My personal investment philosophy is based on a number of contrarian views which you might consider for your own situation. Hope you find these 15 to be helpful.1) The financial services industry has done a fabulous job of convincing the American public that individual is incompetent when it comes to managing his/her own investments and needs to pay an ‘expert’. I consider this to be nothing more than marketing propaganda. Most high school graduates should be able to become successful investors simply by ‘investing in strong businesses’ (or S&P Index Fund) rather than ‘playing the market’.2) The financial services industry has done its best to play on the public's fear about what could happen in the market. The industry deliberately obfuscates the difference between RISK and VOLATILITY by (wrongly) claiming these two factors indicate the same thing - especially when it relates to ‘SAFETY’. The stock market operates similar to an ‘auction house’ – each buy/sell transaction introduces more volatility into the marketplace. Investors must learn to control his/her emotions when it comes to volatility. RISK is related to the ‘quality’ of the BUSINESSES in which you invest.3) I adopted the S&P 500 Index (1yr & 2yr periods) as my ‘personal performance benchmark’. I will not consider investing in an asset whose performance is not at least comparable with that of the S&P 500 Index. Criteria eliminates many investment options including CDs, bonds, annuities, insurance policies, target date funds, and 90% of actively-managed mutual funds.4) I am hesitant about investing in a foreign stock because of likelihood of paying foreign income tax and/or additional fees – suggest you carefully check your brokerage statement for such fees. Major concern with disputes involving global geopolitics (e.g. US-China dispute) which could quickly erase the value of a Chinese stock.5) Our financial world operates on long-term compounded growth (or debt). In other words, there is an element of ‘opportunity cost’ (or ‘time value of money’) included in every financial transaction, including WHEN you pay taxes. My approach is to recognize such ‘opportunities’ and try to take advantage of them. For students, this includes limiting his/her college search to those schools from which he/she can graduate without student loans or credit card debt. Further, my second question would be: "Is degree you are pursuing a prerequisite for that first paying job you desire?" If answer is no, then my response would be "Quit wasting your time and money at college and go get that job you want".6) Per compound interest formula, TIME is a compound GROWTH FACTOR. My ‘Investment Horizon’ includes 40 years of work (i.e., age 25-65) plus at least another 20 years as a retiree. There is no reason that a retiree should not continue trying to grow his/her portfolio so long as he/she is physically and mentally capable of doing so. 7) Contrary to ‘experts’ marketing hype, I will not reconfigure my portfolio for ‘retirement’ – remember my investment horizon also includes perhaps 20 years or more years as a retiree. For certain, I am not going to pay an ‘expert’ to advise me on how to invest in a lower-performing asset as the means to reduce volatility (but not risk) in my portfolio’s value.8) My personal investing bias is to invest maximum dollars allowable while continuing to defer (or even avoid - but not evade) income tax so long as possible. If necessary, my heirs can pay taxes on whatever they inherit. Remember that current law says your children can remain invested for up to ten years before having to distribute an inheritance and pay income taxes. Even at 8% CAGR, children should be able to double value of their inheritance within nine years (remember Rule of 72).9) Tax rate arguments between current rates and those experienced as a retiree are irrelevant. Rather than send cash to the IRS, my bias is to invest those dollars. Long-term compounded growth of these extra dollars will overwhelm any difference caused by tax rate. Better yet, I avoid the risk of ‘double taxation’ with a Roth account should IRS rules be changed during my lifetime.10) Many ‘experts’ extol the virtues of converting one’s Traditional IRA/401K to a Roth IRA so that one can avoid paying future income tax on distributions. Personally, I cannot foresee a situation in which there would be a financial benefit to the individual from such a conversion. I MIGHT consider such a conversion late in life as the means for my children to not have to pay income tax on their (reduced) inheritance. However, remember that the child has up to ten years in which to take distribution and pay income tax on such an inheritance.11) Most of my career involved design decisions for which we had to consider risk identification and develop risk mitigation strategies. For investments, risk mitigation should consider factors of asset identification and selection, portfolio allocation, and portfolio diversification. In my case, I make those risk mitigation decisions BEFORE making an investment. Result: Regardless of ‘expert’ advice, I do not believe in rebalancing one’s portfolio on a yearly basis. As part of my yearly review, I might replace 'laggards' in my portfolio with similar number of individual growth stocks - each predicted to double in value within 5 years (i.e., 14% CAGR). 12) I will not invest in a low-performing asset solely for diversification reasons. Remember my personal performance benchmark is the S&P 500 Index – If I cannot obtain higher yield than available with S&P Index Fund, then I will invest in that fund. 13) I will not invest in low-performing asset (e.g. bonds) as a strategy to achieve ‘safety’. Such a strategy might well minimize the short-term volatility (but not RISK) in one’s portfolio value while also minimizing growth in one's investment portfolio.14) I continually remind myself that compound interest formula is a key factor in each financial decision we face. This is the reason I suggest one should ignore investment ‘advice’ which is based on tax rates ‘now’ versus rate retiree will face. Long-term compounded growth from investing those extra dollars (i.e., cash which would have been paid to IRS) will overwhelm any differences caused by differing tax rates. There is also the element of ‘Time Value of Money’ involved in these decisions. For example, the ‘cost’ of paying $1 in taxes this year is much higher than the cost of paying that same $1 in taxes perhaps as long as 40 years in the future. At 8% CAGR, investing $1 and leaving it invested for 40 years translates to about $21!!15) I am highly skeptical of a fund's prospectus because it is nothing more than a 'marketing brochure' - I expect that its performance numbers are inflated or irrelevant, or both. Many sites (e.g. MF & Yahoo Finance) offer free graphing tool which you can use to plot performance of any fund versus S&P 500 Index over past 1yr and 2yr time periods. As stated earlier, I will not consider a fund (or ETF) which has not recently outperformed the S&P 500 Index. As for me, performance numbers from 5 years and ten years ago are irrelevant - both market conditions and fund management have changed since then. Morningstar 5-star ratings are nice - but I consider them to be irrelevant to any investment decision I might make. In short, I do not care what fund management claims as its performance. My only interest is 'what is in it for me' in terms of YIELD.
I agree that the financial community makes investing look complicated. Meanwhile, Motley Fool began with the idea that individuals can learn the basics and do quite well.Some of the rules relating to IRAs and 401ks are complex. There can be situations where pros can help you avoid expensive mistakes. Ditto estate planning. And businesses.Most can do very well with a basic investment strategy if they simply continue to participate and maintain it over time.
1) The financial services industry has done a fabulous job of convincing the American public that individual is incompetent when it comes to managing his/her own investments and needs to pay an ‘expert’. I consider this to be nothing more than marketing propaganda. Most high school graduates should be able to become successful investors simply by ‘investing in strong businesses’ (or S&P Index Fund) rather than ‘playing the market.The data does not support your hypothesis. "Should" be able to, sure. "Will or Can," not so much.Congress is currently discussing a law that will automatically enroll individuals in their 401k with a mandatory contribution unless you opt out. Not only do we need to bring horse to water, we must shove a feeding tube down their throat to get them to do the right thing.2) The financial services industry has done its best to play on the public's fear about what could happen in the market. The industry deliberately obfuscates the difference between RISK and VOLATILITY by (wrongly) claiming these two factors indicate the same thing - especially when it relates to ‘SAFETY’. The stock market operates similar to an ‘auction house’ – each buy/sell transaction introduces more volatility into the marketplace. Investors must learn to control his/her emotions when it comes to volatility. RISK is related to the ‘quality’ of the BUSINESSES in which you invest.The bolded section is the problem. Investors generally have no desire to learn. Emotion drives investing far more than logic does. It is exceptionally difficult to train/teach someone to trust logic over fear.4) I am hesitant about investing in a foreign stock because of likelihood of paying foreign income tax and/or additional fees – suggest you carefully check your brokerage statement for such fees. Major concern with disputes involving global geopolitics (e.g. US-China dispute) which could quickly erase the value of a Chinese stock.Why are you letting the potential of taxes be the tag that wags your investment performance? Didn't you just extol the virtue of the difference between risk and volatility? And, there is a lot more foreign investment than just China.10) Many ‘experts’ extol the virtues of converting one’s Traditional IRA/401K to a Roth IRA so that one can avoid paying future income tax on distributions. Personally, I cannot foresee a situation in which there would be a financial benefit to the individual from such a conversion.Then you are not likely a person that plans to retire early and/or delay social security.12) I will not invest in a low-performing asset solely for diversification reasonsBut you will avoid one based on potential tax reasons? This is the reason I suggest one should ignore investment ‘advice’ which is based on tax rates ‘now’ versus rate retiree will face. Long-term compounded growth from investing those extra dollars (i.e., cash which would have been paid to IRS) will overwhelm any differences caused by differing tax rates.That simply is not factual - and somewhat convoluted.Ignore advice based on current tax rates. OK, Let's use 401k since this is the 401k board. So one should ignore the tax savings one might get if they are in a high income tax bracket and do what? Invest in taxable investments instead? Smart investing based tax implications can make a huge difference. Ask anyone with a lot of money if in doubt.15) I am highly skeptical of a fund's prospectus because it is nothing more than a 'marketing brochure' - I expect that its performance numbers are inflated or irrelevant, or both.So, you think a fund company would risk legal liability by committing fraud over a percentage point or two - that as you state, can be confirmed via numerous third party sources?I will not consider a fund (or ETF) which has not recently outperformed the S&P 500 Index.Big deal - and really irrelevant. Past performance is not an indication of future performance. It is exceptionally easy to pick funds based on past history but that says nothing about how they will perform in the future. I hope your investment analysis is a lot deeper than simply performance.Not sure I would call such views contrarian so much as contradictory.
1)Disagree with idea that government should be forcing anyone to invest in a 401K. That is the kind of 'nanny state' we do not need. Suggest a more effective approach would be a nationwide educational program (on Personal Financial Management)with emphasis on encouraging individuals to learn how to manage money and invest responsibly. Incidentally, my first effort following retirement was to develop just such a textbook (322pgs) for my kids and grandkids because they were not getting this education in our public schools. I 'coerced' them into reading it by offering to help fund their IRA/529 accounts in return for them reading the book.Note: IMO our biggest challenge is that many (if not most) individuals do not comprehend the power of long-term compounded growth (or debt) which is inherent in the compound interest formula.2)If potential investor cannot learn to control his/her emotions (i.e., keep one's finger away from the 'sell button'), then he/she will likely lose whatever has been invested. Similarly, I have known several people (some were higher salaried) who lived paycheck-to-paycheck with no hope of investing anything. I am not convinced there is viable option for helping such people.4) True Story. Found that I was paying French income taxes and extra fees to my brokerage because I had a French stock and an Israeli stock in my portfolio. Sold both stocks immediately. Also, I am not interested in risking my investment in a foreign stock which might be clobbered by a geopolitical dispute.10) I stand by my comment regarding Traditional-to-Roth conversion - cannot see a situation whereby such a conversion would be of financial benefit. If individual wants to take early retirement (after age 59.5), then retiree can distribute (about) 4% of Traditional IRA portfolio value as yearly income while paying about 1% of Traditional IRA portfolio value in income taxes each year. This same statement holds true if one holds off on retirement until some years later. Incidentally, that tax rate is less than the 'expense ratio' charged by most actively-managed mutual funds. The '4% Rule' is based on idea that retiree can distribute maximum of perhaps 4% of total portfolio value each year if he/she wants to make sure that his/her portfolio does not run out of money before retiree runs out of life.12) Years ago I adopted S&P 500 Index (past 1yr and 2yr periods) as my personal performance benchmark. I will not consider investing in any fund (or ETF) which has not recently outperformed the S&P 500 Index. Otherwise, stick with the S&P Index Fund.13) As for fund prospectus, my analysis is simple. I generate a comparison graph (1yr & 2yrs) of fund's performance mapped against that of the S&P 500 Index. I have reviewed many funds over the years, every one of them 'under performed' (worst case was 14%) when compared to the 1yr & 2yr numbers provided in its prospectus. If I were to invest in a fund, I would make this comparison at least yearly. Otherwise, I would have to rely on fund's management to inform me about the fund's performance.I practice all of these ideas and have for past 3 decades - they support my investment objective of 'maximizing value of my portfolio at retirement and beyond'. We live in a world of long-term compounded growth (and debt) - every financial decision we make includes some element of 'time value of money' and 'opportunity cost'. For example, assuming CAGR = 8%, payment of $1 in taxes 'today' represents loss of opportunity to invest that $1 in S&P Index Fund with expectation of having $21 in one's portfolio at 40 years in the future. That is a simple example of the power of compound interest. Incidentally, this same ratio applies to student loan debt and to credit card debt.Beginning 30 years ago, I built a portfolio consisting of about 35 'cherry-picked' individual growth stocks - each stock was (and still is) predicted to double in value within 5 years (i.e., Rule of 72 translates to 14% CAGR). Many of my stocks were MF recommendations. My basic contribution strategy has been to invest as many dollars as possible while deferring taxes for as long as possible, perhaps even beyond my lifetime. I managed this all-stock portfolio with only 5-10 buy/sell transactions each year - fewer since retiring seven years ago. At least yearly, I review each stock's performance and make one of three choices: sell it, let it continue to ride, or add more cash. My income tax from distributions is about 1% of total portfolio value each year - remaining deferred taxes continue to be deferred and help fuel portfolio growth. Latest IRS rules are that my children will have up to ten years in which to take distributions and pay income tax on any Traditional IRA inheritance. What about performance? Following my retirement in Oct2013, my all-stock portfolio doubled in value within the next 4 years (i.e., 18% CAGR). As of Dec2020, it appears to be on target to double again before end of 2021.
Disagree with idea that government should be forcing anyone to invest in a 401K.Even if the new law passes, 'government' will not be 'forcing' anyone to invest in a 401(k). As already stated, the participants would have the ability to opt out - so there's no 'force' involved. There's already a law that allows, but does not require, companies to auto-enroll people in their 401(k) plans, and there are already companies doing so.Suggest a more effective approach would be a nationwide educational program (on Personal Financial Management)with emphasis on encouraging individuals to learn how to manage money and invest responsibly.Oh, so you're not okay with being 'forced' to have to opt out of participating in a 401(k), but you are okay with rolling out a 'nationwide' education program on finances? We don't even have nationwide agreement on things like how to teach civics, which, given that all citizens have the right to vote, is pretty important. Sorry, not seeing how this option is any better than requiring people to have to opt out of 401(k) contributions. 4) True Story. Found that I was paying French income taxes and extra fees to my brokerage because I had a French stock and an Israeli stock in my portfolio. Sold both stocks immediately.Presumably, you were taking the foreign tax credit that you get on your US tax return to reimburse yourself of the foreign taxes you paid? If not, and it was in 2017 or later, you can amend your return. It won't help you get any extra fees that you paid your brokerage back, but it will compensate you for the taxes paid.AJ
Unfortunately, I suspect that requiring auto enrollment in a 401K plan is not going to have much of an impact on our nation's retirement planning efforts. Suspect that education and self-motivation will be the only way to achieve a significant impact because financial illiteracy is rampant throughout our society. My career was spent among highly educated engineers and scientists who should have been taking maximum advantage of tax-advantaged accounts. However, even as late as my 2013 retirement, many of them knew he/she should be investing for retirement but did not know the basic difference between an account type (e.g., 401K) and an investment type (e.g., index fund). My first post-retirement effort was writing a personal financial management handbook about my life's financial experiences as a means to remedy this situation among my kids and grandkids.As for paying foreign income tax, you are right - except my all-stock portfolio is inside Traditional Rollover IRA account. Implication would be that my account custodian (e.g. Fidelity) would have to file a tax return against my IRA account - not something I want to happen.
I don't think you can look at any one solution in a vacuum. Auto-enrollment is one option, as is education. I remember when I worked for Turner Broadcasting back in the 90's. We did not have auto-enrollment back then, but the company did hold employee learning opportunities each year to provide a basic investing education. This was hosted by Fidelity (the 401k plan administrator) but I am sure it was paid for by Turner. In other jobs, I have been given access to 401k and retirement planning resources, but I don't think any of my employers have been as proactive as Turner was then. Of course, TMF strongly encourages Fools to participate in their 401k plans at least to the point of achieving any company matching competition. But these days, it feels like that while more resources are made digitally available, it is more up to the individual these days to take the initiative.FuskieWho thinks the hope with auto-enrollment is that employees at the very least get some skin into the saving game and will have their interest peaked enough to want to learn why some of their pay is being diverted to their 401k and how they can benefit from it...-----Premium Home Fool: Ask me a Foolish Question, I'll give you a Foolish Response!Ticker Guide: The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME), MongoDB (MDB), Trip Advisor (TRIP), Vivendi SA (VIVHY), Mimecast (MIME), Hain Celestial (HAIN), Royce Micro Capital Trust (RMT)Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate adviceDisassociation: The views and statements of this post are Fuskie's and are not intended to represent those of The Motley Fool or any other sane bodyDisclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu...Invitation: You are invited to interactively watch Motley Fool Live online television: https://livechat.fool.comCall to Action: If you like this or any other post, Rec it. Better yet, reply to it. Even better, start your own thread. This is YOUR TMF Community!
Suspect that education and self-motivation will be the only way to achieve a significant impact because financial illiteracy is rampant throughout our society.While I don't disagree, at least at the companies I worked at, there were multiple educational opportunities on the 401(k) that did encourage participation and did demonstrate the power of compounding, and showed the tax benefits. These occurred, at a minimum, each time you signed up for benefits - so when you started and at least once a year after that. So employees were given the information so that they could become more financially literate. What they chose to do with that information is probably what they would choose to do with any other financial literacy education.My career was spent among highly educated engineers and scientists who should have been taking maximum advantage of tax-advantaged accounts. However, even as late as my 2013 retirement, many of them knew he/she should be investing for retirement but did not know the basic difference between an account type (e.g., 401K) and an investment type (e.g., index fund).Well, auto-enrollment would have helped them get started, then. It may not have gotten them to the point of maxing out contributions, although automatic increases, which are also allowed, might have helped with that. As for paying foreign income tax, you are right - except my all-stock portfolio is inside Traditional Rollover IRA account. Implication would be that my account custodian (e.g. Fidelity) would have to file a tax return against my IRA account - not something I want to happen.Then be sure to never hold an MLP in your IRA. Even if the MLP is managed to minimize UBTI (Unrelated Business Taxable Income) on an annual basis, it's quite likely that the sale of the MLP will generate UBTI because of the recapture of non-dividend payments (formerly known as 'return of capital'). AJ
AJ Gave us all some good replies and food for thought.My experience and beliefs. I never had an auto-enroll, but worked for a large company that encouraged 401K investments and had yearly seminars and lots of emails encouraging this.The Tax Code helped to foster these actions at the largest companies. Safe Harbor and rules about who is participating in the plan drove this behavior and education.As a large corporation salaries ranged from low to medium incomes (relative to the year worked) , all the way up to Hundreds of Thousands and higher.Employees could save a large percentage of their compensation if they could afford it.So if a large percentage of the rank and file workers making 30K - 100K participated then the people at the top end had those same caps. Rank and file could sock away 15 K 0r up to about 20K depending on that years tax code. The higher salaried employees could save the same max contribution for the year.After I left that job , I got a job at a smaller but sizable company. They had a smaller percentage of rank and file participating. This meant the the higher paid employees were considered HCE (highly compensated employees). Their 401K contribution was capped at 8% of salary.So my job change cut my max contribution in half.So if the higher salaried managers want to save more they need to incentivize the lower tier workers to participate. One way they do this is education. Another way is paying for matching contributions. A third was is by use of the opt out instead of the opt in.I can tell you from talking with fellow employees over the years. Many did not plan ahead. Most did. Those that didn't plan ahead didn't sign up for the 401K. They also didn't pay attention to taxes and ways to save on taxes. They looked at their net pay-Take Home and never investigated further.They figured $100 - 200 a month was too much to loose.They never logged into the 401K site to read. They didn't opt in. By changing the plan to an opt-out, they would save automatically. Not enough but a start. They never see this pay in the take-home and learn to live without it. They can opt-out but they need to take that action.I am all in favor of an opt-out , which many here incorrectly called a forced savings plan.
AJ is right - NEVER invest IRA/401K/HSA/529 funds in a Master Limited Partnership (MLP). Such an investment is a 'tax trap' which I have been burned by. Worse, anyone else who owns MLP shares inside a tax-advantaged account is already 'trapped' - whether they recognize it or not.The Situation:1) MLP does not typically file its yearly K-1 report until May-June. What this means is that any EBIT income is not reported on your 15Apr tax return. Result is that IRS will likely assess penalty for non-reporting of EBIT income.2) Another gotcha is that MLP will send your K-1 report to the IRS and to your account custodian (e.g. Fidelity) BUT not to you personally. Practical effect is your IRA account is about to get assessed income taxes - and no one will tell you about it until shortly before cash is extracted from your IRA account. I was given 10 days to make sure there was enough cash in the account to pay the tax.3) Reporting of UBIT income requires filing of a 990-T tax return - as of 2016 your IRA (not you personally) must pay the tax. Fidelity (and likely others as well) will now charge $300 (to your IRA account) for preparation of this 990-T tax return. Ergo, filing 990-T tax return for even a small EBIT tax will now cost your IRA account (not you personally) $300 preparation fee.4) Apparently IRS rules changed in 2016. Your IRA custodian (e.g., Fidelity) is now required to file a 990-T tax return against your IRA Account - not you personally. Apparently, there is no IRS rule that says your custodian must notify you that such a return is about to be filed.5) As an ex-shareholder, the MLP representative I talked with essentially responded with 'tough luck'. If MLP stock is held by an IRA account, the MLP routinely reports ALL OF THE LONG-TERM GAINS for that stock as EBIT income. She mentioned the term 'recapture' which is just another term for 'you are scr***'. Remember that K-1 is not distributed until May-Jun of the year following year in which stock was sold - which was about 15 months in my case.6) I later learned that Fidelity had filed a 990-T tax return for 2016 against my IRA - without bothering to inform me. I managed to thank Fidelity's CEO for this 'free service' - especially since Fidelity would have charged my IRA account $300 preparation fee had this occurred after 1Jan2019.My Situation:1) For performance reasons, I sold (last) two MLP stocks from my IRA account in 2017 which I had owned for nearly ten years.2) Both MLPs apparently (details are still sketchy) reported the all long-term gains as EBIT income in May-Jun2018.3) I am still unable to get an accurate reading from any of the parties involved (including MLP, Fidelity, several accountants, and the IRS), but my IRA account got hit with a 20% tax rate because of this 'EBIT income'. Fact that this tax rate exceeds even the long-term capital gains tax rate seems irrelevant to all involved.My Message:Never invest in a MLP stock - regardless of account type. Appears to me there is nothing but tax grief to be expected from such an investment.
A few tidbits. You are allowed $1000 in UBTI income before it most be reported. Hence, MLPs can be ok for small investors.You are also permitted to deduct expenses from the gross payment to arrive at the taxable amount.Lots of trouble and paperwork for many. Probably not worth it.
A few tidbits. You are allowed $1000 in UBTI income before it most be reported. Hence, MLPs can be ok for small investors.Until you sell, that may be true. When you sell (which someone will be required to do within 10 years after your, or your spouse's, death, in order to fully distribute the IRA), then the recapture of the non-dividend distributions may trigger more than $1000 in UBTI, even if for small shareholders.You are also permitted to deduct expenses from the gross payment to arrive at the taxable amount.Expenses must also be documented on a 990-T, which would have needed to be filed by the administrator of the IRA, so if the expenses occurred in prior years, your IRA administrator would have had to file returns for those years.Lots of trouble and paperwork for many. Probably not worth it.Yes, we agree there. Not worth it at all, IMO. I fear that some of the IRA owners that purchased MLPs based on incomplete knowledge are going to have a rude and expensive awakening in the future.AJ
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