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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35361  
Subject: Re: Yield help please for two complicated scenar Date: 9/15/2012 4:46 PM
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Black,

The math is trivial, and it favors gifting your kid. However, the assumptions make nonsense of the math.

#1, What rate of inflation will prevail over the next 20 years? Over the next 50 years, which is really the time-frame you're making guesstimates about.
#2, Ditto the same about tax-rates.
#3, Ditto the same about possible investment gains.

My suggestion is this. Take the benefit yourself, pay the taxes, and then give the money to your kid with this requirement. He/she has to match it and then put it to work in markets. 20 years of making even one decision a month begins to give them the experience they need to make sound investing decisions for the next 30 years of their life. To that end, I'm going to re-post a squib I did a couple years back on this board that I still like.
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A tithe (from Old English teogoþa "tenth") is a one-tenth part of something, paid as a (usually) voluntary contribution or as a tax or levy, usually to support a Christian religious organization. Today, tithes (or tithing) are normally voluntary and paid in cash, cheques, or stocks, whereas historically tithes could be paid in kind, such as agricultural products. Several European countries operate a formal process linked to the tax system allowing some churches to assess tithes. http://en.wikipedia.org/wiki/Tithe

A couple years back when I was posting under a different handle, a situation came up that I placed before the community. My niece had recently graduated from college, and she had landed a job with a company that provided a 401k plan to its employees. There was no match (as opposed to the 8% match I received from my own employer). So her contributions would only have the benefit of being tax-sheltered. I seriously questioned whether she should contribute anything at all as opposed to setting up an self-directed IRA account that would give her greater control over her investment choices and a better opportunity to make the mistakes that learning requires. I thought my niece should take 2% of her wages and be prepared to lose every penny of it if the losing were done in a thoughtful manner that would prevent later, bigger mistakes. Chris, whose judgment I respect a lot, suggested she simply tithe her salary and that figure should be the amount of her contribution to her 401k plan that others would be managing. I replied (roughly) as follows:

I'm sympathetic with your suggestion that a beginning investor tithe her salary in order to create money for investing, and I wouldn't consider 20% an outrageous amount in peak-earning years. But a truly new investor, one just beginning her work life, will be hard-pressed to reduce an already modest salary by 10%.

What does a beginner have little of? Money and knowledge. What does she have a lot of? Time.

Consider the following contest: a beginning investor with big money and little knowledge, and a savvy investor with small money and market-honed skills. Who would you bet on? I'll pick skills over cash any day.

A beginner is willing to work a standard workweek, which is "forty for the man". Why isn't she willing to tithe her time and work "four for herself"? But she typically isn't. Her time is real to her; her money isn't. So she'll dutifully agree to tithe her money. But she balks at tithing her time. But exactly what good is cash for investing if she doesn't know how to invest?

Find me a person who is willing to risk 2% of their money, but 10% of their time, and I'll show you a person who can make 10% on their money very soon, and more if they want to do the work.

I want 4 hours a week from her for five years so she can learn. Then she can start tithing, because she'll know what to do with that bigger money and truly understand the need for doing so. Faith-based investing is no more effective than trying to teach a pig to sing. (You're wasting your time, and you’re annoying the pig.)

But you're right. She needs to contribute something. It's the amount where you and I differ, and her time where she and I differ. It will be interesting to see how this plays out, and how long she stalls before doing what she needs to do, which isn't necessarily my plan, but it's a whole lot more than she's currently willing. She can delay. Most Americans do. But the post-boomers are going to be hurting if they don't realize that the benefits our parents and our generation found so easy to obtain will have dried up like drops of rain falling on the desert's sands. The coming generation faces lean years. They had better learn, soon and fast, how to invest aggressively and effectively.

I still think my argument is valid. If you’re a beginning investor, tithe your time to learn investing, so that when tithing your wages becomes feasible, you have the skills needed to put that money to work effectively.
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What are a beginning investor's biggest mistakes?

(1) Being so scared of "Risk" that they actually make very risky decisions for themselves.
(2) A simple lack of consistency and discipline.

Investing is never about (just) the math. Always, it's about the emotions of Fear and Greed, which can never be banished (nor would one want to) but must be managed, and that only comes with practice, practice, practice. That's why your kid has to have some skin in the game. It's can't just be Pop's money they are running experiments with. But if their losses are being underwritten by half, a lot of the paralyzing fear can be dispelled and they can begin to feel comfortable with the give and take, back and forth, ups and downs, that characterizes investing.

What's the current demographic trend in this country? To do away with private, defined-benefit pensions in favor of 401ks. It's only a matter of time before public, defined-benefit pension come under the same attack. The result will be that those who intend to retire one day will have to acquire good investing skills *before* they retire or their retirement is never going to happen, which isn't necessarily a bad thing. But it runs contrary to most people's hopes.

What's $80 per month? Barely bait money, right? But put to work as investments, and compounded aggressively for 20 years, you're talking about a serious grub stake, especially when it is matched by the acquired skills needed to compound it. That's the real benefit of taking the money now and then turning it over to your kid. You'd be creating for him or her a means for eventual financial self-sufficiency.

Give a man a fish.... etc, etc. You know the drill. Now act on it.

Charlie
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