One of my favorite stories in tax law is how the 401(k) came to be. I realize the bar here is pretty low. I mean, what’s your favorite tax law story?
Well, the setting is the late 70’s. It’s the middle of the Carter administration. For years rich folk had been attempting to play a shell game with their earnings. This is an important thing to remember about the income tax code in the post WW2 period before the 80’s. Some folks (alright, lefties) like to point out that the top tax bracket used to be, like, 90%. What they fail to point out is that massive amounts of income could be sheltered from the income tax one way or another. One of the ways was for rich employees to have their company defer their compensation into the future, but also to invest that money on their behalf. That way the employee effectively gets control of the money, but doesn’t actually have to pay taxes on it because it’s not income yet. This was an ongoing debate between corporations and the IRS for 20 years or so. (Apparently this is covered in Hicks vs US but I can’t seem to track down the actual cases as it seems that people named Hicks sue the US all the friggin’ time).
So in 1978 the government tries to put a limit on this loophole once and for all, they introduce section 401(k) to the tax code to limit the amount of money that companies can defer on behalf of employees. The next few years are pretty quiet until a benefits consultant by the name of Ted Benna figured out that it could be used to create a retirement plan as a general benefit for employees. Johnson and Johnson then installed one of the first 401(k) plans. There were some changes to the law after congress saw (or was lobbied regarding) what was going on and promoted the status of the 401(k) from what was essentially a loophole to a cherished part of the tax code.
It’s hard to remember what the retirement situation was for people before the 401(k). When I ask people about it I usually hear idiotic things like, “everyone had a pension”. This is just incorrect, what it’s so disappointing to see blog posts like this one from slate: Even the People Who Pushed the 401(k) Think it’s Been a Huge Mistake. Go ahead, and read it.
For those of you that can’t be bothered the article basically reads as, the 401k is so bad even the people who suggested it wish it hadn’t happened, the 401k isn’t working for most people, suggested fixes for 401k’s won’t work, “life has become too expensive for people to save adequately”,
and, to top it all off, we should just increase social security payments.
To be fair this article was written Helaine Olen, who seems to be a relatively well-respected columnist who writes about, among other things, how the personal finance industry takes advantage of people. One hopes that this article doesn’t reflect the overall quality of her thinking, let’s deal with the article point by point.
The People Who Supported the 401(k) Now Oppose It
This simply isn’t true. You can certainly get most of them to say something negative about 401(k)’s. Benna was at one point quoted referring to the 401k system as a “monster” that “needs to be blown up”. It takes a little digging to discover that Benna actually thinks that 401(k)’s are superior to the system that they replaced. He was merely saying that most companies offer too many confusing options for their employees, and that educating employees on investing was probably causing more problems than it was fixing. Of course, reasonable people explaining the issues with 401(k)’s make for terrible headlines. The fact that most of those issues are mostly under your control makes for terrible headlines. “You should probably save money for retirement: make sure you buy and hold“. Does not generate many clicks. Some variant of: “The System Is Stacked Against You: Perfect Excuses for Any Situation!” tends to work better.
The 401(k) isn’t Working for Most People
This is the closest Helaine comes to the truth. It’s absolutely true that most people haven’t saved enough for retirement to continue to spend the same amount of money they spent before retirement. Unfortunately, that’s kind of a bonkers standard. The important question is, does the 401(k) work better than the system it replaced? If so, how do we continue improving?
Can we all go ahead and remember that the 70’s were not a magic time where there was no poverty, everyone had a pension, and money grew on trees? Back when “everyone” had a pension before the 401(k), “everyone” turns out to be: 38% of private sector workers. Yup, 62% of those workers weren’t covered by a pension.
Today 13% of workers have access to a private sector pension. So, when “everyone” lost those pensions, what we really mean is 25% of private-sector workers, who might have had pensions in the past, don’t.
Switching jobs under a pension scheme caused some issues. Occasionally companies offering the pensions go bankrupt. In principle if you have a pension from a company that went bankrupt you should be covered by the Pension Benefit Guarantee Corp, but this corporation only existed for 5 years before pensions peaked.
Many people don’t have access to a 401(k) at their work, but those that don’t can still save in an IRA like everyone else. Yes, the contribution limit is low (currently $5,500), but it’s not as though you literally have nothing (as you would have in the pre-401k and IRA days).
One last quibble, Helaine acts as though the stock market crash permanently damaged portfolios. If you just sat on a diversified mutual fund, like a target-date fund or almost any sort of index fund, you have recovered far more than you lost in 2008 at this point.
Yes, some people panicked and sold at the bottom. Some people kicked up their contributions at the bottom. Why do only the people who did stupid things with their money count? Retirees sometimes waste money gambling, that doesn’t create a retirement crisis. The fact that some people did stupid things with their money isn’t the fault of the 401(k).
Poverty rates among seniors are at all time lows, and that’s relative poverty rates, if you use measures of absolute poverty the picture is even better. The percentage of american’s covered by retirement plans of some sort are at all time highs. The percentage of men over the age of 65 working sits at 23% compared to 35% in the 70’s. This despite the fact that people are now healthier and more capable of work.
Suggested Fixes for 401(k)’s Won’t Work
Economist Richard Thaler suggests some fixes:
- Company match
- Low fee default
- Offer to employees without plans
Unfortunately, it’s more complicated than that. Many companies already do auto-enroll their workers, but as of now employers aren’t required to even offer a 401(k) and they’re certainly not required to offer a match—and if they do match, they can stop at any point. Given the political climate in Washington, it’s hard to believe any of that will change soon.
Yes, many companies already do auto-enroll their workers, but Thaler doesn’t suggest this thinking that no one has ever tried that. It’s precisely because auto-enrolling workers has shown to be effective, that he suggests it. The whole second part of her point is that employers aren’t required to do any of these things, therefore they will never happen, because it’s not politically feasible. That’s just completely bonkers, especially considering her alternative:
Just Increase Social Security Payments
Yeah, the lady who two paragraphs earlier had just dismissed 401(k) plans to have a low fee default as politically untenable is suggesting that raising social security payments is the real solution to the retirement crisis.
Let me break down precisely what’s wrong with this. Your social security contributions go into the social security trust fund. This fund is invested in government bonds which on average have returned 1.6% real over the past 100 years. Over the last 100 years the stock market has returned about 7% real. If you plan on funding retirements from contributions people will have to “save” (be taxed) much more through social security than they ever would with a 401(k) to maintain the same standard of living. The fact that money in a 401(k) is invested productively as opposed to government bonds is just too great a gap. If you don’t believe me, do the math yourself. How much do you need to be taxed for a 1.6% real return to pay for a 30 year retirement at the same standard of living you had pre-retirement. (The fun part is that you don’t need any extra information to solve this particular puzzle).
The upshot is that the author would prefer to supply seniors with money through an expansive welfare state disguised as a pension program, therefore any progress 401(k)’s have made when compared to the pension world of the past is simply ignored. Any reasonable improvements to the current system are dismissed out of hand.
Astute readers will note that I skipped her other point, “life has become too expensive for people to save adequately”. That’s a whole ‘nother blog post.
Trends in Forex Trading are divided into three major categories. They can be either long-term trends, intermediate trends or short-term trends. Understanding how to use these different types of trends to your benefit will make them your friend. Being able to identify a trend and which category it belongs to will serve you well in your Forex Trading.
The Forex market is driven by trends in macroeconomics, and these often take years to establish. The best use of these trends is to help you make long term projections. Traders often check the strength of a trend using a combination of three moving averages. A moving average is when the total of the trades is divided by the number of trades and this gives you an average price for the trades.
I don’t know if you guys have noticed, but this blog is named Thousandaire. Why is it named Thousandaire you might ask? Because I’m a jackass that has to tell world his net worth, and there isn’t that much to speak of right now?
Nope. Well, sure it’s not like I’m a millionaire, I do fit into the thousandaire category, but that’s not what this blogs about. This blog was started to take you from no net worth, or in some cases less than no net worth, to that vaunted height of Thousandairedom.
So you might wonder to yourself, “self, what’s the best way to save $1,000?” There are a number of ways to answer that question, and we’ve gone over it a number of times on this blog. The only way to save $1,000 is to spend $1,000 less than you earn. Money coming in minus money going out has to be $1,000, only then will you own $1,000.
Alright, but assuming you can save $1,000, what’s the best way to save $1,000? The correct answer to that is in an individual development account.
What is an Individual Development Account
Alright, first off you need to not make very much money. Those of you making $100,000 a year should click right out of here and try to determine on your own time why you can’t save $1,000. I’m sure it’s probably some politician’s fault.
Are they gone? Maybe, it’s just folks who actually have to struggle to make ends meet reading now. So, what is an individual development account? Well, if you make less than 200% of the poverty line (in most areas) or under 80% of the median area income (in others) you can make monthly contributions to a special savings account. The contributions to this special savings account are usually matched. Yes, in the case of the Individual Development Account program closest to me (it goes by the PIE program ’round these parts), the match is 4:1. That means as you save up $1,000 the program will also put $4,000 in the account.
I know of literally no other investment this good.
This is it.
This is the best investment.
What’s the Catch?
Good question. There are a couple big an important catches.
- The money must be spent on some individual development goal, like post-secondary education, buying a house, or starting a business.
- You often have to attend some personal finance classes. The important part about this caveat is that the personal finance classes are free.
So, you have to save money to invest in your future, can’t just spend it on consumer crap. Surprise, surprise.
Where are Individual Development Accounts Available?
Basically if you live in a US State that isn’t Wyoming you’ve got a good shot. You can find a complete list at CFED.org. I’ve known some people who have gone through the PIE program in Colorado, where they were matched 4:1 to get $4,000. There are so few obvious wins when it comes to personal finance and investing, this is an obvious win. So if you want to start a business, if you want to go to college, if you want to own a home, look into an IDA ASAP, and when you’re done at the very least you’ll be a Thousandaire.
How’s your financial IQ?
Chances are, it could be better. Most of us can write and speak our native languages passably well (at least, on good days). Mastering the ins and outs of personal finance is another matter entirely. According to Gallup, a respected polling organization, just 32% of Americans create household budgets. Just 30% have long-term financial plans. And far fewer stick to either.
Though better educated, higher-income households are more likely to make budgets and financial plans, Americans at every level of the totem pole struggle with basic financial concepts. In other words, their financial literacy is lacking.
Naturally, this is upsetting to financial professionals for whom managing money is second nature.
While less than a year is far too little time to judge the success of an investing strategy, I like to look in on my investments at least on an annual basis. This also presents a good time to check in on the stocks that we’ve profiled on Thousandaire. All of these are compared to the Russel 2000, an index of the largest 2000 publicly traded companies, the more common comparison is the S&P 500 which only includes the 500 largest companies. Small stocks have done better than large ones over the last 6 months so this represents a higher bar than the S&P 500, but it is hopefully a more accurate comparison because many of the profiled stocks are very small indeed. The stocks I’ve looked at are usually microcap or nanocap stocks and are much riskier than other giant stocks like GE.
SYTE – Sitestar Corporation (+47%; Relative to Russel 2000: +27%)
When I first profiled Sitestar, a dying dial-up internet company which became a real-estate play, on this site it was trading for 5.86 cents per share, the definition of a penny stock. I had open limit orders at levels between 4.5 cents and 5 cents per share, alas my limit orders never got hit, as the stock quickly went to roughly 9 cents per share and stayed around there for the last 6 months. My hubris here was hoping that I’d be able to obtain shares at a price obviously below the true value of the business (the cost of its real-estate). Hopefully some of you were able to get an order filled nearer the fair value of the business rather than aiming for the minimum value. Sitestar currently trades at 8.4 cents per share, and is extremely illiquid. Considering that insiders just sold themselves 80 million shares (doubling the number of shares outstanding). This concerns me, insiders just bought half the company at half price. This money was used to invest in an asset management fund. Interestingly this fund will be run by the fellow who writes over at otcadventures.com. It isn’t clear what the fee structure with this new hedge fund will be. At this point, it’s quite difficult to justify 8.6 cents per share for roughly a 5 cent per share investment in a fancy new hedge fund. If you currently own Sitestar, I’d probably hold on for now. I’ve found that avoiding activity mostly means avoiding selling, so unless I had good reason to believe that Sitestar was going to be worth zero I’d sit on it. That being said, I currently have no plan on buying until or unless I can get in below book value.
ADVC – Advant-e Corporation (+23%; Relative to Russel 2000: +8%)
When I wrote up Advant-e Corporation, a provider of electronic data interchange systems to grocery stores and healthcare related companies, it was trading for $4 per share. The company has not yet released any new financial statements, however the share price has climbed to $4.90. While this looks like a significant increase, the stock is quite illiquid, and can often change by as much as 25% in a day. In my estimate the company is probably worth $5.40 per share, but there are very significant risks because the company is tiny, illiquid, and does not report to the SEC. They will probably announce a 0.20 cent per share dividend for 2017 somewhere between January and March of next year.
FDVF – Fortune Industries (+102%; Relative to Russel 2000: +102%)
Fortune Industries provides subcontracted HR services to small and medium businesses. There was pretty good news here for holders. The company was bought out for $0.586 per share in August. If you were able to pick up shares at 29 cents per share the article ran you came out significantly ahead. If you bought shares before management snatched most of the company you didn’t do quite as well. Unfortunately it’s no longer possible to invest in this one. This is another one that my limit orders turned out to be too low to pick up, oh well. (The relative number matches the absolute number because the russel was basically flat over the holding period, most of the run in the Russel 2000 has been relatively recent).
RELL – Richardson Electronics (+6%; Relative to Russel 2000: -6%)
This was one of the largest companies that I’ve profiled on Thousandaire. The results have not been quite as good as some of the smaller companies, but the thesis was quite straightforward. The company is worth $8.50 per share just on the basis of its cash, inventory and receivables. When I first profiled it the company was trading for $5.97, and today it trades for $6.21 (and you got to earn $0.12 worth of dividends along the way). In my view Richardson Electronics is still undervalued, and it is still slowly liquidating with a $0.06 per share quarterly dividend.
XIV – VelocityShares daily inverse VIX (+31%)
This security isn’t a stock, and it is probably best explained by reading my original article here: XIV. Basically, when the market isn’t volatile XIV gains value. When the market goes up XIV gains value. When the market goes down or becomes more volatile the XIV goes down a lot. In principle the XIV should increase in value over time. I suspect it will increase in value faster than the broader market on average, unfortunately it will probably lose 95% of its value at some point in the future. I have 1% of my portfolio in XIV and I wouldn’t buy more than that. If it gets above 5% of my portfolio I break my rule to never sell and sell some. If you picked it up the day the article ran at $36.64 you are up somewhat. (There is no relative comparison because it would disingenuous, implying that the risk in XIV is similar to the Russel 2000, that isn’t true in any of these cases, but it is very not true with XIV, XIV is much more volatile.)
OUTR – Outerwall (+1.5%; Relative to Russel 2000: +1%)
If you include the dividend between when the article on Outerwall ran and when the buyout was successfully completed you got a 1.5% gain. This doesn’t sound like much but it helps that it was over such a short time period, as that makes your annualized return (the return you would earn if you reinvested your proceeds in an identical deal all year) much higher. I call this one a win.
GTIM – Good Times Restaurants (-1.5%; Relative to Russel 2000: +0.9%)
I profiled Good Times Restaurants earlier this month. My somewhat tepid conclusion is that it might be a little undervalued. I’m long Good Times (that means I profit if the stock goes up). I tried Bad Daddy’s Burger Bar the other day and found everything to be more or less pleasant. The folks I’ve talked to either like it or don’t really care one way or another. Not exactly a full throated endorsement, but at this point I’m really only trying to make sure that it isn’t terrible given the operating results of the company. If you purchased when the article on Good Times was originally released you’re down a nickle (the current price of $3.05 versus the previous price of $3.10). In my view it still probably represents a good deal. (The movement of this one has largely matched the decline in the Russel 2000).
Overall Investment Performance
I missed a few good deals this year by being conservative with my limit orders, but what can you do. If you had invested in each of these companies upon the publication of the article you would have made an average of 30%. If someone tells you something like that your bullshit shields should go up immediately. This is atypical of my investment performance and is probably due to luck. If you invested only in companies that I invested in (as stated in my disclosures at the bottom of each article) you would have averaged only a 12% gain. What is more important as a judge is the relative performance of these ideas. I compare with the Russel 2000 because it includes small stocks as well as large and is, hopefully, more representative of the risk of these ideas than the S&P 500. If you invested in each of the ideas your average return was 22 percentage points higher than the Russel 2000. If you invested only in the ideas that I was invested in your average return was 1 percentage point higher than the Russel 2000. This is easily within statistical variance, and is clearly does not imply any statistically significant stockpicking skill. More time is needed to identify any outperformance of the market.
I am not an investment advisor. I do not give investment advice, everyones investment situation is different. I am long (meaning that I profit when the stock goes up) ADVC, RELL, XIV, and GTIM. I wrote this article myself, and it expresses my own opinions. This is not a investment recommendation. I am not receiving compensation for it (other than from the owner of the blog District Media Corp). I have no business relationship with any company whose stock is mentioned in this article. Always do your own research before making any trade, buying or selling any stock mentioned. (By this I mean do a ton of your own research, never buy anything you don’t understand.)
Making money though blogging doesn’t have to be a pipe dream.
In fact, there’s arguably no better time to hop on the affiliate marketing bandwagon given the wealth of free resources out there for site-builders to get started. From creating killer sales funnels to squeeze pages that make your offers irresistible, the sky’s the limit for skilled affiliates who understand what makes their traffic tick.
However, there are many moving pieces that will determine whether or not your blog will actually generate big bucks. For example, consider the following questions for starters.