The Full Motley -- 1Q, 2017

Another year, and another anniversary has passed. This blog is now over eight-years-old, and next month, my original Roth IRA contribution has been in the same investment for 14 years. That original investment in the Vanguard 500 Index Fund has more than tripled in value (slightly over 3.75x with dividends reinvested).

We have all seen the graphs of investors starting at age 25-years-old being far better off than those who wait to start saving until 35-years-old, which display the power of compounding over time, but the problem is that the graph itself provides an undue instant gratification. Success is defined by decades, not any given year.

It has been about six years since I put any money into my old 401(k) (the one in which my quarterly re-balancing is tracked in each of these updates) and it too has grown significantly since its last dollar was added. As it grows in value, I have been steadily taking some of those earnings and supplanting losses in other funds. Based on the past eight years, I would wager that my portfolio would be higher if I had not been moving money out of the funds that I have been, but that is because the past eight years have been a bit of an anomaly with the markets going virtually in a one-way direction upward, but they can retreat at any point, significantly and suddenly, at which point other asset classes are likely to appreciate, where I have been accumulating additional shares at lower prices that I can then move into the depreciated stock market at the same quarterly interval.

As for this past quarter, the two big movers were a downward bond market and an upward small-cap assets that virtually evened out. My large-cap funds (both the index and actively managed fund) had moved slightly higher, and their increase was redirected into the high-yield bond market and international index fund in amounts that were similarly equal.

The decline in the bond market index fund is not surprising because, as interest rates increase, existing bonds would have to be sold at a discount as newer issues have more favorable interest rates. Of course, because the newer issues have a higher interest rate, those bonds will be higher interest income, generally paid out monthly, than the other bonds. As the price per share has decreased, the monthly dividend accrued should get higher.

Three Reasons To File Taxes Now

Most people over the age of 25 are familiar with their taxes. For some, they have been doing their taxes for years. For others, it has been a couple years since that they have been separate from their parents' return, but they have had enough experience. By now, you would know if you are the type to file your taxes early or late. For those who like to wait until the last month, please consider the following reasons why filing in February is better. (For those who like to file ASAP, please understand the good reasons behind that preference.)

#1. The taxes you pay today are the same as what you pay later.
While it may make sense to delay paying your taxes now if you owe, more people get refunds than not, and they are owed an outstanding balance. That refund you file to get today will be the same refund that you file to get in April.

While many of us say that we got money back from the government, the more accurate phrase would be that "we got our own money back from the government." It's a subtle but important difference. Although I do not fully agree with the J.G. Wentworth commercialized slogan, "It's my money; I want it now," in the case of a tax refund, that mentality is perfectly fine!

#2. Better planning for taxes in the new year.
I said these reasons would be why you should file your taxes early, but there are occasions where you may want to start preparing now, but file later. Certain tax breaks, including contributions to IRAs or HSAs (if eligible), can be effective for the prior year's taxes up until April 15th. If it benefits you to put a few thousand dollars into a tax-deferred account on this year's return, then it might help to have several weeks to set aside that money rather than a few days if you start preparing taxes in April.

Furthermore, preparing your tax return could pinpoint subtle changes in your income that you may not have noticed during the year. Although you cannot do anything about it for the prior year's taxes, you can still make changes for the current year's taxes, which (as sure as the sun will rise) will be due next year. Missing a few weeks of this new year will have almost no impact by December 2017, but making the changes a few months into the new year may require overcompensating for the delay or even falling short of the ideal benefits again this year.

#3. Tax Fraud protection.
Here is how the most common form of tax fraud works nowadays: criminals file a slew of fake tax returns for the highest possible refund amount under random social security numbers. If enough of the information matches up, the Internal Revenue Service pays out the refund. Now when you arrive in April to file your return, it could indicate that you already filed and you received your refund. You are not entitled to a refund until the IRS squares away the conflicting returns, which often takes more than six months.

While there may be only limited ways to prevent this tax fraud from affecting you, the surest method is to file as soon as possible, thus narrowing the window of opportunity during which you could be a victim of this tax fraud. Another method to prevent it from delaying your refund would be to ensure that you owe a small amount. While the prior year's taxes are going to have limited flexibility at this point, reducing your tax withholding with your employer now could be done now (and only changed once, bypassing the issues raised in the prior reason of delaying a change to your tax situation).

Aside from these three reasons, there are other benefits that may be more or less important to you as individuals. First, it is far less stressful. You have about 60 days to complete returns that are started before February 15th. If you often victimize yourself by procrastinating, then this benefit may be better than any of the three aforementioned reasons.

Furthermore, we are only a month into the new year. If your original New Year's Resolution has fallen through already (or if you never actually made one), then you could challenge yourself here and make filing your taxes in February your resolution. That way, you can enjoy the next 10 months knowing that you fulfilled your new year's resolution (or at least you won't be tormented beyond April about failing to achieve it anyway).

Where Is The Other Dollar?

I saw this fun little mind-teaser tonight online.

Not surprisingly, the confusion comes in the framing of the question itself, and the exact "sleight of hand" occurred in the equation. Adding $49 and $49 to equal $98 is the current sum of the outstanding debt. Subtracting (not adding) another $1 has the equalizing sum of $97.

Here is an answer key to illustrate it fully.

Life's Not Fair

"Quite often, it seems like we're not getting
anywhere when, in fact, we are."

It is a given that life is not fair. Many aspects of life are, in fact, often unfair. And then, consuming the world from only our own perspective, so many more injustices can be misidentified when they are simply the consequences of life being too fair against us, e.g. punishing us for our own mistakes, failures, or bad judgments.

I believe most of life's frustrations stem from misunderstanding, specifically that we do not fully understand the reasons contributing to present circumstances. The better we understand things, the more we accept its quirks (for better or worse). For many, the frustrations of dealing with the mysteries of finance is the quintessential injustice of this world. Although I would not classifying income disparity as a myth, the discussions surrounding it seem to be more frequent among the have-tos than the haves, as if it is the reason for their financial despair rather than any of their own choices.

I recently paid off my mortgage. The amount of future interest payments that I saved by paying it off earlier only amounted to about one additional payment because my mortgage was near the end of its term, and more of the payments are assessed to interest at the beginning of a loan than at the end. While some may cry foul, citing corporate greed or other standard excuses, there is a good reason for that perceived injustice. Interest income in a debt represents its risk. The risk of nonpayment is highest at the beginning of a loan and lowest at the end of its term. If debtors have paid a loan consistently for several years, the likelihood that they will default in later years is considerably lower.

Many time-tested, proven "rules" of personal finance are universal without any bias towards the rich over the poor. Budgeting is not needed by everyone, but it certainly is for others. Its necessity depends not based on assets alone, but mostly on money management skills. If you live like you're rich when you're not, then you are unlikely to ever be. Likewise, if you live like you're poor when you're not, then you are unlikely to ever be.

The most common guideline of budgeting is the "50/30/20 rule." Granted, this rule may not be as universally well-known as it should be. I read an article in another person's financial blog this year, and a reader effectively embarrassed himself in the comments section by saying that the article did not provide enough information, simply because the author assumed all her readers knew the 50/30/20 rule. In short, the rule stipulates that up to 50% of your income should be spent on your needs or other obligations, 30% can be spent on your wants, and at least 20% should be saved. Often, the phrase is printed as "the 50/20/30 rule" to reinforce the priority of each (hence the "pay yourself first" rule). The reader also sounded as though he needed more rules on how to manage money. There are reasons why the guidelines and rules of thumb are not exact. First, everybody's situation is different (which, ironically, was also one of the reader's complaints). Everybody gets 100% of their take-home pay, so it does not matter whether that amount is $10,000 or $1,000,000 annually, the 50/30/20 rule can be applied. Second, rules are restricting. The goal of money management is to enjoy more freedom, so being forced into a set of rules (unless you set them yourself) counteracts the end goal.

Our last paystubs of the year are the most useful tool to calculate these 50/30/20 amounts because they will show amounts for the entire year. To calculate the starting amounts for the purpose of budgeting, simply take the net income amount and add any pre- or post-tax deductions. Taxes and employer-paid benefits should not be included in the calculation. The deductions can be categorized in one of the three columns, typically as needs (e.g. medical plan) or as savings (e.g. 401k). Tithing can be subtracted from the starting amount or included in the 50% category as an obligation.

After the target amount of each category is calculated, it is a good time to gauge how close your spending has been to this ideal budget. The beginning of the year is a great time to make these determinations because year-end amounts are so readily available. Also, it may be psychologically easier to use an entire year to assess average spending habits because it levels out any excuses that can be used to over-explain deviations from the categories. While last year's spending will not be the same in the new year, this new year will have its own emergencies and other surprises to be (un)expected.

2017 Preview: Fear Today, Gone Tomorrow

Remember when we were younger and we had an idea of what the future held? Whether our personal lives or as a society as a whole, those ideas rarely came to fruition exactly as expected. The possibilities of the future are limitless. And for good reason, because the possibilities of the mind are limitless as well.

The past only has one course to the present though -- and that is through reality. All possibilities eventually give way to actual events. Out of every possibility of tomorrow, there is only ever one path that becomes our reality. Most of tomorrow's concerns will never come to pass, and a few of yesterday's concerns are tomorrow's laughs (the vast majority are forgotten forever after reality invalidates them).

There are two words that can turn any financial decision into a mistake: "What if."

In terms of returns, those two words have generated the most stellar performance and most disastrous afflictions imaginable. Because we can always imagine a better return than what we have experienced. If we can imagine things getting worse, then we can imagine things being worse than what has happened so far.

Looking back at the unexpectedly positive returns of 2016, it is easy to spot investments that could have netted far greater returns than those we gained. Lucky for me, I was invested in the highest returning stock of the year, aptly named Nvidia, but that does not mean that I reaped the highest rewards imaginable. FOMO is the fear of missing out, and in my case, I missed out on higher gains by not buying more shares when I purchased Nvidia.

With a new administration starting next month (for many, "President Trump" is still an unimaginable reality), there are a slew of unknowns, and at least half are navigated by fear. While the markets responded favorably to the election of Donald Trump last month, the continuation of this bull market is by no means a guarantee. Amid all the uncertainty, the most probable reality is that the more things change, the more they stay the same.

Personally, I still feel as though the 2008-09 crash is still too fresh for the major populous to have forgotten the lessons learned from it. As equities have climbed to new heights repeatedly in the past eight years, there is still a "once bitten, twice shy" mentality masking or negating rational exuberance. In part, the pains of that near-disaster are still memorable, but also, the pains of FOMO are still haunting many others.

At the time it happened, people did not have the free cash available (or the confidence) to benefit from the DJIA tumbling from 11,000 down to 6,500-level, but now many people have learned the benefit of keeping a large amount of cash on hand to benefit from depressed markets. Anytime the markets retreat, that cash on the sideline comes into play now. At this point, I cannot imagine that trend stopping in the coming year either.

While I find it hard to expect the continuation of market growth, I am left with my prediction for the new year as either a gain or less of less than 10%. For this coming year, I feel optimistic enough to predict a small gain. That said, I do not plan to make any changes to how I have been managing my portfolio.

After paying off my mortgage this week, I have afforded myself the possibility to max out both my Roth IRA and my Health Savings Account, which I resolve to do in 2017. Since the markets have been hitting new highs, I have been directing a larger portion of my incoming assets to cash. I expect the bond market will offer strong buying opportunities after a sharp decline as interest rates rise (not that the buying opportunities will be rewarded in 2017), but I do not expect many other great buying opportunities.

Thankfully, I am diversified enough that I should be able to benefit from any unexpected rise. And more importantly, I am disciplined enough that I am not unnerved by leaving money on the table or by missing out on better gains that others will enjoy. I have been on both sides of trades enough times that it does not matter. Plus the majority of my assets are indexed, and it is hard to complain about replicating the general market performance when gains have been this strong.

The Full Motley -- 4Q, 2016

Whataweek!!

Historic can describe the past week, but it would be a modest start because I am not sure if there is any hyperbole to articulate the surprise win of Donald Trump in the presidential elections. Thinking back to the original notion last year that he was running being met with dismissal and smirks, and a large portion of the population were probably still dismissing and smirking the idea up through Tuesday evening. Un-/Fortunately, his supporters and Clinton's dissenters knew that the election would not be decided by words or by actions, but strictly by voting. They showed up across the nation more consistently, and that is how elections are won.

Up early on Wednesday, November 9th, I happened to tweet "The American stock markets open in a few (minutes, so) let's see whether the financial media predictions that the market will crash if Trump wins are true!" As we know now, those predictions matched the political media predictions forecasting a Clinton win in terms of accuracy (or lack thereof). The DJIA went as high as 18,650 on Wednesday, before closing at 18,589, up 1.4%. Then, it closed at 18,808, up another 1.17% on Thursday, before setting a new all-time high closing earlier today at 18,847.

As for Thursday, November 10, which was the day that I processed my regular quarterly reallocation as usual, most of the money came out of Total International Stock Index (not surprisingly, as the international markets were rising over the past three months, although tempering lately) and almost all of it went into Total Bond Market Index (also not surprisingly since the index has been volatile since peaking in July).

Meanwhile, my individual brokerage account got an unexpected surprise of its own this week in the name of Nvidia, which had been sitting with a 300% return from where I bought it two years ago. After surpassing expectations by no small amount, the stock spiked 30% today! That increase pushed my return over 400% and the promise of the stock has an even higher upside. We will have to see where it goes from here. As the cliché goes, time will tell!

The Full Motley -- 3Q, 2016

It has been an active quarter since my last reallocation with the domestic stock markets setting all-time highs amid global jitters, which in the past couple weeks have subsided and seemingly reversed. In my last quarterly update, I compared a portfolio to a collective unit of investments working toward the same goal as opposed to the way people often view them, which is as a group of investments trying to outperform the rest of the group.

To my surprise, this reallocation shifted about 1.5% of my balance (most of the time, it is under 1% and typically way less), pulling from Vanguard Total Bond Market Index, Vanguard Explorer Fund and Vanguard PRIMECAP Fund, as listed from the most highest amount remove to the least (although, all three were almost the same amount). Those assets mostly were directed into Vanguard International Stock Index Fund, and the remainder split between Vanguard High-Yield Corporate Fund and Vanguard Total Stock Market Index Fund.

The fact that bonds performed so well in the past quarter caught me by surprise. I had known that small-caps were on a rise because I own a triple-leveraged small cap ETF in an unrelated brokerage account, which has had phenomenal performance in the past couple months. I was further surprised to see my actively managed large-cap fund outperform my total market index fund. While the index fund had gained assets, it lost pace to the higher performers.

The best part of this reallocation was that I moved a large portion into my international index fund on August 10, 2016, which is the date I have set for my reallocations, and in the following days, that sector has performed relatively strong against domestic stocks. It was not market timing in the sense that the shift was anticipated, but I unwittingly found the best moment to reallocate based on the disciple of rebalancing quarterly.