Weaving the Strands: Business, Economics, and Tax Policy 2.0

[St. Clown]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Oh, dude. Move it. Having your job and your investments in only one basket... I don't really care how strong that basket is.

It's only my match that's in the company stock. All other money is elsewhere. I figure that as long as Warren Buffet holds the stock as one of his prinicipal investements and we keep posting record profits year over year, I'm going to hold it. I do follow the investment fundamentals with regards to the stock (P/E, etc.) The stock was around $23 when I started here, dropped to $8 with the mortgage collapse, and now we're around $54. I have sold off a few chunks over time, but it's still the primary asset within that bucket of funds. My own contributions range from domestic to foreign investing funds, and some debt funds. I'm well diversified outside that one chunk.

 

[FreshFish]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

No, it's not bad advice. In fact, pretty much anyone who has money socked away in a 401(k) or IRA or something else that includes mutual funds probably has some of their money parked in "junk" bonds.

Junk bonds are just bonds, that have a higher yield and a higher risk. There may be many reasons for this. But I get a kick out of people who turn up their nose at junk bonds, only to willingly throw a few dollars at an up and coming tech company stock.

The risk of junk bonds is default. But what is that risk exactly? When the economy is humming along as it is now, default rates probably fall around 1%. When the economy sucks, it's a much dicier proposition. The default rate can certainly climb into double digits.

I don't recommend that you go out and buy the junk bonds of an individual company. Too many eggs in one basket. But, you put a small amount of your money into a fund that takes it's money and spreads it out over hundreds of different bonds, it can be a very good investment.

"Junk" bonds are also a good backdoor way to engineer a takeover of a failing company with a sound product or technology and merely hampered by inferior management. Bondholders have liquidation preference in corporate bankruptcy proceedings compared to stockholders. Buffett I believe (though I may be wrong) used this strategy once or twice.

Several years ago, when interest rates were just beginning their decline, I put a few dollars into a "junk" bond fund and rates on those bonds fell more on a proportionate basis (= gain in market value) than any other bond category. On a risk-adjusted basis, I'm pretty sure that "junk" bonds outperform municipal bonds pretty handsomely over the past 20 years.

 

[FreshFish]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Here's another area for discussion and forgive me for not reading back, but skills wise, we are hurting. We have tons of students in our masters and PhD programs from other countries, but not so many from here. In the long run its got to hurt us, No?

Sounds like one of the reasons given for "immigration" reform: keep those students here in the US after they get their degree rather than force them to leave due to rationing green cards.

 

[FreshFish]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

It's time to do away with defined benefit pensions and put everyone on a 401(k) plan with a defined contribution pension.

Not necessarily, however the true cost of the defined benefit pension should be based on a much lower discount rate than actually gets used. You could have a fully guaranteed pay as you go defined benefit pension using deferred future income annuities for example. Deferred future income annuities actually have a fairly attractive IRR at life expectancy. Even regular individuals could construct a personal defined benefit pension for themselves (better for individuals to use after-tax funds for technical reasons beyond the scope of this post).

The problem isn't the defined benefit pension per se, it is the way the risk-shift elements are allocated that is the real problem. There is too much potential for bribery and kickbacks in the way public pension funds are managed, and too much temptation for politicians to use fanciful funding assumptions to offer unrealistic benefits, that are the problems.

The "best" result IMHO would be a "split" system: everyone could have a baseline defined benefit pension of a few hundred dollars per month, funded realistically solely with fixed income investments, and then top it off with a defined contribution plan allocated across a wider variety of asset classes.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Defined benefit pensions will go the way of the dinosaur. Especially when people don't get pensions because they were promised the world and in order to deliver, the fund managers had to go into super high risk junk. You know, like junk bonds.

401(k)s are far better choices. And annuities are some of the worst investments you can make. The absolute worst.

 

[joecct]

Defined benefit pensions will go the way of the dinosaur. Especially when people don't get pensions because they were promised the world and in order to deliver, the fund managers had to go into super high risk junk. You know, like junk bonds.

401(k)s are far better choices. And annuities are some of the worst investments you can make. The absolute worst.

If interest on federal debt paid 3%, we would not have this problem.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

And annuities are some of the worst investments you can make. The absolute worst.

Because of fees?

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Here's another area for discussion and forgive me for not reading back, but skills wise, we are hurting. We have tons of students in our masters and PhD programs from other countries, but not so many from here. In the long run its got to hurt us, No?

For Christmas I received the book Flash Boys by Michael Lewis. It was a pretty quick read, and I thought quite interesting. For those who haven't heard of it, the book is an account of high frequency traders on Wallstreet, and their use of technology to try to gain a financial advantage over those of us sticking our money in the market. They use technology to find out what sales or purchases of stock we are interested in making, then, in the milliseconds it takes our order to be filled, get there ahead of us. They buy the stock at the lower price and sell it to us at a slightly higher price. At the end of the day they hold no positions in any stock. They effectively just effect a "tax" on our investments, to the tune of billions of dollars a year, that we don't even know was taken out. These guys spent hundreds of millions of dollars on techies, equipment, fiber optic lines from New Jersey to Chicago that had to be absolutely straight, etc... The book is also about the discovery of these methods by certain people on Wallstreet and efforts they undertook to try to stop the leak.

With books like that, especially with something that I don't know a whole lot about, one thing I like to do is search for articles or reviews on the book to see if there are contra-arguments or positions, suggestions of half-truths, etc...

But in one of the reviews that I read the author made a comment that really rang true with me, that I hadn't really considered as I read the book. He thought how sad, the lost capital. The millions spent on a fiber optic line and it's construction, now obsolete. The brilliant mathematicians and engineers who aren't designing buildings or creating new products but are trying to figure out where a computer router should be placed in a room to improve the speed of their trades.

We've got a ton of great minds in our schools in this country, both native born and foreigners. And many of the foreigners who come here for school love to stay here and make this their home. The problem is, we are wasting these minds no differently than if we sat them down in a room and assigned them the task of figuring out a faster way to solve a crossword puzzle.

 

[FreshFish]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

[some] annuities <strike>are some of</strike> [can be among] the worst investments you can make. The absolute worst.

suggested refinement to your post. there are some deferred variable annuities that are so loaded up with riders that the combination of rider fees makes it impossible to get a decent return: gross 12%, net 4% or some such nonsense.

however, immediate annuities are the only investment vehicle than can guarantee you an income for life, no matter how long you live. That is not a bad investment at all when it is utilized as part of a broader strategy.

deferred income annuities are merely a guaranteed income for life that starts at a prescribed future date, rather than right away.

When dealing with such a broad array of different product types, the term "annuity" in isolation can be very misleading, as it might refer to so many different things:
- deferred variable annuity (risk: ridiculous high fees)
- deferred annuity (risk: low yield, high surrender charges, insurance company solvency)
- immediate annuity = guaranteed income for life (risk: inflation, insurance company solvency)
- deferred income annuity = guaranteed income for life, starting later instead of right away (risk: inflation, insurance company solvency)

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

For Christmas I received the book Flash Boys by Michael Lewis. It was a pretty quick read, and I thought quite interesting. For those who haven't heard of it, the book is an account of high frequency traders on Wallstreet, and their use of technology to try to gain a financial advantage over those of us sticking our money in the market. They use technology to find out what sales or purchases of stock we are interested in making, then, in the milliseconds it takes our order to be filled, get there ahead of us. They buy the stock at the lower price and sell it to us at a slightly higher price. At the end of the day they hold no positions in any stock. They effectively just effect a "tax" on our investments, to the tune of billions of dollars a year, that we don't even know was taken out. These guys spent hundreds of millions of dollars on techies, equipment, fiber optic lines from New Jersey to Chicago that had to be absolutely straight, etc... The book is also about the discovery of these methods by certain people on Wallstreet and efforts they undertook to try to stop the leak.

With books like that, especially with something that I don't know a whole lot about, one thing I like to do is search for articles or reviews on the book to see if there are contra-arguments or positions, suggestions of half-truths, etc...

But in one of the reviews that I read the author made a comment that really rang true with me, that I hadn't really considered as I read the book. He thought how sad, the lost capital. The millions spent on a fiber optic line and it's construction, now obsolete. The brilliant mathematicians and engineers who aren't designing buildings or creating new products but are trying to figure out where a computer router should be placed in a room to improve the speed of their trades.

We've got a ton of great minds in our schools in this country, both native born and foreigners. And many of the foreigners who come here for school love to stay here and make this their home. The problem is, we are wasting these minds no differently than if we sat them down in a room and assigned them the task of figuring out a faster way to solve a crossword puzzle.

This is an absolutely brilliant post.

 

[ScoobyDoo]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

This is an absolutely brilliant post.

I agree. Great post SJHovey.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Defined benefit pensions will go the way of the dinosaur. Especially when people don't get pensions because they were promised the world and in order to deliver, the fund managers had to go into super high risk junk. You know, like junk bonds.

401(k)s are far better choices. And annuities are some of the worst investments you can make. The absolute worst.

Again with the blanket statements.

Like junk bonds, annuities are not just something you should go out and purchase without knowing what you are doing, or without the help of someone who does. But you can't just say "annuities are the worst" and consider yourself right.

Annuities, when done correctly, in the correct amount and at the right time, can be a very good investment vehicle for people.

When you get to be my age (in my 50's) you start to really get pressured about annuities. You should do this. You should do that. Steady flow of income until you die, blah, blah, blah.

By and large red lights should go on when you start to hear this pitch.

But that said, just a blanket statement that annuities don't have a value in an investment portfolio is nonsense.

As I understand it, if you invest in certain types of annuities, your money grows tax free until you take it out. Kind of like an IRA.

But let's say you are maxed out on your IRA/401(k) contributions.

Most of us will probably be in a lower tax bracket when we are retired than we are in now. If you've got 15+ years before retirement, it's a nice little way to stick some money in a tax deferred investment and pay a lower tax later.

 

[ScoobyDoo]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

My problem with company pensions in particular for public and private sector is they have been used to artificially deflate salaries in negotiations by promising people money later. Then, the government and/or company is now coming back to the well to take even more money back.

Give me my money now and let me decide what the best investment vehicle is or is not.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Because of fees?

Mainly. But the returns are also capped and can be equalled by most people with a little bit of work.

suggested refinement to your post. there are some deferred variable annuities that are so loaded up with riders that the combination of rider fees makes it impossible to get a decent return: gross 12%, net 4% or some such nonsense.

however, immediate annuities are the only investment vehicle than can guarantee you an income for life, no matter how long you live. That is not a bad investment at all when it is utilized as part of a broader strategy.

deferred income annuities are merely a guaranteed income for life that starts at a prescribed future date, rather than right away.

When dealing with such a broad array of different product types, the term "annuity" in isolation can be very misleading, as it might refer to so many different things:
- deferred variable annuity (risk: ridiculous high fees)
- deferred annuity (risk: low yield, high surrender charges, insurance company solvency)
- immediate annuity = guaranteed income for life (risk: inflation, insurance company solvency)
- deferred income annuity = guaranteed income for life, starting later instead of right away (risk: inflation, insurance company solvency)

I have never heard a person who didn't stand to benefit from the sale of an annuity say they are a good thing. You're the absolute first. It's like whole or universal life insurance. All three are terrible bets.

They have high total costs and effectively capped returns. You are far, far better off investing in a conservative mutual fund or bonds. Although I wouldn't touch long-term bonds at all right now.

I have always liked Suze Orman's take on a number of things. She gives good general advice usually. http://www.suzeorman.com/resource-center/annuities/

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Again with the blanket statements.

Like junk bonds, annuities are not just something you should go out and purchase without knowing what you are doing, or without the help of someone who does. But you can't just say "annuities are the worst" and consider yourself right.

Annuities, when done correctly, in the correct amount and at the right time, can be a very good investment vehicle for people.

When you get to be my age (in my 50's) you start to really get pressured about annuities. You should do this. You should do that. Steady flow of income until you die, blah, blah, blah.

By and large red lights should go on when you start to hear this pitch.

But that said, just a blanket statement that annuities don't have a value in an investment portfolio is nonsense.

As I understand it, if you invest in certain types of annuities, your money grows tax free until you take it out. Kind of like an IRA.

But let's say you are maxed out on your IRA/401(k) contributions.

Most of us will probably be in a lower tax bracket when we are retired than we are in now. If you've got 15+ years before retirement, it's a nice little way to stick some money in a tax deferred investment and pay a lower tax later.

Annuities are fine if you have no tolerance to risk, don't want to do any work, and want to leave a bunch of money on the table.

 

[ScoobyDoo]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Hopefully I have this right.

Whole Life has one advantage. It has a guaranteed death benefit without an increase in premium. So, if you buy a whole life policay at say $20.00 a month, with a $50,000 benefit you are guaranteed that the $20.00 a month stays that and you will automatically never lose that life insurance until you die and your estate will collect on the $50,000 dollars.

As an investment vehicle for retirement you are 100% correct. It's a horrible investment. But, as a way to avoid the increased premiums of term life insurance it makes sense to me.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Also, of you've maxed out your 401(k) for the year, you're doing really, really well and can afford to pay someone to manage your money better than an annuity. I can't even fathom a situation in which you would want to enter into an annuity if you're making that much bank.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Hopefully I have this right.

Whole Life has one advantage. It has a guaranteed death benefit without an increase in premium. So, if you buy a whole life policay at say $20.00 a month, with a $50,000 benefit you are guaranteed that the $20.00 a month stays that and you will automatically never lose that life insurance until you die and your estate will collect on the $50,000 dollars.

As an investment vehicle for retirement you are 100% correct. It's a horrible investment. But, as a way to avoid the increased premiums of term life insurance it makes sense to me.

You're better off with term life and investing your savings over whole life. The only reason you need life insurance is to protect your family if you are a major income contributor. If you die when you're 80, who cares? Especially if you've done even a half-assed job at saving. You don't need $100,000 of coverage when you're 80. You need a lot of coverage when you have a family and kids to make sure they are taken care of if you die and they lose half or even all of their income.

 

[ScoobyDoo]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

You're better off with term life and investing your savings over whole life. The only reason you need life insurance is to protect your family if you are a major income contributor. If you die when you're 80, who cares? Especially if you've done even a half-assed job at saving. You don't need $100,000 of coverage when you're 80. You need a lot of coverage when you have a family and kids to make sure they are taken care of if you die and they lose half or even all of their income.

I didn't say it was the best plan. However, if you want to make sure you leave something for your dependents no matter what happens it's not the worse thing in the world.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Still better off living modestly and saving/investing wisely. IMNSHO.