Anybody can participate in the market and take advantage of capital gains and write-offs (losses). I'm not following your logic.
EDIT: Love that I'm getting down voted for saying anybody can participate which is a fact.
EDIT: Love that I'm getting down voted for saying anybody can participate which is a fact.
Except for people living paycheck to paycheck because they're on welfare making minimum wage. In other words about 20% of the population, if they're smart with their money, can participate in the market.
So your solution for living paycheck to paycheck is to simply not live paycheck to paycheck. It's surprising no one's thought of that before.
While you probably are poor people at Starbucks, most of them don't go there.
Last year alone I went to Chile, Sweden, Romania, Czech Republic, Germany, Belgium, and Ireland. Don't make assumptions about people and things you don't know. Have I traveled more than you?
The current market is cultivated more as a place for gambling than meaningful investment avenue for advancing economies. That's where the sentiment come from.
No one is complaining the access to the market is lacking. Rather, all are forced to join a market that has obvious flaws that the rich and powerful are not interested in fixing. And if not join the market, you stand to lose for sure.
You live in a bubble. You should go talk to some real people.
Correct only for individual incomes above $165,000. Current long-term capital gains rate with ACA surcharge is 23.8%, and according to https://www.taxact.com/tools/tax-bracket-calculator.asp the effective income tax rate for a single individual goes above that at $166,000. Having any family or other dependents introduces new deductions, and so does contributing to an IRA or 401(k), extending that runway.
This also ignores the fact that planning to generate stable income via long-term capital gains is akin to planning on generating stable income by consistently winning the lottery.
2) That is federal income tax, you've missed state, medicare and social security, and are also completely discounting the fact that the capital gains rate is bounded from above by the income tax rate.
3) most importantly, 165000/year isn't very much money. It is plenty to generate personal wealth. Most of the actual income in america is made well in excess of 165k/year, and much of that income is in the form of capital gains.
If you need a better breakdown, I can't do it better than this https://fivethirtyeight.com/datalab/the-top-1-percent-earns-...
So for those three groups the income not subject to capital gains tax constitutes 64%, 90% and 95%.
This is before the capital gains are even broken down into long-term vs short-term (which are taxed at plain old income tax rates).
I am still not seeing what led you to believe that the effective tax rate will be significantly lower.
> That is federal income tax, you've missed state
Mmm, okay. Well, I am not a CPA and not sure about other states, but California makes it easy by treating any capital gains (long-term or short-term) as income, so (at least for CA) the effective tax rate of someone relying on long-term capital gains will be pushed up, not down.
I agree though that if some other states have favorable treatment of long-term capital gains, the numbers would look different.
> medicare and social security
Both are subjects to wage limits, and at $166,000 (which will be a higher value once the state tax is incorporated) we're well past those limits.
> the lottery has a negative expected value, investment does not. In the long run
But a capital gains requires a sale, which means the position has been exited, and there's no long-run. True, it might be a partial sale of an asset, and in some case the proceeds of a sale are invested into another position, but at this point you're pretty much betting the new assets will increase in value and be a candidate for a sale. Hence my lottery comment.
Yes, you're very likely to gain much more by investing in index funds. But "the market can stay irrational longer than you can stay solvent." If there is a stock market crash, that's likely to coincide with personal issues, like losing your job.
Even if you can weather the market, having to pull out money at the bottom of the market will destroy your gains.
Howerver as a long-term (> 10 yrs) strategy and assuming you also keep a pool of capital in a checking and savings account ETF's are the way to go if you just want to fire and forget.
Do you mean cash equivalents? Public stocks are liquid.
Personally I think the 6 months advice is too conservative. If everyone calculated the damage inflation tax did to their savings account each year, probably more people would be willing to take a bit of a risk and invest their savings (or a greater portion of it).
There's a lot of variance on how much is recommended in an emergency fund. Most seem to say 3-6 months. I know if I lost my job I could cut down my living expenses and stretch it out. But if I had to move for a job, had an extended gap, or had to take a lower paying job I might have to dip into those investments prematurely. Having to cash out at the bottom of the market burns years of investments where it would have been better if you just held onto cash even if your interest rate is a pittance. Just like putting money into 401k is more than negated if you have to cash out early.
Everybody has different risk tolerances and the amount needed in an emergency fund varies depending on a bunch of things (if you have debt, variety of incomes vs a single paycheck, gap between expenses and earning). I've never seen anyone actually do a study or source why they chose 3-6months--so it's really hard to argue for or against. I'd be curious if anyone has done a study.
It hurts to have money just sitting there, but I'm not trying to eek out every penny. I really don't think all those extra risks are worth it. Keep your living expenses low and it won't be that much money ;)
It's not as if a diversified portfolio is going to drop to zero during a major recession (unless the government collapses, in which case cash might not be useful either). It might lose around 30%, depending on how you diversify and how extreme the recession is.
If 0.2% of your income is available for investment, that will be different than if 20% of your income is available.
'Anyone' can chose to play poker against people who are much smarter than them, who count cards, who use computers, who have 20 years experience and are buddies with the casino owners.
Now maybe that game would not be theoretically rigged, but one would be pretty stupid to play it.