Investing, Finance and Economics 2021 Study Group

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Qazwer
Posts: 257
Joined: Thu May 16, 2019 6:51 pm

Re: Investing, Finance and Economics 2021 Study Group

Post by Qazwer »

@crusader at the risk of being contrarian to a lot of people on this website
Have you checked out
https://www.financialwisdomforum.org ?
and their wiki

Bogleheads Canadian - will give you the 80% solution that you may be looking for

white belt
Posts: 1452
Joined: Sat May 21, 2011 12:15 am

Re: Investing, Finance and Economics 2021 Study Group

Post by white belt »

@Crusader

Ok I think I understand where you are going with this. I'm not familiar with Canadian tax laws so I can't help you on that front. Any tax consideration question like yours is actually quite difficult to answer because it requires making assumptions and predictions about the future. I'll echo that Bogleheads Canadian is probably a good place to start.

However, I would caution that to me it sounds like you're focused on the tactics of "doing things right", when in fact the overall strategy is much more important: "doing the right things". The strategies vs tactics dynamic is covered in the ERE book, but I guess what I'm trying to say is that any potential gains from optimizing your current situation pale in comparison to the potential losses from not understanding your larger investment strategy and portfolio construction. To give a more specific example, you may save money on taxes and fees in the short term, but that's not going to help you much if your entire portfolio is tanking at the same time because in a low interest rate environment, stocks and bonds are actually highly correlated.

In other words, as Jacob points out in the original curriculum blog post, you might be much better off just doing nothing with your portfolio while you continue to learn rather than making a bunch of decisions now that down the line you may regret.

Crusader
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Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: Investing, Finance and Economics 2021 Study Group

Post by Crusader »

Bogleheads Canadian and https://www.financialwisdomforum.org

This looks great, thanks @Quazwer and @white belt, will check it out (haven't heard of it before).

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Alphaville
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Location: Quarantined

Re: Investing, Finance and Economics 2021 Study Group

Post by Alphaville »

you guys might wanna add mmt to the curriculum

https://60secondinvestor.com/news/the-m ... -on-earth/

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Investing, Finance and Economics 2021 Study Group

Post by WFJ »

Below are better and more useful books for beginning (or even experienced) investors. The below two books cover all the topics needed to create an appropriate portfolio for any investor with AUM under $5 million. Academic textbooks will expose one to theories and jargon used in a theoretical setting, but reading below books will create the knowledge most investors need to make wise investment decisions. I'd also suggest buying a TI BAII financial calculator.

Random Walk Down Wall Street by Burton Malkiel (1973 and updated)

Barron's Guide to Making Investment Decisions (1999)

biaggio
Posts: 35
Joined: Sun Apr 23, 2017 5:31 am

Re: Investing, Finance and Economics 2021 Study Group

Post by biaggio »

I'm reading Investments by Bodie et al., soon halfway through, and so far I can say the book is well written and very accessible. It often sweeps technicalities under the rug but points you to more detailed treatments, and explains the gist very well. I highly recommend it, it's been illuminating for me personally. I now view some popular views, like indexing, in a new light.

mathiverse
Posts: 788
Joined: Fri Feb 01, 2019 8:40 pm

Re: Investing, Finance and Economics 2021 Study Group

Post by mathiverse »

@biaggio - Nice! I recently started reading Bodie. Would you mind elaborating on the insights you had into indexing and other investing methods so far by reading Bodie? I'm curious what's ahead.

biaggio
Posts: 35
Joined: Sun Apr 23, 2017 5:31 am

Re: Investing, Finance and Economics 2021 Study Group

Post by biaggio »

Specifically for indexing:

Ch's 6 and 7 are concerned with building portfolios with highest return per unit of risk where we learn that optimal risky portfolios lie on the efficient frontier (basically "northwestern part" of the convex hull of all possible portfolios in the (risk, return)-plane). If portfolio P is not on the frontier then i) there is another portfolio with the same risk and higher return and ii) there is another portfolio with the same return and lower risk; so it's never rational to hold P. Under certain utility function U---a way to model investor risk aversion---which assigns utility to portfolio P, every optimal portfolio (P which maximizes U(P)) is a combination of the optimal risky portfolio P* and the risk-free portfolio F (e.g. T bills). Changing utility changes weights (what fraction is put to F and P*) but not the risky portfolio itself.

In Ch 8 index models give us computationally efficient approximation to models above and introduce the familiar security pricing model r_i = a_i + b_i * r_market + e_i for security i. Instead of looking at full covariance matrix we say that risk is always factored into market risk and firm specific risk (number of input parameters goes from quadratic down to linear). I had to recall some stuff from statistics here. I also enjoyed reading on alpha transport at the end (it was new to me).

Next in Ch 9 CAPM tells us that (under some quite strong assumptions) the optimal risky portfolio is the passive value-weighted total stock market portfolio (passive strategy is efficient). We also derive the famous expected return-beta relationship. Ideas such as market price of risk, use of CAPM for capital budgeting decisions (CAPM tells us required IRR) and setting rates in regulated businesses such as utilities were also interesting.

Then in Ch 10 APT we arrive at the same expected return-beta from more elegant and plausible assumptions (security returns can be described by factor models; there are enough securities to diversify away specific risk; markets don't allow arbitrage opportunities---only need a small group of active investors which will capitalize on them until they disappear).

And then in Ch 11-13 it basically continues with efficient market hypothesis. This wasn't so new to me although the discussions were still an interesting read. If I have time and energy I want to reread chapter on attempts to validate EMH (a chance to refresh my statistics).

There's more but these are some of the highlights.

Crusader
Posts: 342
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: Investing, Finance and Economics 2021 Study Group

Post by Crusader »

I finally started reading the book. Read the first 3 chapters. Very good book that explains many finance terms and concepts that I've been casually reading and hearing about but never had a proper introduction for them. The overwhelming feeling I get, however, is that I want to have a broader understanding of how money, the economy and governments work. I have a feeling that money is this abstract concept that allows our society to function and that the governments have certain levers at their disposal such as the interest rate or how much money to create to influence the economy. But, I don't even have a superficial understanding of any of this. That is why I will probably read the Economics book by McConnell next, or in parallel.

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Investing, Finance and Economics 2021 Study Group

Post by WFJ »

For the US investor... Boring large index ETFs; VOO, VTI, BBUS, SCHB = 40%, maybe some small-mid cap ETFs; BBMC, SCHM, VO = 20%, some growth; SPYG, QQQ, SCHG, MGK, VUG = 30% enough cash to pay for 1-2 years of living expenses, emergencies or invest in a new career and the remaining in some kind of inflation hedge; materials, energy, real estate ETFs; FMAT, FENY, FREL. Never sell, only rebalance with new money.

Always front-load retirement contributions, contribute as much money early in the year, January 1st, if possible. Under 40, pay taxes now, let investments grow tax free, between 40-50 years old 50/50 between ROTH and Regular and depending on income (higher income more tax deferred, lower more tax now), over 50 or within 5 years of retirement, know the withdrawals penalties for pretax contributions in your plans. In the US, Rule of 55, 72t, 457, in-plan conversion, etc all different depending on company, investment firm, state and will change over time without notice and out of any individuals control... but most likely still 50/50.

Although there are 100's of calculators and individuals providing estimates, tax laws and future returns make any ROTH vs Regular estimation 5, 10, 20+ years in the future fruitless beyond wasting a few hours or confusing someone. For example, if future returns are high, ROTH 100% is preferred, if future returns are low or negative for a time in retirement, tax deferred 100% is always better. Without this future knowledge of market returns and sequence, any estimate is just waste of time. Future estimations by any tool are also fraught with stats based biases and assumptions that may not be true, normally distributed returns vs. left skew (even for a few years) will blow up all estimation tools.

I have worked in Finance most of my life and can count on my thumb, give or take 1-2, the number of people who can consistently over time even come close to matching boring index funds risk adjusted returns (with all his fame, clout, money, power, influence, connections, etc... compare Warren Buffet BRKB to S&P 500 over the past 2, 5, 10 years). You are more likely to have LeBron or Luka show up at your local YMCA for a pickup game than find a successful stock picker. Several hedge fund manager will be able to show positive risk adjusted performance over short samples of time, but usually due to hidden leverage that will blow up from time to time (see Archegos = -100% return, LTCM = -100% return, Renaissance RIEF, RIDA RIDGE public funds that only underperformed a bland S&P 500 index by 35%-47% in 2020, etc... ).

Rad above or follow below and your portfolio will be in the top 98% performance of all brokerage accounts and save 100's of hours.

https://www.youtube.com/watch?v=JdUKhgW1gOo

white belt
Posts: 1452
Joined: Sat May 21, 2011 12:15 am

Re: Investing, Finance and Economics 2021 Study Group

Post by white belt »

WFJ wrote:
Sun Jun 27, 2021 2:57 pm
I think the point of this thread (and the study group) is to move away from the blanket tactical advice without people understanding the principles behind them.

See this quote from another thread:
jacob wrote:
Thu Jun 24, 2021 12:07 pm
Especially for the uni-dimensional FIRE strategy, which is essentially switching out one's job horse for a finance horse, it's hard for me to accept the common unwillingness to at least have an informed opinion on which horse one has put in charge of pulling one's wagon. It's a bit different for ERE insofar there are multiple horses in the race.

Primarily, though, it's about
1) making informed investment decisions as opposed to uninformed/dogmatic decisions. Frankly a lot of the FIRE world lives in an index-bubble both literally and figuratively in the sense that this is the only strategy they have ever considered or experienced. They are doing the political equivalent of informing their entire world view based on the investment-tribe they've chosen between 2010 and 2020 in which the only source of experiential elderly wisdom having only ever seen interest rates decline. I understand this [indexing] is better than random speculating or doing nothing ... but a little knowledge is a dangerous thing for the system as a whole.

2) avoiding catastrophic failure and not about "beating the market" or not bothering to try in the first place. That's the other false presumption that one should either be beating the market or be in index funds to get the average return. No, one's goal should be to avoid portfolio failure. It doesn't matter if you beat the market by 5% if the market just dropped 80%. And if the market just dropped 80% taking you along with it, arguing that "this is not a problem because then we all got bigger problems" is highly ironic because that's exactly it. It won't be "we all"; it will be those who trusted their financial future based on a few slogans aided and comforted by tribal reassurances. We've seen how this goes down in other domains...

IIRC, this was a driving point in my interview with madfientist.

Crusader
Posts: 342
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: Investing, Finance and Economics 2021 Study Group

Post by Crusader »

WFJ wrote:
Sun Jun 27, 2021 2:57 pm
contribute as much money early in the year, January 1st, if possible
Why early in the year? This might be US specific, but I've never heard this advice before.

In general, I agree with your simple portfolio. I don't even bother with smart beta, just plain indices with an appropriate Canadian home bias.
white belt wrote:
Sun Jun 27, 2021 4:57 pm
I think the point of this thread (and the study group) is to move away from the blanket tactical advice without people understanding the principles behind them.
Yes. So far, I am really enjoying the book. I am on Chapter 7. My main issue with all of the theory I've read is... garbage in, garbage out. In other words, all the theory is contingent on the expected returns, variances, covariances, individual risk profiles being accurate... and they were all estimated in one way or another using what happened in the past. There is no guarantee that things will continue being that way in the future.

IlliniDave
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Joined: Wed Apr 02, 2014 7:46 pm

Re: Investing, Finance and Economics 2021 Study Group

Post by IlliniDave »

Crusader wrote:
Mon Jun 28, 2021 8:56 pm
Why early in the year? This might be US specific, but I've never heard this advice before.
It isn't widespread advice as far as I know, but I think the idea, especially in employer-sponsored tax deferred accounts, is to delay paying a fraction of income taxes as long as possible. Also it helps ensure a full year's contribution in the event of job loss later in the year. It also gives you a few extra months of growth potential, which applies to accounts outside of employer-sponsored plans.

I don't do it with my company's 401k plan because of an archaic way my employer implements their matching contribution. I do do it for my little "back door" Roth IRA. Since that's after-tax money the only advantage is getting extra time to grow, and ensuring I don't forget to do it.

IlliniDave
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Joined: Wed Apr 02, 2014 7:46 pm

Re: Investing, Finance and Economics 2021 Study Group

Post by IlliniDave »

WFJ wrote:
Sun Jun 27, 2021 2:57 pm

Although there are 100's of calculators and individuals providing estimates, tax laws and future returns make any ROTH vs Regular estimation 5, 10, 20+ years in the future fruitless beyond wasting a few hours or confusing someone. For example, if future returns are high, ROTH 100% is preferred, if future returns are low or negative for a time in retirement, tax deferred 100% is always better.
There's an alternate way of thinking about it. Although future tax rates are generally unknowable in detail, I (and many ere-ers I suspect) expect my taxable income to be much lower in retirement. In my case, I expect it will peak at < 50% (< 30% for the first 12ish years) of my terminal working income. That probably makes it more likely than not I'll have a lower marginal tax rate on the tax deferred money on the way out than I deferred on the way in. Not a guarantee, but it does shift the odds in favor of going with tax deferred for me. Early on it would have made more sense to go the Roth route, but at the time Roth didn't exist. By the time it did, my income was too high (until "back door" showed up). When Roth IRA became an option I used the aforementioned rationale and stuck with pre-tax contributions.

Of course in my case all this came about post mid-career where I had a little less uncertainty than an early accumulator about a lot of things.

Much of the available "advice" is based on the assumption people are going with the conventional approach or trying to replace 80%-100% of their final working income, implying their relative marginal bracket will be about the same, meaning higher vs lower taxes is more of a 50/50 situation.

I do like a 50/50 approach to traditional/Roth, maybe Roth early then shifting more to traditional as income rises.

Maybe that is over-complicating things for this discussion

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Investing, Finance and Economics 2021 Study Group

Post by WFJ »

Front-loading has two advantages. First is the capital has more cumulative time in the market, full balance compounds for 12 months rather than 1/12 compounding for 12 months, 1/12 for 11 months, 1/12 for 10 months, etc... There are several other early retirees who have their own calculations, which are different during bull and bear markets and whether January 1st or 30th is used as contribution date.

https://www.forbes.com/sites/arielleosh ... 0d67c450f6

The second comes down to the structure of one's plan and whether one job hops. Some plans match some percentage of yearly salary, regardless of when the contribution is made. Assume one's salary is $60k and match is 5%, a contribution of $3k in January will trigger $3k company match in January. One can move to another company with a $60k salary and 5% match with another $3k in match, resulting in a total of $6k in free money when regular contributions would have resulted in a $3k match. Frontloading results in a HUGE difference in returns over long time periods without any increase in risk due to the above to factors (free money).

It can be quite challenging to arrange this as front-loading is not a common request in HR departments. It has become easier with more HR tasks being completed in Workday or other software programs, as paper based 401k plan adjustments can take months to process :(.

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Investing, Finance and Economics 2021 Study Group

Post by WFJ »

IlliniDave wrote:
Wed Jun 30, 2021 3:48 am
There's an alternate way of thinking about it. Although future tax rates are generally unknowable in detail, I (and many ere-ers I suspect) expect my taxable income to be much lower in retirement. In my case, I expect it will peak at < 50% (< 30% for the first 12ish years) of my terminal working income. That probably makes it more likely than not I'll have a lower marginal tax rate on the tax deferred money on the way out than I deferred on the way in. Not a guarantee, but it does shift the odds in favor of going with tax deferred for me. Early on it would have made more sense to go the Roth route, but at the time Roth didn't exist. By the time it did, my income was too high (until "back door" showed up). When Roth IRA became an option I used the aforementioned rationale and stuck with pre-tax contributions.

Of course in my case all this came about post mid-career where I had a little less uncertainty than an early accumulator about a lot of things.

Much of the available "advice" is based on the assumption people are going with the conventional approach or trying to replace 80%-100% of their final working income, implying their relative marginal bracket will be about the same, meaning higher vs lower taxes is more of a 50/50 situation.

I do like a 50/50 approach to traditional/Roth, maybe Roth early then shifting more to traditional as income rises.

Maybe that is over-complicating things for this discussion
There are a few very detailed (Money Guide Elite, eMoney) simulations with 1,000's of variables and runs, but all will get busted with some simple changes to structure of returns (normal vs. left skew) and changes in tax laws (RMDs, Secure Act stretch IRA changes) making any estimation, although interesting and useful to improve Excel skills, almost useless in actual planning. There are also many nominal concerns meaning once one's regular IRA or 401k reaches a certain value, let's say $1 million, any additional contribution will only result in future tax increases, Medicare premium increases and other hidden taxes for responsible savers. 457 plans, rule of 55 and if one is comfortable doing a 72t, will mitigate the weaknesses of the traditional IRA in early retirement, but as long as one is able, the ROTH is usually preferred until income approaches ROTH limits. I shoot for 50/50 tax adjusted balance between the two, but regular IRAs are more common in employer plans and difficult to maintain this balance. One could also easily foresee a "IRA Tax Holiday" allowing IRA holders to accelerate conversions at a lower rate in an effort to temporarily increase tax revenues in the future, again making precise estimations created today with correct methods and data, not useful.

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