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Not sure if this question belongs here or in the housing thread, but I think it ties in more with long term investing because it can apply to any type of debt. In reading through the housing thread I saw a few situations where people with mortgages came across big windfalls and asked if they should use it to pay off their mortgages. The consensus that I got from the thread was that it was better to keep the cash (and presumably invest it long-term) than to pay off the balance. The typical reasoning was based on diversification of assets. I disagree with this reasoning, on the grounds that the point of diversification is to decrease the volatility of your wealth, speaking mathematically, but the recommended strategy actually does the opposite. Making extra payments on fixed rate debt is effectively a tax-advantaged investment with a return equal to the interest rate and a standard deviation of 0. If we consider two homeowners, A & B, who own identical homes with a $200k balance left on their mortgages. Both inherit $200k from their crazy dead uncle. Homeowner A follows the standard advice and invests it all in a typical balanced portfolio. Homeowner B pays off the mortgage. Both have the same net worth ($200k). The variances in their net worth will be as follows: code:I can't help but think that the advice I've seen is tunnel vision originating from "do-never-buy" rationale of the thread (which I wholeheartedly agree with) without considering the actual math that props up that rationale. Given that someone has already bought and does not plan to go back to renting, their best course of action is to pay down the debt as soon as possible. Thoughts?
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Sep 8, 2013 19:47
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kansas posted:I am not sure where you got that formula from, but conceptually it is flawed. You do not just add individual assets volatility together to get total volatility. In fact adding more assets will decrease systemic volatility which is why people advocate a well diversified portfolio (see: Modern Portfolio Theory). I am aware of the point of diversification and the existence of systemic/market risk. I did not say the point was to reduce all risk, just to reduce risk in general. The formula can be found in any intro level stats course or online tutorial, and it does not simply add them; the total volatility is based on the correlation between the two (which can be -1, 0, 1, or anywhere in between). It isn't something you can rationalize around, it's quite literally the mathematical fact that these rationalizations are based on. Your example is correct, but it is not analogous to mine; I am not posing the question of person A having $500 in a single asset and person B having $500 spread across multiple assets. My example is person A having $500 in a single asset (in my example, a house) versus person B having $500 in a single asset (a house) as well as $500 in the stock/bond market and $500 in debt. Both have a net worth of $500, but they have different amounts of money at risk ($500 vs $1000). Person B's portfolio can be said to be more diverse but it is not diversified in the sense that you are thinking because the benefits of being diverse are overwritten by putting more money at risk. It is like comparing a gambler who bets $100 at blackjack and then walks out of the casino to another who bets $100 at blackjack and then goes to bet an additional $100 on craps. To rephrase my original point: if I told you I owned my $500 house free and clear and was planning to remortgage it and take the proceeds of the remortgage and invest it all in the market, would you recommend that I do it? This is called a leveraged investment, and I don't believe that anyone here would make the recommendation to do it with personal funds of this magnitude, and they'd be right. But how, exactly, is this any different than person B taking their windfall money and investing it instead of paying down existing debt?
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Sep 9, 2013 08:49
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ntan1 posted:The question you should be asking yourself is: If you didn't have debt, do you think it's a good idea to take a long term loan at the percentage interest that you actually have and put that money into investment?* This is exactly the question I asked in the paragraph that you quoted. I am trying to point out the inconsistent logic at play here. Given the same circumstances, we cannot advocate someone opting not to pay down debt in leiu of making investments elsewhere while disparaging those with no debt who opt to take on debt and make investments with the proceeds. The two strategies are identical and should garner identical advice. grack posted:Volatility is not a useful comparison between investment choices for the simple reason that volatility does not equal risk. Volatility is risk. You are talking about the balance between risk, reward, and other considerations such as liquidity. I am well aware that one can expect better return from say, the S&P than a typical mortgage interest rate, and that difference in return may dictate decision making. I have intentionally neglected to mention risk/return because it was not mentioned as reasoning for the advice I've seen given in the housing thread. If we think the advice to not pay down debt is sound for risk/reward reasons, we should be actually providing the correct reasoning for our advice, quantifying where one should draw the line based on ones risk tolerance, and generally being critical of our own advice and asking if it makes sense and is consistent. I will use myself as an example. I have a pretty large risk appetite, and would opt to make extra payments into retirement instead of paying down mortgage debt. However, I would not be comfortable taking out debt and investing it. I came to realize that these two positions are logically inconsistent, which is where this discussion came from. I need to re-evaluate my position on my actual level of risk tolerance. I can then only ask what else should I re-evaluate? For example I have a small amount of bonds in my portfolio - would it be beneficial to take the fraction of my contribution that goes towards bonds and use it to pay down debt instead? After all, bonds generally have a lower return and higher volatility (as in, > 0) than debt. I lose the benefits of the negative correlation with my stock assets, but does that outweigh the lower volatility of debt payments? Good response. Including inflation into the mix complicates things because you then have to pick a correlation between investment return and inflation. If inflation rises 2% next year, how likely is it that my portfolio will generate 2% more return to compensate? Its best to look at things like mortgage interest tax deductions and PMI as just changing the effective interest rate on debt, not as special considerations. They should already be baked in to your assumptions if they apply to you. As an aside, do remember that itemized deductions like mortgage interest need to to be evaluated in terms of their benefit in excess of the standard deduction. Eyes Only fucked around with this message at 19:30 on Sep 9, 2013 |
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Sep 9, 2013 19:27
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grack posted:No, it's not. Volatility in return is only one small part of risk tolerance. I think you are confusing the terms Risk and Risk Tolerance. I am talking about Risk, the measurable property that makes up uncertainty, as in volatility.
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Sep 9, 2013 20:11
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MickeyFinn posted:I don't think you did this correctly because you haven't weighted any of the volatility values. I spent way too much time doing a derivation of the cases in which you should invest in a house versus a diversified stock portfolio. The answer appears to be "when you already have lots of stock and not much house value" among a few other things. Maybe I did something dumb in there, but I had fun and it is late, so I'm going to bed! I like this. A couple of questions: (1) It doesn't seem that weighting come into play here, can you expand on this? When I say "volatility of the house" I mean the volatility of that particular house, which is already a function of the house's value and thus is already "weighted". The same goes for the volatility of the stock portfolio. It looks like you are using the house value times the volatility of the underlying random variable, which is the same thing. I think this is a potato/potahto situation. (2) Why do you assume that paying the debt lowers the (weighted) volatility of the house? Fluctuations in the house's value are not based on the amount of debt outstanding or the equity that the homeowner has accumulated. If housing prices go down 10%, a home with a market price of 200k will incur a loss of 20k regardless of the mortgage situation. Payments on the debt do not reduce the value (weighting) of the house, they reduce the value of the debt. Since the volatility of the debt is zero to begin with, nothing changes and there is no increase in the portfolio's overall volatility. It follows that paying down debt keeps total portfolio volatility constant, while buying stock always increases total volatility as long as the correlation is assumed not to be heavily negative. The assumption about house volatility being higher is not needed as this relationship remains true regardless of their relative values.
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Sep 10, 2013 15:39
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bam thwok posted:With a long enough time horizon, investing at the beginning of the year is dollar cost averaging. Or to put it more precisely, the benefit of dollar cost averaging gets diluted away very effectively over long periods. As a result, a 30.5 year old portfolio that has been dollar cost averaged looks identical to a 30 year old portfolio that used Jan 1 lump sums. Dollar cost averaging forfeits 6 months of returns for no discernable benefit when you're looking at a timeframe like that. Of course, 6 months isnt a huge deal in the scheme of things, so its fine to go with regular paycheck deductions if they fit better in your budget. I like to do Roth IRA and HSA as lump sum in January, but spread 401k year round. Since I'm not capping 401k yet, I can always make it up the next year if I need to slow contributions a little to make room for other things in my budget. It's also hard to frontload 401k contributions for a number of reasons. If you're doing riskier short term investing (10 yrs or less) then DCA has clear benefits that you may want to consider, but those benefits quickly trend towards 0 as time goes on.
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Oct 10, 2013 19:27
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For a tax-advantaged account with an expense load of 2% or 2.5% you need to maintain nominal returns of 8% or 10% for it to even be worth it instead of putting the money into a taxable low fee account. And that's generously assuming that all interest in the taxable account would be taxed as income, not capital gains. I dont see much point in participating in that plan at all unless you expect a reasonable employer match or you are not planning on staying with the company very long. Especially if you are planning early retirement and will need considerable after-tax accounts anyway.
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Nov 20, 2013 18:59
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Cost averaging for retirement accounts has no discernable benefit. The reduction in risk from averaging has diminishing returns the longer your money is in the market, but the "cost" of averaging will always be 5-6 (non-compounded) months of interest regardless of time in market. You reduce risk by about 10% if you only hold for a year, 4% for two years, 2.5% for three, etc. At 10 years the difference in risk becomes so small it is imperceptible. An extra 6 months of interest isn't a huge deal, so cost averaging is fine if thats what your budget allows for. But if you can afford to do so you should lump-sum immediately unless you plan to withdraw all the principal in the next 2-3 years. I can go over the math behind this in more detail after work if anyone is interested.
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Nov 25, 2013 19:07
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ayb posted:Have many of you partaken in your companies stock purchase program? What are the biggest drawbacks from such a program? We talked briefly about just selling at the end of the 6 months if the price was worthwhile. Her companies stock is already near it's high for the year(started roughly 20 points lower, from 70-90). I'd prefer us to just participate and build it up but is that better than just taking the money we would put into the program and investing it ourselves? Potential drawbacks are a minimum holding period (ie once the 6 months is over you are require to wait X months/years before you can sell your shares), inability to withdraw from the program mid-term, and having insufficient savings to be able to cover the missing income. Check the plan documents regarding the first two, and make sure your budget can accomodate the third. The "gold standard" for these ESPPs is 6 months / 15% discount / no minimum holding / lower of the two prices. If there is no holding period at the end then it is no risk free money that you can think of as a twice a year bonus since you can sell the stock immediately when the period ends. If there is some sort if holding period you may need to think twice, but as long as you are doing okay financially you should participate in the plan, otherwise you are leaving money on the table. I personally sell it off immediately, others hold onto it for a little while to get long-term gains treatment for taxes. Either way, I would very strongly recommend against building up a long term portfolio that includes shares of your employer's stock. Take the free money and cash out into a safer investment (index funds).
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Dec 25, 2013 23:36
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ayb posted:There is no minimum holding time. The discount used to be 15% years ago but that ended well before my wife was hired. Are there certain industries that something like this wouldn't be good for investing? Her company is oil/gas related and one of the largest in the world. That plan is pretty good then. If you participate and sell immediately then this isn't actually investing, it's your employer giving you additional compensation (free money). It's only investing if you hold on to their stock. The idea is to participate in the plan and at the end of 6 months the company buys stock in your name at a discount. Ten seconds later you sell that stock for its current full price, pocketing the difference. The company pays that difference and as far as they care it is part of your salary. Of course, the point of the program is they want you to hang on to their stock so you have extra motivation to work hard, but you have no real incentive not to sell it right away and invest the money elsewhere. The industry or even the individual company doesn't matter - investing in individual companies is generally a bad strategy even for experts, and investing in your own employer is doubly bad, even if it is a world-class stable blue chip.
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Dec 26, 2013 01:40
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Vehementi posted:Where da data at? I'd start here and here. Note that this research is hard to do yourself with current public data because institutions intentionally obscure the past results of their underperforming funds (how nice and honest of them). quote:Very few funds can consistently stay at the top. Out of 703 funds that were in the top quartile as of Eyes Only fucked around with this message at 01:01 on Jan 4, 2014 |
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Jan 4, 2014 00:58
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ranbo das posted:If you're saving long-term, stocks don't drop in value. They go on sale. I never quite understood this sentiment. If you deconstruct this attitude, aren't you basically saying that a dollar invested today has a higher expected return than one invested last friday when the market was higher? It's really just veiled market timing. The same goes for the idea that rebalancing produces excess returns after market swings. I prefer to think of market movements as totally random, and my expected return on each dollar doesnt change from day to day (at least not in a way that I can actually predict better than chance). If stocks recently have gone down a lot or up a lot it doesnt affect my returns long term. Stocks don't go on sale, they fluctuate.
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Feb 4, 2014 17:23
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Let's say you want to save $4000 in cash this year for a house. For the sake of simplicity we'll assume that you are also saving for a decent amount for retirement in the form of a 401k, but not a Roth IRA. Option 1 is to just keep the cash in a savings account until you have enough for a down payment. Option 2 is to put the cash into a Roth IRA and invest it in a safe fund (money market, or even just cash). You then withdraw it for your down payment when the time comes. From a STRICTLY financial perspective option 2 is objectively better, because if all goes as planned you are in the same situation as option 1, but if you end up not buying a house you are ahead of the game with regards to IRA contributions. However it's hard to recommend option 2 even for the most disciplined folks here. From a psychological perspective it is a much worse position since it gets you used to treating retirement accounts as temporary and raidable. Once that happens it gets really hard to resist withdrawing from your 401k when you need cash suddenly. I'm not saying that you are weak minded or will definitely fall into that trap, but why take the risk of getting into that habit. Understanding your own psychology can be worth a lot more money than understanding the financial parts.
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Feb 25, 2014 00:29
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Oh I agree completely and I'm pretty heavily against homeownership in the US, at least in the northeast (I cant speak much to pricing and taxes in other regions). I was just giving an example of "if you are in this situation and really want to do this, then this is the best way, financially speaking."
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Feb 25, 2014 01:21
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i81icu812 posted:I am currently maxing out my 401k and Roth IRA through my job. Technically the Roth IRA is independent of your job, but I get what you mean. The 17.5k limit for 401k contributions only applies to the employee's contributions. The total combined limit for 401k employee contribution + 401k employer contribution + SEP IRA contributions is 51k. There is an additional sub-limit on SEP IRA contributions, which is 25% of the income from your business. As an example, if you max out your 401k and your employer contributes an extra 6k, you will have used 23,500 of the overall 51,000 limit. If you made an extra 24,000 on the side from your blog you can sock away another 6,000 in the SEP IRA. That brings you up to 29,500 which is still well under the overall limit. Sadly the remaining space is unusable unless you increase the income from your side business substantially. I don't believe your Roth IRA contributions matter for any of these limits. Alternatively, if your employer offers a Roth 401k option you should consider it due to the larger effective limit it offers. Other routes to look into are accelerating any debt payments you have or looking into other tax advantaged vehicles like annuities (though this might not be better than taxable accounts). I would just take a nice vacation at this point though. I am not a tax professional and you should definitely check this advice against a real life professional before setting up an SEP IRA. I am only moderately sure of the information above so if you get dinged by the IRS I will take no responsibility and will probably laugh at you.
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May 12, 2014 00:09
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SiGmA_X posted:Now, how do I convince my company (financial services / life and disability insurance) to go back to 15% ESPP discount... I know the involvement has decreased since they dropped it to 5%, for obvious reasons... In my (very limited) experience, you don't.
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Jun 4, 2014 06:20
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The reason most of the random picks outperform the index is because small caps happened to outperform large caps in the recent past and a random selection of tickers is statistically very likely to overweigh small caps. Since in general any two stocks are overall pretty correlated with each other, this means that a random selection of small caps is likely to beat the index simply because small caps overall beat the large cap market in the recent past. Diversification within one asset class has dimishing returns due to the internal correlation mentioned above, but a small randomly selected portfolio of 30 smallish stocks will still have plenty of room for improvement and is unlikely to outperform a small cap fund on a risk-adjusted basis. As mentioned equal weighting will also incur more fees and higher turnover. I don't see much reason to deviate from cap weighted funds though, unless your risk appetite is so insanely high that 100% stocks isn't enough.
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Jun 5, 2014 19:27
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It's worth noting that the true yield on a mid term bond fund is much higher than the YTM of its components would suggest - individual bonds get sold off well before maturity. If you buy a 5 year bond yielding 2.5% and sell it off in two years you will make more than 2.5% annualized because most of the interest is front-loaded due to the way interest rates fall as duration falls. The rate curve is flatter for short-term bonds, but there is no point in holding those in the first place as an individual investor when you can get FDIC savings accounts with more yield and zero risk. So bonds aren't quite as bad as they seem. In the other hand, for retirement investors year-to-year volatility is only important in the psycological sense. Minimizing annual volatility or targetting some arbitrary metric like sharpe ratios or annual percentiles are abstract measurements that don't directly impact reality. In the end the only metric that really matters is "if I save X per year and want to retire at age Y and withdraw Z per year until I die, what allocation strategy minimizes the probability of me running out of money?" In that point of view I can see how it might be worthwhile for young investors to have 0% bond allocation for a time. I've been thinking about putting out tool that does a multi-year simulation that does this for you. You'd plug in (or use the default values) picks for each asset class' expected return, volatility, distribution of returns, and expense ratio, plug in some correlations, and put your savings rate and retirement goals in. It then runs a monte carlo sim with your assumptions and a life table and tries to minimize the likelihood of you or your spouse landing in the gutter. I'm sure there are plenty of services that do something like this already (I know wealthfront does a simplified version of this), but would anyone be interested in that?
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Jun 19, 2014 18:57
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Fancy_Lad posted:If you can pull off something better than http://www.firecalc.com/ (if you aren't falmilar, be sure to play with all the tabs to see the options), I'd waste several hours playing with it Yeah, basically like this but modernized and with more advanced simulation. I'll see of I can find time to jam out a prototype in the next few months after my life calms down a bit.
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Jun 20, 2014 01:39
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Cicero posted:Someone correct me if I'm wrong here, but even if you put it in a traditional IRA and took a 10% hit when taking the money out early, I think you'd still come out ahead relative to never having put in the money into the IRA in the first place, because you would've lost more than that 10% to taxes. It's 10% on top of paying regular income taxes on the gains. This will only beat out a taxable account over very long periods (certainly more than 20 years).
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Jun 20, 2014 21:56
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ChipNDip posted:The stock market has beat inflation for every period of 25+ years since at least 1920 . Another way to think about it is: what if you had private ownership of the companies that make up the stock market? As in, if you were a super-rich master of the universe and fully owned all of the companies in, say the S&P 500. Those companies, collectively, have posted a profit every year for 143 years. This is an astoundingly strong result - especially since the last 20 or so of those years have been subject to accounting funny-money writedowns that have greatly increased the variance of earnings reports, and yet the S&P has still reported a profit every year. Sure, the value that people are willing to give you in exchange for ownership of those businesses fluctuates wildly for [insert short-lived reasons here] but in the long run, you still make money. Short of glorious communist revolution / the end of the world / governmental collapse (all of which likely result in you getting a bullet in the back of your head, and your cash is worthless too) you can't really lose in the long run.
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Jun 22, 2014 22:50
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I'd go with the blackrock 500 and bond funds, they are both textbook indices and have nice low ERs. The lifepath one is also good, but holds some REITs and commodities which aren't really my thing, although it does have international if you really want to pay the extra ER. Avoid the vanguard fund: it is mostly bonds and the stock part is semi-active so it's hard to benchmark.
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Jun 27, 2014 03:51
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As an individual investor there is very little reason to hold any short term bonds at all, so I take exception to #3. Savings accounts can be as much as 1% interest right now with zero risk, so buying any bond with a YTM less than that is purely irrational since the bond will come with interest rate risk. 5 year CDs are also FDIC insured and go up to 2.3% now, usually with an early withdrawal penalty of 6 months interest. It's hard to beat that with treasuries unless you go well into intermediate duration. The short-term bond market is mainly driven by large institutions that are forced to by short-term treasuries for one reason or another.
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Jul 3, 2014 03:39
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.Z. posted:How big of a difference was the returns for lump sum vs monthly? The difference should amount to slightly less than 6 months worth of returns.
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Jul 18, 2014 07:29
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Nail Rat posted:You can replace 401k with 457 and 403b. Since there is no match for anything you put into these, you should max out an IRA. Then, if you can pay more into your 457 or 403b, do so up until you hit that 17,500 max. Then it's time for hookers or taxable accounts. 457b actually has its own separate limit, so you can actually go full-baller status and do 35k total. e: beaten
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Aug 4, 2014 19:14
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Serious effortpost: I don't generally like to challenge the opinions of someone like Bernstein, but a 3% real return expectation is inconsistent with his own investment philosophy. Expected inflation (as per TIPs yields) is about 2% - under the no-market-timing philosophy you must assume this is the most accurate estimate of future inflation there is, or else you should be trading TIPs markets instead of holding equities. So that means Bernstein's nominal return pick is 5%. Since the current dividend + share repurchase yield is also 5%, the interpretation is that Bernstein predicts that market caps will experience 0% nominal growth. That more or less implies deflation which is a contradiction. It works well as a pessimistic view, but as an actual pick for expected return across zillions of parallel universes 3% is ridiculous. I don't have his book where he makes these, so I'm not sure if he explicitly words them as being conservative minimums (and not expectations). I can only comment on the way I see his picks being used by others, which is as expectations. Theoretically, long-term average real returns for equities should approximate Real GDP Growth + Dividend Yield + Share Repurchases. Current figures would suggest 2-3% real gdp + 2% dividend + 3% buyback = 7-8% annual real return. I'd pick 7.5%. Arguments about population growth or low-hanging-fruit resource extraction or whatever are qualitative and you can't do any actual decision making with them. Anything regarding comparing current PE to historical is suspect; accounting practices now are materially different than in the past, so unless you honestly believe 2008's insanely low earnings were an anomalous 1-in-250 year event you simply can't use this as an indicator. The 7.5% is an arithmetic 1-year return, so it doesn't help with TwoSheds' question which was about expectations of account balance at age 65. For that, we have to use geometric mean return to include the "drag" on returns that results from reduced compounding due to years with losses. The magnitude of this effect depends on your pick for standard deviation and chosen statistical distribution since annual stock returns are random in the passive investing framework. There's no convincing theory as to what to pick for volatility, so I'd pick 18.5% stddev based on the past century. The best fit (that I know of) for equities returns is the student-t distribution with parameter DOF=3. Under those assumptions the long-term (n=infinity) geometric yield works out to about 5.6% per year. For comparison, the averages for real returns since 1915 were 8.25% arithmetic, 6.66% geometric. I ran a quick and dirty Monte Carlo sim in excel to plot this against some percentiles:   Bernstein's pick, if assumed to be a 30-year geometric average, lies on the 22nd percentile of my simulation, which is why I say it's good as a pessimistic view - it's about as low as I would go for planning purposes. There is an implicit tradeoff where being too pessimistic will result in you throwing your life away (either by being too frugal or working too many years in order to get a "safe" account balance), and being too optimistic results in you running out of money at the end of your life and wasting those years living in a shack in Fixed-Income-Nowheresville, AZ. TwoSheds' savings rate is phenomenal and will likely result in early retirement or a huge estate, but even with savings as strong as that you can see from the 10th percentile that bonds inevitably become a necessity for everyone as they get older.
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Aug 12, 2014 05:29
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shrike82 posted:I agree with you broadly about people potentially being too conservative about long-term returns expectations but a couple quibbles about your simulations. Well, I'm punting on modeling the retirement phase for now, and in accumulation phase I'm not sure I see the benefit to using IRR; incoming cash flows are assumed periodic and substantially equal and there is full reinvestment (thus no outflows), so geometric mean is a fully complete return description. You have a point that modeling something like variable contributions could potentially be useful, but the problem with a complication like that is that it's hard to quantify exactly how to vary the contributions. Am I going to have kids sometime soon and start contributing less? Save for a house? Get a huge raise? When? You get into a situation where you'll have to account for fundamentally unquantifiable elements. I can't disagree about asset allocation, but that's a bigger question requiring a bigger tool. There is still meaning in the lower percentiles of the pure equity distribution: a properly allocated portfolio can't be any worse than this so you get some idea of the lower bounds. Isurion posted:Is this based on a spreadsheet? If so care to share it?
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Aug 12, 2014 23:30
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Droo posted:You can also take out a series of equal payments (basically about 4% a year) from an IRA without paying a penalty, so even if you have low expenses, and end up with $1m in your 401k by age 40, you can quit your job, roll the 401k to an IRA and then take about 40 grand a year from it penalty-free. Yeah, combining the SEPP rule with the fact that you can withdraw principal / converstions (after 5 years) from Roth IRAs pretty much allows for early retirement at any age without penalties. I would not not recommend taxable accounts for early retirement unless you can max out all tax-advantages options first.
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Sep 15, 2014 03:10
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Claiming that social lending can have higher return than equities at a lower risk point heavily violates even the weakest forms of the efficient market hypothesis and is quite frankly, absurd. Madoff is chuckling from his cell - his fund only returned 10%. Unormal is correct, the word diversification is being misused here. Diversification is just a strategy, risk control is the goal. All consumer loans are inter-correlated with each other because they share a common underlying varible; the unemployment rate (source: the year 2008). This means that (like equities and other types of bonds) there is a base amount of risk that you can't diversify away. In anything even approaching an efficient market, that undiversifiable risk is the only thing that you as an investor are being paid for. There is very little difference between a lendingclub portfolio of 200 notes and one with infinite notes - once you have enough notes you rapidly converge to the risk profile of asset class itself. The class has happened to do well for the (extremely short) duration of its existence, but that duration has been a relatively stable period with low inflation and constant job growth. There is a little overlap with the GFC but if you look carefully at the lendingclub data you will find a lot of older, underperforming loans that are not included in their sitewide statistics, under the age-old underwriter fallacy of "we have changed our policies since then so the data is no longer relevant." When the next recession hits the default rates on LC will skyrocket. I like LC a lot. They charge very low fees and have opened up a direct market for consumer debt, which should reduce gouging by banks against consumers. Choosing notes and doing analysis on them is fun. But I would absolutely not suggest this as short-term investment. If you need your money in 2 years, don't use junk debt, equities, or even treasuries. Use a CD if you know exactly when you need the money, or a savings account if you do not.
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Oct 5, 2014 20:13
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MyRA isn't a type of retirement account, its just allowing the general public to invest in the TSP G fund inside of a Roth IRA. The president doesn't actually have the power to add new types of tax advantaged vehicles without the cooperation of Congress.
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Oct 29, 2014 20:02
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Raimundus posted:In less than a month, I will receive a promotion and a very substantial raise at work. Though I've been with the company for over a year, I will now qualify for benefits. My new benefits package includes several things I've never had before in my life: 0. I would strongly recommend against buying real estate if you are not married. Also your future wife will have a claim to the place no matter what you do since you'll be paying property taxes on it from your marital income. And living in it. 1. The 17.5k limit is for your own contributions only. The total limit for you + employer match is 52k. 2. Mathematically its best to pay off the high interest debt first, but if you will get some satisfaction from knocking down the tiny debt then go for it. Finance is really only half math, psychology is the other half. 3. If you're asking where you can invest money without locking it away until retirement, the answer is nowhere, there is no such thing as short-term investing. That being said CDs can be gotten for 2-2.25% right now and that will almost prevent your savings from dying to inflation after taxes, if you want to save up for a future down payment or something. Alternatively, paying down your debt is an investment that is going to be impossible to beat from a risk-reward perspective. Individual stocks are for suckers.
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Nov 26, 2014 00:09
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I'm not sure I understand your calculations. You are letting the tax adjusted savings rate vary between the traditional and roth scenarios? That isn't the way it works in real life. While working you have your normal lifestyle costs and at the end you have some free net cash flow to invest. The question at hand is "should I invest this $1000 of net money in Roth or should I do the equivalent $1000/(1-marginalRate) in traditional?" Both leave you with the same net income and the same tax-adjusted savings rate. You have to nail this part down or your optimization will end up with circular logic. It will all come down to current marginal rate vs effective tax rate in retirement. Traditional is going to be better for mostly everyone, the main exception being young college grads temporarily stuck in lovely retail jobs with no high interest debt, an existing emergency fund, enough net cashflow to invest at all and exceed any available company match, and a 401k plan that's decent enough that there is even a choice to be made in the first place. That being said I still support the use of Roth IRAs because of the other advantages they offer.
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Dec 18, 2014 17:22
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etalian posted:CDs and savings accounts are extremely attractive (relative to bonds) in today's low interest environment since institutional investors have no access to them and thus no way to bid down the rates. Fixed your post. Also, 5 year CDs with a cancel option go as high as 2.25% currently: https://www.gecapitalbank.com/savings-products/high-yield-cds.html As a consumer oriented product there will always be lovely rip-off offerings with a line in the water. You should shop around and compare best price to best price for each product before making generalizations.
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Feb 9, 2015 06:23
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Blinky2099 posted:Questions: 1) It makes sense to do the 2014 contribution first since the clock is ticking on that. You don't have to wait until 4/15 for the 2015 one, so you can do both now if you want. At Vanguard when you deposit into the Roth IRA it will ask which year you want to designate it as. 2) When you sell you'll only be taxed on the capital gains, ie any profit you've made between when you bought them and now. If this isn't very much then you absolutely should sell them off, deposit the proceeds into the Roth IRA and park it in an index fund. If it's a lot of profit and a relatively diverse array of stocks you might want to hold off. 3) It's probably not a good idea to use the Roth IRA as a savings account to be withdrawn for a home purchase. It may be the mathematically correct decision, but you will be encouraging future you to be in the habit of raiding your retirement accounts. As someone who is a mere 5yrs older than you, I can tell you that FutureYou is a completely different person that you shouldn't trust. Stick with good habits.
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Feb 19, 2015 23:29
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snickles posted:Nothing at all. My mom advised me to invest in it when I got my first job and I've continued to do so ever since. My return has been pretty good, but I see now that my money would be better served elsewhere. My plan calls to eliminate contributions to this account but I'm not sure the best course of action for the money already invested. It would probably be better to just bite the bullet and sell it off and pick up a cheap index fund with the proceeds. You'll take a hit on capital gains taxes, but the fund has 23% turnover, so you're basically taking that hit every 4 years anyway. Unless you're planning on saving up for something big, I'd say avoid putting any more into taxable and just focus on your 401k. Is the VGSIX in a taxable account? REITs are best placed in tax-advantaged accounts. What are the ERs and ticker symbols on the 401k funds?
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Mar 9, 2015 05:41
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The math works out such that dollar-cost averaging has no effect over longer time periods. Studies of historical returns have reached the same conclusion. In the long run, investing $1 every day of the year has the same risk/return stats as investing $365 on July 1 (or June 22nd or whatever the exponential midpoint works out to). Doing it all on Jan 1 is slightly better (6 months more returns) but the differences are small enough that you should just do whatever makes you feel better.
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Mar 25, 2015 16:03
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Technically speaking you always want to overweight the country where you plan to spend your retirement, if only slightly. The reason being that assets based in other countries will be subject to (uncompensated) exchange rate risk on top of their locally-denominated asset risk. Extra risk without extra reward is always inoptimal (this is the point of diversification in the first place) The extent to which "slight" overweighting is warranted depends on your home economy. Diversification has diminishing returns so if you're in a well-diversified, large economy (US, EU), then you are okay with overweighting more. If you're in a relatively small, specialized country (sorry Canada & Australia) then you want to stick closer but not quite equal to worldwide marketcap weights.
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Sep 5, 2015 07:30
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Most plans at large companies have that feature, if the loans are for a qualified purpose (check the IRS regulations). As to whether or not you want to deal with the admin issues, up to you. It's probably not a good idea to get into the mindset of encouraging/discouraging behavior like this though. Your employees are (presumably) grown adults. If they want to make dumb decisions let them. Acting like it's your responsibility to save them from themselves is only going to cause strife.
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Nov 12, 2015 21:52
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Ludwig van Halen posted:30% bonds for a 24 year old is way too conservative IMHO, especially with a 6 month emergency fund. You're not going to need to withdraw from your investments to cover expenses with that much in cash. They were asking for a 10-15 year timeline. That's roughly the equivalent of being 55 years old. I think 30-35% bonds is spot on for that timeframe.
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Feb 28, 2016 04:14
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| # ¿ May 3, 2024 16:18 |
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e: double post
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Feb 28, 2016 04:15
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