Lazy Man and Money

My Biggest Money Mistake

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My Biggest Money Mistake

For whatever reason, people love to ask me about my biggest money mistake. Other bloggers will ask it when they are compiling a top ten article. For a few years, I had gave some answers, but I didn’t have any strong conviction behind them. There was a brief period of day trading after college. I also bought a convertible after college. Basically, the “after college” time wouldn’t make many of my financial highlight reels.

However, in hindsight, I don’t think either were big money mistakes. I didn’t lose too much day trading and I learned a lot. I still have the Mustang convertible today (20 years later) and have paid roughly about $1400 a year (or a little more than $115/mo.) for it. Things could have been a lot worse.

I think it’s difficult for many people to talk about their biggest money mistakes. In about 99.9% of the cases, it is because they are embarrassed that they made the mistake in the first place. I’m finding it difficult to write about my financial mistake, but for a completely different reason. My biggest money mistake comes from a situation when it’s considered a “good problem to have” such as having two great starting quarterbacks or being at a great buffet and realizing that you only have one stomach. (Does anyone remember buffets?) Because most people would love to have this kind of problem, it may sound tone-deaf. If so, I’m sorry in advance.

I Saved Too Much for Retirement

For years, I made it my mission to max out my retirement accounts the best I could. As a software engineer, I was pretty successful. As a blogger, less so. My wife, as a pharmacist was able to max out her retirement accounts as well. It turns out that if you max out your retirement you can have a million dollars in 20 years. Neither of us are there, but, as you can imagine with our retirement accounts are not small. Given the stock market run of the last decade, maybe a lot of people find themselves in this situation.

In general, putting more money into retirement accounts is a smart move. You get to delay paying taxes during what is, for most people, their peak earning years. Then you can pull out the money and pay taxes on the smaller amount because you don’t have your main income. The downside to most retirement accounts is that you can’t easily access the money until you are older, typically around age 59.5.

Having too much money in the future isn’t the problem. The big money mistake is that the money we have access now is 7% of that retirement nest egg. That’s not a lot of liquid cash.

I should have planned it so that we set aside 35-45% of the money to use now and 55-65% that we can use later in retirement accounts. It’s a lopsided situation, where it feels like we are just getting by now, but are set up to have a lot more money in the future.

That’s why we stopped retirement contributions, with the exception of Roth IRAs. We continue to contribute to Roth IRAs because we can pull those contributions out at any time without a penalty. In fact, the ability to do this may turn out to be very important in the future, but we’ll put that aside for the follow-up article.

There was another reason why we put so much money for the future. Simply put, we could. We didn’t have kids for a long time, so the dual-income, no kids gave us a lot of financial flexibility. More importantly, we have my wife’s military pension and rental properties to help supply income before retirement. Unfortunately, we still have to wait five years for the mortgages on those rental properties to be paid off. They won’t produce income until then.

There’s one other “problem” with this lopsided situation. When you combine a pension, rental income, and a big IRAs it has the potential to lead to a high tax bill. The IRA disbursements are taxed as regular income which may be 37%, or (much likely) even higher in the future. I’ve forgotten a lot of math over the years, but if memory serves, the commutative property of multiplication means that it doesn’t really matter when you pay the taxes, you just want to pay the lower amount. If we had invested money in a regular taxable account, it could be subject to long-term capital gains rate which maxes out at 20%. The money could also be invested in a way that paid qualified dividends that would realistically max out at 15% for us. (You need over $500,000 in qualified dividends a year for a married couple to get to the 20% range.)

If we could pay taxes of between 15-20% it would be a lot better than paying taxes of 40%.

Fixing My Biggest Money Mistake

Sometimes there are problems you can’t fix. As the saying goes, you can’t put the toothpaste back in the tube.

Fortunately, in this case, there are some things we can do. OThe solutions that I initially found were less than ideal. However, with a little more time and focus, I think I’ve found some ways that it won’t be so terrible…

… but that will be an article for another day.

How to Teach Your Teen Investing

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They say that best writers steal ideas from others and make them their own. I’m not sure about stealing, but I have to admit that my ideas come from the input of others. That can be from books, newspapers, blog articles, television, essentially any media. Usually, making them my own involves adding some of my own thoughts, opinions, and commentary. (On very rare occasions it involves adding comedy.) Occasionally, the idea is so good, I don’t have anything else to add – I’m simply pointing to it to make you aware of it. This is one of those cases.

Today I’m stealing borrowing from Jonathan of My Money Blog. I’ve been reading his blog for more than 15 years as it inspired me to create Lazy Man and Money. He flies under the radar in the personal finance space. However, his research and content is always top-notch. The latest example is a gem from NPR’s Planet Money. They’ve had a “summer school” where they taught investing at a basic level.

If you are new to investing, this will be a great listen. However, I agree with Jonathan that it would be a great course for my kids when they are teenagers. A small sliver of why I’m writing this today is to document it and hopefully see it a few years in the future to revisit with them.

How to Teach Your Teen Investing

Jonathan’s article, Weekend Listening: NPR Planet Money Summer School Investing Edition, lays out the course’s syllabus:

  • Episode 1: The Stock Market
  • Episode 2: Index Funds & The Bet
  • Episode 3: Smooth Spending & The 401K
  • Episode 4: Bonds & Becky With The Good Yield
  • Episode 5: Bubbles, Bikes, & Biases
  • Episode 6: Crypto & Commencement

I have to admit that I haven’t listened to the whole course. It’s not designed for the personal finance blogger who has been investing for thirty years. If you feel like you know the basics of investing, you may want to skip this course. That’s why I’m targetted it towards teens for the readers here. (That’s also an idea that I stole from Jonathan.)

You can get the whole podcast at Planet Money Summer School. I’m not a podcast person, but I’m guessing you can get it through the mobile app of your choice by searching for “Planet Money Summer School.” Each episode is a little more than a half hour long.

When you are done, there is a the final exam. I took the exam before listening to the episodes and only got 5 of 8 correct. The ones I got wrong were historical or based on nomenclature, where I knew the concept, but not the precise term for it. Give it a try and see how you do.

Is this the perfect way to teach investing? Nope. My kids are 7 and 8, so I have a few years before the teenage years. I don’t imagine they’ll want to listen to this podcast without some kind of carrot stick. However, I do believe it can be one of the tools in your toolbox if you want to teach your kids about money.

Looking for something else? This investing course is actually season 2 of the Planet Money’s Summer School. Season 1 covers Microeconomics concepts.

Maximizing Your Long-Term Investments

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[My alternative title for this article could be, “My Kids Roth IRAs’ Asset Allocation.” However, you don’t have to have a kid Roth IRA or a kid to take advantage of some of the ideas here.]

I’ve written about my kids’ Roth IRAs before. One of the benefits of dog sitting is that they can help, get paid, and legally save money for retirement that they’ll never have to pay taxes on. It’s not a lot of money, but a minimum of 50+ years of compounding is very powerful.

One thing we recently learned from Peter Thiel’s Roth IRA is that high-growth assets can make huge gains over time. Their dog money will never be compared to early shares of Paypal at a fraction of a penny, but it will still give them a tremendous leg-up in retiring early. Every dollar that they put in now will grow to $11.50 if it compounds at 5% – a reasonable number after inflation.

To get that 5% after inflation they’ll have to invest aggressively. They’ll have to take some risks, but with a balanced portfolio and 50-years to recover from the inevitable crashes, it shouldn’t be a problem.

It’s with this thought in mind that I decided it was time for me to formally create:

My Kids Roth IRAs’ Investments

The challenge is looking for high-growth investments for a long time in the future. However, I also want to be highly diversified as my crystal ball has been in the repair shop. This means that I’m going with a 100% stock portfolio. I’m not going to have any bonds, cash, or anything that I don’t think can reasonably return 8-10% over the long term.

For a number of years, I’ve read that small capital stocks perform a little better than large stocks. This makes sense since small capital stocks can double a lot easier than a very, very big company. The United States has had a great run, but I think international stocks have more growth potential over the next 50 years. They have better valuations if you use traditional methods like Shiller P/E.

For those two reasons, this portfolio will be weighted a little more towards those areas than many experts would typically suggest.

With that in mind, I focused on a set of six ETF that I believe get me to my goal. I specifically chose Vanguard (with one exception) because I know their expense ratios are going to be very, very low. I want my money working in the markets, not in managers. Those ETF are:

  • Vanguard Total Stock Market (Ticker: VTI)
    VTI is a staple for almost any investment portfolio. It is one-stop shopping for the United States stocks. Unfortuately, it has a lot of technology controling it, so remove that tech risk by diversifying with other US-based ETFs. Return Since inception 05/24/2001: 8.80%
  • iShares Core High Dividend ETF (Ticker: HDV) – The one non-Vanguard fund is a high-dividend ETF from iShares. Vanguard has a high-dividend ETF too, but a while back, for reasons I no longer remember, I like HDV more. In my view, this is a great way to remove tech risk from your portfolio. It’s got boring companies that simply make money and return it to shareholders. You won’t find Google in it, but you will find consumer staples, energy, health care, and utlities stocks. Return Since inception 03/29/2011: 10.34%
  • Vanguard Small-Cap ETF (Ticker: VB) – Remember my focus on the returns of small-cap stocks? This is a great way to “fix” the unbalanced nature of VTI. VTI weighs holdings by market cap, so the biggest companies dominate it. This gives me more small companies that hopefully can be more nimble and score big wins over 50 years. The index will cycle out companies appropriately over that time. Return Since inception 01/26/2004: 10.35%
  • Vanguard FTSE All-World ex-US ETF (Ticker: VEU) – This ETF invests in stocks outside the United States. Like VTI, it’s a good core holding. However, I’ve found that it mostly focuses on developed countries and stocks. That’s not bad if that’s your goal, but I think emerging markets have real growth potential especially over the long haul. For that reason, I added the next ETF. Return Since inception 03/02/2007: 4.32%
  • Vanguard FTSE Emerging Markets ETF (Ticker: VWO) – This is a pure emerging markets play. Just like how HDV helped balance VTI, this helps balance my overall international exposure. Return Since inception 03/04/2005 – 6.99%
  • Vanguard FTSE All-World ex-US Small-Cap ETF (Ticker: VSS) – This ETF is a mouthful, right? It’s a combination of VEU and VB… a mix of international small companies. One could reasonably leave this out of the portfolio, but I loved how it honed on the two things that I was looking to weigh more: small companies and international. I think this will have many companies that aren’t represented in VEU or VWO. Return Since inception 04/02/2009: 11.11%

It doesn’t seem like the VEU and VWO historical return is going to improve our gains. However, because they have better valuations, I feel more confident that they’ll perform better in the future while US stocks will trend back to historic norms.

My Kids Roth IRAs’ Asset Allocation

So I’ve got my six ETFs. The problem is solved, right? Nope, not exactly. I still have to figure what percentage of each to buy. I can’t just buy the same amount of shares of each. They have different prices. I don’t want to get into fractional shares. I also don’t want to leave too much cash uninvested.

I opened up my spreadsheet program and put the tickers in one column. Then I put the share prices in the next column. In the third column, I guessed the number of shares for each. Then I multiplied it across to get a total investment for each ETF. Then I added up all the totals and made sure that my kids would have enough to buy the ETFs. If I had too much money left over, I switched up my guesses on the number of shares to buy. However, I always tried to keep the ratios around where I wanted them to be.

Finally, I got some numbers that looked like they’d work. Was I ready to buy? Nope, not yet. I had to check my work.

I asked my friend if there was a tool that analyzed a group of ETFs and told you how diversified your portfolio was. She pointed me to a TD Ameritrade version of Morningstar’s X-Ray tool. I felt like an idiot, because I had written about Morningstar’s Instant X-Ray tool back in October of 2006. It’s the perfect tool for the job.

So I put the numbers in and found that I had too many large caps and more developed Europe stocks than I intended. I adjusted my guesses trading some VEU and VTI for small-cap stocks and got this result:

I think that result is beautiful. Information Technology is still the highest sector, but it’s only 16.5% of the portfolio. No single industry dominates the portfolio, so it is well-diversified from that perspective. Sixty percent of stocks in North America are more than I had originally wanted, but it’s not bad. Perhaps I could tweak it by changing my guess to add more to VSS and less to VB.

Finally, the stock-style box at the bottom looks good. It still has a little more large-cap stocks than small caps, but it is much more balanced than what most people have with a core holding of VTI. That holds so many large companies that the small companies can’t move the index. It’s also worth noting that the expense ratio is a low 0.07%. I’m not giving very much money to the managers at all.

How did the percentages work out to make this X-Ray? Because the kids have different amounts in their Roth IRAs, I don’t have the same exact percentage for each of them. If I did, I would be stuck buying fractional shares or not putting all the cash to work. It roughly turned out to be:

VTI – 17.5%
HDV – 5.3%
VB – 33%
VEU – 24%
VWO – 14.5%
VSS – 5.32%

Due to rounding, this doesn’t add up exactly to 100%, but it is close. So now, you can replicate something close to this with your own portfolio if you choose to do so.

Next Year’s Plan

The plan for next year would be to add REITs into the mix. I originally didn’t think REITs performed well enough to be included in a long-term high-growth plan, but they definitely can be included. So I’ll buy some VNQ (Vanguard’s main REIT ETF) next year. Also, I can work on the above point about including more small foreign companies instead of domestic ones.

Final Thoughts

You might have read all this and thought, “That’s great, but I don’t have kids” or maybe, “That’s great, but my kids don’t have Roth IRAs because I don’t have a dog sitting business.” You can come up with a hundred reasons why this specific circumstance doesn’t apply to you. However, I would argue that the process that I used can be useful for you and your asset allocation. You might have to add more bonds or change your objective, but the concept can work in any investment scenario.

I do have to leave you with one more final, final thought. I have a lot of fun with this stuff. I’m weird. You are likely not as weird as I am. I’m (attempting) to optimize this to an extreme level and it makes everything a little more complicated. Investing doesn’t have to be complicated though. Most people could put 65% of their money in VTI and 35% in BND (a Vanguard bond fund) and spend more time doing something they love. I never want to scare anyone away from investing, even if this article might be for more advanced investors.

Cryptocurrency Experiment – July 2021 Update

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If you read my article on dog sitting on Tuesday (or many of my other articles recently), you know I’ve been busy with dog sitting. I had been meaning to get an update out on my cryptocurrency investing for a few weeks now, but it’s been hard to put the time together. As luck would have it, I was able to put the time together just as the cryptocurrency market rebounded earlier this week.

I swear it was a coincidence. So in the interest of full disclosure, I was down around 20% in all my cryptocurrency purchases. It would have been much, much worse, but dollar-cost averaging has helped keep the percentage low (low in a relative sense). When I started investing Bitcoin was above $60,000, so about twice the price of what it was just last week. It’s hard to make money buying at the top.

I wrote about when I started buying bitcoin. I also bought some dogecoin, but it amounted to $22 worth in my kids’ Robinhood account. They’ve lost about $6, so it’s not a big deal.

Soon after buying Bitcoin, I bought Ether. I originally thought that all crypto was more or less the same, but it seems that different ones have different infrastructure to do different things. It also looked like Ether was the top coin going to switch to a system that is energy-friendly, which would give it an advantage over Bitcoin.

Below is a table that shows when and where I invested in Bitcoin and Ether. Since I’ve bought crypto many times, it’s a long table. The big thing to note is that I buy in lots of small transactions (usually $50, but sometimes $100) and that I almost always buy when there’s a drop and I can get more crypto for my dollar.

CoinDateAmountValueTransactionCoinPrice
BTC4/17/2021$50.000.00081635Buy$60,943.43
BTC4/18/2021$50.000.00090356Buy$55,061.05
BTC4/18/2021$0.008.967E-05Free$0.00
BTC4/22/2021$50.000.00094692Buy$52,540.02
BTC4/22/2021$50.000.00099871Buy$49,815.13
BTC5/13/2021$50.000.00102105Buy$48,725.17
BTC5/16/2021$50.000.00111111Buy$44,775.83
BTC5/18/2021$50.000.00122328Buy$40,670.15
BTC5/19/2021$100.000.00278012Buy$35,790.62
BTC5/23/2021$50.000.00146844Buy$33,880.12
BTC5/23/2021$50.000.00155946Buy$31,902.82
BTC5/29/2021$50.000.00144891Buy$34,336.83
BTC6/7/2021$50.000.00150995Buy$32,948.84
BTC6/21/2021$50.000.00152426Buy$32,639.40
BTC6/22/2021$50.000.00158529Buy$31,383.03
BTC6/22/2021$50.000.00168063Buy$29,602.67
BTC7/20/2021$50.000.00167383Buy$29,722.82
Total$884.50$850.000.022341544.06%$38,045.72
CoinDateAmountValueTransactionCoinPrice
ETH5/3/2021$50.000.0146626Buy$3,393.07
ETH5/18/2021$50.000.01598978Buy$3,111.44
ETH5/19/2021$50.000.0170301Buy$2,921.37
ETH5/19/2021$50.000.01893828Buy$2,627.02
ETH5/19/2021$50.000.02078337Buy$2,393.80
ETH5/19/2021$50.000.02294418Buy$2,168.36
ETH5/23/2021$50.000.02426996Buy$2,049.91
ETH5/23/2021$50.000.02539767Buy$1,958.89
ETH5/23/2021$50.000.02762223Buy$1,801.13
ETH6/21/2021$50.000.02580257Buy$1,928.15
ETH6/22/2021$50.000.02665997Buy$1,866.14
ETH6/22/2021$50.000.02859266Buy$1,740.00
ETH7/20/2021$50.000.02833601Buy$1,755.76
Total$702.12$650.000.297029388.02%$2,188.34
All Crypto$1,586.62$1,500.005.77%

At the end of each crypto in the table above, I have a percentage of gain/loss. So as I write this article (7/26), I’m up 4.06% in Bitcoin and 8.02% in Ether. That’s 5.77% overall. Crypto moves quickly. As I mentioned above, I was down probably 20% last week and even though I’m up now, I expect to be back down soon.

I don’t have any plans to add any new crypto types. That could change if I catch some news that gives me reason to invest differently. I also don’t expect to buy any new crypto soon. With the jump in crypto value over the last couple of days I don’t think it would be a good value to pay these prices. Of course, no one knows when the next drop/buying opportunity will happen, so maybe in a couple of weeks, I’ll be buying more.

The other thing that you can see is that I’ve invested $1500 so far. I didn’t expect to invest this much over a span of a couple of months, but the steady drop of price has created consistent buying opportunities. Bitcoin would have to drop to around $20,000 for me to invest as much over the next couple of months. Also, in the grand scheme of our net worth, $1500 isn’t a lot…

… and that’s the goal. This cryptocurrency experiment is intended to be a small part of our personal finance journey. By keeping it a limited percentage of our net worth and using time-tested methods like dollar-cost averaging, it won’t make or break any of our life’s plans.

Thiel’s Scandalous Roth IRA and What You Can Learn From It

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A few weeks ago, ProPublica dropped another tax bombshell. If you missed the first one* a couple of weeks ago, they published a bunch of the wealthiest Americans’ tax details when it was sent to them. They were able to show how the ultra-wealthy are able to avoid taxes.

It was a fantastic read and it might just change Congress’s tax policies going forward.

ProPublica is back this time with an exposé of Peter Thiel’s Roth IRA. It’s a little bit different in that this article focuses on one person’s Roth IRA (for the most part).

What makes Peter Thiel’s Roth IRA so amazing is that it is estimated to be worth $5 billion dollars… and he’ll never have to pay taxes on it. I’ve been investing socking money away in my Roth IRA for a couple of decades now and it’s doing well, but without any other income streams, it might be just enough to supplement Social Security in retirement. For years, the maximum was $2,000. Even if that compounds for decades, it’s hard to expect that to provide enough income to retire on.

So how did Thiel get a Roth IRA worth $5 billion dollars while contributing under the maximum of $2,000? According to ProPublica’s information, “Thiel paid $0.001 per [PayPal] share — yes, just a tenth of a penny — for 1.7 million shares. At that price, he was able to buy a large stake for just $1,700.”

Of course, today PayPal is worth a lot more money, so nearly two million shares are worth a lot of money as well. Thiel is also a Silicon Valley insider, so he can invest these gains in other Silicon Valley start-ups. Some have surely failed, but some have become home runs.

So what’s so scandalous? I see two things that are scandalous:

  1. As founder of the company, he could price the shares unreasonably low – which appears to be a tax violation**. The ProPublica article points out that soon after the transaction there were multimillion dollar investments in place. So theoretically, the shares should have been worth maybe $0.25 (pure speculation on my part for sake of example), meaning that he would have “only” been able to buy 8,000 shares with $2,000… quite a big difference than 1.7 million shares. If those 8000 shares became worth $100, he’d have only $800,000 a far cry from $5,000,000,000.
  2. If Thiel didn’t have the Roth IRA tax shelter (or used it how it was meant to be used) the taxes he would have paid on his investment gains could have funded critical infrastructure for many, many Americans.

I like to give people credit for beating the system. However, it’s hard when it looks like “beating the system” appears to be illegal tax manipulation.

How Can You Be Like Thiel

The simple answer is you can’t. ProPublica has a video explaining why:

However, we can use the extreme Thiel case as a guide for what you could do with your own investments. He put in an extremely high-growth asset. Since most money in a Roth IRA is designed to stay there for a number of years, it makes sense to buy in your highest growth investments as well. Typically these would include investments in small companies. For example, I’ll be putting more of my stake of Vanguard Small-Cap ETF (Symbol: VB) in my Roth IRA. Since its 2004 inception, it has gained an average of 10.5% a year.

On the other end of the spectrum, I invest in Vanguard Total Bond Market ETF (Symbol: BND) as well. Since its 2007 inception, it has gained an average of ~4.1% a year.

Let’s see how the two investments strategies work in a Roth IRA vs. a taxable account. If Mary invests $6,000 in VB (and earns the historic 10.5% a year) in a Roth IRA (once and does nothing else), she’ll have $325,568 to withdraw tax-free. If Mary invests $6,000 in BND (and earns the historic 4.1% a year) in a Roth IRA (once and does nothing else), she’ll have $29,935 to withdraw tax-free.

Let’s assume that Mary is in a 25% tax bracket. Mary has $6,000 to invest in both a Roth and a taxable account and puts the high-growth in a Roth, she’ll have both amounts $325,568 and $22,451 ($29,935 after taxes) or nearly $350,000. If she switches where the assets are she’ll have $29,935 tax-free and $244,176 ($325,568 after taxes) or around $275,000. That’s a loss of $75,000 or nearly 20% by simply managing your assets in the most advantageous places.

You might say that this is an extreme example, since it’s 40 years in the future. However, keep in mind that this is a one-time Roth IRA investment, most people will invest many years of their life. It should also be noted that inflation isn’t factored here. However, it would hurt both investments equally, so the example still has integrity… it’s just that the $350,000 and $275,000 won’t buy as much in 2060.

You may want to be even riskier with your Roth IRA and pick satellite stocks. You won’t find a PayPal for a fraction of a cent, but I’ve been able to invest in SNAP and Pinterest and seen those shares grow 5x or 10x what I’ve paid. This is also why I invest my kids’ Roth IRAs in riskier, high-growth assets.

So what do you think? I realize this is largely two articles in one, but I hope it’s got you thinking. Please let me know those thoughts in the comments.

* I should clarify, “First one this year.” In 2019, ProPublica covered how taxes scam everyone, by purposely being complicated to keep the tax preparation industry profitable.

** I’m not a tax expert, so I’m relying on my best interpretation of the ProPublica article and common sense.