CNNFN: Bond Investors, Beware!

Bond Investors, Beware
By Kim Clark @Money December 3, 2012: 6:03 AM ET
(Money Magazine) -- As Chief Investment Officer of Vanguard, George U. "Gus" Sauter, 58, is responsible for a staggering amount of fund investors' money -- some $1.9 trillion.

More important, he's saved a lot of investors' money. Almost 60% of Vanguard's assets are in passively managed index funds, so Sauter's biggest job has been to pare costs so shareholders keep more of their return. (It may not be glamorous, but it has paid off in performance.)

Along the way, Sauter guided the company into a booming market for exchange-traded funds, the portfolios that can be traded like stocks.

His perch as top investor at the country's largest fund manager has also given him a sharp view of the big picture. And part of that picture today is that bond investors -- who added $27 billion to Vanguard funds alone so far this year -- may be in for a bumpy ride.

Sauter retires from Vanguard at the end of the year. He spoke with MONEY senior writer Kim Clark; their conversation has been edited.

In the past five years, we've had a crisis on Wall Street, wild volatility, and outflows from equity funds. Are investors losing faith?

We're worried about that. But we do not think the markets are broken. I can't recall too many periods in my 25 years here where we didn't experience volatility. The market was down 21% on Oct. 19, 1987. And then the Asian contagion in the fall of '97, the Russian debt crisis, the tech bubble bursting.

Now we've got European debt, and we've got the fiscal cliff. Still, that does not convince us at all that you won't get normal returns going forward.

Why? Seems like there's a lot of economic danger ahead.

It turns out equity returns are not related to economic growth. The best predictor of future returns over the long term -- over, let's say, a five-or 10-year horizon -- tends to be current valuations. The market is priced at about 13 times [expected] earnings, and that is a little bit cheaper than normal.

What about bonds?

The best predictor of bond returns is the yield to maturity of the 10-year bond. The 10-year Treasury is at less than 2%, so returns would probably be 2%, maybe 3%. Historically bonds have returned about 6%. It's difficult to see how we could get that.

You've seen big inflows into your bond funds. Are you concerned investors are overdoing it?

Yeah. We're trying to educate clients to be aware of the risks. A rise in rates will negatively impact their principal. At the same time, we do believe that even with lower expected returns, bonds play an important part in the portfolio: diversification. You want to have that anchor.

Vanguard founder Jack Bogle has criticized overuse of exchange-traded funds. You've created dozens of them.

We think that ETFs are just a different way to distribute an index fund. You can invest in our Total Stock Market Index fund (VTI) either through the conventional share class or you can invest in the ETF.

It comes down to investor choice. Jack is concerned that people become market timers with ETFs. We have some research that is contrary to his view. Our ETF investors [in broad-based funds] do not have substantially different time horizons than our conventional shareholders.

I think Bogle's concern is about all the ETFs that focus on just a narrow slice of the market. Aren't those likely to be used by market timers?

I certainly share the concern with the proliferation of ETFs in the marketplace. We have data that show that with narrowly defined investments, investors are not invested in them on the way up. They pile in at the top and then ride them on the way down.

But you created funds for sectors like energy and health care.

We have funds for broad sectors, but we don't have industry funds or single-country funds. There's a level where you have to call it quits.

I was telling somebody I was going to interview the guy in charge of the big index funds, and he asked, "How can that be a full-time job?"

You want to see the number of people we have? [Laughs.] Indexes change more often than you might imagine. There's a lot of trading involved. On a given day, we'll do 5,000, maybe 10,000 trades.
Your last hurrah has been to change the indexes tracked by many Vanguard funds, including Total Stock Market. What exactly did you do and why?

We changed index providers. Index licensing fees have been a very rapidly growing component of costs, and we found a way to reduce that by switching. It will save hundreds of millions of dollars [for our clients] over time.

How does it change the funds?

For example, the index provider we will use for international funds classifies South Korea as a developed market, whereas the current index considers it an emerging market. Every person I know who knows anything about South Korea says it's a developed country. As a result, our developed markets index funds will now include South Korean stocks.

Are there any changes with the funds that follow U.S. stocks?

The Center for Research in Security Prices, which created the new U.S. indexes, have a process they call "packeting." Say a stock is transitioning from being a small- cap stock to midcap. Normally, Vanguard Small Cap Index would have to sell the stock, and then Mid-Cap Index would have to buy it.

With packeting, only half of the weight moves into that new classification. In the next quarter, if the stock remains above that band, only then does the remainder move. When you're at the border, you don't want to flip-flop back and forth. This cuts turnover by about 25%, and that means lower transaction costs.

Last question: Why retire so young?

As they say, it's the miles, not the years. And I wanted to have time to do other things.

The Full Motley: "In Prez We Trust" 4Q, 2012

Now that the elections are over, we citizens are once again freed from incessant exposure to the biggest waste of financial resources.  Whether that ranking is accurate or not is secondary to the fact that the Presidential campaigns is a celebration of ignorance in America.  The majority of statistics thrown about against an incumbent President (like Barack Obama was this year) are either inaccurate or (far more often) irrelevant, and the most commonly referenced ones are that of the Dow Jones Industrial Average (known throughout the media as "the stock market").

All too often observers indicate what the markets have done during a President's tenure as a reflection of the President's effectiveness.  Nothing could be further from the truth.  Market trends are rarely reflective of the President; the President's role is reactive to market trends.  Notwithstanding, the markets popped up more than 2% on Election Day, only to retreat the same 2% the next day.  Lucky for me, I sold out of the remainder of my STAR Fund earnings as I had been planning to do all year.  Let's see if the markets close higher at any point in the remaining in the year than they were on Election Day.

Maybe due to Election Day or maybe due to only being one month into my new job, I forgot to rebalance my portfolio on Friday, November 9, 2012, but my actual target date is November 10th, so I have a rebalance in place for Monday, November 12, 2012, so I am considering that date just as good as Friday's date.  Especially considering the amount moving is only 0.37% of my portfolio balance (not 37%, not 3.7%, but less than one-half of one percent of my account balance).

I won't trot out the spreadsheet that I usually have of how much moved since so little did.  Maybe February 2013 will have more significant moves.  Probably not.  Without adding money to my retirement account leaves minimal affect to my portfolio, hence the reason professionals recommend rebalancing annually, not quarterly.

Job Safari: Most Dangerous Game

It's well-known that Americans today are earning less than their parents did.  This number is not even adjusted for inflation (although reports boasting the opposite truth disclose that it is leveled by two-worker households and/or working more hours, so while Gross earnings before taxes is higher, they still earn less hourly).  Were Americans overpaid in the '50s and '60s or is the Land of Opportunity drying up?  I think the answers are "both, yet neither."  These aren't mutually exclusive, and "Land of Opportunity" is a misnomer as it originally referred to the opportunity to start your own business and be successful.

Regardless, the American economy is nowhere as strong as it once was.  Whether that is the result of a globalizing economy or our national class disparity is a matter of some conjecture, but most experiences are that college is not worth the investment of time or money, and many job hunting methods have become so structured and scientific that they are almost worthless.

The advances in technology come rapidly.  Consider what that means to a four-year degree.  If you started a degree four years ago, then how much of that information is valid by the end of the program?  Then double it for eight-year degrees.  Granted, professional degrees (especially in the medical field) require continuing education to keep practitioners informed of these advances, but if it took more than four years to complete the Bachelor's Degree, then that point is a serious issue.

Fortunately, most employers do not give weight to those considerations as they have been conditioned to only look for the fact that an applicant is a college graduate.  The year matters less, even though there may be more relevance to the year than most other considerations.  The bigger flaw exists in the methods of job hunting promoted these days.

As I have noted frequently, I left my job in April 2011 to start a Paralegal Studies Program at Phoenix College.  I completed that program in August 2012, and then I spent most of the next two months hunting for a job.  Although the job openings were numerous, the actual opportunities were minimal.

The way I figured, CareerBuilder.com and Monster.com generate at least 200 applicants for every position (people "in-the-know" may scoff at that number as ridiculously low), and hiring managers probably read 50 of those resumes, then interview five people for each job opening.  These websites are a glorified lottery, except you can tilt your chances by reusing keywords and overstating qualifications.

I borrowed "New Job, New You" from the local library, and the author referenced her own preference towards writing fiction so often that any critical mind could decipher the text to mean "I'm just releasing this book for the money."  It was devoid of any genuine insight and the examples I read of successful job transitions (almost unanimously from public sectors to a private sector) were only useful to the people following identical paths.  I think the book's target market was the actual people featured in the text, and of course, their friends & family.

My study partner texted me today, "it's a sad day when job placement companies cannot even find work."

Fortunately, I am a lucky one!  I spent over six weeks sending out at least one application per day, and in that time, I only heard back from one employer (mainly because I forgot to attach my resume, but my cover letter sounded interesting enough that she wanted to know more).  My results were both frustrating and depressing.  A concerned friend asked me whether I thought I was being too hard on myself considering the current economy and that I was moving into a new career with no professional network to leverage.  I defiantly said that I would push harder than expect less.

After turning my resume into a job placement company, I bolted across the street to Half Price Books to see what they had available.  I realized that spending money was not something I could afford, but I did read a book by someone calling herself "The Job Whisperer."  In lieu of purchasing her book, I decided to rent it from the library.  Albeit, not before checking their DVD section and finding a Montreal Canadiens DVD set. It was priced at $25, but I decided that spending money was not something I could afford.  But that DVD set certainly made a nice incentive!

The next day, I went to the library to check out that book, and I saw a computer set up specifically for job hunting.  I inquired about it ("if something seems too good to be true, it usually is") and the rep told me that they had recently hired a job search specialist, and she set up the computer and loaded it with helpful programs.  This specialist also hosted seminars and she was available for individual meetings.  I figured that I could still do things myself, and anything the job search specialist had to offer could be found in books, but then, there was also the simplicity of it, so I requested her number and, a few days later (of no requests for interviews), I contacted her to schedule an appointment.  If for no other reason than to ensure that my email would actually *receive* messages.

By that time, I had quantified my bullet points and related them to the paralegal requirements to show that they were transferable skills.  Unfortunately, the job search specialist's first comment when we sat down was that my resume did not reflect a paralegal's resume one iota!  She said the transferable skills are there, but they were too obliquely embedded in unrelated jobs.  She introduced me to the Functional Resume.  Contrariwise to a traditional resume, the Functional resume was a newfangled approach that focused on the skills required from the job application.  In place of my job history, I needed to list the required skills with tasks I had done displaying those skills in the bullet points, and prospective employers would see exactly what they're looking for.

Rewriting my resume was the last thing I wanted to do, next to staying unemployed, so I did it.  There was a company where I wanted to work that posted a job opening in August, but I never heard back from them.  Then, they posted another job opening this last week of September and I wanted to reapply, but I didn't want to resend the same resume.  If for no other reason, I created my Functional Resume for this job and I sent my application on Sunday.

More resumes were sent, but I heard nothing back on Monday and nothing back on Tuesday.  Or so I thought.  As it turned out, there was a message left for me on my voicemail on Tuesday afternoon, but I had been so wrapped up in submitting more resumes online and researching other ideas that I missed the call.  It was from the company that I had not heard from the previous month.  They were calling me in for a job interview, so I returned their call first thing Wednesday morning.  Later that night, I heard back from another place where I had sent my resume on Wednesday morning (because the job posting was nearly identical to one I had replied to the day before, except this one sweetened the deal because the company practiced in civil litigation and family law in addition to bankruptcy).

I landed two interviews in the first week of switching to a Functional Resume.  Was it the switch, or was it just these employers?  Obviously we will never know, but I choose to credit the Functional Resume myself.  If you read independently about Functional Resumes, there are a lot of criticisms about how they feel suspicious to employers.

Lots of a ideas on job hunting exist, from resumes to interview skills, but there's only one truism in all of it..... DO NOT BUY ANY OF IT!

To clarify, I literally mean "purchase" when I said "buy."  Do not pay for a resume seminar.  Do not pay for mock interviews with a self-proclaimed expert.  Do not even buy books on the subject.  The reason why not is that the information is already online.  All of it!  Also, visit the local library like I did for books and check its event calendar, because they may be running seminars on job hunting.

In job hunting, there's a why-not for every how-to.  Sadly, both are usually correct.  There is no science behind job hunting.  There is no sure-fire success.  There is only persistence, and trying harder instead of expecting less.




Recommended reading:

• The New Job Search: Break All The Rules. Get Connected. And Get Hired Faster For The Money You're Worth. (Molly Wendell)
• A Foot In The Door: Networking Your Way Into The Hidden Job Market! (Katherine Hansen)
• The Job Search Solution: The Ultimate System For Finding A Great Job Now! (Tony Beshara)

"I Ate The Marshmallow"

Recently my girlfriend told me, "I ate the marshmallow," seemingly off-subject during a discussion of self-discipline, before explaining that it was a popular reference to a 1960s psychological experiment.  She was surprised that I had not heard of it.  After I did a little research on the subject, I was quite surprised as well.  It was right down my alley!

The experiment was hosted by Walter Mischel who set out to gauge will power and self-control by sequestering several children under the age of six (one at a time), and then providing him or her with one marshmallow and a challenge that he would be back in 15 minutes, and if the child had not eaten the marshmallow, then the child would receive an additional marshmallow.

The results were that most children (70%) ate the marshmallow before the 15 minutes expired; most caved within the first three minutes.  Years later, though, Mischel noted a correlation between school performance and the individual results from the preschool experiment.  Those children who displayed self-control were getting higher grades and performing better on the SAT by upward of 210 points.  Inspired by the oblique benefits from this old experiment, Mischel and company resumed tracking many of the participants into their late-30s.

"What we're really measuring with the marshmallows isn't will power or self-control," Mischel said. "It's much more important than that.  This task forces kids to find a way to make the situation work for them.  They want the second marshmallow, but how can they get it? We can't control the world, but we can control how we think about it."

For most of us, especially for those who are notably impatient, saving and investing would be a lot like these children eating marshmallows.  As soon as I read through the experiment, I immediately compared it to investing myself because of its focus on delayed gratification through increased self-control.  In reality, each of the children equally wanted as many marshmallows as he/she could get, but not all of them were willing to pay the same price.

In this case, the cost was valued in time and many people overlook time as a currency.  Truly, calling time a currency would be a misnomer, but it certainly is a fair way of viewing it.  Re-envision the experiment to run several hours, and every 15 minutes, the number of marshmallows present would double.  Each child would still start with one marshmallow, and after 15 minutes, the more patient children would have two.  If those children waited another 15 minutes without eating one or both marshmallows, then they would get two more.  If they ate one, then they would still have the remainder doubled every 15 minutes.

In theory, the most patient (and arguably, greedy) children would eventually have enough marshmallows that he/she could begin to eat comfortably without it affecting their accumulation.  This comparison is a lot like the time value of money.  I think one turn-off to investing is the presentation.  It is too honesty and too money-hungry.  It uses graphs based on past performance usually, so telling a new graduate that he/she should wait another 40 years to have a cushy nest-egg on which to retire is counter-intuitive.  Sure, everyone wants a nice retirement, but sacrificing over the next 40 years will make a rather dull 60-year-old without very many fun life experiences.

In reality, there is a point where enough should be enough (this excludes the greedy).  Not necessarily enough for a lifetime, but enough for that current point in life.  If a tightwad feverishly sacrificed to accumulate vast amounts of wealth by his/her mid-30s, then it would be hard to imagine having a happy life up until that point.  But if those could-be "tightwads" loosened their purse strings along the way, then they would enjoy the best of both worlds.  They would have both enough in the bank and plenty to spend, like a child with a dozen marshmallows would have plenty to eat.

At that point, there is a paradigm shift in the term "self-control."  With little, "self-control" automatically means controlling yourself by refraining from various actions to result in a better life down the line.  With enough, "self-control" starts to mean that you have control over more things yourself.  You don't have to work a horrible job, because you have enough financial stability to take greater risks and to find a better job.  You don't have to miss big events because your latest paycheck has not posted.  You have a better sense of choice because you have more power to choose.

At work, my youngest co-worker told me to "feed the pig," referencing American Institute of Certified Public Accountants (AICPA) mascot Benjamin Bankes.  In 2006, there was a recognized push to encourage people to start saving more.  A website was created (www.feedthepig.org) and commercials started airing, and I guess it was moderately successful, especially if my 20-year-old colleague is now open-minded to saving enough to discuss it intelligently.

Unfortunately, I see a glaring error between their message and their goal, which is that people who don't save have a different interpretation of money than those who save.  At a certain point, it is like they are speaking two different languages.  When people who don't save hear about how to building up a lot of money, I'm not sure they understand what the indirect benefits of having a lot of money are.  In fact, I'm fairly certain "having a lot of money" to people who don't save simply means "being able to purchase a lot."  If that's the case, then I understand the lull in savers.

I wonder what would happen if their message went from "save to build up a lot of money" to "save to seize more control over your life."  Would that increase the desired savings lacking among our population?  Or would the lure of that self-sustained freedom still be overpowered by instant gratification?

Personally, I think life's too short for instant gratification.




Read more about Walter Mischel and the results of his marshmallow experiment at http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer#ixzz248Bs2pkh

The Full Motley: 3Q, 2012

I heard an interesting experiment about marshmallows and self-control, and how it links to success, but I will save my thoughts on that for next month.  Today, I re-balanced my 401(k) amidst a strong market climb.  If you disregard the notable exceptions of 2000 and 2008, then most election years have seen gains in the market.  From the market activity we have seen hitherto this year, 2012 is unlikely to join 2000 and 2008 as a notable exception.

If anything, this year has been extra normal.  My movement for this quarter reflects that point nicely.

Vanguard Explorer Fund 24% / -1% / 25%
Vanguard High-Yield Corporate Fund 5% / x /  5%
Vanguard Total Stock Market Fund 25% /  x  / 25%
Vanguard PRIMECAP Fund 26% / +1% / 25%
Vanguard Total Bond Market Fund 10% /  x  / 10%
Vanguard Total Int'l Stock Fund  10% /  x  / 10%

Although only 1% of movement was actually required (my actively-managed PRIMECAP fund made up what my aggressive Explorer fund has been lacking), I really pulled from four funds slightly above their target and put it into two funds: the aforementioned Explorer fund and the Total Bond Market Fund.

Obviously, there has not been too much movement in the major markets, which is a good sign, especially in contrast to all the "gloomers & doomers" (as Mo Anari calls them) expecting the bond market to retreat sharply into a freefall (as Mo Ansari himself is predicting).  Not that I argue with that mentality; since December 2010, I have been expecting the bond market to retreat as well.  Ditto for the precious metals, which as a whole have seen a far worse annual return (arguably) than almost any bond fund, especially these past 12 months.

Regardless, this quarterly update is a strong indicator that my quarterly re-balancing is not essential to successfully self-managing a financial portfolio.  Most experts advise an annual re-balance is sufficient, and a quick review of the nominal movements made in my past several quarterly updates, it is easy to support that logic.  But, finance is my hobby so I personally enjoy re-balancing more frequently.  The professionals managing mutual funds re-balance every single day, so it is my self-serving belief that re-balancing quarterly will not harm my portfolio.

I noticed Walter Updegrave responded to a question last month on Money.CNN.com from a 25-year-old investor concerned about making a poor decision that could cost hundreds of thousands of dollars by retirement.  I especially like the reply, citing a few key principles "like keeping it simple, holding the line on costs, diversifying broadly, and ignoring the jabber pundits who advocate buying & selling, any flubs you make aren't likely to wreak mortal damage."  He also noted that "even though many (professionals) like to make investing seem complicated(,) it's really not all that difficult."

Having started my retirement investing on the day I turned 25 myself, I understand exactly what he means.  Perfection will not be achieved in investing any sooner than it will be achieved in any other endeavor, but for all the complexity above the basics, it is only necessary to understand that basics.  I usually support concepts supporting "less is more," and investment knowledge may fit that mentality nicely.  Understanding investments fully will not always generate success.  And the difference in returns between people who simply understand the basics to those who have a solid understanding behind more of the complexities is a strong argument against investing in the time to understand the markets better.

When I first started in finance, someone at my first job told the story about a client asking an adviser for the next hot stock tip, and the professional replied, "even if I told you, you wouldn't know what to do with it."  I think I was the only one in the room to understand what that meant: knowing what you don't know is safer than only partly learning things.

After the basics, your personal finances can be as complex or as simple as you want to make them.

The Full Motley: 2Q, 2012

Another quarter has passed, and the markets have not had much activity lately.  They've gone up, and they've gone down as normal, but nothing consistent in either direction. Until this week.  The day on which I do my quarterly rebalance was built towards with six consecutive down days in the market.  Lucky me!  I'm not sure there would have been much activity in my portfolio this quarter without it.  Hence the reason experts have said rebalancing annually, like on your birthday, is sufficient.

But if you're one of the obsessive types who writes a financial blog to track your movements, then this may have been how your allocation chart could have looked this quarter:


Fund # - Real / Current / Target
Fund 24 - 25% / 0% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 25% / 0% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 25% / 0% / 25%
Fund 113 - 10% / 0% / 10%

Fortunately, there were some rounding percentages that allowed me to move small portions around, but the final amount moved was less than 1% of the portfolio so it does not show up on the chart.  But if you have a 401(k) plan to which you are no longer contributing, then rebalancing once a year or twice a year is sufficient.  Corresponding research has shown that rebalancing more frequently (e.g. daily, monthly, or even my quarterly) had no significant effect on lifetime returns over 40-50 years.  An annual rebalance is standard reference in the financial field, which is why I was surprised Vanguard released the following video:

There was a simple question, followed by a somewhat simple answer, but notice that the answer does not ever truly address the question.  It's aggravating because it feels like it is another case of the industry professionals complicating their field to keep others from being able to manage it themselves.  The further I get away from finance, the more I appreciate the aggravations of laypeople to whom the entire concept is a mystery.

Fortunately, I experienced the field from the inside for 10 years so I learned most of the finer points directly.

Understanding Taxes

It occurred to me last week that I had not filed my taxes (or even started) yet, and it was already April.  Luckily, I realized that I was somehow a full week ahead, and at that point, it was only the last week of March (which is when I usually file) but among homework assignments, shifts at work, and self-imposed obligations to friends, I couldn't find any time to take care of them.  Luckily, I had a later shift at one point this week and there is an H&R Block in the same shopping center as where I work, so I popped in with my tax information to see what would happen.

"I am coming in to start my taxes," I explained to the secretary when she asked me how they could help.  She asked me if I had an appointment, "nope."  To which she disappointingly said, "It's APRIL ... and you're coming in ... to START your taxes ... WITHOUT an appointment?"  "Yea, basically."  I already knew where this was headed, and it was the opposite of where it should be going.  "Well... *exasperated sigh* it just so happens that we had a cancellation."

This is why I often call myself "Mr. Lucky."

On one hand, it amazes me how much people don't know about the tax laws in our country.  On the other hand, it amazes me how complex the tax laws in our country are.  For both reasons, I have always gone to a tax professional to file my taxes.  It allows me to be lazy and laissez faire.  Also, I was once told very early in my career "H&R Block pays for itself."  It's true.  A few years ago, I owed some taxes (several hundred dollars were due) so we ran the numbers, and I could get a couple dollars back if I maxed out pre-tax contributions into my IRA.  I could have paid the government money and never seen it again, or I could have paid a little bit more to myself and keep it in my possession.  Of course, I did the latter.  But I never would have known it without H&R Block.

More importantly, I was employed for half of this past year and then under-/unemployed for the rest of the year, so I knew my 2011 tax situation would be unique.  Also, I was a student this year but I did not even consider that there would be significant tax breaks.  As it turned out, the tax deductions that I had in mind (and one that the average taxpayer would have used) would have reduced my taxes.  Conversely, there were some tax credits available for full-time students such as myself (I don't think of myself as a "full-time student," but I qualify as one) from which I could get a large refund.

If you don't know the difference between a tax credit and a tax deduction, then you probably need assistance from a professional.  You could pay taxes on your own and save the $100 fee from H&R Block, but you will risk missing out on potential "loopholes" to reduce those taxes.  For example, my taxes were 15% this year but what I paid (owed) was 1%.  I proudly felt like Bobby The Brain Heenan when I heard that fact.

Another sign you may need a tax professional is if you don't know that when I say "my taxes were 15%" that I mean, my last dollar earned was taxed at 15%.  The Internal Revenue Code uses a marginal tax rate, which means everyone is taxed the same way.  The first $9,000 we earn annually is not taxed ... at all ... for everyone.  The next $8,500 is taxed at 10%.  The next $8,500 is taxed at 15%.  Above that, it is taxed at 25% until you've earned $85,000 over that original amount (which I believe it $9,000, but I could be wrong), and then you reach the 28% tax bracket.

If you think your being in the 28% tax bracket meant every dollar you earned was taxed at 28%, then you're wrong (but you're in good company).

Another common misunderstanding is if you receive a bonus at work and the taxes are withheld at a higher percentage than on your ordinary income.  Many people are mistakenly under the impression that bonuses are TAXED at a higher rate.  This is untrue!  The increased withholding is to protect you from yourself.  You were not expecting the bonus (ideally) so withholding more of it means more of your taxes are paid by the end of the year than the remainder of your earned income.  Unfortunately, correcting people on either point is usually a fruitless endeavor, because (for whatever reasons) taxes are just misunderstood by the American public at large.

If you hear politicians push for "flat tax," this is the reason why.  Unfortunately, I think it's a bad idea.  Very bad idea.  I like the marginal (tiered) tax rates in this country myself.  Part of the reason it is a bad idea is that it would need an entire re-write of the entire Internal Revenue Code, and as confusing as it is now, at least enough people understand it.  If the entire book were rewritten, then it would be a crap-shoot whether it was written for better or worse.

Albeit, it would make filing taxes a lot easier.