EARLIER THIS YEAR, I swapped the Vanguard Short-Term Bond Index Fund (symbol: VBIPX) in my 401(k) for an inflation-indexed Treasury ETF (VTIP). The trade worked out well: The replacement fund has since fared better, thanks to this year’s accelerating inflation. To buy the inflation-indexed ETF, I had to open a brokerage subaccount within my company’s retirement plan—a feature some 401(k)s offer, though these “brokerage windows” typically aren’t heavily promoted for fear employees will end up trading too much. Initially, I didn’t think I’d use the subaccount for anything else. But I’ve come to realize that the flexibility to choose from thousands of securities in a tax-deferred account could come in handy. For instance, in my regular taxable account, I had bought income-producing funds that own real estate investment trusts (REITs). I like the generous dividends, but not the tax bill, even after the 20% deduction. I wish I owned these in my 401(k) subaccount instead. That way, I could defer the taxes, instead of footing the bill during my high-earning years. Another problem I often face: headaches caused by tax-loss harvesting. In the past, I’d sell an investment to book a loss and use the proceeds to buy a similar, but not substantially identical, investment to preserve my market exposure. I’d then look to switch back to the original investment after the 30-day wash-sale period. But if the temporary investment had gone up in the intervening period, often I’d be reluctant to reverse course. The reason: The short-term capital gain from the sale would partly negate the harvested tax loss. Result? I’d be stuck with the temporary fund indefinitely. Now, I can simply buy the temporary fund in the tax-deferred subaccount instead of my taxable account. Even if the temporary fund climbs in value, I can sell it after 30 days—with no taxes owed—and then buy back the original investment in my taxable account.

A CRUCIAL STEP WHEN buying a preowned car is to scrutinize its Carfax report. A single-owner car with a regular maintenance history and which was driven solely for personal use should be a safe bet, while an accident record gives most people pause. All things being equal, a car that was in an accident, however minor, ought to cost less than a similar one with a clean history. Some bargain hunters don’t mind taking a chance on a car with an accident history as long as it drives well. After all, the discount can be quite attractive. This might seem unfair for a seller who wasn’t at fault for the accident. Even if the car was repaired to perfection and the tab was picked by the other party’s insurance, how does the owner recover the value lost? A recent accident forced us to find out the answer. We flew across the country to spend the Labor Day week with my brother-in-law. While driving us around in his almost-new car, he was rear-ended by a pickup truck. Thankfully, no one was hurt, and the car was still drivable. The pickup’s apologetic driver accepted fault and assured us that his insurance would cover all repairs. Still, we worried about the car’s market value. It turns out that my brother-in-law can recoup some of the loss through a diminished value claim. First, he needs to get a fair estimate of the loss of market value due to the accident. This might involve researching prices of similar used cars with and without an accident history, or even getting a free estimate. Next, he must contact the other driver’s insurance company and specifically request diminished value compensation. This amount would be on top of the repair and rental costs. The claim should be made in a timely manner and backed by the necessary documentation. The insurance company will likely reduce the compensation amount. For example, if the pre-accident value of a low-mileage car that suffered severe damage was $25,000, the insurance company might cough up $2,500 at most. It’d likely be far less if the damage is moderate or the car has higher mileage. Paying a few hundred dollars for a written estimate from a licensed appraiser may increase the odds of fair compensation.

I'VE BEEN MARRIED TWICE, yet neither time could I take my newlywed wife on a proper honeymoon, let alone a lavish one. Hearing the honeymoon stories of others always left me feeling wistful, tinged with a hint of envy. My first marriage was a bit rushed. My first wife—now my ex—and I wanted a no-frills civil marriage followed by a simple reception. But my parents insisted on a traditional Bengali wedding with its array of rituals, many of which seemed meaningless to me. The clash between my youthful arrogance and my parents’ orthodox stance blew this seemingly minor disagreement out of proportion, and it didn’t end well. Long story short, I left amid a heated argument and decided to do things my way. My fiancée and I exchanged vows in the office of a marriage registrar in Kolkata. A few close friends attended the modest celebration that followed, but none of my family. Disappointed and disheartened by how things unfolded, we weren’t in the mood for a honeymoon. Thankfully, sanity prevailed after a few months. Faced with the consequences of our stubbornness and momentary lapse of reason, both my parents and I hurried to reconcile and mend the emotional wounds. It took some time to move past the bitter experience. By the time the dust settled, it was too late for a honeymoon. My second wedding wasn’t entirely devoid of tension, albeit for a different reason. Divorce and remarriage are still uncommon and frowned upon in our culture and family. For undertaking such a step, both Bonny—my soon-to-be second wife and a single mother—and I were pioneers in our respective families. As the wedding day neared, we felt the apprehension of “what would people say” hovering over our parents and elders. The wedding turned out to be less dramatic than we feared. We were married in a lovely venue in Kolkata by a Vedic priest who insisted on including the essential rituals of a Bengali marriage, while omitting the outdated ones. Elders from our families, close relatives and friends all attended the ceremony to offer their blessings and best wishes. My eight-year-old stepdaughter and nine-year-old niece enthusiastically took charge of greeting and entertaining the guests. Unfortunately, there wasn’t a honeymoon this time, either. We were concerned that my stepdaughter might feel neglected, especially after such a significant change in her life. In addition, Bonny’s mother, who was battling late-stage colon cancer, was in poor health. We chose to postpone our honeymoon to another time, but that time never came. Still, I’m finally experiencing what a honeymoon feels like. No, I didn’t have to go through yet another divorce and remarriage to finally enjoy the long-desired honeymoon. Bonny and I are perfectly content in our marriage, and we both intend to keep it that way. Instead, it’s another milestone in our lives: my retirement. A brief recap of my journey through the retirement stages so far: My “pre-retirement” phase began in 2014 when, on my 47th birthday, I resolved to retire by age 50. Though I was enjoying my work, I grew weary of the relentless pursuit of career advancements and professional accolades in the U.S. corporate rat race. It took more than three years of planning and portfolio adjustments before I took the leap. The moment arrived, and I broached the subject of retirement with my supervisor. After pulling a few strings, he offered me a reduced-hour arrangement. Initially, I agreed to try the part-time role for one year, but the low-stress position surpassed my expectations. After all, who wouldn’t relish the luxury of four-day weekends every week of the year? This “semi-retirement” phase continued for more than five years, until I made the decision to call it quits last fall. My “retiring” stage began when I informed my team of my intention to leave. Instead of setting a firm date based on the standard notice period, my manager and I opted for flexibility, leaving the date open to minimize disruption. The goal was to allow ample time for hiring the right replacements, transferring my workload and monitoring the team’s progress ahead of my departure. It took several months from the date of my initial announcement to officially becoming an ex-employee. Surprisingly, this period turned out to be the most relaxing and carefree time of my entire career. I was no longer accountable for ongoing projects, nor considered for new tasks. My role shifted to providing support and guidance for the new managers, if necessary. But to the team’s credit, I found myself simply sitting back, relaxing and enjoying the show. Meanwhile, the notes congratulating me on my retirement kept pouring in. My team organized a couple of events to reminisce about our time working together. As a farewell gift, my coworkers presented me with a ukulele. With the help of YouTube lessons, I learned how to play Jamaica Farewell on the ukulele and made a recording. That recording served as my parting gift to my teammates. The next phase of retirement—the proverbial “honeymoon” stage—began earlier this year. For the first few days, I didn’t feel anything was different, except for preparing for the big trip I’d planned. I was heading to India to spend two months with my mother. As I was about to set my out-of-office message before the trip, I remembered that neither was it necessary nor did I have access to my work email anymore. That feeling was truly liberating. It's only been a few months, but I already understand why they call it the honeymoon phase. I’ve been relishing my newfound freedom. The time is entirely mine to enjoy. With the liberty to plan my days and activities however I please, I wasted no time in charting out my next six months. I contacted friends with whom I’d lost touch, including folks from different stages of my life. This included my best friend from school, who later became a monk after completing his engineering degree. I visited the ashram where he currently resides. Reuniting with him after 25 years was an incredibly special moment. I also caught up with many college friends, some of whom I was seeing for the first time since our college days, only to find that our bond hadn’t faded a bit. Luckily for me, several close friends had settled in India and stayed in contact with one another. I was delighted to join their network and meet up a few times, both in small groups and one-on-one. It’s never too late to reconnect. Another highlight of my 10-week stay in India was the tours I took with various companions, but I’ll save those stories for another post. After returning to the U.S. a few weeks ago, Bonny and I made a short trip to experience the music scene in New Orleans, and we’ll be heading to French Polynesia in a few weeks. Suffice it to say, I’m cherishing every moment of my retirement honeymoon and hoping it lasts forever. Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and co-founder of Dollar Mentor, a 501(c)(3) non-profit organization offering free investment and financial education. Follow his non-profit on LinkedIn, and check out Sanjib's earlier articles. [xyz-ihs snippet="Donate"]

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, I’m keeping my fingers crossed, hoping the next boat will come along soon.

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 companies emphasize that the stated performance goal of a leveraged ETF is strictly a daily target. A 2x ETF is structured to generate—before costs—twice the gain or loss that the benchmark experiences during the course of a single day. Its return over longer holding periods is anyone’s guess. To illustrate the effect of mandating a daily target, suppose we mimic a 2x S&P 500 ETF starting with $100. To double our market exposure, we borrow another $100, allowing us to buy $200 worth of S&P 500 stocks. By keeping the debt at the same level as our “net balance”—meaning our account value after deducting the debt—we can earn twice the market’s return for that day. As the market moves in either direction during the day, the portfolio’s gross value changes proportionally, but the debt remains constant, thus amplifying changes in our portfolio’s net balance. For instance, if the market goes up by 25% on the first day, the stocks rise from $200 to $250. Our net balance, after subtracting the $100 loan, is—voilà!—$150, a 50% gain on our initial $100 investment. At the close of that first day, the $100 debt is below our $150 net balance. As a result, we’re no longer positioned to generate twice the market’s return the next day, so we need to take on more debt. We do that by borrowing another $50 to buy more S&P 500 stocks, thus ensuring our debt is equal to our net balance of $150. In other words, if prices rise on day No. 1, the daily performance goal compels us to buy more stocks before day No. 2. Leveraged ETFs do the same thing. In practice, they don’t buy stocks with borrowed money. Instead, they use indirect leverage through derivatives. But conceptually, their rebalancing is the equivalent of buying more after prices rise. What if the market had gone sour on the first day and dropped 20%, instead of rising 25%? In our portfolio that mimics a 2x ETF, the value of our stocks would drop from $200 to $160. After subtracting the $100 outstanding debt, our net balance falls to $60, a 40% drop. Our portfolio is now overleveraged, so we need to make adjustments to set us up to earn twice the market on day No. 2. This time, we have to reduce borrowing to bring it to the same level as our net portfolio balance. That means selling stocks worth $40 and using the proceeds to bring down the debt from $100 to $60, so it’s the same as our net balance. In other words, we’d be obliged to sell stocks because their prices have fallen. Again, similar adjustments happen with a leveraged ETF. This daily rebalancing causes the leveraged ETF to buy stocks after prices rise and sell after prices drop, day in and day out. The continuous adjustment of the leverage causes the long-term performance to deviate significantly from the daily target. Indeed, thanks to the costs involved and the difficulty in recouping losses suffered on down days, a leveraged ETF can lose money over longer periods even when the underlying benchmark posts gains in the same timeframe. What would happen to a triple leveraged ETF if its benchmark dropped by a third in a single day? You guessed it: The ETF would be wiped out. But even if a leveraged ETF survives a big market drop, the underlying benchmark has to soar for the ETF to recoup its loss. A 20% drop of an unleveraged asset requires a subsequent 25% gain to break even. In the case of a leveraged ETF, a 20% benchmark drop leads to a 40% drop in the fund’s value. Result: The fund needs to go up by almost 67% to break even, which can only happen if the benchmark rises by more than 33%. Market volatility can be devastating for leveraged ETFs, even when the underlying benchmark recoups its losses. Suppose that Mr. Market goes up 10% on day No. 1 and down by 9% on day No. 2, and follows this whimsical pattern for a year. Despite the extreme volatility, the market would be up by 0.1% over any two-day stretch and, over the course of a year, its rise would exceed 13%. How does a 2x ETF fare in the same year? It experiences a 20% gain on day No. 1 and an 18% drop on day No. 2. Compounding the daily returns, the ETF loses 1.6% over two days. If this seesaw continues for a year, the ETF would lose almost 87% of its original value. Even on a profitable day, the pretax profit of a leveraged ETF is likely to be less than its stated goal. Why? The leverage isn’t free. If the ETF uses a total return swap—a contract that gives the return exposure of an asset without having to own it outright—it has to pay interest for the swap contract. The already high expense ratios of these ETFs, typically close to 1% and sometimes more, don’t include either the cost of leverage or the fund’s trading costs. The bottom line: If I could get my hands on a crystal ball that accurately predicts short-term market movements, I’d use leveraged ETFs in a heartbeat. Until then, count me out. A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Identity Crisis, Triple Blunder and Freedom Formula. Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He's passionate about raising financial literacy and enjoys helping others with their finances. [xyz-ihs snippet="Donate"]

INFLATION CROPS UP in almost every conversation I have with friends and acquaintances. Everyone’s getting squeezed by higher prices. Folks complain not only about where prices are today, but also about how quickly they rose. Prices today seem shocking compared to last year or the year before that. But how do they compare to prices from 10 years ago? To find out, I calculated the average annual inflation rate over trailing 10-year periods using the Consumer Price Index for All Urban Consumers (CPI-U). The chart below shows the rolling 10-year average annual inflation rate for the past 80 years. Lately, 12-month CPI-U has been running around 9%. But if we extend the time horizon back 10 years, to mid-2012, the recent spike barely registers, with the average annual increase for the past decade coming in at just 2.6%. From this longer-term perspective, inflation looks deceptively mild. Going back 10 more years, the average annual price increase for the 10 years through mid-2012 was 2.5%, almost identical to the most recent 10-year stretch. Does anyone remember a ruckus being made about price increases in 2012 similar to the one being raised today?  My point: A sudden surge in inflation causes panic, but the insidious effect of slow and steady inflation gets little attention. When I pointed this out to a friend, he wasn’t impressed. It seems he would’ve preferred steady, annual price increases of 2.6%, instead of the low inflation we’ve enjoyed for much of the past decade followed by a sudden spike. I wasn’t so sure. Why not? Let’s assume my friend’s annual spending as of mid-2012 was $10,000 a year and his yearly expenses went up in lockstep with CPI-U. His total expenses from July 2012 to June 2022 would amount to $110,267. But if, instead, he got his wish of steady 2.6% annual inflation starting from 2012, his spending over the 10 years would have been $115,405—almost 5% more. Why the difference? Remember, each year’s inflation builds on past price increases, so—if you must have inflation—it’s less damage if you have low inflation early on and higher inflation later. For proof, let’s run history backward. I’ve taken the actual inflation numbers from the past 10 years but reversed their order, assuming that the annual inflation rate was 9.1% in 2013, 5.4% in 2014, 0.6% in 2015 and so on, ending at 1.8% in June 2022. In this backward universe, my friend’s cumulative expenses for the 10 years would climb to $120,569. That’s 9% more than before. The reason: The inflation spike came at the start of the 10-year period rather than at the end. This experiment demonstrates sequence-of-inflation risk. High inflation at the start of a period is more costly to us because higher prices stick around, even if inflation subsequently settles down. In other words, prices reach a permanently higher plateau after a spike and then continue climbing from there. This sequence-of-inflation risk is particularly dangerous for folks who are in the early years of retirement or who are planning to retire shortly. The risk has similarities to sequence-of-return risk—the double-whammy of suffering investment losses early in retirement while also withdrawing from a portfolio—but it’s harder to counteract. If the market drops in the initial years of retirement, retirees can dodge the bear market by living off their stable investments, instead of selling stocks at lower prices. No lasting harm is done to the retirement portfolio if we can weather the entire bear market—which might last several years—in this manner. When the market rebounds, the effect of the earlier price drop disappears as if nothing happened. [xyz-ihs snippet="Mobile-Subscribe"] Sadly, it’s not so simple with sequence-of-inflation risk. Retirees can’t simply stop spending when inflation runs high. Moreover, the elevated prices from a high inflationary period stick around even when inflation eventually tapers down. The result is significantly higher withdrawals over the course of retirement. What, then, would be a good strategy to handle sequence-of-inflation risk? First, stocks are a great inflation hedge over the long run. Some experts suggest that, even in retirement, allocating a minimum 50% of total investable assets to stocks might work well to fight unexpected inflation. Second, for cash and bond investments, there are Treasury Inflation-Protected Securities, or TIPS, but they come with a catch. When we buy TIPS, the expected inflation rate is already priced in. That means we’re insured against additional unexpected inflation from there. But it might be too late to invest in TIPS if the breakeven inflation rate—the difference in yields between a regular Treasury bond and its inflation-protected counterpart—is already high. If inflation turns down over the holding period, the high price paid for the inflation protection would be wasted. The breakeven inflation rate for both five-year and 10-year Treasurys spiked above 3% in recent months, but has come down since. As we’ve seen, that peak is a bit higher than the long-term inflation rate in recent decades. Most of my non-stock investments are in a short-duration TIPS fund, but I’m thinking of replacing it with a ladder of individual TIPS bonds, each maturing in a different year. Inflation’s bite on my finances will eventually weaken once I start receiving Social Security benefits, with their annual inflation adjustment. But until then, my TIPS ladder should provide some relief. Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles. [xyz-ihs snippet="Donate"]