, at least the closest I found, is Vanguard Total World Stock Index Fund (VTWSX) [1]. It is very diversified.
Yes, I've heard that a million times, but that kind of advice presupposes a bull market. What if it's 1967, and you're about to go into a 15 year period of up and down markets, with no real growth in stock prices? And that's before inflation; the market fell substantially during the horrible 70s if measured in real dollars. All kinds of stock enthusiasts (like most folks here) got eaten alive. Pessimism reigned by the early 80s. Most people said "I'll never buy stocks again.".
Ironically, when investors finally capitulated, the great bull market of the 80s and 90s started.
My point is that most people here are mesmerized by that bull market, and by recent gains. But historically the indexes have had huge, long term swings that probably exceed most people's investment horizon.
"Past performance is no guarantee of future results" is not just a legal disclaimer. It's a bitter truth. Our current optimism is strongly colored by recent gains.
What if you had retired in 1929? You would have received nary a return for 25 years.
Sure, indexes average 8 percent or so, over the very long term, but it can be an intolerably long averaging interval.
http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
> What if you had retired in 1929? You would have received nary a return for 25 years.
That just isn't true? You're looking at charts without dividends reinvested. Plug 1929-1950 into https://www.measuringworth.com/datasets/sap/ for example. It had bounced back above 1929 by 1937; never falls below the starting value after 1944.
Definitely this. I personally believe "Always be invested in the market" is very irresponsible advice to give, precisely because it completely ignores this fundamental truth.
Just because markets have averaged a positive return in the past doesn't mean they necessarily will continue to average a positive return in the future. And as the saying goes, the market can remain irrational far longer than you can remain solvent.
That said, I still do invest most of my money in the market, but I don't try to pretend it's anything but a gamble. I've weighed my options, and the upside of investing in the stock market is much higher compared to all my other available options for investment, and I can afford to lose this gamble at this early stage in my life.
But when people ask me for investment advice, I will tell them it's a gamble and let them make that decision for themselves, rather than try to propagate this ridiculous urban myth that the stock market will always somehow eventually end up higher, and add fuel to what has essentially become a massive pyramid scheme.
The easiest way to tell if someone understands financial markets is to find out whether they believe they can time the market. If they believe they can predict the market, they don't know what they are talking about.
[edited - removed ending]
You are astoundingly unlikely to know more about any stock from reading the newspaper, seeing their chart on Google Finance, or consuming their quarterly reports than a team of PhDs who did nothing but study that stock for the last year, and accordingly are vanishingly unlikely to trade stocks in such a fashion that you do better than the market once you account for fees and tax impact.
It gets to why these comment threads can sometimes have people talking past each other. Someone will say "You can't time the market", and mean 'you' in the same way Patrick does, but someone else will come along and think the statement meant "no one can time the market". Then the discussion goes off into a whole rabbit hole about quant hedge funds and the like.
This is the comment equivalent of a loaded question. Or it's like those people who dismiss those arguing against them because of who they are rather than what their argument is.
for example, I'm heavily invested in the market but recent events are leading me to consider halfing my investment rate to be more cautious. I'm not going to take any money out or stop investing but by your def I'm "timing" the market, but really I'm "timing" my life. I don't feel confident that I can afford the risk, and I'm lowering my exposure rate.
Time in the market beats timing the market - the adage is as old as time itself. Not sure that knowing it makes you understand the markets especially well. Similarly, not sure that not knowing it says anything about you either.
People also unwittingly imply have actions where, if you asked them, they'd say they couldn't predict the market, but they'll say things like "I'm waiting for the market to cool off"
This. Another way to think of it: if you are out of the market when it goes up by X% that is functionally equivalent to an X% loss, i.e. you have X% less money than you otherwise would have had.
(Well, OK, technically it's equivalent to a loss of X/(1+X) but that's pretty close to X for X<<100%.)
The larger American companies are global companies, so you get that anyway. The proof is look what happens to the US markets when some foreign event happens, like Brexit.
Also, what are your feelings about various robo advisors like Wealthfront and Betterment and the competing products that Schwab and Vanguard have out now?
Say you have Fund A and Fund B set to automatically invest 50/50 your $100 dollar contribution bi-weekly, with a buy commission of $5. You pay buy commissions on fund A and B 4 total times a month, so you've wasted 10% of your monthly investment ability ($200 - $20). In a year that money is $194 at 8%. (This used to be the case with old ShareBuilder/ING/Capital One---not sure about the new-style other brokers)
Consider a monthly payment to Fund A and two weeks later a monthly payment to Fund B. You saved half commission cost of above, and in a year your return is ~$205.
Robo Advisors like Wealthfront are still just advisors, and that means they're just guessing like real-life advisors. And as has been proven time and again, they underperform index funds.
* http://www.investopedia.com/articles/investing/060216/3-reas... * http://finance.yahoo.com/news/buffett-most-mportant-investme...
>>I stopped putting money into the stock market since a while ago
These two statements are in conflict with one another. You are literally timing the market by not investing anymore. Just invest every month and you will be much better off.
You realize you are trying to time the market, right?
There's a big difference between timing the market and looking at p/e ratios or debt load for stocks (or entire indexes) and deciding that they are way over valued. If you also think bond interest rates are too low likely to climb, hold your cash and come back to pick up stocks when they are cheaper. There's nothing wrong with that strategy as long as you are buying and selling on value and not trying to time a crash. Let the mob chase the yield down the rabbit hole.
If no one did this and everyone was just long everything forever, the market would be immediately broken.
edit: While I think John Bogle is a hero of the investment world with advice that all investors should heed, the Boglehead-Dunning-Kruger-effect can be profoundly annoying. They are a fantastic starting point and they address the most common mistakes, but it's a wee bit more complicated than Bogle's rules if you really want to learn equities and investing.
To conclude, I think it is prudent to review your asset allocation maybe once or twice a year, and shift things around a bit.
I'm glad you don't adhere to the defeatist approach of Efficient Market Hypothesis proponents. Always be in the market, yes. Always follow the market, no.
here's something to think about, and i know i'll take downvotes to hell for all this: if everyone agrees and everyone is investing (for retirement etc) identically (long stocks bonds whatevers), what are the odds it's "cheap" or represents future extraordinary gains?
If I have 99% cash and 1% in VTI for 10 years, am I "always invested in the market" during this time?
It's a whopping 16 page book of plain talk and he made it free on the internet, no strings. [1] It's the best introduction to planning for retirement, especially for those under 35, I've read so far.
First of all their fees are too high. Wealthfront's 0.25% fee seems rather small and it is smaller than what a lot of human advisers charge, but if you compute it over a lifetime of savings with the negative compounding effect it will cost you a lot.
Imagine you receive some money when you are 20 from a rich uncle and invest it for 40 years using the wealthfront fee structure. After 40 years you will have paid about 10% of your savings in fees. Or, in other words, you will have about 10% more savings if you had taken a couple of hours to sit down and decide which funds to invest in. Keep in mind that the wealthfront fees are in addition of any etf or mutual fund fees you have to pay to get into investment vehicles.
So yeah, compounding interest is a dangerous thing.
There is another problem with roboadvisers -- people put too much trust in them. In our society there is this implicit trust of the computer, probably bred from multiple sci-fi shows with all-wise computers. Well it is a very dangerous thing when it comes to your savings.
You may not be the best investor, but you should take responsibility in your investment choices. You should know what you are investing in and why. Even if the thing you are investing in is a boring simple S&P 500 fund (as it should be for most of you) you should know what it is and why you are investing in it. You shouldn't just blindly follow some algorithm programmed by god-knows who.
If you just want to 'set it and forget it', consider its an approach you're taking with the fruits of decades of your life.
[edit: typo]
The Betterment site is pretty, which makes me more inclined to put more money into it more often. This is irrational, but for me this makes it worth more than the 0.15% I end up paying them in fees.
I'm less sure about whether TLH is worth the 0.15% fee, though. The premise is that you do some "equivalent" (to you, but not to the IRS) transactions, report them on your tax return, and lower the taxes you pay today ("basis"). In exchange, you would have to pay those taxes later on your investments when you withdraw them. Is this always the right answer (because those later taxes are in compounded-inflation dollars)? What if I think my tax rate now is lower than the tax rate in ten, twenty, fifty years?
That being said, you won't always benefit from it, and there are caveats you should read about. I've decided to take a slightly more hands on but simpler approach, and have moved all of my investments into a simple 4-fund portfolio at Vanguard.
If and only if you would have done about as well as the robo-advisor in those couple of hours. (I'm not saying this would or wouldn't happen, but it's pretty big for an unstated assumption.)
My point is this portfolio distribution stuff is not an exact science and there really isn't a right answer. There are some broad accepted guidelines, but they are rather broad and simple and you definitely do not need computers to follow them.
Should I also be performing the work of checking several times a year if I should be making sales, recording the losses, buying equivalent securities, and bundling that into a form for the IRS?
Ex: Wealthfront's high risk portfolio back in 2013 had significant exposure to commodities -- mainly oil and metals. That sector has done poorly to say the least, and many a retail investor would not have correctly understood what Wealthfront's definition of risk actually meant.
http://whitecoatinvestor.com/retirement-accounts/the-stealth...
Actually, both account types have the same yearly limit; it's just that the employer can contribute much more than the employee, and when self-employed you can contribute as the employer.
In fact, the difference between SEP IRA and 401k is not the funding limits, but the fact that the SEP IRA allows only employer contributions. You can actually open a "solo 401k" for yourself if you are self-employed, and make both employer and employee contributions. That will let you put more money away for a given income than the SEP IRA, until you make 275k or so at which point you have hit the cap for both (and the cap is the same for both).
Edit: Vanguard has a calculator to show the difference:
Additionally, with a solo 401k plan, the $18k employee contributions can be Roth.
And you think that's problematic? I have relatives telling me that they'll go with X anti-thrombotic therapy because a cousin of the brother of a guy who they met in the supermarket took it 6 years ago and worked wonders for him. I'm a pharmacist and I have rather strong opinions about some drugs over others, but I can take advices from doctors, physicians, nurses or anyone with a minimum degree of knowledge on the topic. Still, many times I have to argue with with relatives, to the point where I get frustrated.
Edit: It's not clear from the essay, but I'm assuming Patrick's 8% rate is not adjusted for inflation (based on his 40k drawdown scenario - the other 3-4% would cover inflation).
http://www.nytimes.com/interactive/2011/01/02/business/20110...
On scale, it makes it seem like +3% to +7% real returns is "neutral". This makes it seem like the stock market is sometimes good sometimes bad but overall it may as well be just okay.
On comparisons, it does a huge disservice by not adding a tab showing bond yields and a tab showing cash/treasury yields (which would be dark red across the board except light red around 1930).
I feel these slights make the graphic present stock investing in an unfairly unfavorable light and makes the suboptimal strategy of keeping your money out of the market seem much more favorable than it is.
This single diagram explains the market dynamic year over year in a way I've never seen anywhere else. The 1/3/5/10 yr returns figures you see don't even come close to understanding the nuances of one year over another.
I remember when this diagram was published in 2011 and _still_ refer to it routinely.
This is why you do dollar cost averaging and steadily invest every year, to spread out your investments over multiple years.
Right now it is at 7.6%. It is not inflation adjusted, so it's lower in real terms. Also, for the great majority of those 20 years, the APY was much lower. And, since most advice says to do some mix of domestic, international, and bonds, most ideal portfolios will have even lower performance.
I know it's just one data point, but one reason this is lower than expected is because people tend to have more money to put into the market when times are good (and the market is high), and less money to put into the market when times are bad (and the market is low). It was true for me in terms of my contribution history, at least.
And if you're concerned about "one data point", I'll give you plenty:
http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
For a 20 year window, it's below 6% inflation adjusted, and close to 8% without taking into account inflation (closer to your 7.6% figure)
US GDP growth has been slowing for decades now. At some point that will be reflected in the markets and the index funds that track them.
https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&...
(But, yes, I still invest in index funds. I just don't have the same dreamy expectations that many other people seem to have.)
http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
The first question is: What window are you looking at? For 30 years, it's about 6.8% for the last 30 years (inflation adjusted - close to 10% if you ignore inflation).
I've plotted it for each 30 year period going way back. 6.8% is not high. It's been well over 10% a number of times. I think 7% is a good average.
His figure was from a 10 year window. Unless you plan to retire in that timeframe, I would suggest just looking at a larger window. Less volatility.
Oh, and based on my plots, his 8% looks like it is inflation adjusted.
The problem with looking at extremely long periods of time (i.e., 50 years) is you see these massive events like depressions and the housing crisis. How many of those will happen in the next few decades... who knows?
Maybe we'd be better off to look at median percentages than averages.
If realized rates over the next ~30 years are less than 5%, not only are we as a civilization going to have bigger problems than my retirement, but I don't think much anything will save you regardless of how much you are saving, unless you have a very frugal retirement.
Also, regarding safe withdrawal rates, consider that (depending on the jurisdiction) in retirement you might have to pay taxes on the nominal rates, but then leave enough to compensate for inflation.
Say: 4% nominal, pay 25% taxes, leaves you with 3%, but 2% inflation, so you can safely withdraw only 1%. Thus, conservatively, $1m might give you only 10k a year.
I simply cannot fathom why he would state that. I cannot imagine a scenario where my retirement income would (nor should) be as high or higher than my peak earning years.
Typically in retirement you have a home and all sorts of hard goods (clothes, furniture, cars) paid off and thus need less money.
Also note that any increased or decreased "need" doesn't factor in to the calculation.
I see the Roth/Regular as a bet-hedging opportunity - ideally, put some in each type and then you are ensured against either scenario.
Tricky.
Your effective tax rate is likely to be much less than your marginal rate.
Also, for anyone interested in financial independence and simple investing with your 401k and IRAs, I'd like to recommend the Stock Series here: http://jlcollinsnh.com/stock-series/
Another one that no one has mentioned: state income tax. I live in CA but would put a >50% chance that I will live in a lower tax state when I retire. Thus, Traditional > Roth.
Me either, unless he assumes:
1) His audience is all tech workers, and
2) all tech workers are making better than $62k (single earner) or
whatever the higher married-jointly exclusion is.
Under what conditions could this occur?
Also an HSA can be used to shelter a bit more income. If you don't consume much health care a HDHP may be the way to go.
There is also the backdoor Roth, but I never wrapped my head around it.
Medical bills.
I look at it as diversifying against tax law going crazy though, siNce so much of my retirement income is in 401k and pretax. Also the limits are a third of 401k, so it's only a quarter of retirement savings, and principal can be pulled out if needed.
Non-deductible IRA actually gets a worse tax treatment than an ordinary taxable account, due to the long-term capital gains rate being lower than the income tax rate.
[1]: http://www.mrmoneymustache.com/all-the-posts-since-the-begin...
If nothing else, that site made me realize where i stood on the consumer/producer scale, and what i needed to do to feel better about my future.
(That's pretty much the gist of this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... )
That said, you need to be invested somewhat just to fund retirement. It can be pretty conservative, though.
One handy way to extend your tax-advantaged space: buy Series I and Series EE bonds from Treasury Direct. Both are tax-deferred until you cash them in. You can purchase up to 10K of each type per year. They are government-backed, highly-safe fixed-income instruments.
I bonds will pace inflation (like TIPS) for up to 30 years. EE bonds have low 'normal' yields but they automatically double after 20 years (so around 3.5%/year annualized, better than the rates on 20-year Treasuries). These rates are better than what you get on the open market.
And unlike normal bonds, they won't kick out payments that are taxable along the way - you can save the tax bill until you have a lean year then cash them back out (in the case of I bonds at least), or save them to the end of their lifespan (or until they double in the case of EE bonds).
Also, you cannot reliably time the market.
https://medium.com/@blakeross/wealthfront-silicon-valley-tec...
2. Max out 401k, IRA
3. Put most of your money in cheap index fund like https://investor.vanguard.com/mutual-funds/lifestrategy/#/
Note: this is not investment advice
this is not investment advice
So below $10k you're not going to get the best expense ratio, and many of Vanguard's funds have a min of $3k so you can't buy the Vanguard LifeStrategy class or 500 Index fund either. You CAN however buy a Vanguard Target Retirement fund ($1k min and ~0.12-0.16 expense ratio). You don't have to use it for retirement -- you can invest in it just like any other fund, and if you choose a longer horizon the fund will be 90/10 stock/bond or 80/20 stock/bond biased.
With 2500 you should go FSTMX.
(Don't take investment advice, including this, from strangers on the internet)
In Australia you could pay off your mortgage then refinance in a brand new loan to buy investments. The interest you pay on THAT loan is income tax deductible.
If cost of debt < return on investments -> then invest it, don't use it for your downpayment.
Obviously, this does not apply to credit card debt, on which you pay 10-15% interest per annum.
* https://www.reddit.com/r/personalfinance/wiki/commontopics ("I have $X, what do I do with it?") (and the rest of the PF wiki is a good general resource as well)
* https://www.reddit.com/r/financialindependence/ (How do I save enough to be able to stop working?)
I explain to them that I put most of the money I make into my company, and have a greater ROI than if I put the money into real estate. But, since I have to live somewhere, I rent.
Yet, I am not sure this argument is correct. If I had money for a down payment, perhaps the strategy of getting a mortgage would win in the long run. So, instead of getting into the details, I usually mention I also like to be able to change apartments every year or so.
What are your thoughts - those of you who have now, or have had, growing startups?
Plus, if you decided to relocate to a different place there is a significant cost of selling, which would wipe out any modest gains in appreciation.
VTSMX 60% VGTSX 30% VBMFX 10%
or ETF's
VTI 60% VXUS 30% BND 10%
These allocations follow the Boglehead principle of 3-Fund portfolio / Lazy portfolio
Is there a particular reason you chose mutual funds rather than regular index funds? Everything I've heard in the past says that mutual funds generally have higher expenses without worthwhile increased returns.
Can you link to a source for this? I was not under the impression that IRA contribution income limits were impacted by whether or not you also have a 401k at work.
P = principal,
T_0 = current tax rate,
T_t = Tax rate at retirement (t years in the future).
r = rate of return between time 0 and t
Roth IRA: (P * (1-T_0)) * (1+r)^t
Traditional IRA: (P * (1+r)^t) * (1-T_t)
- I deposit $4000 into my Roth IRA this year.
- This was post-tax income on $6000.
- In 40 years, It grows to $20000.
- My total tax burden is still $2000.
Let's say that you deposit $4,000. You've paid $2,000 in tax or 1/3rd of your money. That grows to $20,000 (5 * 4,000) which you can put into your pocket.
Let's say that you deposit the entire $6,000 into a traditional IRA. That grows (at the same rate) to $30,000. You take that money out and owe the government 1/3rd of that money so $10,000 goes to the government and you pocket $20,000 - the same amount.
So, with one exception, they come out the same assuming the same tax rate at both times. You're paying more tax to the government, but the amount in your pocket is the same.
The one exception is that the cap is the same for both. So, if the cap is $5,500 and you put $5,500 into both, you'll get more out of the Roth. 5,500 * 5 = 27,500 in both cases, but in the case of the traditional, you'll still owe taxes. So, in effect, the Roth has a higher real contribution cap (even though the caps are nominally the same).
Because the government didn't set the Roth contribution cap at 2/3rds of the traditional cap, you can effectively contribute more.
Money: Set up life insurance, income protection insurance, and decent medical coverage.
Accommodation: You don't need to own your own home, but have some money available to cover rent or mortgage if needed.
Social: Don't let your social life revolve exclusively around work colleagues. Invest time in family and broader groups. Find a way to have achievements outside of work.
So this happened to me. My wife and I went from a very comfortable double income to countless hospital visits and no time or energy for anything else. And this is just after we had kids.
I'll be forever grateful that my wife set up the safeguards above. I was 100% invested in work, financially and socially, so it has been a huge shock and could have been much worse.
Local banks usually offer a very small selection of funds and the fees are usually 2%, which has a huge impact.
In general, take a look at etf funds with low commissions.
Search on bogleheads the wiki pages for Europe (there are also few for specific countries)
If you put in some fixed amount regularly over, say, 35 years, and the asset manager charges 2% p.a., they easily take a third of your savings overall, or more.
It is imperative (particularly in this low yield environment) that you keep your fees down.
If your current tax bracket is rather low, or you expect to be earning lots of money through retirement, then Roth IRA can be a better solution.
I think for a typical "geek" who this article is about, rare is the scenario where you expect to be making that much more by (and throughout) retirement to justify taking the tax hit now. Maybe this works for a doctor who's doing residency and still paying for medical school, who eventually expects to be raking it in. But for tech workers our compensation tends to plateau very early and not grow a great deal throughout our careers. I know on a percentage basis, my comp grew more in my first 5 years than it has in the last 15. This scenario would appear to encourage tax-deferred investment.
> No 401k Offered:
> Open a traditional IRA or a Roth IRA. The traditional IRA contributes pre-tax money, the Roth IRA post-tax money. The upshot is that if you believe your marginal rate at retirement to be higher than your present rate, you should pick a Roth IRA, otherwise, you should pick a traditional IRA. If you don’t feel like forecasting that, take my word for it that 90% of you should have Roth IRAs.
I don't see many people where Roth IRA makes more sense than Traditional yet they say 90% should go Roth.
Assume I make 100k and I put in $5500 into traditional... I would have to earn about $8000 to have $5500 to put in my Roth IRA after taxes. Having all those years to grow that "extra" money seems much superior to me even if somehow you amass so much money that you are making more in retirement than during your working life UNLESS you suspect future tax brackets will be much higher. I suspect that is a typo and 90% of folks should choose traditional...
If you can spot something that's genuinely original in how it blends things together, has enough expert mindshare to be a leader in its domain for the foreseeable future, stands good odds of capturing a decent amount of the value it creates for those who support it, and offers a way for you to throw money at it: throw money at it.
It's a completely different game from trading in more mature markets where politics and statistics become major forces alongside original innovation in determining what happens next.
And generally, its not exactly a safe bet either. People who do throw their money at startups tend to also have lots of other very safe, diversified investments to balance out the risk of larger singular investments on specific bets/companies/tech/ideas.
For example, the author is advocating and claims to invest in your basic Vanguard Retirement Target fund, but he's also an accredited investor who also does just what you suggest
With startups specifically, I'm hoping Title III is just the beginning of making them a lot more accessible for more casual investment, like throwing $5 at whatever cool/useful thing has caught your attention lately.
As an aside, I'm sorry to read that Starfighter is closing down. Seemed like an interesting idea, and one that could have been good for both employers & employees. My best to tptacek — I know that he'd high hopes for it.
The market is not efficient. Full stop. Stop telling me that I'm not going to beat the market. I beat the market all the time. In 2007 I was telling everyone I know that the housing market was about to burst. I sold all of my family investing company's stocks (except for Apple) and I moved everything into money markets / bank accounts. Bought back in during 2009, road the wave up until about last year I started feeling a bit skiddish and sold off not everything, but many things. I routinely pick individual stocks, like Apple, Telsa, Amazon, Bitcoin; that I know are better. Apple: iPhone is better. I don't care if some analyst at Goldman knew this before me 90% of the public was still talking about how Blackberry had a keyboard. Telsa: the physics made sense, plus Elon had that Silicon Valley-ness to him. Amazon I knew would win with AWS and the whole "ecommerce is a bear" thing. Bitcoin: People like drugs and buying things online, bought in at $4 a coin, have since sold almost all of it.
It is actually really easy if you are smart enough to be a programmer to beat the market. Just make sure you understand the domain you are in really well, and be cautious of overall trends in the economy. I've averaged 18% year over year returns with a diversified portfolio (yes, more than a quarter of that is bonds or and another quarter is super low risk dividend companies like consumer staples).
"Survivorship bias" I hear you say.
Maybe there should be this other word "suvivorship bias bias" where one is incapable of having their view of the efficient market hypothesis challenged because this is the only thing that comes to mind when they talk to someone about investing.
There are ways to do better than the S&P 500. Patrick is right about one thing though, you won't pick winning stocks from reading the newspaper but you might miss a 2008/2009 if you read The Economist instead of Time Magazine.
http://www.tradersnarrative.com/wp-content/uploads/2008/03/a...
http://img.timeinc.net/time/images/covers/pacific/2005/20050...
I understand your sentiment, and have felt the same way. I made the same bets on Apple, Tesla and Amazon at around the same time and beat the market. I think the issue is — can you replicate that for the next 30+ years? I don't think I can.
This is a reasonable default option but not necessarily the best for everyone.
There is a flaw in this statement - you are encouraged to save more today in order to maximize amount of money in your retirement account, with side effect of some immediate tax savings (which btw will not be in absolute figures but will be in rate - if you save more to 401k, your tax rate will be lower but amount of tax you will pay will still be higher).
If you are too far from retirement and have other goals that will come before retirement that could be very important to you, it becomes a decision just like anything else, not a no-brainer.
This is because of tax law - you are very constrained in your ability to take money from 401k before retirement if you need it.
However, the opportunity lost for every year you defer retirement contributions is huge, especially when you factor in the employer match you could be getting.
If you assume a $200 a month contribution at about a 3% rate of return, the difference between 39 and 40 years of contributions is $7,600. Discounting the $2400 in contributions you would have made, that's still $5,200 lost just for waiting a year. And we're not even factoring in an employer match.
Again, agree that for some this may be a tough decision. But generally speaking, if you receive a salary and have the option to participate in a retirement plan, you should do it.
There are also certain 401k rules that may play very hard against you. For example, take a look at mandatory withdrawals ("required minimum distribution" - RMD) for some types of retirement accounts in the US at certain age + how your retirement account suffers disproportionately if market is down when you start mandatory withdrawals.
I know the math you are talking about, it does make sense conceptually and that's why it's cited in all 401k materials, real life with its rules and uncertainty is bit more complicated.
Sometimes, it is difficult to resist trying to time things, and if the market drops 2% or 3%, I'll buy more. So far, it has worked out, but holding on through massive losses can really hurt. Throwing your money into a correction can feel really strange. In February, I was down probably 40 or 50K over a month. But I stuck it out. I even bought some individual stocks (mostly SaaS companies) that are up 40% or 50% (CRM, HUBS, etc.)
Sometimes reading HN makes me feel really poor
It is actually a bit higher than that, since I rolled over some funds from another account and those gains are not included in the investment return calculation. Vanguard is showing the entire roll-over amount as a "purchase", despite the true cost-basis actually being lower.
There are a few companies with good ethics, mostly in tech, that I would invest in. I don't see myself investing in a mutual fund or index fund though.
If you make $100,000 and put 10% of that into a 401k, your income tax will be based on a $90,000 income.
You do pay taxes on the money you put into a 401k when you start withdrawing from it during retirement, but what matters is this: if you believe your income during retirement (i.e. the money you'll be paid regularly out of your retirement accounts) will be less than your income today, then contributing to a 401k means you will end up paying a lot less in taxes overall, over the course of your life.
There are ways to take money out of your retirement accounts before retirement age, but it depends on certain scenarios[1]. If you need to access the money before retirement age outside of those scenarios, then do a regular brokerage account.
Regardless though, you should definitely open a Roth IRA if you're eligible, and contribute the maximum amount every year. Contributions to your Roth IRA are after-tax, so they won't be taxed when you take them out during retirement - since they have already been taxed. This makes them very advantageous.
In that case always max (currently $5,500/yr) a Roth IRA first, because you can withdraw the principal before retirement.
Second, if your company 401k offers loans the typical (maybe this is a legal thing?) max I hear is 50% up to 50k total. You're making a loan to yourself that pay back into the investment. Keep in mind if you leave the employer you may have to pay off the loan...
If you really might need access to your money it's probably best to stick to Roth IRA + taxable (non-retirement) investments.
Another thing about 401ks is the fund choices can sometimes be shit. If they're all high expense rate funds I don't even bother. These days the companies I've worked at typically offer one or two halfway decent index funds, YMMV.
If I had some unique situation where I wanted money more accessible, I'd forego the 401k and get into an IRA with Vanguard, with one or more index-tracking ETFs (VTI i think?). But, I'd make sure its done every single payday automatically and directly. No stop off at the savings/checking account.
*This is not professional investment advice.
I partially agree, but the big difference between a crap 401k with at least one decent index fund and a Traditional IRA is that I can dump 18k/yr into the 401k. IRAs phase out quickly and have low deposit/yr maxes.
Considering how often people change jobs these days, the 401k is a way for most people I know to shove 18k/yr into a special bucket so they can move it to Vanguard within a few years when they leave the company.
I've used a non-matching 401k mostly to save more money (and roll it into a Vanguard IRA as soon as possible) but a lot of advice I've read on the internet suggests maxing a Roth IRA before contributing to a non-matching 401k. (I don't have a Roth yet because it's always seemed crazy to me that my taxes will be higher in retirement than now. I see in this thread they have other advantages, like being able to withdraw principle.)
You lend your money to other people through the marketplace and they pay it back with interest. The ROI is about 10% to 15% per year. I think it is low risk since you can choose the type of the loans you want to invest in (loans secured by real estate or short term loans with buy back guarantees). You can also diversify since the minimum investment is €10.
I don't think you can invest hundreds of thousands or millions of euros (the market is not so big) but the market can definitely support tens of thousands of euros.
https://docs.google.com/document/d/1KXfTFYfmhb9Cy5NE0uRuf8Sv...
I bought my first house when I was 19.
It's a little two bedroom shack in Boise, Idaho, which I bought in 1999 for $68,000.
I still have that little shack. Today it's worth about $135,000 and the tenants I had in it essentially paid the mortgage on it and I own it free and clear.
I've actually got 26 total rental units and I generate about $10k a month of almost completely passive income off of them, net.
I made a ton of mistakes along the way, but I learned quite a bit--which I'm happy to share.
Over the years, I tried to buy one property every year.
At first I could only afford small properties and would put 10% down, so I was a bit leveraged.
But, eventually I was able to afford bigger properties and put more money down.
I always bought properties using 30 fixed loans and that ended up working out well.
I watched in horror as many of the other investors I knew--who were really speculators--went under, during the big housing crash.
I actually thrived during this time, picking up properties for cheap.
All the time I was working as a software developer, I had this goal of retiring early.
I kept saving as much as I could and investing real estate... little by little.
Like I said, I made mistakes, but learned from them and got smarter as I got more experienced.
Eventually, I had built up enough cash flow to actually "retire." This happened a few years ago.
Why is real estate such a good investment?
Well, I think there are two main factors: leverage and hedging against inflation.
Leverage is extremely powerful.
A bank will lend you a large amount of money, sometimes 90% or more, for you to invest--if you buy real estate.
This isn't the case with other investments.
So, you can buy a house for $100k, put $10k of your own money into it and if it goes up 10%, and is worth $110k, you make 100% return on your $10k.
That's insane. I don't know other investments where that is possible with such low risk--if you mitigate the risk properly.
Now, I don't depend on appreciation--and you can't count on it--but, you don't even need it.
Just the cash flow alone can get you excellent returns on your money. Again, with little risk and huge upsides.
Hedging against inflation is also a beautiful part of real estate investment.
Most other investments are hurt by inflation, real estate isn't.
In fact, if you owe money on a mortgage and inflation hits, you actually owe less.
Home values go up with inflation, as do rents.
I know it's a bit difficult to believe--I probably wouldn't if I hadn't done it myself--but, I have done it and I did escape the rat race.
Anyway, if you'd like to know more, let me know and I'll post the link to my YouTube videos and the video course (that is in beta) that I am releasing on specifically real estate investment for software developers.
a) leverage cuts you both ways. Great when the market goes up, terrible when it goes down (particularly with a Loan-to-Value ratio of 90%).
a') futures or broker margin trading give you leverage in other markets, too. Doesn't mean it's prudent.
b) much harder to diversify, because of the big chunks (you can buy shares for 5k, but not a house. You can sprinkle 100k into different equity/debt markets in different countries, but not into many houses in different countries).
c) massive transaction costs. Round trip can be 10% or more.
d) much less liquidity. If shit hits the fan, you can sell shares and have cash at hand in a few days. Try that with a house.
f) again, regarding diversification: you could get bad tenants that trash the place and/or don't pay rent. If you own a large number of properties, it's a quantity you can average over and deal with. If not, it's a gamble.
g) rates are pretty much as low as they can go (though, to be fair, everyone's been saying that for some 7+ years now...) but seriously, they'll have to come up. That would put pressure on real estate prices. (Of course, you can avoid liquidity issues with fixed rate mortgages, that's prudent, as long as rents hold up).
h) inflation has not really been an issue for several decades. It is prudent to keep it in mind, though, but clearly real estate is not the only real asset.
i) Lastly, there might be something of "picking up pennies in front of a steamroller" to it. I have no doubt that what you are saying is accurate - but you might have been lucky, and avoided a massive downside. And clearly, it is not a feasible strategy for everyone to own 26 properties and rent them out (because someone actually has to live in them and pay rent...)
Not exactly. Only if you sell. My strategy is to buy and hold--pretty much forever.
I get to get the leverage benefit and flip something if there is an opportunity and if not it's still a great cash flow deal to hold onto.
I also get to have depreciation which I never pay back.
I get what you are saying, but when you invest in real estate properly--not speculate--it's about cashflow, not appreciation.
Appreciation is a bonus you sometimes get but don't rely on.
Over a long period of time--say 20-30 years--you'll get appreciation in almost all cases, but never count on it for the short term.
a') futures or broker margin trading give you leverage in other markets, too. Doesn't mean it's prudent.
Yes. Different kind of leverage though.
Risk in real estate is essentially capped. It's like having a hedge in options or futures trading.
BTW, I've done both. I've traded all kinds of complex spreads. Real estate is much better--trust me.
b) much harder to diversify, because of the big chunks (you can buy shares for 5k, but not a house. You can sprinkle 100k into different equity/debt markets in different countries, but not into many houses in different countries).
Yes, but also less critical if you are talking about cash flow and in it for the long haul.
I am diversified over 26 rental property units in two spots in the country.
Yes, really bad things could happen, but it's very unlikely.
There will always be some risk.
c) massive transaction costs. Round trip can be 10% or more.
Yes. Definitely.
That is why buy and hold. Flippers get stuck holding the bag.
Really good point though. People need to understand this when investing in real estate.
d) much less liquidity. If shit hits the fan, you can sell shares and have cash at hand in a few days. Try that with a house.
Yes, another great point.
You need to have cash reserves if you invest in real estate. Don't lose all your liquidity and get in a squeeze.
I keep plenty of cash on hand or in a more liquid investment for emergencies.
Great point.
f) again, regarding diversification: you could get bad tenants that trash the place and/or don't pay rent. If you own a large number of properties, it's a quantity you can average over and deal with. If not, it's a gamble.
True again, but this can be highly mitigated with skill and volume.
I've been holding properties for about 18 years. I have not had more than $4k of damage done at once. And there are remedies.
Mostly this is a non-issue.
Don't buy expensive interiors. Buy middle-end and mitigate possible damage.
Another really good point though.
g) rates are pretty much as low as they can go (though, to be fair, everyone's been saying that for some 7+ years now...) but seriously, they'll have to come up. That would put pressure on real estate prices. (Of course, you can avoid liquidity issues with fixed rate mortgages, that's prudent, as long as rents hold up).
Yes and no. Could actually go lower. I don't think it will.
Most likely they will go up.
Never in history been a better time to buy in my opinion.
Don't know if we'll see rates this low ever again.
Again, I don't care about prices. I care about cashflow.
h) inflation has not really been an issue for several decades. It is prudent to keep it in mind, though, but clearly real estate is not the only real asset.
True, but when rates go up. It will be.
And when it does if you get caught with your pants down, it hurts really, really bad.
i) Lastly, there might be something of "picking up pennies in front of a steamroller" to it. I have no doubt that what you are saying is accurate - but you might have been lucky, and avoided a massive downside. And clearly, it is not a feasible strategy for everyone to own 26 properties and rent them out (because someone actually has to live in them and pay rent...)
Not everyone can do it, not everyone will.
But there is a huge opportunity here.
I've survived the good and bad. Solid strategy will give good results with minimal risk.
Most real estate investors don't have solid strategy.
Thanks for bringing these things up.
I kid you not.
Since it is a duplex, I've been able to rent out the other unit, and the rent on a big, 2BR apartment in this market is enough that it more than pays the mortgage, leaving me to just pay the property taxes.
Glad to help if I can--for free.
Usually the biggest headache, because you can't find property management to manage it and it's much more difficult to get leased then residential.
I think some people make commercial work, but it's a different ballgame and less reliable, IMO.
A few commercial loans.
And my locations are Boise, Idaho and Kansas City, Missouri.
Reason is because of cap rates.
A good investment is one that has good return, regardless of market conditions.
"Investing" in a boom market is speculation.
You'll pay too much.
Look for good rent vs price situations where you can cashflow.
Midwest markets are good like Kansas City.
Look at this post to get an idea of 5 yr vs 10 yr vs 20 yr vs 30 yr windows:
http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
10 years has enough volatility that you shouldn't use it to compare between funds.
https://www.reddit.com/r/ukpersonalfinance/wiki/lumpsuminves...
I'm UK based but the principles seem the same, and I'm fairly sure I'm paying more tax now than I will be after I retire.
"Crowdfunding has a bit of an adverse selection problem, where only companies which are insufficiently attractive to more professional angels .... go"
If you want to be 100% sure that your money lasts to the end, i.e. your death (in real terms), you cannot erode your principal, in real terms.
Thus, if you have, say, a 5% total return nominally, but 2% inflation, you can withdraw 3% p.a.
(Taxes complicate things, particularly insofar as you pay taxes on the nominal returns.)
However, with this strategy you bequeath your original principal at the time of death (in real terms, i.e. grown by inflation), which might be too much.
Thus, people generally argue for taking out a bit more, which might give you, say, 4% withdrawal with 5% nominal returns and 2% inflation (taking out about 1% or your principal p.a., halving it over the course of 70 years).
When you erode principal like that, you run a small chance that you run out of money if your
a) returns are lower than expected or
b) you live longer than expected.
A solution to a) is, as the name suggests, fixed income (i.e. bonds), which have no equity risk and (when you hold a bond with fixed rates to maturity) no interest risk. You are stuck, however, with credit risk (bond issuer goes bust) and inflation risk (except with inflation adjusted bonds).
A solution to b) are annuities, that is an insurance product that pays you a fixed amount until you are dead, pooling the early/late mortality risk. The market for these is very different for different jurisdictions, one reason being, as usual, tax issues.
"In the 10 year period from 2006 to 2015, the average return was a little lower than 8%"
From the peak of the '99 bubble till around today we have about 2% yearly return on the S&P 500 (excluding dividends). You would actually do much better if you were in bonds. Between '99 and '09 you would actually lose money. Two takeaways from these, one is that you can't just pick some period and build a theory over that, the second is that when you're invested in stocks there is a non-negligble probability of losing money over a 10 year horizon. The only reason stocks are so high these days is that their prices are supported by zero interest rates. That doesn't mean they can't go higher for various reasons but you need to be cautious. Everyone talks about buying stocks right about when things get frothy, not too many people post this sort of financial advice at the doom and gloom bottoms. Over long periods, dollar cost averaging, you'll do OK. Don't rush in at a top and obviously don't sell at a bottom, something a lot of people end up doing.
Privately held tech companies, especially startups, can actually have a better return vs. public companies. The problem is not the return, the problem is getting a strong, diversified portfolio. Unless you are a VC you can't really do that. In general small caps tend to outperform large caps and startups tend to outperform small caps, in aggregate, over long durations. It's really not about out-picking stocks, it's about being able to diversify.
There are a few factors affecting diversification. Different markets and asset classes tend not to be perfectly correlated. This means that some may be overvalued at the same time that some our undervalued. While it's not always easy to tell (sometimes it is easy, when no one wants to buy) I would think one should offset their weighting to areas they consider to have better value. As long as those areas are themselves well diversified (e.g. Europe or Emerging Markets) the long term risk you are taking is low. The other factor is that having multiple assets allows you to construct a better portfolio. This is known as the "Efficient Frontier". Assuming you have some information about how the different assets correlate with each other (which is a big assumption but still) you can combine those assets to create a higher returning portfolio with less risks.
Personally I'm invested in a mix of stocks (worldwide), fixed income, real estate (through funds) and bonds. I keep adding to this. I make some macro bets (e.g. I've been heavier Brazil, Greece, emerging markets, junk bonds ATM) through long term weighting of my portfolio and I keep an eye on those. Out of my current bets Greece hasn't worked out (yet) but the others have. YMMV. These are not the kind of bets where I can suffer heavy losses over extended periods (IMO) but there's certainly increased risk. I don't expect US stocks to have great returns over the next decade or so but I'm still in there with some portion of my investment. My horizon is 10-20 years and I very rarely sell anything (except the stock I get from work :). I try to buy when people are panicking but it's hard to find good panic these days ;)
You would have made a profit (albeit a small one) if you invested every year from 99 to 09, using the yearly figures on wikipedia.
> From the peak of the '99 bubble till around today we have about 2% yearly return on the S&P 500 (excluding dividends)
Using March 99 as the peak, it's 2.5% ignoring dividends and ~4.5% if you include them.
Source: https://dqydj.com/sp-500-return-calculator/
> Over long periods, dollar cost averaging, you'll do OK. Don't rush in at a top and obviously don't sell at a bottom, something a lot of people end up doing.
This is a very important point (though lump sum investing tends to outperform DCA), there's a big difference between how you might feel now while stuff is going up quickly and how you might feel when everything is falling apart. Selling low is a historically bad move. Far worse than buying high (http://awealthofcommonsense.com/2014/02/worlds-worst-market-...).
I wouldn't sleep well if I was 100% in stocks so I realize I'm giving something up in very long term returns.
Ask me again in 10 years.
https://www.nerdwallet.com/blog/investing/roth-ira-roth-401k...
He was the guy who was constantly warning about the potential for a 2008 style crash starting around 2006. The longer the bubble was going up, naturally, the more and more he was mocked. Until it all came tumbling down.
The point is, he is basically saying what we are seeing now in 2016 looks like the run up to the crash in 2008. Although his critics would rightly point out that he has been saying the same thing for effectively most of the last 10+ years.
If you think 2008 could and should have been avoided, you might not agree with his views. If you think it was a long overdue correction, you would be more likely to agree.
Finally, how this relates to the article mentioned here: while timing the market is definitely difficult, I suppose there are times when you are better off not entering the market at all lest your investing psychology gets permanently burnt. The next year or so might be one of those periods. (In other words, my personal view is - just hold on to your cash for a while and do nothing with it).
They mean every idea that doesn't have a 10 billion market to disrupt and gain 1% of
Its crowded at the bottom, enjoy the liquidity preference!
I know which I prefer.
But the market can be brutal. It can have decades-long stretches of terrible returns. If you had all your money in index funds, and retired in 1929, you would have made no money for 25 years. If you retired in 1967, 15 years. If 2000, 10 years. Do you have 10 years of living expenses saved up?
There are good stock pickers out there, people who focus on fundamentals. And you don't have to take their word for it. Mark Hulbert has been subscribing to many stock pickers' newsletters, trying out their picks, and reporting objectively on the results since 1980. Some libraries subscribe to his monthly report, but since investing is a very long-term process, the same handful of newsletters keep showing up in the report: you only need to look at a few recent Hulbert reports to find good stock pickers.
Some background, I bought Hilbert's newsletter in 2003, and then bought and followed The Prudent Spectular, based off of its recommendation. I did so religiously, and even though I'm glad for it's advice which helped me ride through the collapse of 2008 without selling, the returns haven't been spectacular.
I wonder now, though, if the game has changed. Has there been so much ongoing disruption due to the advancement of tech, that what worked before won't work anymore.
Which is to say, the problem with stock pickers is that it takes a long time to measure their performance, and what worked in the last 20 years may not work in the next.
Btw, I don't know why you are getting downvoted. What you say is interesting and certainly has merit.