Changing My Mindset
Sanjib Saha | Oct 13, 2023
WHETHER MONEY BUYS happiness is a matter of debate, but a recent incident reinforced my conviction that financial security does indeed help. The incident would’ve caused me considerable distress a few years ago, when I was earning more but was still dependent on my fulltime job’s paycheck. My newfound financial security, however, transformed the situation into a truly memorable experience. My wife, Bonny, and I both enjoy attending Indian music and dance performances. We make it a point to see the live shows put on by local groups and, if the ticket prices are reasonable, also those featuring artists visiting from India. This year, Bonny was keen to see a dance-drama performance by a touring group from India. Although the show was scheduled for July, Bonny wasted no time securing two tickets when reservations opened in March. I got the sense that the tickets came with a hefty price tag. As the date drew nearer, Bonny’s excitement built. On the day of the event, she repeatedly urged me to hurry up and get ready, with the half-joking threat to leave me behind if I delayed any further. Both of us got dressed up and were about to head out when Bonny received a text message. It was from a friend who’d purchased tickets in the same row as us. She was curious if we changed our seats because she couldn’t spot us in the theater. Bonny responded with a touch of impatience, assuring her that we’d be there shortly. Her friend called within minutes to say the show had just finished. Bonny was perplexed, while I hastily jumped to the conclusion that she must have misremembered the showtime. Bonny, however, was adamant that she had purchased tickets for a 7 p.m. performance, and the screenshots of the tickets saved on…
Read more » Simply Works
Sanjib Saha | Oct 25, 2021
I THANK MURTHY, a friend at college, for teaching me guitar. Instead of theories, he taught me five easy chords. I could soon play a few songs and that fueled my motivation to learn more. The same strategy can help beginner investors. Novices often find the stock market intimidating and mysterious. Result? Inaction and opportunity cost. Solution? Simple steps. A former coworker comes to my mind. He was uninterested in stocks, including the company shares he received as part of his pay. He sold the shares immediately—often the smart thing to do—but he didn’t know what to do with the cash. For people like him, a simple solution is a fund like Vanguard Total World Stock ETF (symbol: VT). No need to research individual stocks. All my friend had to do was sell his company shares as he received them and then buy this fund. Over time, his interest in investing grew, and he’s no longer ignorant about the stock market. Another example: A friend’s daughter needed help with investing. She learned fast and decided to invest equal amounts in four commission-free index funds. She adopted a shortcut for rebalancing. Whenever she had money to invest, she’d buy the fund with the lowest balance. Was this the best strategy? Maybe not. But it works for her. My last example: A recent acquaintance had a large sum sitting in her bank account for years. She was too afraid to invest and too embarrassed to ask. After we chatted a few times, she realized that—while she was avoiding risk—she was also avoiding return. She decided to start investing in small installments, but invest less if stock prices were high. To keep things simple, she transfers just enough from her bank each month so her investment account reaches a fixed dollar target. If…
Read more » Ready or Not
Sanjib Saha | Mar 26, 2020
THE PAST FEW WEEKS have brought back memories of the 2008 financial crisis. Back then, stocks were at bargain prices, but I had little money to invest. Today, my financial house is much stronger—and I want to be ready to buy if stocks get dirt cheap. I’ve already made some portfolio adjustments. But from here, my plan is to keep an eye on stock market valuations. A large percentage drop by the market averages might—by itself—create the false impression that stocks are cheap, so instead I prefer to watch valuation measures such as the market’s price-earnings multiple, price-to-book value and dividend yield. What are these metrics saying? Despite a 27% drop from its peak, the S&P 500 isn’t exactly cheap. For instance, the cyclically adjusted P/E ratio, or CAPE, is still above its historical average by a large margin. Most other valuation measures paint a similar picture. At these levels, the odds of superior market returns are still low. I’ve decided to wait to overweight stocks, at least until valuations are closer to normal. I’d put a normal valuation for the S&P 500 at around 1800—a 47% drop from the Feb. 19 all-time high. That size drop has happened just five times, including two occasions since 2000. That’s when I’ll start shifting my asset allocation to overweight stocks. Until then, I’m fine with dollar-cost averaging my ongoing savings into my current asset allocation. Meanwhile, I’d consider stocks dirt cheap if valuations fall 25% below their historical averages. That would require a whopping 60% drop from the peak, taking the S&P 500 well below 1400. A drop of that magnitude, which would motivate me to bet big, hasn’t happened since the Great Depression. Even at the depth of the 2007-09 bear market, the fall was smaller. Think I’m daydreaming? Perhaps. The stock market…
Read more » Working the Plans
Sanjib Saha | Mar 10, 2020
I’VE DEVELOPED a series of what I call “Geico talks,” named after the ubiquitous insurance company commercials. They’re 15-minute talks that, I joke, are aimed at boosting financial knowledge by 15% or more. The talks are for friends and acquaintances who work at the same company as me or at companies with similar employee benefits. These firms typically have great retirement plans and many employees own company stock. I figured the topics I’d researched for my own finances would help these folks. I also suspected that some friends were making the same mistakes I’d made. With that in mind, I came up with three Geico talks: 1. After-tax 401(k) contributions. Only a minority of 401(k) plans allow so-called mega-backdoor Roth conversions, but it’s worth checking to see whether your plan does. What’s involved? It starts with making after-tax contributions to your employer’s 401(k). These contributions are over and above the usual tax-deductible or Roth 401(k) contribution limit, which in 2020 is $19,500 for those under age 50. The after-tax contributions can sometimes be immediately converted to the company’s Roth 401(k), where the money grows tax-free thereafter. Alternatively, the after-tax dollars can be transferred to a Roth IRA, either while you’re still employed or when you leave the company. If the money ends up in a Roth IRA, either immediately or when you leave your employer, it also escapes the rules for required minimum distributions that apply starting at age 72. My employer’s 401(k) plan allows both after-tax contributions and the ability to convert that money over to the Roth 401(k) option. Ditto for the employers of some friends. Be warned: If you convert to a Roth and the after-tax dollars have enjoyed some investment gains, the conversion will trigger a tax bill, though it’ll typically be modest. 2. Company stock. Many…
Read more » Subject to Revision
Sanjib Saha | Mar 12, 2021
DURING MY SCHOOL days growing up in India, my exposure to English literature was confined to textbooks that reprinted essays and short stories, or portions thereof. One of them was a humorous piece by Stephen Leacock from his book Winnowed Wisdom. The excerpt was titled “Old Proverbs Made New” and it seemed funny even to a middle-schooler with a limited grasp of the English language. It argued, with examples, that proverbs get outdated and need to be rewritten. It recently dawned on me that Leacock’s contention also applies to personal finance. Here are eight popular sayings, along with my tweaks: 1. Hard work never hurt anyone. Yes, it does. In fact, successful investing requires so little effort that laziness is almost a virtue. Working too hard at investing can do more harm than good to our long-term performance. For instance, we might try hard to time the market, only to find that it doesn’t really work. We might expend too much effort finding the next highflying stock, only to watch our hard-earned money slip away. We might burn midnight oil overdiversifying our investments, only to end up with an unruly, complicated mess. On the other hand, a simple portfolio, consisting of a few low-cost diversified funds, needs nothing more than occasional rebalancing. Hard work can hurt investment results. 2. Proof of the pudding is in the eating. Intuitively, this sounds right, doesn’t it? The final result should be the only way to judge something’s quality. This is true for cases where there’s little room for uncertainty. It doesn’t, however, apply to financial and investment decisions. Why not? Because luck and randomness contribute to the outcome. It’s difficult to separate luck from skill. In her bestselling book Thinking in Bets, Annie Duke explains that the measure of a great decision isn’t…
Read more » Options in Disguise
Sanjib Saha | Jun 28, 2022
DO YOU INVEST IN options? Think twice before saying that you’d rather go to Vegas. My bold claim: Options investing has a lot in common with investing in stocks and corporate bonds. Intrigued? Let’s recap a European style call option. It’s a discretionary contract that allows someone to buy an underlying asset at a set strike price at a future date. Let’s say the buyer of the call, Bob, has an option on a stock with a strike price of $100. Bob will only exercise the contract if it’s profitable. If the stock price rises to $150 by the time the option expires, Bob can acquire the shares for $100 and immediately sell them for a $50 profit. On the other hand, if the stock price drops to $80, Bob has no obligation to exercise the option. His call option will simply expire worthless. Bob’s only chance at profit comes if the underlying asset clears the strike price. That brings us to the option seller, Shelly. She owns the underlying stock and is participating in a covered call, meaning she’s selling a call option on an asset she already owns. In return, Shelly receives a call premium from Bob. Selling covered calls is a popular strategy for generating extra income. In exchange for the income she receives from selling the covered call, Shelly risks having to sell the stock at the strike price. If the shares rise to $150, Shelly must still sell for $100. The covered call limits her payoff. If the asset doesn’t exceed the strike price, Shelly keeps her shares and pockets the income. What if the stock falls? Shelly still has her option premium, but that may be more than offset by the share price decline. Now, let’s consider the positions of stock and bond investors…
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Direct Indexing Anyone?
ostrichtacossaturn7593 | May 10, 2026
"Direct indexing is generally not as good as buying broad ultra-low-cost index funds. That said, it could be beneficial in certain circumstances:
· You want to donate to charity in a few years so you can harvest the tax loss and then donate the appreciated securities to the charity, thereby never paying taxes on the appreciation.
· You currently have large taxable long-term gains at the 23.8% marginal federal tax rate (20% +3.8% investment income tax) but soon will be in a lower rate.
· You are in a high tax bracket but have a very short life expectancy and the kids will soon inherit the money with a step-up basis."
Roth ended with this: "Direct indexing is good. It’s just generally not as good as owning broad ETFs."
Thanks to all who responded. Please update here if you use direct indexing and learn something worth sharing.
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