picked up some CPSL

10/1/2010 3:09:21 PM

Another day, another flash crash?

10/1/2010 4:11:11 PM

SIRI up ~25% over the past month.

10/1/2010 4:35:33 PM

^^

?

10/1/2010 7:46:52 PM

LQD

10/1/2010 8:08:08 PM

So for those of you who have been doing this a while what are your thoughts on investing heavily on stocks with large yearly dividends, such as 8% - 15%. To me it seems like a fairly safe way to build up some steady returns, but if it was that easy everyone would do it.

Can someone point out the obvious flaw that I am apparently missing?

Thanks.

10/2/2010 9:49:22 AM

^ What you are missing is that anything over a ~2-4% dividend isn't typically safe.

If a company has that high a payout ratio it's either a company people are nervous might need to reduce their dividend or it's a company with severely limited growth potential (i.e. a utility company).

Not to say there aren't exceptions (Verizon and AT&T come to mind) but there's no free lunch in this game. If the dividend is high there is always a reason. Also, don't forget to put these dividend payers in qualified accounts so Obama doesn't kill you.

Quote :

"I have a quick beginners question. Currently I have 13% of my income in my 401K and Max out my roth which saves approximately 20% of my pretax income. On top of this I have 3months living expenses readily available in liquid assets. My question is this, I feel that I am comfortably saving for retirement, but I would like to retire before the age of 65. Many of these programs have penalties for earlier retirement. What adjustments could I make to better direct me on that path?"

Most people will not retire before age 59.5 anyway so this is a moot point for all but .0001% of the population, but if you actually save enough money you can retire whenever you want to.

You can always take a 72(t) distribution from your IRA without penalty if you actually retire early.

It doesn't leave a ton of flexibility in retirement for your first few years, but normal people's paychecks don't leave tons of flexibility either.

Ultimately, it's a pipe dream for most because their spending is too high, wants too great, and they realize they'd rather work than sit at home everyday.

Personally, I'd like to retire at age 40 but I can't convince myself not to eat lunch everyday or go on 5-6 vacations a year now while I can enjoy it.

[Edited on October 3, 2010 at 1:33 PM. Reason : add]

10/3/2010 1:30:19 PM

Yeah these stocks don't change much. There hasn't been more than a 12% swing in either direction for these two stocks in the past decade.

That being said is a 13% annual return not better than what one could get out of a mixture of stock picks?

10/4/2010 9:34:28 AM

Where did you come up with 13%?

10/4/2010 1:25:43 PM

Are you talking about stocks or closed end funds and REITs?

10/4/2010 1:28:26 PM

The dividend of the stock pays out multiple times a year and the total dividend ends up to 13% - 14% per share.

If the stock is stable and a solid 13%/year return is it reasonable to put heavy investments into that stock, or are there better investment options that would provide a much more valuable return on that investment.

I apologize if I am not being clear, I am new to the market and am trying to make the best understanding of it I can.

10/4/2010 7:43:25 PM

Which stock? All stock suffer from capital risk due to normal market forces, mgmt fuck-ups, etc. With high dividend payers there is the risk that they cut the dividend which would make the stock price go down, a double whammy.

Treat them like any other stock, look for good points to enter and if you get capital appreciation (stock price up) over the short term then don't hesitate to take the profit.

Also

http://www.ritholtz.com/blog/2010/10/do-dividends-matter-maybe-not/

10/4/2010 9:49:54 PM

Anyone have any good emerging market etfs they are investing in?

10/5/2010 7:29:31 AM

VWO and EEM are solid.

EPI (India) has performed well over the past month.

EWZ (Brazil) is also solid, though it can also be viewed as betting on the price of copper as its heavily invested in copper mining.

I know that it's not quite an emerging market at this point, but EWY (South Korea) has kicked ass over the past month as well.

10/5/2010 11:52:03 AM

Do you have any of those ETFs?

10/5/2010 6:08:32 PM

the more bad news we get in the economy, the more likely QE 2 becomes, and the higher stocks rise in panic to get out of cash.

Crazy, when bad news is good...


This video is an absolute must watch for its hilarity and great explanation as to why the latest market "surge" is completely fake. It's really just plain old dollar destruction.

http://www.youtube.com/watch?v=MPtFLNq7NWU&feature=player_embedded#!

[Edited on October 5, 2010 at 6:31 PM. Reason : add]

10/5/2010 6:25:43 PM

^^ I've had an open position in EPI for ages though all of it is about to be called away from me at 25 (d'oh!). I've got Oct puts at 26 and will probably sell some Nov puts when those expire.

I've gotten in and out of EWZ several times, though I just got into EWY recently around $47 - though all of both will likely be called away this month.

I used to play with EEM and VWO, but the option premiums are better for country specific ETFs.

10/5/2010 8:41:36 PM

ive been telling everyone who will listen to keep buying BIDU. it could be trading at 200 in a year. I've been buying 20 shs a month since the 10:1 stock split

10/5/2010 9:10:01 PM

if i found a woman that treated me like BIDU treats me, it would be a wrap

10/5/2010 9:21:44 PM

I need to put my old 401k somewhere because its closing.

roll it into my current 401k or into a traditional IRA?

10/5/2010 9:51:32 PM

Roth IRA

10/6/2010 1:04:05 PM

What's so great about BIDU? Got a huge P/E

10/6/2010 8:34:57 PM

It's the Chinese google with state supported exclusions of competition (ie, google) and a huge population to tap into.

That isn't stopping it from crashing hard along with the rest of the world economy when the quantitative easing wheels fall off. When that happens, who knows.

10/6/2010 9:03:42 PM

^^ just the price action.



also, what's this guy talking about:

http://seekingalpha.com/article/228879-forget-2000-an-ounce-gold-set-to-plummet?source=email

10/7/2010 2:40:11 PM

^ Today a banker pointed out to me that something is generally a bad investment when tv and radio are flooded with commercials about what a smart investment it is.

WTF drove TIP up this week?

10/7/2010 5:06:18 PM

Quote :

"^ Today a banker pointed out to me that something is generally a bad investment when tv and radio are flooded with commercials about what a smart investment it is. "

I made the exact same statement on a blog about 22 handles ago on the GLD after I overheard some older folks at Mikes in EI talking about Gold saying "I don't know why but he insisted we have some so I bought some coins".

GoldLine has been pushing their wares for a couple years now. Billboards claiming "cash for your gold" have been up for about the same amount of time. Yet Gold. Keeps. Rising.

So long as Central Banks continue their beggar thy neighbor policies, it will do as much.

10/7/2010 7:58:16 PM

The end of VMW's rise?

10/8/2010 1:26:56 PM

What broad international etfs do you guys use? Also anyone a fan of reits

[Edited on October 10, 2010 at 3:31 PM. Reason : ]

10/10/2010 3:05:27 PM

Might not be as broad as you're wating, and I'm just starting my portfolio, but I bought 30 shares of BKF.

I plan to slowly add to that in future. I pretty much am topheavy with SPY and BKF at this point, but I'm just doing the "Auto-draft $25 per week" into my account and I buy in $750 or so chunks when my balance reaches that point

10/10/2010 4:26:28 PM

So my current 401k is with Fidelity and my play stocks and Roth IRA are with TDAmeritrade.

I want to roll myold 401k (in ING) to an IRA (unless i can be talked into why i should put it into a Roth IRA, consensus seems to be IRA for holding). Should i roll it into Fidelity or TDAmeritrade? I'm just a noob, i don't really need anything fancy. I just want to consolidate things for management sake.

10/11/2010 11:20:07 AM

I may be a little wrong here, if you roll into the Roth, you will have to pay taxes on the current principle as if it is real income. And I think this is included with the income you'll earn from your employer this year. So...if your 401k is big enough, it very well could push you into a (much) higher tax bracket this year and you'll get hammered hard. The time to have rolled it over would be when you aren't earning any income so your actual tax rate would be as low as possible.

However, once you have done that, any gains you earn on that principle will be tax free when you retire.

So, the game becomes what type of return could you get on that money you'll lose through taxes versus what type of taxes you'll have to pay when you retire and start drawing the money out of the IRA. I haven't even attempted this math but I can imagine it isn't fun. The deciding factor would obviously be the principle you'll lose to taxes compounded at some rate of return needing to be more than the taxes you'll pay total yearly at whatever your rate will be when you retire.


Btw, my understanding of this may be quite a bit off base, hopefully others will correct me where I am wrong.

10/11/2010 11:52:07 AM

^thats my understanding. and yeh, basically it was too complicated so i'm now rolling it over to a Fidelity IRA. I can then move chunks of it out to a Roth IRA if i want later. Fidelity has free consultation/planning so i'm going to get this squared away and then go meet with someone.

10/11/2010 11:57:25 AM

^^ I believe you are correct.

Roll it into a traditional IRA

If you are young enough, it would probably be worthwhile to go ahead and pay taxes on a Roth conversion, but you better get your checkbook ready. You're gonna owe a ton of taxes at the end of the year.

[Edited on October 11, 2010 at 4:12 PM. Reason : ]

10/11/2010 4:10:52 PM

^^^ Your assessment is pretty spot on.

The best time to do a roth conversion is if you have a year where your income will be low... a couple examples would be you missed a few months of work due to layoff, your income was low due to cyclical reasons, you have a ton of writeoffs one year, or you are going back to school...

Now if you have a small 401k like ~5k and it's not going to push you into a higher tax bracket you're probably better off converting it to a roth now and take the small tax hit knowing your money should be tax free upon retirement.

If you have a larger 401k say $25K+ you should consider converting it a little bit at a time...

Typically if you are young and only in the 25% tax bracket AND plan on saving a few million or so I think you'll come out better by converting.

But if you're the average american and will never save more than a million, in a high a tax bracket already, or have good reason to think you'll be going back to school in the future, etc then just roll it to a traditional...

[Edited on October 11, 2010 at 6:34 PM. Reason : edit]

10/11/2010 6:33:41 PM

Quote :

"I haven't even attempted this math but I can imagine it isn't fun."

It's actually pretty simple. You just looks at your current tax rate and hypothesize if you'll ever have a lower tax rate in the future.

10/12/2010 9:03:29 AM

You are right, your future tax rate is the biggest factor, but it isn't as simple as that. Let me present a scenario that I believe calls for going to the IRA, you can present one that calls for the Roth if you like. This is simplified as much as possible to make the analysis easier, but I believe the methodology is correct, someone please correct me if I am wrong. Obviously, you can include many other variables, that will only serve to make the calculation more difficult, but even this simple example will show that it isn't as simple as you just stated.

Let's assume said 401k holder is currently making $75k/yr and has $75k in his 401k he needs to rollover. If he puts all 75k in an IRA, and it grows for 30 years at 7%, he has $570,919.13 at retirement. We'll assume he is only drawing out of this pile of money, obviously if he is drawing out of additional accounts (and SS if it still exists) then his effective tax rate will be higher. Its simply unknowable what tax rates will be like at retirement, however the case can certainly be made that its better to take advantage of low tax rates now than to risk higher tax rates in the future, but I digress. Let's assume this person has been prudent with his finances and has no debt at retirement (he owns his home) and doesn't plan to smoke through this pile of money in a lavish way. He wants to draw $50k per year to live on. At present tax rates, he will be paying $6344 in Federal taxes using the std deduction and 1 exemption (if this is severely off, the rest of the analysis is trash, so please correct me here if this is wrong).

Now lets assume he wants to go to a Roth. We can even assume that he is smart and only rolls over a little at the time such that his effective tax rate doesn't go up. Note, I'm not looking at how much he could roll per year and stay at the same rate, it's possible that this would be prohibitive given how long it would take to roll, so we'll give this scenario extra benefit of the doubt. His effective rate this year at $75k with std deduction and 1 exemption is 16.8%, meaning he will pay $12594 in tax, leaving him with $62406. If we now compound this at the same 30yrs and 7%, he has $475,050 available at retirement. Not as much, but awesome, he doesn't have to pay any taxes on this.

But, umm....hmmm. Subtract this $475k from the $570k received in the IRA, divide this difference by the tax bill and you'll quickly see that the number of years required to break even on not having to pay the tax is greater than the number of years of funds available withdrawing $50k per year (15 yrs vs 11.4 or 9.5). Of course, this is ignoring continued interest earned on the funds...which I believe would still favor the IRA.


Of course, this is sensitive to the growth rate and what taxes are in the future. At 5% growth and the same 16.% rate and 50k draw down, the break even is 8 years but funds exhaust in 5 years. We'll assume with a higher growth rate the gap widens to favor the IRA. So, what we can conclude that the deciding factor is what your effective rate will be at retirement.

Am I wrong?

10/12/2010 12:12:46 PM

[Edited on October 12, 2010 at 2:57 PM. Reason : ]

10/12/2010 2:29:49 PM

The 570K is pretax. If you tax it at 16.8% you receive $475K, the same value from scenario #2.

I think the flaw in your logic is the assumption that he'll only be drawing out of this pile of money. I believe this is a poor assumption. If you do that then you miss out on the really low tax brackets. Although these tax decisions may be difficult while young, they should become easier as you get closer to retirement. Then you can make choices to give you a diversified portfolio from a tax standpoint which will be most beneficial to you. I can't really see someone very old making 75K a year and putting a ton of money in a roth 401k/roth ira if they had zero taxable assets.

10/12/2010 2:57:00 PM

Quote :

"The 570K is pretax. If you tax it at 16.8% you receive $475K, the same value from scenario #2."

Ok, so you're assuming he stays at the same tax bracket he was at for the entire time he is withdrawing funds from the IRA/Roth, that is, he is withdrawing 75k per year. Again, take the difference in 570k and 475k and divide by the tax bill. The breakeven number of years is 7.5. The only problem is, you'll run out of funds in your Roth in 6.3 yrs. The other thing I didn't mention in the first analysis because it only complicates the calculation is, while you are drawing down, that larger principle in the IRA is earning more in interest income to the tune of about half your tax bill (if we are still generating 7%, though at retirement I suppose we can say this will be in the 3% or less range), only serving to double the breakeven period over the Roth.

Quote :

"I think the flaw in your logic is the assumption that he'll only be drawing out of this pile of money. I believe this is a poor assumption. "

We had to start with the calculations somewhere. If he has other income sources (SS, rental property) then that just means he still has a 95k greater principle in his IRA that will be earning interest for a longer period of time. And those other sources of income will still be imposing some sort of tax bill. I guess the real gotcha would be if those other income sources are high enough and you also draw from this IRA such that it causes you to really jump to a higher effective rate (which as I outlined from the beginning is simply unknown 30,40,50 years out from retirement). This is indeed the situation where a Roth is a huge benefit, the one where your future tax rate is higher than the one you were in when you earned the money.

Quote :

"If you do that then you miss out on the really low tax brackets."

I'm sorry, but I do not follow what you mean.

Quote :

"I can't really see someone very old making 75K a year and putting a ton of money in a roth 401k/roth ira if they had zero taxable assets"

Ditto for this.


You're a financial planner, aren't you?


I'm certainly interested to understand a hypothetical situation where the Roth becomes a big advantage over the traditional. I rolled my 401k to one last year and would be fine with moving to a roth if it really makes sense.

10/12/2010 3:35:02 PM

Quote :

"The only problem is, you'll run out of funds in your Roth in 6.3 yrs."

Well yeah, you should have used the standard 4% withdrawal rate in your original scenario.

Quote :

"I'm sorry, but I do not follow what you mean."

From $0-$8,375 you are only paying 10% on this money. If you are only drawing from one source of income and it has all already been taxed then you essentially miss out on this low tax bracket. The current tax bracket for the person in this scenario will most likely still be higher than the lowest tax bracket 30 years from now, so it would make sense that he wait 30 years to pay taxes on some of his money.

Financial planner is my backup career once all my jobs are outsourced

I rolled my old 401K to a Roth IRA several years ago. As mentioned above, it was only 6K so no big deal. Obv it would have been a much harder decision at 75K. One tough choice I have to make now though is if I should max out my roth 401K or split the contributions between roth and traditional. I've decided to max out the roth for the time being. I think ideally I'll retire with half my assets in taxable accounts and half in non taxable accounts.

[Edited on October 12, 2010 at 3:47 PM. Reason : ]

10/12/2010 3:47:02 PM

Quote :

"I'm certainly interested to understand a hypothetical situation where the Roth becomes a big advantage over the traditional. I rolled my 401k to one last year and would be fine with moving to a roth if it really makes sense."

As I said above you just look at your current tax rate and hypothesize if you'll ever have a lower tax rate in the future. I'd like to assume as I get older I'm going to be making more money. Even if I make the same amount the tax rates will probably eventually go up. You're going to have to claim that money as ordinary income some time. Why not do it now?

10/12/2010 4:20:53 PM

There isn't really a need for all this analysis... really the only thing that matters is what rate the money gets taxed at.

The compounding and etc are irrelevant.

If you are paying taxes now at 25% and save in a roth and then you withdraw the money tax free in retirement when you are in the 28% bracket you are better off.

If you are taking a tax deduction now with a traditional IRA when you are in the 28% bracket and you withdraw it as taxable income in retirement in the 25% bracket you are better off.

Also please note your "effective tax rate" is irrelevant because the money is taxed at your marginal tax rate not your effective rate. That is a big flaw in your math.

The reason I make all my contributions into Roth now is because I'm in the lowest tax bracket I believe I'll ever be in.

I plan on being worth $5-7 million in retirement unless I really strike it rich somehow and if I take out $200k a year I'm almost positive it will be at a higher tax rate than what I pay right now therefore the Roth is a better option.

I'm also almost positive that social security benefits will be reduced more than they already are for people who have large retirement income already. What a fucking scam they have going hey if you already saved for retirement we are going to cut your benefits because its more fair to help the people in need. I can't believe people stand for that shit.


Also, the roth will give me a lot of diversification in retirement. If i have a particular year where I need a lot of extra money to pay for a boat, wedding, huge trip, etc I can pull from the roth and keep my tax bracket in its normal spot rather than taking a huge hit.


The bottom line is if you plan on saving a few million you'll prob end up in the highest tax bracket in retirement. If you are avoiding taxes now at 25% only to pay 40% on them later that is a REALLY bad deal.

I avoid pre-tax saving like the plague because it really doesn't make sense for me until I get in the highest tax bracket.

Also, I'm a huge believer in dollar destruction and inflationary pressures coming in the US and if that happens we will have enormous paper gains (not real wealth gains) and I'd prefer for them to be tax-free gains rather than taxable gains.

[Edited on October 12, 2010 at 5:31 PM. Reason : add]

[Edited on October 12, 2010 at 5:33 PM. Reason : a]

10/12/2010 5:30:37 PM

Quote :

"There isn't really a need for all this analysis... really the only thing that matters is what rate the money gets taxed at. The compounding and etc are irrelevant. If you are paying taxes now at 25% and save in a roth and then you withdraw the money tax free in retirement when you are in the 28% bracket you are better off. If you are taking a tax deduction now with a traditional IRA when you are in the 28% bracket and you withdraw it as taxable income in retirement in the 25% bracket you are better off."

The analysis is based off of converting a lump sum to a Roth, not yearly contributions. The compounding plays a huge role as I already showed when doing this analysis.

Quote :

"Also please note your "effective tax rate" is irrelevant because the money is taxed at your marginal tax rate not your effective rate. That is a big flaw in your math."

What money? The %s I calculated were based on a hypothetical 75k per year in income or 150k for the year you rolled over the 401k (actually, I set this rate the same as the 75k, in actuality the effective rate if done this way is 22%).

Quote :

"I plan on being worth $5-7 million in retirement unless I really strike it rich somehow and if I take out $200k a year I'm almost positive it will be at a higher tax rate than what I pay right now therefore the Roth is a better option."

You got a lot of work ahead of you to get from tdub all star to multimillionaire. Btw, I readily admitted that the biggest factor in the analysis was the future tax rate. Based on my calculations, there is qutie a bit of room between the present marginal rate and your future rate where the IRA still wins.

The rest of your statement is unknowable, and if someone really is worth 5-7 million at retirement, whether they have to pay out pennies in taxes or not is the least of their worries.

[Edited on October 12, 2010 at 7:49 PM. Reason : .]

10/12/2010 7:31:26 PM

Quote :

"From $0-$8,375 you are only paying 10% on this money. If you are only drawing from one source of income and it has all already been taxed then you essentially miss out on this low tax bracket. The current tax bracket for the person in this scenario will most likely still be higher than the lowest tax bracket 30 years from now, so it would make sense that he wait 30 years to pay taxes on some of his money."

I'm still not completely following...you seem to be saying this is the reason to go for the traditional over the Roth.

10/12/2010 8:03:08 PM

The compounding is still irrelevant, your analysis is off base.

Let me make a simple example for you. We'll assume a 20% tax bracket to make things easy (im aware this doesnt exist at the moment).

Scenario A) Guy squirrels away $100k in pretax income (traditional)

Scenario B) Guy squirrels away $80k in aftertax income (roth)

They have both put away the same amount of gross earnings ($100k)

Let's say the accounts grow by a factor of 10x.

A) has $1 million

B) has $800k


At retirement guy decides he needs $40k/yr income.

In scenario A) he will need to withdraw $50k/yr (20% tax)

In scenario B) he will need to withdraw $40k/yr (no tax)

Either way that is precisely 5% of his total account value.


The compounding simply doesn't matter because although your account value is compounding, your future tax burden is compounding at the exact same rate.

The tax is a PERCENTAGE not an absolute quantity so it simply won't matter.


Now, one argument that can be made in favor of a Roth is that you can contribute more of your income to a qualified retirement account. If you max out an IRA at $5,000 in a traditional you are really only squirreling away $3,000-$4,250 depending on your marginal tax rate upon withdrawal whereas with the roth the entire $5k is dedicated to savings.



As for my situation I simply find it unlikely that I'll be in a 28% tax bracket in retirement. Probably closer to 50% with the way our country is moving and I would expect our govt to curtail Soc.Sec benefits for people with other sources of retirement income even more than they already do.

$5-7 million would assume that I get married and have kids (duel income). If I stay single $3.5-5 million would probably be a more accurate goal. That isn't something I'm trying to brag about, that is simply the amount I think people should save for retirement to secure their future. Some people don't need that much and others will need more... A million dollars only guarantees ~$35,000-$50,000 income a year relatively safely right now... that isn't exactly balling out in retirement...

I could certainly save a lot more if I felt the need to retire "rich", but I think it's important to have balance between the here and now and the future. If I ever make a lot of money I'll prob aim a little higher but not much more so, I'd probably just upgrade my current lifestyle instead.

10/12/2010 8:49:53 PM

Quote :

"Let's say the accounts grow by a factor of 10x. A) has $1 million B) has $800k At retirement guy decides he needs $40k/yr income. In scenario A) he will need to withdraw $50k/yr (20% tax) In scenario B) he will need to withdraw $40k/yr (no tax) Either way that is precisely 5% of his total account value. The compounding simply doesn't matter because although your account value is compounding, your future tax burden is compounding at the exact same rate. "

You're using the fact that both draw downs happen to be 5% of the account as your reasoning for them being the same? Really? Your math is incorrect anyway. Why would you take out 50k to end up paying a 10k tax bill to make the Trad vs Roth equal? You wouldn't. You'd take out the 40k and pay the 8k tax bill. The point is, up until 25 years, you come out better with the traditional. With the average life expectancy rate, even if you retire at 60 there is a good chance you're leaving your children a larger principle.

Quote :

"$5-7 million would assume that I get married and have kids (duel income"

What kind of income per year would it take to get to this point, what rate of return?

10/12/2010 9:20:06 PM

I'm shooting for 4 mil. And yes, I do care about pennies.

10/12/2010 11:15:24 PM

^^ Definitely important to leave your children with lots of principles

10/13/2010 6:29:18 AM

if you take out $40k in scenario a you only net 32k. You will always have to withdraw more from the trad than the roth. The trad will have a larger balance because really you are just comingling your money with the government's share.

I'm not sure exactly what is tripping you up here but its really much more simple than what you're trying to solve.

I use 6-8% assumed rate of return typically. Again its not a perfect science certainly I could end up higher or lower than my goal and I'd adjust my retirement lifestyle accordingly.

My roth should hit $50k in the next few weeks which will put me pretty close to the first million (tax free). Its really not that hard to save the first million if you start saving early...

10/13/2010 7:59:12 AM

Quote :

"I'm still not completely following...you seem to be saying this is the reason to go for the traditional over the Roth."

I was merely suggesting you diversify your assets between taxable and non taxable, preferably paying taxes on stuff now, and maybe holding off when you are older, making more, and in a higher tax bracket.

Quote :

"You'd take out the 40k and pay the 8k tax bill."

Why would you be paying taxes on the roth?

10/13/2010 8:50:56 AM