Investing, Stock Market and Retirement Planning Thread

robbiestoupe
Posts: 11556
Joined: Thu Apr 30, 2015 3:27 pm

Investing, Stock Market and Retirement Planning Thread

Postby robbiestoupe » Wed Jan 09, 2019 12:48 pm

Source of the post A simple example: Assume that your 529 account holds $100,000. And, assume that given your total wealth, you are comfortable holding $100,000 worth of stocks (in addition to bonds, cash, real estate, etc.) in your total portfolio. In that case, your $100,000 worth of stocks should be fully residing in your 529 account - not in your Vanguard brokerage account - in order to avoid taxation of all the expected capital gains.
Can you explain this a bit more? Are you saying I should be investing non-retirement money in a 529? Basically, the penalty for not using 529 money towards education is less than capital gains tax?

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Wed Jan 09, 2019 1:54 pm

Source of the post A simple example: Assume that your 529 account holds $100,000. And, assume that given your total wealth, you are comfortable holding $100,000 worth of stocks (in addition to bonds, cash, real estate, etc.) in your total portfolio. In that case, your $100,000 worth of stocks should be fully residing in your 529 account - not in your Vanguard brokerage account - in order to avoid taxation of all the expected capital gains.
Can you explain this a bit more? Are you saying I should be investing non-retirement money in a 529? Basically, the penalty for not using 529 money towards education is less than capital gains tax?
Oh, no! And I am sorry if my example appeared to suggest that. The penalty for not using 529 money toward education is sizable.

In my example, I am assuming that I will use ALL f the $100,000 (and more, because daddy has hopes for the Ivy League education :) ) toward education purposes. The full math of my suggestion goes as follows:

Provided you are reasonably sure you can spend $X on your kid's education, and provided that $Y of your personal wealth should be invested in stocks, then the MIN(X,Y) should be invested in the 529 account as stocks for the next year. So, if Y>= X, then the FULL value of your 529 account should be kept in stocks.


Here is a little more detailed example:

Assume you are reasonably wealthy, and, in addition to your house, you operate with, say $500,000 personal wealth portfolio. Assume for the next year, you would like to have it invested as $250,000 cash + $150,000 bonds + $100,000 stocks. Oh, and let's say you have a 19-year old kid and $100,000 out of your $500,000 wealth sits in your kid's 529 account.

Since your kid is 19, Utah 529 suggest investing the full value of the 529 account in cash:

Image

because that way, apparently, the future of your child is "protected."

I see it as a stupid strategy. Putting the 529 account in cash removes the key advantage of 529 investment to earn a TAX-FREE return. For sake of simplicity, assume that cash earns 0% interest. Granted, in reality the actual "FDIC insured" money market account will earn a modest positive return, but still far less than the expected return on stocks (say, 10%).

If you follow Utah suggestion, your portfolio will look like this:
$250,000 cash: $100,000 in 529 account + $150,000 in your bank account
$150,000 bonds: all in your personal brokerage account
$100,000 stocks: all in your personal brokerage account

Instead, if you are smart, your portfolio should look like this:
$250,000 cash: all in your bank account
$150,000 bonds: all in your personal brokerage account
$100,000 stocks: ALL IN YOUR 529 ACCOUNT

Next year, cash will keep its value, while bonds and stocks will probably go up - but even if they lose (less likely situation) - they lose the same value regardless whether you followed Utah or my advice - so your ability to send your kid through college is the same (who cares which "pocket" you will be paying the kid's education from!)

BUT - while you gain no advantage from having your money invested in cash in 529 account (the return is tax-free, but you generated no return on cash), the expected return of 10% on $100K stock investment - that is, $10,000 - will be fully taxable in Utah suggestion (because that return happens in your personal brokerage account) , but it will be tax-free in my example (because you put it in a tax-free account).

Naturally, the advantage of investing in a tax free account grows the longer you keep the money in the account. For example, it takes only about $18,000 to grow to $100,000 at 10% per year over 18 years. So, you have $82K of a tax-free gain!

DigitalGypsy66
Posts: 19680
Joined: Wed Mar 25, 2015 7:33 pm
Location: Iodine State

Investing, Stock Market and Retirement Planning Thread

Postby DigitalGypsy66 » Wed Jan 09, 2019 1:58 pm

Or you could go work for a college that has tuition exchange/remission...no 529 needed (or at least not as much invested in it).

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Wed Jan 09, 2019 2:05 pm

Thanks for the write-up. So your own plan is to have your 529(s) 100% equities the entire time? Our target going into this was basically a dollar figure - $25k. We hope that's enough for one year at a private school, or multiple years at a community college. Either way, the rest can be covered via financial aid or, hopefully, scholarships.
Yes, 100% equities until I liquidate that account! :)

Now, my target is north of $100K (that's why I used the $100K value as an example), because I hope I will be able to get my kids through college without financial aid.

Incidentally, scholarships are a non-issue here. You can actually WITHDRAW the full value of the scholarship penalty-free if your child earns one.

(Thus the ultimate dream - full scholarship for an expensive Ivy League school which brings the parents the reward of huge tax-free profits!! :D)

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Wed Jan 09, 2019 3:52 pm

Or you could go work for a college that has tuition exchange/remission...no 529 needed (or at least not as much invested in it).


“I don't want to belong to any club that would accept me as one of its members."

Groucho Marx

:twisted:

robbiestoupe
Posts: 11556
Joined: Thu Apr 30, 2015 3:27 pm

Investing, Stock Market and Retirement Planning Thread

Postby robbiestoupe » Wed Jan 09, 2019 4:18 pm

Thanks for the write up Tomas, makes sense

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Wed Jan 09, 2019 6:45 pm

Quick question for @NTP66 : Where did you get the Utah 529 portfolio weights? More importantly, what are those weights for? (Just suggestion for investors, weights used in their target date funds...?)

I decided to talk about this in my Executive MBA class this Saturday (especially because I will be introducing students to the concepts of Future Values in our first class) and I will definitely show the picture to the class.

Incidentally, if you remember where exactly you got it, can you post the most recent version? Your chart does not reflect the fast that Utah must have recently lowered the administrative fee from 0.19% to 0.16% or 0.17%. Thanks!!

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Wed Jan 09, 2019 6:58 pm

I have the Customized Age-Based plan, and .19% is the new lower fee; it was .20% until last August or thereabouts. The other plans have lower admin fees, IIRC.

I didn’t think of this account the way you did, so everything you see from going 100% equities to 100% cash was part of my plan, which I’m now going to re-evaluate. It was basically based off of Bogle’s three fund portfolio.
Last edited by NTP66 on Wed Jan 09, 2019 7:13 pm, edited 1 time in total.

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Wed Jan 09, 2019 7:01 pm

And while we’re on the topic, how do you feel about international stock in your portfolio? I’m talking about a 529 as well as your retirement accounts.

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Thu Jan 10, 2019 2:28 pm

And while we’re on the topic, how do you feel about international stock in your portfolio? I’m talking about a 529 as well as your retirement accounts.
529: I have 0% weight, because CA 529 does not offer it. :) However, I don't care because, as I explained in a few of the above posts, 529 account is destined to contain the riskiest portion of my personal portfolio.
403b/457: about 25%

My take: I am diversified internationally, because "it's the right strategy to do". However, among everything I know about finance, benefit of international diversification for retirement purposes is one of the strategies I am the least certain about. I am OK admitting that globally-diversified portfolio apparently outperforms the US portfolio in terms of Sharpe Ratios i.e. Abnormal Return per unit of risk (measured by standard deviation). However, the few papers I read on the subject seems to suggest that the abnormal returns on globally-diversified portfolios are actually slightly lower compared to the US portfolio (so the improvement in Sharpe Ratio comes from reduction in the denominator). I feel that "diversification" I get through investment over long-term horizon is sufficient enough, and so the reduction in expected abnormal return actually hurts me.

Ultimately, what see as a potential real benefit of global diversification is the fact that lower volatility will allow me to stick with stocks a little longer compared to just investing in the US index. Since I have about 20 years until retirement, and I am still 100% stocks, the issue of rebalancing toward less risky securities is knocking on the door! :)

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Thu Jan 10, 2019 2:34 pm

Thanks, @Tomas, that's good to know. I've hovered around 20% international in my overall AA and intend to stay there for the duration. Your risk tolerance is definitely uncommon, IMO. Not many people can stand the ride at all equities.

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Thu Jan 10, 2019 3:37 pm

Here is why I think I am right:

1) Some anecdotal evidence:

There are actually several finance professionals I know who go all-equity until the day of the retirement. Here is a story of one of my friends, who was about to retire right around the time of 2008 huge financial crisis. Dow drops from 14,100+ to about 6,500. More than 50%. My friend is all equity. He could have cried that 50% of his retirement savings got wiped out In reality, he went all cash when Dow hit 11,000. That's a definitely painful move. Or, he could have looked at it this way (I don't remember the correct numbers, that's why I call it "anecdotal"): The average annual return for 30-year stock investment culminating right before the crisis was somewhere around 10.5% (maybe slightly more). How big the average return dropped after the market lost 50+% value. It dropped to...
.
.
.
.
.
9.5%!!! There is NO WAY how $1 invested in bonds (corporate or Treasury) anytime in the history of the US would have earned anywhere near 9.5% /year. So, that shows people should go all-stock until at least 30 year prior to the retirement.

2) So now some real data:

How long until retirement should you be all-stock? This is actually my own chart:
*AVERAGE* Stock HOLDING returns (S&P 500 including dividends) vs. LT Govt. bonds for various windows if the investment started in 1928 or later, until 2016. Enjoy!:
Image
Years in the picture describe the ENDING year of the investment. For example: The best 30-year horizon annual rate of return for stocks was 13.63% per year for investment that was held from beginning of 1970 to end of 1999. So, your $1 invested would have grown to $1*(1.1363)^30 = $46.22

The "Stock minus Bonds" is the difference in annualized returns for investments ending in a particular year. For example: For 30-year investment horizon, the worst relative stock performance happened in 2010. In terms of average returns, investment in stocks held from beginning of 1981 till end of 2010 outperformed the investment in bonds by "only" 1.7%, because average stock return was 10.61%, while average bond return was 8.91% per year. So, your $1 invested in stocks would have grown to $1*(1.1061)^30 = $20.60, while $1 invested in bonds would get you to $1*(1.0891)^30 = $12.94. Still, even in this WORST investment horizon, stocks would have made you more than 50% richer...
So, for 20-year investment horizon (where I am roughly right now), if I still with all-stocks, I have 69 out of 70 (98.5%) chance that after 20 years, my investment will beat investment of anybody who invested ANY money in "safe" Governmental bonds. I like those odds. :)

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Sat Jan 12, 2019 7:19 pm

@Tomas, I've been going over what you said and looking into possibly changing my 529 around. My only holdup with Utah's plan is that their 100% domestic equities plan is entirely Vanguard Institutional Index Fund (VIIIX), with is basically just the S&P 500. I prefer the TSM fund (VITPX) that I currently use. Would this be a minor enough deal to you in order to switch?

Image

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Mon Jan 14, 2019 2:54 pm

I've been going over what you said and looking into possibly changing my 529 around. My only holdup with Utah's plan is that their 100% domestic equities plan is entirely Vanguard Institutional Index Fund (VIIIX), with is basically just the S&P 500. I prefer the TSM fund (VITPX) that I currently use. Would this be a minor enough deal to you in order to switch?

Image
Not surprisingly, the market funds based on broader indices than SP500 should generate higher returns over very long horizons - simply because they contain riskier mid- and small-cap stocks outside of the large-cap SP500. (That, of course, does not mean "outperform" - you are rationally getting higher return for accepting higher risk).

In this regard, the Vanguard VITPX is really interesting because it is one of the few funds based on the largest possible definition of the "market" - CRSP 4000 - while many other funds (including the TIAA-CREF total fund used by California 529) are based on Russell 3000.

Now, if you don't mind the 0.2% fee charged by Utah 529 administrators, and you want to stay with Utah, while putting the "riskiest part" of your total investment portfolio into the account, I think the "10% international" method is quite interesting. Granted, I don't know what to think about the 10% invested abroad, but you would be quite massively over-weighed in mid- and small-cap stocks in your US part, IMO.

I am too lazy to look for it, but I believe there should be the "optimal" weights for emulating "total market" with "SP 500" + "mid-cap" + "small cap" indices on message boards of boggleheads, etc. . In fact, it's here:
https://www.bogleheads.org/wiki/Approxi ... ock_market

Notice that SP 500 weight > 80%, while the "10% international" has it 50/90 = only 55.6%! A lot of the value of your portfolio would be driven by risky mid cap and small cap US stocks.

So, if you are willing to hold the (high-beta) mid-cap and small-cap stocks in your personal portfolio, and cannot get the mid- and small-cap indices directly, maybe the "10% international" method allows you to move a decent chunk of US high- risk exposure into the 529 account...

This being said, I personally will gladly stay with my Russell 3000 index in California, because I get charged less than 0.1% fee...

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Mon Jan 14, 2019 3:09 pm

Gotcha. The 100% Domestic static option would result in a total fee of .18% (.02% fund + .16% UESP fee), with the 10% International option would be .189% (.029% + .16%). I don't think I'm any closer to a decision, to be honest.

mac5155
Posts: 13841
Joined: Wed Mar 25, 2015 12:47 pm

Investing, Stock Market and Retirement Planning Thread

Postby mac5155 » Mon Jan 14, 2019 3:23 pm

So I never really drilled into my 401k, just picked a target fund and went with it.

Vanguard Target Retirement 2050 Trust Select

Is this a good approach, or could I make better use by adjusting a few things? Looks like my 5 year ROR is 4.1%. I have 90/10 stocks/bonds split.

I'm 30 years old.

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Mon Jan 14, 2019 3:45 pm

So I never really drilled into my 401k, just picked a target fund and went with it.

Vanguard Target Retirement 2050 Trust Select

Is this a good approach, or could I make better use by adjusting a few things? Looks like my 5 year ROR is 4.1%. I have 90/10 stocks/bonds split.

I'm 30 years old.
NOT AN INVESTMENT ADVICE, YOU A MEANINGLESS OBSERVATION! :lol: :

- *If* your retirement plan offers most (all?) of the individual index funds Vanguard utilizes in their Target Retirement Trust, you will most likely do better if you allocate the retirement funds by yourself based on the weights Vanguard has to disclose, e.g. here:
https://institutional.vanguard.com/VGAp ... undId=1682

- Since you hare 30, you have more than 30-year investment horizon. Go to the chart on that appears just a few posts above yours and read it the following way: never in the history of US markets from 1928 to present did $1 invested in bonds outperform $1 invested in stocks for a 30-year investment horizon. Granted, that's past (but past that includes the crash of 1929, 1987, 2008... ), but still... :)

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Mon Jan 14, 2019 4:55 pm

It would help if you listed all of the funds available to you.

Tomas
Posts: 3444
Joined: Sun Apr 05, 2015 10:28 am

Investing, Stock Market and Retirement Planning Thread

Postby Tomas » Mon Jan 14, 2019 5:37 pm

Gotcha. The 100% Domestic static option would result in a total fee of .18% (.02% fund + .16% UESP fee), with the 10% International option would be .189% (.029% + .16%). I don't think I'm any closer to a decision, to be honest.
The concern I have about spreading the investment over more funds is this: when I started my job, my employer gave us access to a super-wide selection of all possible Fidelity funds, including the riskier ones such as small-cap, emerging markets - all in their lowest cost (Spartan) form. Because I was 30, I intentionally over-weighed the riskier investments (had something like 7% emerging markets, 10+% small cap...). I hoped that the 40-year horizon, it was reasonably sure that the "good years" would balance out the "bad years", and I would be left with the high annual average return rewarding me for the willingness to take on the higher risk. Unfortunately, the bad years (2008,9) came early, and I took quite a hit. I would not have minded - except that relatively shortly after the financial crisis ended, my employer re-worked the contract with Fidelity. All low cost funds disappeared, and in terms of index funds, we are now left with just one Vanguard SP500 index, one extended market index, total international stock index, and 1 or 2 total bond index (possibly one for the US and one international). And I had to move in my (still depressed) emerging markets fund into total international and my small-cap into extended market.

The moral of the story - you never know when your high-beta funds disappear, whereas it is reasonably sure that you will always have access to at least one "total stock" (Russell 3000-like) . So, from now on I try to simplify things - one domestic stock index (i.e. S&P + extended since we don't have access to "total market") + one total international index. And that's it.

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Mon Jan 14, 2019 5:49 pm

I don’t particularly care for the 10% International plan. I honestly don’t see myself switching out of Utah’s plan, but am going to consider the 100% Domestic route.

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Wed Jan 16, 2019 7:04 pm

RIP John Bogle.

mikey
Posts: 42257
Joined: Thu Mar 26, 2015 10:58 pm
Location: More of a before-rehab friend...
Contact:

Investing, Stock Market and Retirement Planning Thread

Postby mikey » Wed Feb 06, 2019 2:29 pm

Ok you Kong Donkeys, listen up...

I'm officially into professional gambling. I downloaded the robinhood app, so hit up ya boy with those fire stock picks...

Also: I know nothing about this stuff, clearly. With regard to lower-end stocks (stuff that's under $1 or even $5), I assume that's like betting parlays in sports gambling: dumb, dumb, improbable, dumb, dumb, and then one of them hits and it pays like 30:1 and you look like a genius and it makes up (mostly) for the other dog **** bets you've made...is that a generally fair assessment?

dodint
Posts: 59160
Joined: Wed Mar 25, 2015 1:39 pm
Location: Cheer up, bіtch!
Contact:

Investing, Stock Market and Retirement Planning Thread

Postby dodint » Wed Feb 06, 2019 2:30 pm

wtf

willeyeam
Posts: 39564
Joined: Wed Mar 25, 2015 12:49 pm
Location: hodgepodge of nothingness

Investing, Stock Market and Retirement Planning Thread

Postby willeyeam » Wed Feb 06, 2019 2:35 pm

options would be more akin to parlays

NTP66
Posts: 60742
Joined: Sun Oct 04, 2015 2:00 pm
Location: FUCΚ! Even in the future nothing works.

Investing, Stock Market and Retirement Planning Thread

Postby NTP66 » Wed Feb 06, 2019 2:41 pm

This is sure to end well...

Who is online

Users browsing this forum: Beveridge, DigitalGypsy66, faftorial, JC2, the wicked child and 109 guests