Personal Finance Financial Planning & Investing

[4Q Basket Case]

FYI ...

If you didn't see my note on Monday, the IRS has released the new 401k max contribution amounts and also updated the 2023 tax brackets. Biggest changes ever. Might want to take a look!

Also, Vanguard's VMFFX (Money Market Index) has a 7-day SEC yield right now of 2.88% and the Total Bond Index (BND or VBTLX) has a 30-day SEC yield of 4.41%. The key to bond funds is you have to hold them for their duration (~6.5 yrs for BND/VBTLX) if you want to actually get that yield. Otherwise, you're at the mercy of market pricing - which has been very unkind to bond fund prices YTD.

Important concept, BN.

Too often, investors conflate loss of market value vs. loss of principal. They are in fact two different concepts.

If you invest in a US Treasury, and IF (two huge letters) you hold to maturity, you have no risk of loss of principal.

If, however, you decide you want to sell during the period of time between when you bought and when the Treasury matures, you do have risk of a reduction in market value.

Hold to maturity and there is no risk of loss of principal. Decide you need the cash before maturity, and you can get a surprise.

For geeked-out mathematical reasons I won’t bore you with, that’s especially true on longer term bonds.

 

[4Q Basket Case]

A great article summarizing:
1. How unusual the interest rate environment of the last 20 years was
2. How normal today’s is
3. Why the news media don’t highlight either of those — ignorance or willful kowtowing to the fact that bad news sells….i.e., the old adage that, “If it bleeds it leads.”

IOW, Keep Calm an Invest On

Having Trouble Making Sense Out Of The Market? The Following Might Help

We've been this way before, with high inflation and rates, blood in the streets, horrible sentiment and attractive valuations. It turned out to be a great time to be in the market.

seekingalpha.com

 

[4Q Basket Case]

An article from CNN explaining that the collapse of FTX is far from the only problem facing cryptocurrencies in general.

https://www.cnn.com/2022/11/14/investing/premarket-stocks-trading/index.html?utm_source=optzlynewmarketribbon

Essentially says that the Fed is reducing its balance sheet, which is reducing the money available to buy crypto. This gets back to the point in another thread around crypto being a poor medium of exchange — very few sellers of anything will accept crypto in payment.

IOW, when there was a lot of Federal Reserve money floating around, people and companies could afford to buy an asset (crypto) that pays no interest, produces nothing, is backed by nobody, and has little to no direct convertibility into consumable stuff - products and services.

Regarding the last, you had to use dollars (or euros or some other government-backed currency) to buy the crypto, then convert the crypto back into a government-backed currency in order to pay for the consumables.…incurring material transactions fees both ways.

During the period of time between purchase and sale of the crypto, you’re exposed to volatility that is extreme even by commodity standards — might be good if it goes up, but not good if it goes down.

If that last part sounds kind of like gambling, that’s what it is. So long as you’re eyes-open understanding that, that’s fine. Just don’t confuse it with either investing or business acumen. You’re no smarter or dumber than if you won or lost at the craps table.

BTW, the shrinking Fed balance sheet is also what’s driving up interest rates.

 

[4Q Basket Case]

When talking with younger investors, I often get questions around the differences between the three major US stock indices: The Dow (30 stocks), the S&P 500, and the NASDAQ.

The differences, and how the indices are calculated, gets a bit geeky and you can almost see the TL;DNR behind their eyes.

This article explains those differences better than I have in the past, and I thought some people here might be interested.

Dow Vs. Nasdaq 'Feud' Is Now A Critical Indicator For Stock Investors (DIA, NDX)

The relationship between the price trends in Dow Industrials and Nasdaq 100 turned on its head in 2022. Click here to read more to know what to look for next.

seekingalpha.com

Take particular note of the way the S&P is calculated — it’s heavily weighted toward the Top 10 - 20 stocks by market cap, meaning the other 480 - 490 stocks really don‘t have much influence.

In the recent market, the Top 10 has been in turn heavily weighted toward tech, specifically the FAANG stocks — Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet). Their collective successes drove the S&P to huge heights, and their collective recent struggles have done a number on the S&P Index.

I think the author goes off the rails a bit in the very last paragraph, advocating some pretty sporty derivative exposures in an attempt to exploit the differences in the moves of the indices.

Unless you’re hedging a very specific risk, and you really understand what you’re doing, I don’t like derivatives. That’s because to win, you have to be right not only about the general trend, but also about the specific timing. Additionally, you open yourself up to a double whammy (i.e., you lose on both positions) if the movements in the indices don’t maintain their typical relationships.

To me, the takeaway is the value of diversification, even among indices.

 

[Bamaro]

When talking with younger investors, I often get questions around the differences between the three major US stock indices: The Dow (30 stocks), the S&P 500, and the NASDAQ.

The differences, and how the indices are calculated, gets a bit geeky and you can almost see the TL;DNR behind their eyes.

This article explains those differences better than I have in the past, and I thought some people here might be interested.

Dow Vs. Nasdaq 'Feud' Is Now A Critical Indicator For Stock Investors (DIA, NDX)

The relationship between the price trends in Dow Industrials and Nasdaq 100 turned on its head in 2022. Click here to read more to know what to look for next.

seekingalpha.com

Take particular note of the way the S&P is calculated — it’s heavily weighted toward the Top 10 - 20 stocks by market cap, meaning the other 480 - 490 stocks really don‘t have much influence.

In the recent market, the Top 10 has been in turn heavily weighted toward tech, specifically the FAANG stocks — Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet). Their collective successes drove the S&P to huge heights, and their collective recent struggles have done a number on the S&P Index.

I think the author goes off the rails a bit in the very last paragraph, advocating some pretty sporty derivative exposures in an attempt to exploit the differences in the moves of the indices.

Unless you’re hedging a very specific risk, and you really understand what you’re doing, I don’t like derivatives. That’s because to win, you have to be right not only about the general trend, but also about the specific timing. Additionally, you open yourself up to a double whammy (i.e., you lose on both positions) if the movements in the indices don’t maintain their typical relationships.

To me, the takeaway is the value of diversification, even among indices.

The DOW was created in a time where calculations were performed by hand so the less stocks tracked, the easier. It was simply a convenient/easy indicator. IMO, its outlived its usefulness. S&P 500 is obviously much more broad, by a factor 0f 166, and therefore a better 'indicator'. I guess if you want an even broader indicator you should look at the Russell 3000.

 

[4Q Basket Case]

The DOW was created in a time where calculations were performed by hand so the less stocks tracked, the easier. It was simply a convenient/easy indicator. IMO, its outlived its usefulness. S&P 500 is obviously much more broad, by a factor 0f 166, and therefore a better 'indicator'. I guess if you want an even broader indicator you should look at the Russell 3000.

I don't think I got my point across.

I agree that because the Dow is weighted by share price, it's much easier to calculate. And it was limited to 30 companies when the US economy was driven by heavy industrial activity. Over the years, its makeup has evolved and is now more broadly representative of the economy as a whole. But you're right in that it's concentrated in mega-companies.

That doesn't mean the S&P is as good a measure of the market as a whole as it used to be.

The S&P is figured on a market-cap weighting. Which means the Top 6 (1.2% of the companies represented) account for almost 20% of the index. Compounding that, 5 of the 6 -- accounting for just under 18% -- are tech. The other one is Berkshire.

If you expand that to the top 50 (just 10% of the companies), the weighting goes to roughly 52% of the index as a whole.

IOW, 10% of the companies in the S&P index account for 52% of its value.

S&P 500 Companies - S&P 500 Index Components by Market Cap (slickcharts.com)

Point being, the S&P 500 is heavily weighted toward tech and mega-companies and is therefore nowhere near 16.6x more diversified than the Dow.

That doesn't mean you throw the baby out with the bathwater. The S&P is still a valuable measure. It's just that due to a combination of (1) the way it's calculated, and (2) the massive runup in tech over the past decade or so, it's not as connected to the economy as a whole as it once was.

The Dow also went through a period of disconnect with the economy. But as more and more manufacturing takes on a tech aspect, it's now a more accurate measure of the strength of the overall economy than it was, say in the 1980s - 2000s.

For example, is GM heavy manufacturing or tech? What about Tesla? What about GM and Ford's efforts to manufacture their own microchips and EVs? I would argue that, whereas major car manufacturers were once heavy industry that used some tech components, they're now tech companies with a heavy industrial aspect.

You're right in that the Russell 3000 gives a broader picture. But it too is weighted by market cap. So it suffers from the same top-heavy representation as the S&P, just to a lesser degree.

All of which gets to my point about diversifying even among indices -- I think you need to diversify among at least three major indices to get a portfolio that tracks the economy as a whole.

 

[Bamaro]

I don't think I got my point across.

I agree that because the Dow is weighted by share price, it's much easier to calculate. And it was limited to 30 companies when the US economy was driven by heavy industrial activity. Over the years, its makeup has evolved and is now more broadly representative of the economy as a whole. But you're right in that it's concentrated in mega-companies.

That doesn't mean the S&P is as good a measure of the market as a whole as it used to be.

The S&P is figured on a market-cap weighting. Which means the Top 6 (1.2% of the companies represented) account for almost 20% of the index. Compounding that, 5 of the 6 -- accounting for just under 18% -- are tech. The other one is Berkshire.

If you expand that to the top 50 (just 10% of the companies), the weighting goes to roughly 52% of the index as a whole.

IOW, 10% of the companies in the S&P index account for 52% of its value.

S&P 500 Companies - S&P 500 Index Components by Market Cap (slickcharts.com)

Point being, the S&P 500 is heavily weighted toward tech and mega-companies and is therefore nowhere near 16.6x more diversified than the Dow.

That doesn't mean you throw the baby out with the bathwater. The S&P is still a valuable measure. It's just that due to a combination of (1) the way it's calculated, and (2) the massive runup in tech over the past decade or so, it's not as connected to the economy as a whole as it once was.

The Dow also went through a period of disconnect with the economy. But as more and more manufacturing takes on a tech aspect, it's now a more accurate measure of the strength of the overall economy than it was, say in the 1980s - 2000s.

For example, is GM heavy manufacturing or tech? What about Tesla? What about GM and Ford's efforts to manufacture their own microchips and EVs? I would argue that, whereas major car manufacturers were once heavy industry that used some tech components, they're now tech companies with a heavy industrial aspect.

You're right in that the Russell 3000 gives a broader picture. But it too is weighted by market cap. So it suffers from the same top-heavy representation as the S&P, just to a lesser degree.

All of which gets to my point about diversifying even among indices -- I think you need to diversify among at least three major indices to get a portfolio that tracks the economy as a whole.

OK, I think I see what you are saying. Market cap has a built in problem. i.e., a tech company whose stock price has been run up is not really equal to a manufacturing company, who really 'builds' things, that has the same capitalization.

 

[4Q Basket Case]

OK, I think I see what you are saying. Market cap has a built in problem. i.e., a tech company whose stock price has been run up is not really equal to a manufacturing company, who really 'builds' things, that has the same capitalization.

It's really that a market-cap index has a built-in skew toward the performance of huge companies. The antidote is really more about diversification of indices than it is favoring or not favoring any one sector.

A company whose current stock price is based heavily on projected future growth has been a massive beneficiary of artificially low interest rates and sometimes other governmental subsidies (e.g., tax incentives for consumers to purchase the product). That profile fits tech far better than it fits more traditional manufacturing, banking, insurance, retail, etc.

So it's not about favoring or trashing any sector. It's about understanding the nature of the valuation.

When those companies also have a massive market cap, they have an outsized effect, both up and down, on market-cap weighted indices. Which means they introduce outsized volatility -- up and down.

Here's the catch: The S&P over the last 5 years without FAANG is far worse than it is with FAANG. The performance in 2022 without FAANG is better. So you need exposure to the S&P to reap the rewards of tech. You need exposure to something like the Dow to smooth out the dips associated with companies valued on material sustained growth.

The goal of risk management is not to eliminate volatility, but rather to reduce it to what financial geeks call, "non-diversifiable market risk." IOW, the risk that the market as a whole, no matter how you measure it, goes into decline. Even perfect diversification can't protect against that.

Diversification -- among stocks, sectors and indices -- does, however, reduce the sting of a decline in a single sector.

 

[BamaNation]

To add a bit more to the very interesting immediate discussion above... ( and a topic that is hotly debated in the bogleheads.org forum on occasion - and something that might be really important if you don't have pure S&P500 or total market funds available in your 401k and may need to approximate the total market funds: https://www.bogleheads.org/wiki/Approximating_total_stock_market )

The correlation between S&P500 (i.e. VOO) & Total Market (i.e. VTI) over the long term is 1.00 - perfect correlation meaning they move exactly together over time. Any given point in time will see some fluctuations (over last 36 mo correlation is between 0.991 and 0.997 - still incredibly high)

In any given year one might outperform the other due to the differences between 500 stocks and 7000+ stocks. Over time, those differences are just noise.

The return from total market is like 83% comprised of S&P 500. The other 20% is mid and small caps. But over time, return is very very close (generally within a few bps depending on the selected time horizon).

Which means if you don't have the total market fund in your 401k, use the S&P500 fund and you're going to be just fine (and vice versa).

There are also very minor differences between, say, Vanguards S&P500 fund, Fidelity's, Schwab's etc. So the return won't be EXACTLY the same, but again, very very very close (like 9.84% vs 9.79% in a given year)

Below is from http://www.ycharts.com

VTI Top 25 Holdings

Symbol	Name	% Weight
AAPL	Apple Inc	6.07%
MSFT	Microsoft Corp	4.49%
AMZN	Amazon.com Inc	2.30%
TSLA	Tesla Inc	1.57%
GOOGL	Alphabet Inc	1.47%
UNH	UnitedHealth Group Inc	1.35%
GOOG	Alphabet Inc	1.29%
BRK.B	Berkshire Hathaway Inc	1.29%
XOM	Exxon Mobil Corp	1.20%
JNJ	Johnson & Johnson	1.19%
JPM	JPMorgan Chase & Co	0.96%
V	Visa Inc	0.87%
PG	Procter & Gamble Co	0.83%
NVDA	NVIDIA Corp	0.83%
CVX	Chevron Corp	0.83%
LLY	Eli Lilly and Co	0.80%
HD	The Home Depot Inc	0.79%
MA	Mastercard Inc	0.73%
PFE	Pfizer Inc	0.68%
ABBV	AbbVie Inc	0.67%
MRK	Merck & Co Inc	0.66%
PEP	PepsiCo Inc	0.65%
BAC	Bank of America Corp	0.64%
KO	Coca-Cola Co	0.60%
COST	Costco Wholesale Corp	0.58%

VOO Top 25 Holdings

Symbol	Name	% Weight
AAPL	Apple Inc	7.08%
MSFT	Microsoft Corp	5.29%
AMZN	Amazon.com Inc	2.77%
TSLA	Tesla Inc	1.85%
GOOGL	Alphabet Inc	1.73%
BRK.B	Berkshire Hathaway Inc	1.63%
UNH	UnitedHealth Group Inc	1.59%
GOOG	Alphabet Inc	1.55%
XOM	Exxon Mobil Corp	1.41%
JNJ	Johnson & Johnson	1.40%
JPM	JPMorgan Chase & Co	1.13%
NVDA	NVIDIA Corp	1.03%
V	Visa Inc	1.03%
CVX	Chevron Corp	1.00%
PG	Procter & Gamble Co	0.98%
HD	The Home Depot Inc	0.93%
LLY	Eli Lilly and Co	0.87%
MA	Mastercard Inc	0.86%
PFE	Pfizer Inc	0.80%
ABBV	AbbVie Inc	0.79%
MRK	Merck & Co Inc	0.78%
BAC	Bank of America Corp	0.77%
PEP	PepsiCo Inc	0.77%
KO	Coca-Cola Co	0.71%
COST	Costco Wholesale Corp	0.68%

 

[4Q Basket Case]

An article from Seeking Alpha on how to accumulate wealth using tax-deferred accounts — 401Ks and IRAs.

The first paragraph after the bullet points at the top is really a summary of what Brett and I have been saying for several years now: It’s not hard. It does require discipline over a 25 to 35 year working career, and for a lot of reasons, it really helps if you start early.

It does go into a lot of mathematical detail, but all that is really proving the validity of the first paragraph.

Nothing really new here, but a good reminder.

Why Millennials Should Aim For $4 Million (For Retirement)

We discuss how young folks in their early 30s can aim and accumulate a large sum by the time they are in their 50s. See how big can be your retirement savings.

seekingalpha.com

 

[B1GTide]

An article from Seeking Alpha on how to accumulate wealth using tax-deferred accounts — 401Ks and IRAs.

The first paragraph after the bullet points at the top is really a summary of what Brett and I have been saying for several years now: It’s not hard. It does require discipline over a 25 to 35 year working career, and for a lot of reasons, it really helps if you start early.

It does go into a lot of mathematical detail, but all that is really proving the validity of the first paragraph.

Nothing really new here, but a good reminder.

Why Millennials Should Aim For $4 Million (For Retirement)

We discuss how young folks in their early 30s can aim and accumulate a large sum by the time they are in their 50s. See how big can be your retirement savings.

seekingalpha.com

Need articles like this that talk to people making an average American wage. Only the top % are making 100k at 30.

And 7-9% growth with only 3% inflation is a pipe dream for the next decade or more. We live in a different world right now. Young people are not willing to invest as heavily in the market, which will create a drag.

 

[BamaNation]

Need articles like this that talk to people making an average American wage. Only the top % are making 100k at 30.

And 7-9% growth with only 3% inflation is a pipe dream for the next decade or more. We live in a different world right now. Young people are not willing to invest as heavily in the market, which will create a drag.

I have a journal paper on this very topic (i.e. modeling how to save for retirement 40 years from now) coming out soon and I'll share it here once it is published. The uptick is that It is not "hard" to reach $2mm in investment savings over 40 years for anyone that makes $40K now as a fresh college grad. Getting to $4mm will require a bit more focus but still should be very achievable for upwardly mobile youngsters.

 

[Bamaro]

Longterm Investing for Dummys:
Do more sooner

 

[BamaNation]

Longterm Investing for Dummys:
Do more sooner

so simple! But some folks think “investing”means buying bitcoin, ether, tesla, gamestop, etc.Might as well go to Tunica and put it all on Red…and get a free meal out of it

 

[BamaNation]

Relationships & Finances

Interesting article in WSJ ($$) today on "Couples Who Combine Finances Are Happier. So Why Don’t More Do It?"

Here are some of the points & comments from the article and research article

• Married couples hold four times as much wealth as unmarried couples who live together, and researchers point to combining finances as one reason why.
• 43% of couples said they have only joint bank accounts
• 23% keep their finances entirely separate.
• “A lot of people have money trauma they bring into relationships. How money and relationships interact is based on people’s personal history with money.”
• “On one end, you have finances that are so separate that it’s like two strangers, from a financial point of view, and when one of them picks up dinner, the other Venmos them for half,”

I realize I am old school and to each their own, but I would ask couples why get married if you're going to keep acting like your just dating? I can't imagine my wife "venmo-ing" me (or vice versa) after we had a nice dinner. Maybe if it's not the first marriage or there is a wide disparity in what each brings into the finances part of the marriage (and other similar reasons) it might make sense to have separate finances but if you're getting married with divorce in mind, I refer back the first sentence of this paragraph.

Anyway, just thought this was a thought-provoking article with some "weird-to-me" comments. If you are in a marriage like this, more power to you, but I couldn't do it!

 

[BamaNation]

A pretty good end-of-year checklist, if for no other reason than to trigger your thought processes on what to do in 2023!

 

[BamaNation]

Year-End Tax Tips to Maximize Your Deductions

A pretty good end-of-year checklist from Quicken, if for no other reason than to trigger your thought processes on what to do in 2023

Year-End Tax Tips to Maximize Your Deductions

Are you overpaying the IRS? Here’s what you need to do before year-end to maximize your tax deductions and credits — and keep more cash in your wallet.

www.quicken.com

 

[4Q Basket Case]

Talk to your tax professional about conversion from Traditional IRA to Roth

This is especially helpful if, for whatever reason, you have low taxable income in 2022.

Disclaimer:
This stuff can get really complicated and I have the luxury of a live-in tax attorney (Mrs. Basket Case). I have no idea what your or anybody else's specific circumstances entail.

While I think it's worth at least asking a professional about, CONSULT YOUR TAX ADVISER FOR THE BEST MOVES, IF ANY, IN YOUR SPECIFIC CIRCUMSTANCES.
-----------------
In the case of the Basket Case household, we're both retired, but haven't started taking Social Security yet. So this year's income is probably the lowest we'll ever have. Which also means we'll have the lowest tax bracket we'll ever have.

(Side Note: It's OK. This was part of a plan crafted over years...we're fine.)

To get ahead of the tax man on a Traditional IRA -- withdrawals from which are taxed -- we've converted some holdings from a Traditional IRA to a Roth IRA.

Very quickly:
1. While this minimizes the overall tax bite on withdrawals from IRAs, it doesn't eliminate taxes. You will pay tax on the disbursement from the Traditional to the Roth.

2. But we're paying the tax now while we have low income and therefore a low tax bracket....rather than later when we expect higher income, and therefore a tax bracket.

Plus, I expect tax rates to rise in the future. But even if I'm wrong on that, the move still makes sense for us.

3. The really cool thing is that the post-tax proceeds of the conversion, newly resident in the Roth, grow tax free, and when we do make a withdrawal from the Roth at some point in the future, there's no tax, no matter how much its value goes up.

Major Caveat:
The amount you convert (net of any basis in your contribution(s) to the Traditional IRA), is treated as income, and is in addition to whatever other income you have.

If you or your spouse is 65 or older and on Medicare, you need to be careful not to breach the income threshold beyond which you start paying for Medicare coverage. Or, if you do breach it, you do so knowingly, with eyes open, and a plan in place.

Be aware: once you bust the Medicare threshold, the required payments ratchet up the higher your income goes. You don't want to be surprised on this point.

And again, before making any moves, consult your tax adviser for help regarding your specific circumstances.

 

[4Q Basket Case]

Longterm Investing for Dummys:
Do more sooner

And I would add, "Do not pause. Do not stop. Not ever. No matter what."

 

[B1GTide]

And I would add, "Do not pause. Do not stop. Not ever. No matter what."

If possible, because life happens