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Carrying Humble Dollar Forward

"Thanks Andrew. For me, Humble Dollar remains a rare corner of calm and reason on the internet. It is one of the very few places I feel comfortable to communicate my thoughts."
- greg_j_tomamichel
Read more »

Getting Older

"Doug, Comprehensive list and many of these things hit close to home for me (68 and retired about 3 years). I’ll add a couple things to the “positive” side that I’m doing and the challenging side that I’m trying to deal with: Doing:
  • taking a college class (non matriculation basis) of a subject of my choosing on campus one day/ week 
  • have been playing Pickleball (with my wife) several times a week during open play with like minded others at our gym or outdoor public courts
  • Reaching out to friends, both old and new for get togethers, lunch, concerts and travel
  • Being more aware and mindful of my health and following doctors recommendations for activities, medications and advice for more healthful living
  • Serving on volunteer boards both religious organizations and our condo association for our 2nd home
Challenges:
  • Dealing with frustrations due to relatively minor incidents with merchants, financial institutions, and bad customer service…cranky old man syndrome
  • Exercising patience with my grandkids.  I’m blessed to have them nearby and spend a good deal of time with them but I can get upset by their behavior for minor things….they’re kids (ages 3-14). As my DW says, we’re too old to be parents of young children…she has more patience with them than I do 🤷🏻‍♂️
  • not making enough effort to stay in touch and show care for some  family members and friends
  • sharing articles on retirement and aging with family and friends (I read a lot) and not realizing that most probably don’t care and may even resent these “helpful” reminders
Doug’s comment about giving thanks for the blessings he has is something I am constantly thinking about.  Despite some of the challenges I listed, I do try my best to convey this appreciation of life to those around me. "
- luvtoride44afe9eb1e
Read more »

Financial regrets about parenthood?

"Perhaps an equally "intriguing" article would be to discuss the idea of children in the role as caretakers of elderly parents. In our retirement community, there are examples of every possible living situation imaginable. There are adult children living with their parents. There are married couples, unmarried couples, partnerships and households where two friends live together as a way to help keep their expenses down. To a large extent, most people in our community don't rely that heavily on family members to help them out. Instead, they rely on the network of friends and neighbors who--in general--are happy to look after one another."
- kristinehayes2014
Read more »

Any concern?

"I’m near retirement and all set with the portfolio AA initial conditions, specifically with a healthy dose of fixed income ready to weather an inevitable market downturn. What I’m a bit unsure of is refilling my fixed income efficiently &!sufficiently as time goes on. I have the usual plan of rebalancing and its nuances, but we’ll see how it goes. I’m fairly confident, have read a ton and run the numbers but haven’t done this before. Retirement: There’s always that first time ;)."
- Andy Morrison
Read more »

Tax Efficiency

TAX EFFICIENT FUND placement is an often underrated topic. The goal of the tax efficient fund placement is to minimize taxes within your investments, and select the right account for those investments.

But how much does that actually matter?

Vanguard’s research finds that a thoughtful asset location strategy can add significantly more value than an equal location strategy. The value added typically ranges from 5 to 30 basis points of after-tax return, depending on circumstances (e.g., income, portfolio size).

Investors generally have access to different account types, including:

  • Tax-free accounts (Roth IRA, Roth 401(k))
  • Taxable brokerage accounts
  • Tax-deferred accounts (401(k), 403(b), Traditional IRA)

If you are an employee that may not have access to a retirement plan, you could perhaps consider a Solo 401(k) if you have "side hustle" business income.

Generally, if your investments are all in tax-deferred or tax-free accounts, fund placement will not make a huge difference for you. That is because these accounts already come with tax efficiency.

If that's your case, two things become important though:

1. Consideration between pre-tax, like Traditional 401(k) or after-tax account, like Roth 401(k). Put simply, this decision generally comes down to your marginal tax rate now versus marginal tax rate in the future (which isn't something easy to predict due to the ever-changing tax landscape).

2. Account allocation. It becomes equally important where exactly you are investing. Roth accounts grow tax-free and qualified withdrawals are tax-free. You likely don't want to hinder that growth by choosing conservative assets (like fixed income, Money Market Funds, and so on).

Tax-efficient fund placement becomes extremely important when you also have a taxable brokerage account, along with tax-advantaged accounts. Many funds pay dividends and distribute capital gains if placed in your taxable brokerage account. At the end of the year, you receive a 1099 with that income and must pay taxes on the dividends and certain distributions.

One thing to call out from history is that you generally shouldn't hold Target Date Retirement mutual funds (or any "proprietary" funds) in your brokerage account. This is because unexpected redemptions could cause a huge tax bill.

You may remember a Vanguard 2021 fiasco where Vanguard opened an institutional TDF to more investors (lowered the minimum investment from $100M to $5M), which caused smaller retirement plans to sell out of individual funds and move into the institutional fund. This triggered massive unexpected capital gains for anyone invested in the individual funds if held in a brokerage account.

All of those unnecessary taxes could've been avoided by:

  • Choosing investments that don’t distribute many dividends or capital gains
  • Choosing passively managed investments (low portfolio turnover)
  • Placing them in tax-advantaged accounts

Let me give you a simple example:

Let’s say you are in a 22% federal tax bracket and a 5% state tax bracket, and you have some money invested in a dividend fund like Schwab US Dividend Equity ETF (SCHD). SCHD dividends are generally qualified, which means that the dividends get preferential treatment at a 15% federal tax rate for this investor.

The dividend yield is 3.43%. Considering the tax rates, the tax drag is (15% + 5%) * 3.43% = 0.686%.

To put this in perspective, a $10,000 investment will yield ~$343 in annual dividends. The tax impact on that investment will be $60.86.

Of course, if that money was in a Roth IRA, you would pay $0 in taxes on dividend distributions. Alternatively, this is something you may need to decide whether a dividend-focused investing strategy is the right one for you. For example, a Total US Stock Market ETF could have almost 3x less tax drag, and potentially more growth.

As someone in their 20s (who is subject to the Net Investment Income Tax) my focus is 100% on a growth investment strategy, rather than income generation. For someone in their 60s, that strategy could be different (even though selling shares for capital gains is better from a tax timing point of view).

A few more important points:

REIT stocks/ETFs are the least tax-efficient asset class to hold in a brokerage account because their distributions aren’t qualified, so you pay more tax (even though it may qualify for a 199A deduction).

Stocks that don’t pay dividends are the most tax-efficient to hold within your taxable account (Adobe, Amazon, Netflix, and others). However, holding individual stocks may not be the best strategy from an investment and diversification standpoint.

A big benefit of a taxable account is that the money is always easily accessible (liquidity), and you can control your withdrawal timing. While there are strategies that allow you to withdraw from retirement accounts before age 59 (like Rule of 55, 72(t) SoSEPP, Roth conversions), a brokerage account is more flexible. Therefore, analyzing the contributions and investments that go into this account is crucial.

How do you maximize tax efficiency? Let us know in the comments!   Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.  

Read more »

The Home Ownership Gamble

"Dana, we experienced something similar with our first and 2nd homes (almost the same year of purchase as well), except that we sold our first home for exactly what we paid for it and had been underwater for the 8 years (4 more than the original plan) we owned it. The 2nd home, the one we raised our kids in and still own has more than tripled in value. Of course we have done lots of improvements that we wanted to and ultimately we have a relationship with our home-comfort, memories, a solid sense of security-and it has been a forced savings that has allowed us to build a certain amount of wealth which we can touch if needed. I see the memes about moving every 2 years and pocketing the increase in value tax free but real estate (like all investments) is volatile and if you're counting on it always going up, there will sometimes be disappointment. But if you are purchasing a home for reasons other than "just" investment" there is nothing like a place of ones own."
- Rachna Condos
Read more »

Recency Bias (or: You’re Running Buggy Software)

"The Zoom-Out suggestion is golden. I occasionally look at what has happened to my accounts since I retired, and then some dates that are relevant to me, but no one else. Examples include when my divorce became final and when I started my last job. In all cases, I've benefitted from the set-it-and-forget-it approach to investing. It's really not unlike Kathy's "benign neglect", but I look at everything more frequently than she does."
- Jeff Bond
Read more »

Simplify Everything

"Kristine: The subscription auto-shipment thing is a great idea too. Like you, we have that set up for our dog food needs (we have two hungry border terriers), and certain over the counter medications and pantry items that we consistently use. That adds to the list of things to not have to remember, not run out of and not have to go shopping for. We also make a weekly Costco run, but at this point it is still something I enjoy and I coordinate that visit with my weekly gasoline fill up. But, thanks for the "Instacart" subscription idea. I'll have to remember that for future reference."
- Doug C
Read more »

Perfection, enemy of good

"I was fortunate that two of the three jobs I held included access to employer-funded retirement accounts. My first job came with access to a pension plan--I got locked into a particularly generous 'tier' of that benefit. The money my employer put into that account has been there for 30+ years now and I plan to leave it there for as long as I possibly can. The job I held for 24 years came with a benefit where the employer set aside an amount equal to 10% of my salary in a retirement account. For many years, I relied solely on that contribution to fund my future retirement. In my forties, I realized I needed to save more and began to aggressively add more of my own money to that account. The trade-off I found to be true was that jobs with the most generous benefits often came with lower salaries. I've never regretted opting for less money/better benefits."
- kristinehayes2014
Read more »

Blood Money

"That is indeed a very salient article. I wonder about a sequel given the stock price is now so much higher than when you considered it before. As you mention preserving the NUA opportunity, I gather you’re not inclined to do it now. "
- Michael1
Read more »

Stock Market Contest

"My guess is individual stocks will win but a broad fund will best most others. At least there may be one lesson there."
- Randy Dobkin
Read more »

Why I use a Donor-Advised Fund

"Our after tax account is pretty equally divided between a total market index fund and a tax efficient fund. The performance of the two is very similar. But when doing our taxes this year, I noticed the index fund had major taxable gains; the taxable income on the tax efficient fund was zero. I’m also concerned about leaving my kids— who are high earning professionals— taxable IRAs. We do regular major Roth conversions each year."
- Marilyn Lavin
Read more »

Carrying Humble Dollar Forward

"Thanks Andrew. For me, Humble Dollar remains a rare corner of calm and reason on the internet. It is one of the very few places I feel comfortable to communicate my thoughts."
- greg_j_tomamichel
Read more »

Getting Older

"Doug, Comprehensive list and many of these things hit close to home for me (68 and retired about 3 years). I’ll add a couple things to the “positive” side that I’m doing and the challenging side that I’m trying to deal with: Doing:
  • taking a college class (non matriculation basis) of a subject of my choosing on campus one day/ week 
  • have been playing Pickleball (with my wife) several times a week during open play with like minded others at our gym or outdoor public courts
  • Reaching out to friends, both old and new for get togethers, lunch, concerts and travel
  • Being more aware and mindful of my health and following doctors recommendations for activities, medications and advice for more healthful living
  • Serving on volunteer boards both religious organizations and our condo association for our 2nd home
Challenges:
  • Dealing with frustrations due to relatively minor incidents with merchants, financial institutions, and bad customer service…cranky old man syndrome
  • Exercising patience with my grandkids.  I’m blessed to have them nearby and spend a good deal of time with them but I can get upset by their behavior for minor things….they’re kids (ages 3-14). As my DW says, we’re too old to be parents of young children…she has more patience with them than I do 🤷🏻‍♂️
  • not making enough effort to stay in touch and show care for some  family members and friends
  • sharing articles on retirement and aging with family and friends (I read a lot) and not realizing that most probably don’t care and may even resent these “helpful” reminders
Doug’s comment about giving thanks for the blessings he has is something I am constantly thinking about.  Despite some of the challenges I listed, I do try my best to convey this appreciation of life to those around me. "
- luvtoride44afe9eb1e
Read more »

Financial regrets about parenthood?

"Perhaps an equally "intriguing" article would be to discuss the idea of children in the role as caretakers of elderly parents. In our retirement community, there are examples of every possible living situation imaginable. There are adult children living with their parents. There are married couples, unmarried couples, partnerships and households where two friends live together as a way to help keep their expenses down. To a large extent, most people in our community don't rely that heavily on family members to help them out. Instead, they rely on the network of friends and neighbors who--in general--are happy to look after one another."
- kristinehayes2014
Read more »

Any concern?

"I’m near retirement and all set with the portfolio AA initial conditions, specifically with a healthy dose of fixed income ready to weather an inevitable market downturn. What I’m a bit unsure of is refilling my fixed income efficiently &!sufficiently as time goes on. I have the usual plan of rebalancing and its nuances, but we’ll see how it goes. I’m fairly confident, have read a ton and run the numbers but haven’t done this before. Retirement: There’s always that first time ;)."
- Andy Morrison
Read more »

Tax Efficiency

TAX EFFICIENT FUND placement is an often underrated topic. The goal of the tax efficient fund placement is to minimize taxes within your investments, and select the right account for those investments.

But how much does that actually matter?

Vanguard’s research finds that a thoughtful asset location strategy can add significantly more value than an equal location strategy. The value added typically ranges from 5 to 30 basis points of after-tax return, depending on circumstances (e.g., income, portfolio size).

Investors generally have access to different account types, including:

  • Tax-free accounts (Roth IRA, Roth 401(k))
  • Taxable brokerage accounts
  • Tax-deferred accounts (401(k), 403(b), Traditional IRA)

If you are an employee that may not have access to a retirement plan, you could perhaps consider a Solo 401(k) if you have "side hustle" business income.

Generally, if your investments are all in tax-deferred or tax-free accounts, fund placement will not make a huge difference for you. That is because these accounts already come with tax efficiency.

If that's your case, two things become important though:

1. Consideration between pre-tax, like Traditional 401(k) or after-tax account, like Roth 401(k). Put simply, this decision generally comes down to your marginal tax rate now versus marginal tax rate in the future (which isn't something easy to predict due to the ever-changing tax landscape).

2. Account allocation. It becomes equally important where exactly you are investing. Roth accounts grow tax-free and qualified withdrawals are tax-free. You likely don't want to hinder that growth by choosing conservative assets (like fixed income, Money Market Funds, and so on).

Tax-efficient fund placement becomes extremely important when you also have a taxable brokerage account, along with tax-advantaged accounts. Many funds pay dividends and distribute capital gains if placed in your taxable brokerage account. At the end of the year, you receive a 1099 with that income and must pay taxes on the dividends and certain distributions.

One thing to call out from history is that you generally shouldn't hold Target Date Retirement mutual funds (or any "proprietary" funds) in your brokerage account. This is because unexpected redemptions could cause a huge tax bill.

You may remember a Vanguard 2021 fiasco where Vanguard opened an institutional TDF to more investors (lowered the minimum investment from $100M to $5M), which caused smaller retirement plans to sell out of individual funds and move into the institutional fund. This triggered massive unexpected capital gains for anyone invested in the individual funds if held in a brokerage account.

All of those unnecessary taxes could've been avoided by:

  • Choosing investments that don’t distribute many dividends or capital gains
  • Choosing passively managed investments (low portfolio turnover)
  • Placing them in tax-advantaged accounts

Let me give you a simple example:

Let’s say you are in a 22% federal tax bracket and a 5% state tax bracket, and you have some money invested in a dividend fund like Schwab US Dividend Equity ETF (SCHD). SCHD dividends are generally qualified, which means that the dividends get preferential treatment at a 15% federal tax rate for this investor.

The dividend yield is 3.43%. Considering the tax rates, the tax drag is (15% + 5%) * 3.43% = 0.686%.

To put this in perspective, a $10,000 investment will yield ~$343 in annual dividends. The tax impact on that investment will be $60.86.

Of course, if that money was in a Roth IRA, you would pay $0 in taxes on dividend distributions. Alternatively, this is something you may need to decide whether a dividend-focused investing strategy is the right one for you. For example, a Total US Stock Market ETF could have almost 3x less tax drag, and potentially more growth.

As someone in their 20s (who is subject to the Net Investment Income Tax) my focus is 100% on a growth investment strategy, rather than income generation. For someone in their 60s, that strategy could be different (even though selling shares for capital gains is better from a tax timing point of view).

A few more important points:

REIT stocks/ETFs are the least tax-efficient asset class to hold in a brokerage account because their distributions aren’t qualified, so you pay more tax (even though it may qualify for a 199A deduction).

Stocks that don’t pay dividends are the most tax-efficient to hold within your taxable account (Adobe, Amazon, Netflix, and others). However, holding individual stocks may not be the best strategy from an investment and diversification standpoint.

A big benefit of a taxable account is that the money is always easily accessible (liquidity), and you can control your withdrawal timing. While there are strategies that allow you to withdraw from retirement accounts before age 59 (like Rule of 55, 72(t) SoSEPP, Roth conversions), a brokerage account is more flexible. Therefore, analyzing the contributions and investments that go into this account is crucial.

How do you maximize tax efficiency? Let us know in the comments!   Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.  

Read more »

The Home Ownership Gamble

"Dana, we experienced something similar with our first and 2nd homes (almost the same year of purchase as well), except that we sold our first home for exactly what we paid for it and had been underwater for the 8 years (4 more than the original plan) we owned it. The 2nd home, the one we raised our kids in and still own has more than tripled in value. Of course we have done lots of improvements that we wanted to and ultimately we have a relationship with our home-comfort, memories, a solid sense of security-and it has been a forced savings that has allowed us to build a certain amount of wealth which we can touch if needed. I see the memes about moving every 2 years and pocketing the increase in value tax free but real estate (like all investments) is volatile and if you're counting on it always going up, there will sometimes be disappointment. But if you are purchasing a home for reasons other than "just" investment" there is nothing like a place of ones own."
- Rachna Condos
Read more »

Recency Bias (or: You’re Running Buggy Software)

"The Zoom-Out suggestion is golden. I occasionally look at what has happened to my accounts since I retired, and then some dates that are relevant to me, but no one else. Examples include when my divorce became final and when I started my last job. In all cases, I've benefitted from the set-it-and-forget-it approach to investing. It's really not unlike Kathy's "benign neglect", but I look at everything more frequently than she does."
- Jeff Bond
Read more »

Simplify Everything

"Kristine: The subscription auto-shipment thing is a great idea too. Like you, we have that set up for our dog food needs (we have two hungry border terriers), and certain over the counter medications and pantry items that we consistently use. That adds to the list of things to not have to remember, not run out of and not have to go shopping for. We also make a weekly Costco run, but at this point it is still something I enjoy and I coordinate that visit with my weekly gasoline fill up. But, thanks for the "Instacart" subscription idea. I'll have to remember that for future reference."
- Doug C
Read more »

Perfection, enemy of good

"I was fortunate that two of the three jobs I held included access to employer-funded retirement accounts. My first job came with access to a pension plan--I got locked into a particularly generous 'tier' of that benefit. The money my employer put into that account has been there for 30+ years now and I plan to leave it there for as long as I possibly can. The job I held for 24 years came with a benefit where the employer set aside an amount equal to 10% of my salary in a retirement account. For many years, I relied solely on that contribution to fund my future retirement. In my forties, I realized I needed to save more and began to aggressively add more of my own money to that account. The trade-off I found to be true was that jobs with the most generous benefits often came with lower salaries. I've never regretted opting for less money/better benefits."
- kristinehayes2014
Read more »

Free Newsletter

Get Educated

Manifesto

NO. 29: WHAT MATTERS to long-term stock investors is the market’s dividend yield and growth in earnings per share. Everything else is noise that can bully and seduce us into foolishness.

act

PREPARE FOR a long life. For a quick gauge of your life expectancy, try the Social Security and Society of Actuaries' Longevity Illustrator calculators. What will you learn? First, the longer you live, the longer you can expect to live. Second, lifespans vary widely. Educated, health-conscious Americans might live three or four years longer than average.

Truths

NO. 27: COST-CONSCIOUS investors can save thousands over their lifetime. Take two investors who salt away $5,000 a year for 40 years. One pays 1% of assets in annual investment costs, while the other incurs 0.1%. If both earn 5% a year before expenses, the cost-conscious investor will amass $618,000, while the high-cost investor garners $494,000.

think

MARKET PORTFOLIO. This is the investable universe—all securities available for purchase. It consists of four sectors of roughly similar size: U.S. stocks, U.S. bonds, foreign stocks and foreign bonds. This is what all investors own and reflects our collective judgment of what securities are worth. Arguably, if you own a different mix, you’re making a market bet.

Savings Initiative

Manifesto

NO. 29: WHAT MATTERS to long-term stock investors is the market’s dividend yield and growth in earnings per share. Everything else is noise that can bully and seduce us into foolishness.

Spotlight: Borrowing

Digging Out

LIKE MANY AMERICANS, Sally found herself caught in a whirlwind of unexpected expenses and mounting credit card debt. It wasn’t lavish vacations or shopping sprees. Rather, it was veterinary bills for her aging dogs.
I conducted a credit-card debt-reduction workshop for Sally. Here’s a glimpse at her finances:

Her Mastercard balance was $12,970 at a hefty 17% interest rate.
Despite that, she had an exceptional credit score of 820.
She also had a $26,000 emergency fund.

Read more »

This Old House

WHEN WE MOVED to Pennsylvania in 1996, I wanted to buy an old house. After months of looking, we found a stone farmhouse close to my new job and in a good school district. There was just one problem: We didn’t know if we could afford it.
We hadn’t been able to sell our home in Maryland, so we didn’t have any home equity to bring to the table. When our real estate agent saw the asking price,

Read more »

Helping Ourselves

WE NEEDED MONEY to close on a new home. The mortgage process progressed smoothly—until the underwriters suddenly rejected the property right before closing. To get together the money needed to close, my wife and I had to resort to loan sharks—ourselves.
We borrowed from our IRAs. The rules allow tax-free distributions for either a 60-day rollover to a new IRA or reinvestment back into the same IRA. When we called Vanguard Group to execute our “rollovers,” the phone reps were well-versed on this short-term,

Read more »

Not Your Friends

FINANCIAL FIRMS spend heavily on marketing to create a friendly, customer-first impression. But these firms aren’t your friends, at least not in the ordinary sense of the word. They make their money, fairly and legally, by providing specific services to customers.
Friendliness at a retail level keeps your capital in place, where it works for the firm’s benefit. Every once in a while, I see language that clearly expresses what they want from our “relationship.” These communications help me review where I do business,

Read more »

So Rewarding

A FRIEND RECENTLY asked me the interest rate on my credit card. I admitted I had no idea. I pay off the balance in full every month and therefore don’t know, or care about, the interest rate.
I’m a minority in this regard. Only 35% of us pay off our credit card balance each month. We’re dismissed as “deadbeats” by profit-hungry credit card companies, perhaps with some justification: We reap the benefits of credit card rewards programs designed to lure the other 65% of the population into using their cards on a regular basis—and then foolishly carrying a balance.

Read more »

Spotlight: Saha

Fatal Attraction

HOW WOULD YOU FEEL about a stock market strategy that routinely invests more after prices go up and sells when prices drop? As someone who invests for the long haul, I’m skeptical—which is why the increasing popularity of leveraged exchange-traded funds (ETFs) puzzles me. A leveraged ETF aims to amplify the daily return of its stated benchmark. The fund’s benchmark might be a widely followed stock or bond index, a particular market sector, a single industry or one country. These ETFs are easily identified by their names, which often include terms like 2x, 3x, bull and ultra. For instance, ProShares Ultra S&P 500 (symbol: SSO) seeks to return twice the daily performance of the S&P 500-stock index, while Direxion Daily MSCI India Bull 3X Shares (INDL) tries to triple the daily return of Indian stocks. Leverage is a double-edged sword that exaggerates both gains and losses—often costing investors dearly. Yet a wrongheaded narrative keeps attracting inexperienced investor to leveraged ETFs. Consider ProShares Ultra S&P 500, mentioned above. It lost almost 20% in the five years following its June 2006 launch, including dropping more than 80% from peak to trough during the 2007-09 bear market. In the same five-year period, a low-cost S&P 500 ETF would have gained a cumulative 15% with half the volatility. Wasn’t the ProShares ETF supposed to double the benchmark’s gain, by rising 30% over the five years, instead of losing 20%? This is the dangerous misconception about leveraged ETFs—and the reason they shouldn't be used as long-term investments. Instead, leveraged ETFs are tools for sophisticated day traders and swing traders. They’re meant to be held for a day or so and kept under close watch. When market timers are firmly convinced about the market’s immediate direction, they try to use leveraged ETFs to make a quick buck. Fund…
Read more »

Missing the Boat

I’VE BEEN WAITING since late last year for a stock market correction. No, I’m not sitting on a pile of cash and looking to time the market. Instead, I’m simply hoping to trim my tax bill. Last October, I sold the recently vested shares of my company stock and used the proceeds to buy Vanguard Total Stock Market ETF (symbol: VTI). This sell-high-buy-high exchange was meant for diversification, but I also hoped that the market would drop later. I could then harvest tax losses by temporarily replacing the Vanguard fund with a combination of Russell 1000 and Russell 2000 ETFs. Given the prospect of an interest rate hike to counter rising inflation, a market correction was a distinct possibility. The market seemed to move in my favor by November’s end. My Vanguard ETF dropped below my purchase price, but the extent of the unrealized loss wasn’t worth the effort of tax-loss harvesting. I waited for a bigger drop, but a market rally wiped out my unrealized loss. My hopes were renewed during the fourth weekend of January, as I glanced through Barron’s. My Vanguard ETF shares had dropped more than 6% the week before. Another 3% drop would be enough for some meaningful tax-loss harvesting. I planned to keep an eye on the market on Monday. I logged onto my brokerage account on the morning of the 24th and was pleased to see a further decline, but I didn’t pull the trigger. The rapid price swings made me nervous. What if the market rose substantially between selling my Vanguard Total Market shares and buying the replacement funds? Anything’s possible in a volatile market. I decided to wait another week, hoping the market would settle down. Instead, the market pulled off a weekly gain and I missed the boat. For now,…
Read more »

It’ll Cost You

IT’S IRONIC THAT WE often shortchange retirement savings during the first half of our working lives, because that’s when we can buy future retirement dollars at a huge discount—thanks to investment compounding. How can we hammer home this point? My proposal: We should adopt a simple mental math rule that allows us to weigh today’s spending against future retirement dollars. That brings me to my ”6 to 2 times 200” rule. The rule covers five age groups: early 20s, late 20s, early 30s, late 30s and early 40s. The first part of the rule—the “6 to 2” part—gives the compounding factor for each age group. For instance, the compounding factor is six times if you’re in your early 20s, five times if you’re in your late 20s, and so on. As you grow older and enter the next age group, the compounding factor drops by one. What does all this mean? Each $1 spent by folks in their early 20s means at least $6 less in retirement spending. Similarly, $1 spent in your early 40s means at least $2 less in retirement. Admittedly, the rule is only an approximation. Still, with any luck, it’ll help us to pause before spending. For instance, it will make a 27-year-old realize that switching to that shiny new $1,000 iPhone could cost as much as $5,000 in retirement spending. Is it worth effectively spending $5,000 on a new phone? Our 27-year-old may still decide to switch to the new iPhone. After all, we all make bad spending decisions and we usually get away with it, provided the bad decisions aren’t too frequent or too costly. Instead, the real damage often comes from recurring expenses—the monthly magazine that no one reads, the extra property taxes for the bigger-than-needed house and countless similar items. This is where…
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Eye of the Beholder

ARE JUNK BONDS RISKY? That was the question from a friend in his late 20s, whom I’ll call Josh. I answered that they were probably risky for him, but quite safe for me. Josh looked puzzled—until I explained that risk is in the eye of the beholder. Josh has a stable career that pays well, but he doesn’t plan to stick with it forever. Instead, he wants a job that relates to his passion for outdoor activities. His strategy? Sock away as much money as possible. Once he’s done saving for retirement, he’ll switch to a more interesting job that pays just enough to sustain his lifestyle. Josh has many years before he taps his retirement fund. He needs growth to maximize the power of investment compounding over his long time horizon. Income investments, whether FDIC-insured bank deposits or high-yield bonds, would endanger his nest egg’s growth prospects. He’s safer buying stocks and taking more risk. My situation is different. I’ll soon start to live off my investments. I’m always looking to diversify my portfolio’s income sources. I can live with small doses of high-yield bonds, preferred stock and senior bank loans to boost my cashflow. No, these investments don’t promise price stability. But I can count on these riskier sources of income for my non-essential expenses. All investments are risky in one way or another. But their risk should not be viewed in isolation. An investor’s own situation and objectives matter the most. An investment is risky when it doesn’t align with your overall financial goals. It’s safe when it fits well with the rest of your investments and it has a clear purpose in your portfolio. Consider two casino games. In the first game, there’s a 25% chance of doubling your money. Otherwise, you get back just half…
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Tax Bites

MY TAXES ROSE 50% in 2021. I've never paid so much before, not even during my peak earning years. I’m not upset about having to pay my fair share, but the extent of the increase puzzled me. After examining my tax return, I came away with a handful of insights. To be sure, I wasn't expecting a large refund. The reason: I suspected that a onetime employment windfall would cause me to owe money, so I withheld more taxes during the year. I wanted to avoid an underpayment penalty at all costs. While the workplace windfall and some employer stock vesting contributed to higher taxes, I made moves in my taxable brokerage account that increased the pain. I had rebalanced my portfolio in early 2020 to take advantage of the stock market swoon. The market recovered and soon my stock allocation exceeded my target portfolio percentage. I trimmed my stock holdings in 2021 to get them back to an acceptable size. Many of the stocks I sold last year had risen in value, so rebalancing increased my capital gains for the year. I’m not much bothered by that. Regular rebalancing is part of my investment process, and this was the expected result. Here’s where the unexpected happened: I invested the rebalancing proceeds in a short-term inflation-indexed Treasury ETF. I wasn’t planning on much income from this investment, thanks to the chronically low interest rate. But soaring inflation changed the dynamic, boosting the value of inflation-indexed Treasurys—and leading the fund to distribute a large sum that was taxed at the ordinary income rate. The most unexpected surprise came from capital gains distributions in my ETF portfolio. Vanguard International Dividend Appreciation ETF (symbol: VIGI), for example, distributed more than 6% of its net asset value in capital gains. Half of those gains…
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The Art of Spending

I GREW UP IN a middle-class family in Kolkata, India. Like most folks, my relationship with money was shaped by my parents’ financial habits. They were on different sides of the saver-spender continuum. My homemaking mother strove to live beneath our family’s means and never seemed to feel deprived. By contrast, my father—even with a modest salary from his government job—was focused on the art of spending. At my mother’s insistence, my father bought most of our household supplies from wholesalers and cooperative stores, instead of the pricier local bazaar. Branded condiments and drink concentrates were missing from our grocery list, because my mother considered them overpriced. Instead, she joined a community food-processing center to learn how to make tomato ketchup, rose syrup and the like. She used to make enough for our family, as well as neighbors and relatives. My childhood friends still reminisce about the homemade mango-flavored drinks that she served them on hot summer days. Meanwhile, my father had no problem paying up for convenience and life-enhancing extras. He wasn’t extravagant, but he wouldn’t be deterred by the price tag if he felt an item was worthwhile. Years before television became mainstream, he bought a black-and-white set for our home. A few years later, a basic refrigerator appeared in our kitchen to give my mother a break from daily cooking. To manage these expensive purchases, he’d set a financial goal and then save regularly toward the cost. When I first started working, I continued to live with my parents and—similar to my father—made a few big purchases. I installed an inverter power generator to combat the frequent electricity cuts at that time. I learned to drive and bought a used car—our family’s first ever vehicle—for occasional commutes when public transport was inconvenient. Each purchase emptied my accumulated savings…
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