Category Archives: Investing

How zero-commission securities brokers get paid

Ever wonder how that can work? How can TD Outhouse, or Squab– or–afford to stay in business if they don’t charge you to trade stocks?

Okay, you know what happens with NTF mutual funds: They get kickbacks. Fine. But where’s the money come from on market-day securities trades?

It comes from you. You just don’t realize it.

The foregoing link is to a Mother Jones article that I found very informative. If you elect not to read the article, I’ll summarize it. The brokerage gets a fee from a market maker (a firm that is always buying and selling the actual securities), who gets a better deal than you do. The fee is called PFOF, or payment for order flow. The difference between what you realize and what the market maker realizes is the market maker’s profit.

If you want to watch your broker stammer and dissemble, ask them how much PFOF they get.

Does that mean that your brokerage actually does not give you the best execution on your trades? Sure does! It also means, as the article makes very clear, that the market makers want frequent trades. People who buy and hold index ETFs are their nightmare. They are making billions off the eager young investors who change their portfolios even more often than they change cellphones or social media platforms.

Is that so bad, though? Someone sells someone else the right to conduct your transaction at a slightly better price than you are going to receive. You are, in theory, your broker’s client. In practice, you are the merchandise. And the more you trade, the more often you get rooked.

It would not be bad if they put it out into the open. They don’t. Wait, if it’s legit and reasonable, why not broadcast it loud and proud? They can’t have this both ways. Either it’s sleazeball, and they would rather evade the subject, or it’s honest and decent. If it were, they’d have commercials bragging about it.

Ask yourself why they don’t.

They even have a term for this: the “dumb money” trades. Yes. The people who buy and sell stocks frequently? They tend to lose–not just in the slimy behind-the-scenes way, but because the real money is made by people who know more about it. If you’re a loser, someone else won. Of course will do anything it can to appeal to younger, phone-based investors with amounts of money in inverse proportion to their eagerness to risk them. They’re the easiest to fuck over.

When you see me use profanity here, it is rarely just a frustrated voice. The normal reason is to make a point. These people are fucking you, and the more business you do with them, the more they fuck you. The people you trust are whoring your trades to e-leeches. None of it is in your best interests.

I want to win. My method is to buy and hold index ETFs. I research the area of the market I want to be in, compare the available index ETFs, and accumulate shares over time. I keep doing that.

It’s dull.

It gives me no [x]-baggers to brag about.

It wins.

If you want thrills while losing money, support your local reservation casino. Then when you take a bath, at least it’ll work toward a good cause.

Will this harm eSnapStoxx or eWealthFreedumb or whatever the fad app-based brokerage is this month? Gods, I hope so. They need to be harmed. But even if you aren’t feeling vindictive and punitive, you should at least be feeling avarice in service of your best interests. Whatever makes you more money consistent with your risk objectives and temperament, that’s where you should be.

Your future isn’t a charity for the mega-rich.


The investing fast takes I wish I had absorbed when I was much younger

When not editing people’s manuscripts, one of my interests/occupations is investing. In thirty years, I’ve paid lots of investing tuition, which means I made stupid mistakes that cost me money. This has taught me some things, ones I can distill into the modern attention span, so here they are.

  • Stock and index raw numbers do not matter. Only percentage change matters. If you see a headline like DOW JUMPS 100, and you care, you are incorrect.
  • The Dow sucks (and not just because it’s the market’s FUD dispenser). When it’s done, it sucks some more.
  • The money media spend long hours trying to scare you into reading their media. None ever get fired for being wrong. So we keep reading them…why?
  • All fees and taxes matter. Never ignore any fee or tax; that’s the path to self-delusion.
  • Any investment setup that looks like a cutesy little dance, such as little gimmicky stuff that gives you free money to invest, is probably an e-monte game designed to tap into your “omg i could get rich yes plz” wishes. Read the terms, especially those about how you get out when you want to. Bears repeating: Watch the fees. Yes, even those little ones. Yes, those too. And yes, that one. Do you sense a trend? Are they targeting those at younger and less experienced investors? Well, what do you think? Do you suppose that it’s aimed at people who know much about what they are doing? If it’s that great, wouldn’t affluent older people be doing it?
  • Wall Street gets to cheat; you don’t. Love that or hate it, but it is what you will live with, and no one with the power to change it will ever do so.
  • Anyone who uses the word “bagger,” without “grocery” or “vance,” start ignoring. Just put an R after the B and all will be clear.
  • When you are young, time is your friend. Most young people will reject this friendship. I get it; so did I. I was a young idiot. If it were easier to accept that friendship, more young people would do it.
  • Even your brokerage will give Big Money better deals than it will to you. They will only be surprised if you act surprised (or outraged) by it, as if all people were created equal or something. In investing, you would be a hopeless naïf to believe this, and they would treat you with the gentle restraint and pity typically shown toward volatile persons missing a few marbles.
  • The three main ways to make money investing are to: sell it for a profit, get it to pay you, and/or save on your taxes. Growth, income, tax advantages. That’s them.
  • You really can’t know how you’ll react to big gains and big losses until you experience them. What you say about them now is irrelevant. What you do when the crowd’s going wild, or the building is on fire, is your investing identity.
  • Most non-index mutual funds do not beat their target indices, raising the question of why pay them more in order to do worse.
  • Conventional open-end mutual funds have some inherent flaws that harm performance.
  • Understand every investment you buy. It is very stupid to buy something and then go find out what you just got.
  • The biggest enemy of your success is your own emotions, both greed and fear.
  • If you just read the above and though, “Aha! I’m a man, and the women are more emotional, so I have the advantage!”, your furry ass is showing. A book called Warren Buffett Invests Like a Girl makes a convincing case that women are likely to be better investors, more prone to do their research homework. I wouldn’t take any generalization too far, but read that book before you start patting your XY chromosomes on the back.
  • If that doesn’t convince you, consider this. With the exception of Berkshire, the only separate issue stocks that have ever succeeded for me were the ones my wife picked. She knows very little about investing. She rarely misses. I don’t even buy them any more, except those she directs me to buy. If you want to know her secret, it’s not very complicated; she buys stock of companies she likes and uses.
  • If you want to punish an evil company, don’t boycott their stock.  That’s mindless, and doesn’t hurt them. Want to mess them up? Buy a bunch, and then vote against management every time in shareholder elections, especially for the loopy proposals management recommends you vote down. Donate the dividends to anti-company causes if you like. But don’t confuse activism with investing, because they do not have the same goals.
  • If your job has a 401k, and you aren’t putting in at least up to the employer’s match, you are financially self-harming. They’re offering you free money and you are refusing it.
  • As you change jobs, roll your old 401ks into a rollover IRA, then manage them yourself. You will have better and more options.
  • Read good books about investing. Ask successful investors which are good books, and why. Don’t read stupid books.
  • If you’re tempted by an investment newsletter, start by rejecting any that arrive as junk mail.
  • If you just want the market return and can be happy with it, buy and hold index ETFs. If you did that consistently, you’d probably end up with a pile without having to do any work.
  • Every minute you spend watching Jim Cramer, you’ll get a little dumber. About 160 hours might be a functional financial lobotomy.
  • “It’s different this time” are investing’s famous last words.

It’s up to you. Good hunting.

2021 Prediction #3: Get ready for more GameStops as hedge funds are no longer the only bullies in town — I, Cringely

JK here: this I found to be a useful take on the GameStop/Reddit situation we had recently. It might not have much to do with editing services, but that’s okay with me sometimes.

Today is my birthday. Thirty-five years ago today I was drinking coffee in my Palo Alto kitchen when the Space Shuttle…

2021 Prediction #3: Get ready for more GameStops as hedge funds are no longer the only bullies in town — I, Cringely

Doing what we are told–or not

While this won’t see publication until mid-December 2020, and I admit it doesn’t have much to do with editing services, I wonder if there are others out there who think as I do. I write on November 30, at the height of what we are told is Cyber Monday.

For the US readership, and those of any other country with a lot of Christmas gift-giving, did you buy anything online today? I did not. Were you tempted? But how could I resist the bargains, bargains, bargains? I was not even tempted.

I’d be interested in knowing if anyone else is as cynical about commerce. My starting presumption was/is that the designation of this as A Very Special Commercial Day was an attempt to manipulate the herd into overspending. The logic goes: “Better hurry, or other people will get all our Very Great Deals.” I assume it’s all smoke and mirrors; that they just raised prices and then marked them down, like our grocery stores do; that it’s a con job.

Black Friday, as it has been designated in order to make it Another Very Special Commercial Day, held even less attraction for me–and had done so in the many years before the pandemic turned large gatherings into superspreader events full of maskholes. “But you won’t get all the good deals!” Oh, I bet most of them aren’t so good. I don’t resent the marketing industry for presuming that the public is stupid, because for the most part the industry is correct when the public is taken as a mass. I probably should, but I do not. After cracking a couple of Black Fridays Matter jokes with my wife–and reflecting on the unfortunate impact of language choices on perceptions–I stayed home and watched college football.

The point, I guess, is that the Designation of the Very Special Commercial Days by itself was enough to turn me off. It triggered automatic assumptions that following a large crowd would lead to me spending money I should not, spending more money than necessary for anything I might want, and jostling around arterial streets and stores or the online ordering platforms.

It was that way with Amazon Prime as well. Remember when that came out? To me, it seemed obvious that Amazon would not do this unless they expected it would draw people to spend money with them more often than they should, just to “take advantage.” I took one look and said: “What is to your advantage will occur at my expense. No thanks.” Am I the only person who sees it this way? I just saw an American corporation pitching a gimmick, assumed it was screwery, and moved along.

The same applies to investing. On any given day, one can read a ton of articles about Some Intensely Important Indicator having made a critical shift: a Death Cross, an Inverted Yield Curve, a 50-Day Moving Average, or some other bit of technical talk. About half the time it warns us that we should sell, sell, sell, in order to avoid losing money. The other half is spent telling us now is the time to buy, buy, buy or miss the boat. Each side is right about 50% of the time, which poses a greater problem than people generally realize because in order to achieve an outperforming capital gain, one generally has to be right twice (timing of buying and selling). No wonder people just buy index ETFs.

Speaking of which, if you want a very effective strategy for cutting out all that racket and ignoring the Cassandras and Candides of our precious financial media, seriously consider subscribing to Jason Kelly’s financial newsletter. It is not cheap, but if you are managing five figures or more of assets, you should earn enough on dividends alone to wipe out the cost. It is entertaining, consistent, and often supplemented with midweek issues that comment on major movements. I can also verify from our business dealings and contacts that Jason maintains the highest possible standards of integrity and value. Time and again I have seen him lean to the side of making sure people are fully informed, well updated, and well supported. That’s not true of every financial newsletter out there, something I paid a lot of tuition (in the form of dumb investing decisions) to learn. Jason takes care of his people.

Unlike most of the money wonks on MarketWatch, Jason can write entertaining English with a dry wit. I go back to the time of the Fukushima nuclear disaster, and Jason (who lives in Japan), decided to seek sock donations to give to refugees. There’s always some negatory type who could find fault with free beer or a form of cheesecake that causes weight loss, and sure enough, one of them wrote in to question Jason’s qualifications to operate this process. With elaborate tact and patience, Jason reviewed what was required: use platform to request socks from community, assemble socks once arrived, load in van, take to refugee centers. Approximate quote: ‘Do I think I’m qualified to put socks in a van and give them to people? Yes, I think I’m qualified to do that.’ One of the highlights of my week is watching him point out what’s wrong with what the financial media are currently saying.

Of course, Jason’s guidance doesn’t tell people to do what most of the media are stirring them to do. That might be the greatest part of its early appeal to me. His method radiates indifference toward mass manipulation efforts.

Good holidays to all you who are observing holidays. Good fun to those who are just having fun. And great fun to all my fellow nonconformists; you aren’t the only ones.

lighting a financial candle rather than cursing the financial darkness

Now and then, I have to give credit to a complete idiot.

Dirty laundry: I sometimes have trouble coming up with good topics to maintain a twice-monthly blog posting schedule. In this case, a friend’s friend said something so blithering that I had to contradict. Not harshly, of course. You never know when it’s someone’s wonderful Aunt Edna who, while dumber than a bag of wet nickels, has devoted her whole life to helping her nephew and about two hundred other kids from broken homes. I’d rather not find out the hard way. But the facts, at least, needed a saying.

This brought me to the realization that I have a substantial financial reading list, if I would but share it, to help people self-educate. Self-education is good. Why take my word for this stuff? Better to read people who know more about it than I do. And another of my beliefs is the old saying about lighting candles and cursing darkness. If I don’t feel good, I try to make myself do things that will make me feel more positive.

Before I go into the reading list, I ought to disclose my basic investing outlook and methods. I am not a fan of corporate America. I begin with the presumption that it is impossible to find a publicly traded American company not operated by criminals, at least as I define the term. The harder a company puts on the PR to tell me how wonderful it is, the more I assume the reality is opposite.

I am more an income investor than a growth investor. I don’t like CEO promises and predictions; my basic outlook is “Fuck you; pay up.” I like income because they can’t take it back. I own very few separate issue stocks. I go mostly for index ETFs (exchange-traded funds) and closed-end bond funds (CEFs). I can wring 2-5% payouts from the bond index ETFs, 12-15% from the CEFs (with capital loss potential), and results from the stock ETFs vary but are more volatile than most of the market (this works to my advantage). My primary objective, naturally, is to make money. The secondary objective, which leads to the primary but has to come first, is to keep emotion out of my investing.

It follows, therefore, that I don’t much believe in ethical investing. If you want to get all ethical, buy Satan Inc.’s stock (DEVL), donate the dividends to their enemies, and vote against all management’s recommendations. That is the action on your part that they fear most–but don’t confuse it with investing for gain.

I do believe that financial innumeracy is one of the leading causes of youth poverty in this country. The schools and parents didn’t teach them. The young made the naive assumption that opportunities would be the same for them as they were for their parents, a myth their parents knew was bullshit, but did not puncture. The parents should have.

With that, I offer you a list of excellent reads about money management, investing behaviors, strategies, and suchlike. I hope it will help you beat the rigged game that is our market, even if your method doesn’t even involve buying any stocks.

  • Financially Stupid People Are Everywhere; Don’t Be One of Them, by Jason Kelly. You’ll be seeing his name a couple more times, for good reason: Jason combines a very readable style with an iconoclastic, no-bullshit approach. We’re friends, but I was a fan of his writing years before we became personally acquainted. If adulting classes existed, this could be the textbook. If you’re in your twenties and you have debt and/or no savings, start here. It’s the icewater bath you need.
  • Warren Buffett Invests Like a Girl, and Why You Should, Too, by Louann Lofton. It turns out that women have investing tendencies that work to their advantage, and Lofton has taken time to observe and quantify these. It’s an excellent read, and likely to promote confidence on the part of women navigating what has historically been a male-dominated industry. Bottom line: if you’re beating their numbers, it doesn’t matter whether you do it through newsletter picks, tarot, Sacred Vagina Meditations, research, or free association. It means you’re better.
  • The Motley Fool Investment Guide, by David & Tom Gardner. While I’m out of the business of researching and picking separate issue securities (that would include common stocks), others might not be. Either way, this is a fun read full of helpful education.
  • Priceless: The Myth of Fair Value (and How to Take Advantage of It), by William Poundstone. Poundstone is the guy you have never read that you should be reading: author of the Secrets books, who then turned to studies of human psychology. Distilled essence: marketers use our instincts to lead us to decisions that work to their advantage and against ours. Understanding this is worth your while.
  • The 3% Signal: The Investing Technique that will Change Your Life, by Jason Kelly. Jason publishes The Kelly Letter, an outstanding investment newsletter. He used to pick stocks. He stopped, and his life got better. This book tells what he does now, and how anyone with an investment account can do the same. Five stars without a moment’s hesitation.
  • Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, by Jason Zweig. Another good entry in the field of investing and money psychology. I don’t believe you can go too far wrong applying critical thinking to an understanding of how our minds work.
  • The Neatest Little Guide to Stock Market Investing, by Jason Kelly. There is some overlap here between more recent versions of this book and The 3% Signal. That said, if you want to go stock hunting, I’d take this book in addition to the Gardners’ treatise.

Because I feel in a sharing mode, I’m going to make a number of statements that I wish more people could absorb:

  • Any stock index report that goes by points rather than percentage change just makes you dumber.
  • Any person reporting a stock index result that reports points rather than percentage is either too uneducated to know how dumb this is, or is deliberately using the big number to draw attention.
  • Conventional open-end mutual funds are usually a bad deal. They’re great investments for 1975, if you’re currently living then.
  • About 90-95% of investors should just buy and accumulate index ETFs (exchange-traded funds).
  • Financial media suck. You get stupider every time you watch or read them.
  • Bonds don’t automatically mean you get your money back. Bond funds especially don’t mean this.
  • If investing a very small amount, you can afford to shoot high. Only when you pile up a big heap o’ money do you have to think about holding onto it.
  • Emotion is your investing enemy.
  • You don’t know who you are as an investor until you see a crash. Who you are is what you do during and after that crash. A fern could make money in a bull market.
  • The Dow is worse than useless; it is distortive. Any time someone cites it as meaningful, my opinion of that person’s investing savvy drops.
  • It follows, from the above and previous commentary, that any time anyone says “Dow drops 300 [or whatever number],” without including the percentage change, I conclude that the individual doesn’t understand the markets at all. I may heart them big time, but they said a dumb thing.
  • Most people throw away about half their lifetime returns just by playing with themselves all through their twenties, only getting serious come their thirties.
  • If you buy an investment you don’t understand, you do a stupid thing.
  • Any time someone starts by saying “If you had bought XX back in X month, year Y,” this person is sharing irrelevancy. Why? Because you didn’t. You wouldn’t. Next time, you won’t either. If only that defensive end had gotten to the passer on that third down play in the first quarter, the whole game would have been different–but he did not.
  • Always buy the stocks my wife says to buy. Unless, of course, I helped pick them, in which case they’ll tank.
  • The choice of a traditional vs. Roth IRA comes down to the tax benefit. If you don’t make enough money to need the writeoff, the Roth is probably more advantageous. However, the Roth means trusting the government to honor a promise years in the future. I never have. Your call.
  • Rich traders get to cheat in ways you and I do not.
  • For IPOs, if they’re worth getting into, you probably aren’t getting in unless you’re with a big full-commission brokerage. That’s one advantage for full-commission brokers, set against an ocean of disadvantages.

Closed-end funds in the simplest possible terms

Side benefits of having a blog: when you get tired of trying to explain a concept, you can use the platform to explain it in the simplest possible terms.

Let me also begin with a promise. As this essay gets more involved, I will let you know at those points, so you can say “nah, we done now” rather than go further. It looks long. It need not be.

Because we live in dumbth nation, I must include the disclaimer that nothing herein should be construed as investment advice; that all investments should be evaluated through one’s own research; and that the aim of this article is to promote the understanding of how investments work, not to encourage investment in any specific security or security type. And that, therefore, the author assumes no liability or responsibility for nincompoopery in anyone’s investing.

God, how I hate that. One day tire irons will come with warnings saying “DO NOT EAT.”

A substantial part of my investing energies goes into closed-end funds, which many people seem not to know exist. I try to explain them, and how they differ from conventional open-end mutual funds, and eyes go vacant.

All right. This is too simple to be eye-glazing.

Cora, Eve, and Clark offer to invest your money. Each will give you his or her own branded poker chips representing shares. How much each share (white chip) costs depends on the day. Hear out their plans.

If you go with Cora, she accepts your money, manufactures the proper amount of chips, and issues them to you through your broker. Some may be fractional; in fact it’s rare for anyone to hit a perfectly round number. Cora will invest your money, along with that of others, according to guidelines she publishes. Cora’s value lies in her perceived market savvy and expertise. She has a prestigious degree, lots of whizbang charts, and other marketing hoo-hah to convince you to buy and hold onto her chips.

The price of a Cora chip is based on the total value of her investments divided by the number of her chips that exist, so that changes every day and is determined about two hours after the markets close. Sometimes the government makes Cora pay you dividends or capital gains, so they can get tax from you sooner. To fire Cora, before the trading day is over you tell your brokerage to sell however much $ worth of her chips. This occurs at the price that is determined after market close. Cora gets your chips back and melts them down, then pays you based on that day’s price. If you don’t place your order with the brokerage before market close, your order happens tomorrow. Note that you lack firm control over the price you pay. Market went nuts in last five minutes? Could be good for you. Could be bad.


Eve has a different plan. She is like Cora in that she invests other people’s money, and she does publish a base chip price determined in the same way Cora does, but you don’t do business directly with Eve nor at that base price. You pay a brokerage to find someone to sell you his or her Eve chips. The amount of Eve chips stays the same, unless Eve makes one of her rare new chip productions.

Eve’s guidelines say that she has to mimic a given stock or bond index to the best of her ability. Therefore, the market price never gets far from the base price Eve calculates (referred to as an NAV). Eve pays regular dividends, and you have to pay tax on them. Unlike Cora, though, who coughs up the tax bomb as a Christmas present, Eve pays them regularly throughout the year with little suspense. Because Eve gets a small fee for her work, she never quite beats the index she tries to mimic. But she comes damn close without fail and, about 60-70% of the time, Eve’s results pummel Cora’s.

Cora gets very good at filling up her regular chipowner reports with great excuses for why she again underperformed her target index. Oh, and Cora’s annual fees are ten times Eve’s. She hopes chipholders won’t stop to think about that. She also hopes the people holding her chips won’t stop to ask why, during a year in which she actually lost them money, they still had to pay a bunch of tax on gains. If bugged about it, she blames the government and the law.


Clark’s program resembles Eve’s. When he started up, like Eve did, he made a bunch of chips and sold them into the market through an investment banker; thereafter he doesn’t create or destroy or transact them. Like Eve’s, you buy Clark’s chips from someone who wants to unload theirs. Because Clark is not trying to mimic an index, his chips’ market price can swing well above or below the base price he calculates. His job is as hard as Cora’s. He can screw up.

Clark only invests in bonds with moby payouts, and he buys hundreds of them. High-risk bond issuers have to offer high interest to attract buyers. Because some are at risk of not being repaid, Clark spreads the money out very thinly. He pays chip owners high yields, often 10-12% per year in monthly installments. Sometimes the money comes out of interest on the bonds, sometimes out of profits from selling bonds, and at times out of uninvested cash. Clark’s chip owners will have a shit fit if he cuts the payout, so he does his best to avoid that. However, Clark is human, and if he screws the pooch, the payout could go down. If he does that, his base value might go down, and his chips will probably trade for a lot lower price than his base value.


Cora manages a conventional open-end stock mutual fund. Eve manages an exchange-traded stock index mutual fund. Clark manages a closed-end bond mutual fund.

If you want to, keep reading for more details. If you just wanted the simplest possible explanation that I promised you, I hope I succeeded, and thanks for giving me a chance to explain it.


It’s important to know what the terms mean. Without definitions, one wanders blindfolded through an explanation.

A security is a (nowadays mostly virtual) piece of paper that says you own something. In conventional investing, one buys shares of securities in pursuit of growth (one hopes to sell them later at a profit) and/or income (one wants to be paid just for owning them). Sometimes both goals are in play, and obviously anyone seeking income at least wants his or her original money back in the end.

There are other rational goals, but those are the two big ones. It’s foolish to buy securities without knowing what you want from them.

What are securities? Many types: common stocks (you own a little piece of a corporation), bonds (you own a little piece of a loan), preferred stocks (you own a weird hybrid of stock and bond), publicly traded partnerships (like stocks, but instead you own a little piece of a limited liability company), mutual funds (you own a little piece of a whole bunch of securities someone else picks out), and some more.

If you are following the main thrust of this post, it has registered with you that this makes a mutual fund a security of securities. True.

Most individuals and many professionals lose money buying individual stocks. Buying individual bonds is sometimes risky and usually cumbersome for individual investors. Thus, someone proclaims him or herself an expert, files an ocean of paperwork, and says: “I will invest other people’s money according to some preset guidelines. I know what I am doing.” This results in what we call a pooled investment–as in ‘your money is pooled with others’– commonly called a mutual fund.

The three major sorts of mutual funds all work differently. That’s why I began this article with that poker chip explanation. I believe it is the least understood, most-needed-to-be-understood aspect of modern personal finance. I believe that understanding liberates you from bad decisions. Here’s the less simplified version, which I hope the first example made easier to follow.

First, you need to know what is meant by ‘ticker symbol.’ Stocks, mutual funds, and stock-like securities all go by shorthand labels called ‘ticker symbols,’ consisting of letters. Microsoft is MSFT. Alaska Airlines is ALK. Long ago, Continental Illinois Bank was CIL. RCS is the Pimco Strategic Income Fund, a closed-end bond fund.

Conventional mutual funds (CMFs; Cora’s fund) work like this. All shares are bought and sold through the fund manager or its agent. All CMFs are distinguished by five-letter ticker symbols ending in X. Thus, FCNTX happens to be Fidelity Contrafund. VFINX is Vanguard S&P 500 Index Fund, and so on. Thousands exist. They usually trade by dollar amounts rather than numbers of shares, which are recorded to three decimal places. (Going back to our starting example, imagine Cora, Eve, and Clark’s chips stamped with their ticker symbols.)

When you buy CMF shares, the company accepts your money and issues (creates) the shares to you. When you sell them, the company redeems (destroys) the shares and pays you their market value, which is based on that percentage of every security the fund owns. A CMF’s share price is referred to as its net asset value (NAV). That distinction matters because they are not stocks and must not be viewed as stocks. The number of shares of a CMF in existence thus changes daily.

If CMF shareholders sell (redeem) enough shares at once, the company may not be able to pay the sellers from free cash. Those following along very well have registered that the company might have to sell some of its security holdings to fund very large redemptions, thus demonstrating one of CMFs’ biggest problems: their mechanics can force them to trade when its managers might not prefer to do so, which means your highly paid professionals aren’t allowed to use their full best judgment, which in turn is what you (yes, you) pay them for. It’s like a computer managing a baseball game that calls for a bunt even when a slugger–and a lousy bunter–is at the plate. The slugger can only shrug and attempt the bunt, knowing it’s a bad idea.

I used to work for a company that managed CMFs. The big money situation works in both directions. What if a huge pile of money comes into the fund at a time when it’s a lousy time to buy? And yet the fund guideline says that it will be no more than 5% in cash? There is no choice. Disobey their own guidelines and they will be in big trouble. They must pick the least unpromising choices available in compliance with their guidelines. It’s like hiring a contractor when there’s too much work for contractors (or at any time in Portland): all the best options are booked six months out. Only the inferior builders will even come out to look at your job, and they will charge too much for crappy work.

Ever hired a house-sitter? If that person was an adult, you probably set out some guidelines, but ultimately you realized that the reason for having a house-sitter was to have a responsible adult keeping an eye on your place. If the adult could not contact you, or detected an emergency, you would have to trust that adult to do intelligent and prudent things to protect your property. Owning a non-index CMF is like hiring a house-and-pet-sitter but with such extensive rules as to paralyze the sitter’s best judgment. Who hires a house-sitter without trusting that judgment? This is stupid.

Index CMFs, a variation on the above, take the judgment out of the equation by attempting to imitate a stock or bond index (fictional investment portfolio meant to represent some portion of the market for benchmarking purposes). A Standard & Poor’s 500 index fund buys, in proper proportion, all the stocks in the S&P500. If S&P ditches a stock, so does the fund. (This may sound to you like Eve’s method. It is. Think Cora’s chip issuance mechanics combined with Eve’s investing plan.)

In workplace 401ks, an index CMF is often the least doggy of the ten or twelve dogs on offer. And if it’s a conventional 401k, there won’t be an annual tax hit. Most 401k CMF offering lists I have seen were full of mediocre funds. I believe that most are selected by the 401k custodian through kickbacks. I am also convinced that the 401k custodian often pays off the employer’s representatives in order to be selected. It’s the most logical reason for such laggard choices.

Index ETFs represent the same basic idea as index CMFs, but with different mechanics since one buys or sells them on the open market at a price negotiated with another investor by brokers. Either way, the NAV (and thus your price) goes up and down in lockstep with the index. Both charge low fees because this doesn’t take that much brainpower. If Slave Labor & Prostitution, Inc. (ticker: SLAP) gets big enough for Standard & Poor’s to include it in the S&P 500, the index fund managers of S&P 500 index funds will obediently buy the correct proportion of SLAP shares to mimic the new composition of the index. Since Rust Belt Decay Corporation (RBDC) got thrown out of the index to make room, the managers dump its shares. All of them. Eve’s ETF does it this way.

Index ETFs can attempt to imitate bond indices, or in fact any imaginable security index. So can index CMFs, of course, and they do. In the case of bonds, pooled investments represent the primary way individual investors park their money in fixed income (the sophisticate term for bonds, but which includes some other investments that also pay a, wait for it, fixed income).

CEFs, like Clark’s, are the main subject of this article; however, to understand them, one needs to understand how they differ from their lookalikes. Most invest in bonds, but there are stock CEFs and perhaps other kinds. Maybe there are some that invest in partnerships, or preferred stocks, or gold coins. My focus here is on high-yield fixed income CEFs, because I’m impatient and greedy and don’t have much faith in long-term promises or institutions. I have faith in what can no longer readily be taken away from me.

CEFs interest me because if I buy them intelligently, I get distributions amounting 10-12% per year, paid in monthly installments. I may even get a capital gain if I ever sell them–but the goal is not growth. It is income, paid now and not later, which means two things I like:

  1. It’s too late for them to screw my money up or take it back. I got it. Not theirs anymore.
  2. Because I get it now, not later, I can use it now. I can buy more shares now and increase the amount of money that’s paying me that 10-12%.

At this point, I consider CEFs well explained. Everything after this para expounds my experiences and observations, and may herewith wander from the topic. If all you cared about was the topic, school’s out. Thank you!


Most people investing in the stock market would figure 12% a reasonable goal, year over year on average. They would accept major declines, and might stay invested for years without having actually locked in most of their gains (i.e. sold the shares). And 12% is in fact a very rational goal based on long-term historic performance. But I want my money now, not later, so that I have it to reinvest.

That’s what I do with CEFs. I buy them, at a discount to NAV where possible. I hold them unless/until they decrease the distribution, or I find better options. If they cut the distribution far enough to make them unattractive, I find better options with ease. I may take a capital loss doing so, but remember that all along–for years, even decades–I got my 10-12%. And all along, therefore, I had that money to use for something else–such as more CEF shares.

Yeah, I paid tax on those distributions…except when I did not owe any. Those CEFs in my traditional IRA were not subject to tax. I got that money every month. When enough of it piled up, I looked over my CEF universe (current holdings plus potential holdings of interest), decided which would pay me the most money without being too overweighted in a given CEF, and bought shares. Those shares then started to pay me money.

Now and then, I’d see a major share price dump in a CEF. I’d go to find out why. Usually it was that they’d cut their distribution, absorbed another CEF, experienced shareholder drama, or otherwise done something excitingly harmful to my pleasantly dull regular payments. Most commonly, I’d just dump the CEF shares regardless of capital gain or loss. I would redeploy that amount into the best available option at the time.

A surprising percentage of the time, thanks to cheapskate buying practices, I’d realize a capital gain from selling the shares. Now that was fun. Pay me monthly for eight years, then a parting bonus for firing you? Yes, please.

This took me minimal work. Every month or two, I’d go to my spreadsheet comprising my CEF watch list. I would update current market values, current NAVs (so I could see whether it was trading at a premium or discount, and what magnitude), monthly payouts, and my own original cost for the shares. The latter numbers were essential to me knowing what I was currently being paid. The rest of the numbers related to what I would be paid if I bought shares now. I would also seek to add a CEF to my universe, searching my brokerage for the best paying bond CEF, then reading up to filter out the ones that seemed unsustainable or outlandish. If it looked too good, probably was. The biggest dog in my universe, after all the updating? I’d cease tracking it. If I actually still owned it, I’d place a sell order. If I knew I could get 11%, why would I even follow something offering 7%? No need.

Some years, the stock market would eat flaming death. Many people would freak out. Many would panic-sell their stock shares, mutual fund shares, everything, eek, the sky is falling, sellsellsell. I would go shopping. When my CEFs looked to be down about 25%, I’d update my spreadsheet and blow every dollar of cash in my account on dirt-cheap shares. I knew what I was seeing was panic, irrationality–and opportunity. I didn’t buy on margin, but I bought with every real dollar that had been piling up. Since I paid less for the shares, I got much higher yields, some almost embarrassing.

I would be paid those grotesque yields for years and years, until they either cut the distribution or I sold the shares.

Eventually I no longer bought separate issue securities at all. With money I couldn’t afford to have bounce up and down to any degree, I bought conservative bond index ETFs. With money I wanted to grow, I put part of it into CEFs, and part into a rough 80/20 mix of small-cap stock and conservative bond ETFs called the 3% Signal. I no longer even cared what high-flying tech stock the pundits touted. I stopped reading financial pundits, none of whom ever paid a penalty for being wrong. I decided that I was never again going to take advice from a Jim Cramer unless he was putting in writing to reimburse me any potential losses. If the market were to crash, I would make a lot of money and it would recover within a couple of years. History supported me.

Only a total collapse of the national economy, including the dollar’s value, would wreck me. If I ever came to believe that was likely, I would have invested in some other way that was immune to such a cataclysm. All those ways are very big bets on very unlikely outcomes. I realized that everyone who bought any form of securities, no matter how preppy he or she talked, didn’t really believe in this impending disaster. I have pure contempt for the concept of professing a philosophy one does not in fact believe, be it religious, economical, what have you. If you believe it, your actions will prove it.

How you invest money you can’t afford to have vanish is what you really think about the economic future. What one says means nothing. If you buy gold, but you leave it on deposit at Edward Jones, evidently you think there is a greater risk of home burglary or theft than of a cataclysm causing Edward Jones to close its offices. If you put money into your 401k, but talk big about how everything is going to be destroyed, you are lying. If you were that sure of your outcome, you wouldn’t put one dime into a 401k even if your employer matched it. Double nothing is still nothing.

There could still be a total collapse that renders everything irrelevant. If there is, it’ll also nullify most of my potential protective measures and screw me (and nearly everyone else) up real bad. It doesn’t make sense for me to prepare for something that has been predicted annually going way back, without happening or punishment for the wrong predictors. It is more logical for me to prepare for recurrences of what has been demonstrated to occur.

I’ll keep collecting my 10-12%.

Old friends, and an investing epiphany

Live long enough, and even the somewhat socially awkward will accumulate a network of old friends with decades of experience in various fields. This is great for getting answers. When I have a question about physical science, I can contact a professor of physical science. Question about U.S. military history? I’m fortunate enough to know someone who teaches it at the collegiate level. Want to understand how a given firearm works? I can choose from multiple enthusiasts, none of whom need any encouragement beyond a hint of interest. Need an antique valued? One of the best men at my wedding has been in the business for thirty years. Question about the workings of a suburban police department? How about the deputy commander of a well-respected suburban police force? Real estate? In addition to agents I’ve worked with in three states, I could also call a friend and past client who made his career in the field. My uncle is a civil engineer, one cousin a retired petroleum chemist, another cousin a speech therapist, and so on.

The question is not whether one can locate the expertise, but whether one may fairly impose upon the friend. I’m not unique in this, nor even above the curve. I have this only because I lived to my mid-fifties without spending it all in a shack somewhere out near Glenallen, Alaska. Everyone else my age, except those who live in shacks near Glenallen, has at least as great a network. Those who got out more than I did probably have far greater networks, but I’m very satisfied with my folks. I wouldn’t trade any of you.

For them, it follows, I’m the old friend who edits. When they begin to consider doing some writing, it is quite natural that they ask me about it. I’m glad, because gods know I’ve bugged all of them often enough about this or that. If it comes to an actual project I’ll charge something, but advice is always free to old friends. Truth told, I don’t mind a bit. It’s rather nice that people would think I could help them understand something.

One old friend of mine is named Randy, and with some admitted contact gaps, we’ve known each other since college. Randy retired as a stockbroker with one of the big brokerages, and while in most people that might not mean as much, I’ve always known him as a maverick immune to peer pressure where he knows he is right. That tends to be true of me as well, so I found it easy to believe that he had knowledge and instincts on behalf of his clients that the average full-commission broker might not have had. Put another way, there aren’t very many such brokers I’d have steered anyone toward, but Randy would be the one.

Not long ago, Randy and I had a long conversation about investing. We agree in substance, especially in matters such as that people should remain within their comfort/knowledge zones. I told him I no longer buy separate issue securities, because while it’s possible I could develop the knowledge to do well at it, I know that I will not, and thus shouldn’t fool myself. I received a precious pearl of approval, which I will have set into a suitable mounting in a place of honor.

Maybe it’ll distract everyone from all the little tombstones representing my dumber investing mistakes.

While schooling me, Randy crystallized a realization that explains so very much: winning vs. losing, and the arithmetic. The instinct and habit is to look at an investing choice as one decision, to get right or wrong. It isn’t. Most investing decisions are based on some stated goal, even one as nebulous as “make money.” There are two decisions to make, and for an investment to meet or exceed expectations, both decisions must be right. There is the decision to buy (when/what/how much), and the decision to sell (when/how much) or hold (some or all). That’s a thing to consider: not to sell is also a decision.

If you are wrong 50% of the time, you will probably like your results 25% of the time because that represents the percentage of the time you will do what in hindsight turned out to be the right thing both times. That means that two times out of four you will likely be disappointed, and once out of four, you’ll probably take a straight-on bath.

If you are right 60% of the time, you will get satisfactory results 36% of the time, same reason. You are taking a hosing. About half the time, you will get one decision or the other wrong, with disappointing results. You’ll go splat big time about one time in six.

If you are right 70% of the time, all other factors being equal, you should be happy 49% of the time. You are still losing, though not by much. Slightly less often, one decision or the other will be wrong enough to disappoint. About once in ten, the disappointment will be great.

You have to be right just over 70% of the time just to be pleased more often than not. If you can arrange to be right 75% of the time, you will get a favorable result about 57% of the time. Not many people are that good. I’m not even close.

In the meantime, of course, the overall market does whatever it does. Goals can vary, as can strategies. This is a rabbit hole of exceptions, and I have felt the need to oversimplify this (yes, I am aware I am doing so), but the key takeaway is that there are two opportunities, not one, to screw up a given investment. A mistake in either case will probably cause disappointment.

Thus: even then, even being right three-quarters of the time, you’re pretty happy just slightly more often than not. Enough to matter, of course; enough to be meritorious, and definitely enough to offer a shot at outperformance over time. Your good decisions should outweigh your bad ones. And I guess if you are confident enough to feel you will be right 75% of the time, you probably should carry that through.

The minority of people who can achieve that success is small indeed. I have learned that I am not one. Many of the rest are more or less playing the slots in a different format. Whenever I find myself tempted, nowadays, I remind myself how much I despise gambling, and ask myself whether those glitzy casinos were built with the money people won. I suppose it’s like a former smoker who, when tempted to lapse, looks at graphic images of cancerous lung tissue: if that helps, go ahead.

And how often does one get to make an analogy between casinos and cancerous tissue? You’re very welcome.

For the rest of us, it’s buy and hold index ETFs all the way. We will generally not outperform, but we will get the market return less (very bearable) expenses. Even Jason Kelly, a noteworthy author and manager who has an excellent track record with stocks, has shifted entirely to a mechanistic method involving index ETFs. I’ve been running it in two different portfolios now for a couple of years, and I think it stands a good chance of outperforming because it takes the emotion out of the decision. The only free choice one makes is when to add more cash to the plan. From there, the entire course of events can be handled with a pretty simple spreadsheet and two trades per quarter per portfolio. You can learn more from his book on the topic.

Jason’s writing is entertaining and straightforward. My favorite part is the way he begins by politely butchering out the pundits who bray frequent predictions for which they are never held to account. It’s hard to imagine they can even keep writing, much harder to imagine anyone still wasting time on them, after Jason hits them with the literary equivalent of a fire hose loaded with ice water. He calls them “z-vals,” as in “zero validity,” and when he’s done with them they look like Leroy Brown at the end of the famous song.

You want to hate the media? Don’t hate the ones who are trying to tell you what has happened around the country and world. Start with the mainstream financial media, because they have hate coming. They get to tell you what will happen, be wrong on a consistent basis, and never suffer. They don’t even lose readers. Were you able to confront one, he (most of them are men; for some reason, it appears harder to find intellectually dishonest women) would tell you that doing your own research was your problem, and not to blame him. “If you believed me, it’s not my fault you were that big an idiot.”

Even the salesiest full-commission broker at Merrill Lynch has more accountability than that.

As for me, if I have to be right three-quarters of the time in order to do well, maybe I’d better keep my decisions in the comfort zone.

What looks sillier than me trying to buy Hello Kitty stock?

Not much, I suppose.

There isn’t actually a Hello Kitty stock, of course; the character is a property (doesn’t that sound so cold?) of Sanrio, a company in Japan. Seems HK is an even bigger deal over there, definitely Sanrio’s cash cow. The little mink is worth seven bill a year. I am looking into this for a simple reason: all of my wife’s stock recommendations, except those where I help pick the stock, do well. Since she had thought about this before I did, just hadn’t gotten around to asking me, this makes it a Deb-Approved Security that should do well.

If it does well, I don’t give a damn how silly a security looks. (Or how odious. I don’t believe in ethical investing. I believe in activism, and in investing for gain, but I do not believe in confusing the two.)

I’m not sure how easy it is to trade the shares on the Tokyo exchange, but it has US-traded shares as SNROF. Did you know that, that in most cases you can buy major foreign companies on the US markets? Generally you can. However, you can face a number of issues. You will certainly pay foreign tax, and in some cases ADR (American Depositary [spelling is correct] Receipt) fees. And yes, this means if you get a dividend, you will have to check ‘yes’ on your tax return when it asks “Did you have any foreign income?” In case you’re interested, a five-letter ticker ending in F is a foreign stock. A five-letter ticker ending in Y is typical an ADR (the distinction is not tremendously important). Some foreign stocks do not have five-letter tickers, like Toyota (TM).

Thus, this has me researching a way to buy shares of a foreign company whose main revenue generator is the image of a cartoon cat. Why would I be all right with this? In addition to the noteworthy fact that it’s Deb-approved, it’s near a long-term low. It does not look to have much downside, and based on its price history, has potential for a four-bag upside. I’m enamored of stocks my wife likes that are cheap at the price. I’m also enamored of 4% dividend yields, especially when payout seems on the upswing.

I’m greedy on dividends. I am not a fan of annual report proclamations (authored by management) of how great management is, how we’re all going to roll in money, and so on. I think: “Screw you. Pay up. If I’m going to hold this, I expect compensation now and frequently. That’s money you can’t take back later. If you bomb financially, and you don’t pay up, no problem. I was just in it for the money and I’ll be going then.”

I’m less enamored of low liquidity. One has to watch for that with foreign shares, and with quite a few investments. During Friday’s trading day, according to my research, only 100 shares of SNROF traded. That’s it. What if someone had wanted to buy 200? Might not have gotten them, especially at a limit price. People need to remember that you don’t automatically get to sell stock and ETF shares; they are not sold into a void. They are sold to someone else who wants to own them. If you want to sell, and there isn’t enough buying interest, maybe you can’t sell at all. By the same token, if no one wants to sell you any shares, you can’t buy them. Oh, someone will always cough them up–but not always at a limit price.

Foreign investing is kind of wild-west stuff for reasons like these. The governing laws are different. The style of annual report bullshit is different. (That’s not to say it’s less bullshitty, just that different cultures present bullshit in different ways.) It is generally more speculative in part because it’s harder to say how a company is doing in another country. I mean, if you’re in the US and you hear that Ford Motor Co. has turned in a crappy year and is laying off workers, well, that wasn’t hard. But if Nissan was boning the beagle financially, you might not see that splattered all over the US financial news. You’d have to make extra effort to keep tabs.

Most times, I think it’s easier and safer to just buy an ETF or CEF (types of mutual funds you can trade on exchanges) to focus on a given sector of foreign investing, but not all my ETF or CEF picks work out well. All of Deb’s do. Thus, if she is feeling it on Hello Kitty, I’ll start watching Sanrio, feeling a little silly for doing so.

Hello, kitty.

Shareholder revolts

I love closed-end fund shareholder revolts, when you get two different ballots, and one of them is all about how management sucks. Such a refreshing change from ballots issued by management, which typically say that management is wonderful and that we should therefore vote as management desires.

(If you do not know, a closed-end fund is a form of mutual fund. Most trade in bonds. The biggest difference between CEFs and conventional funds, the kind most people think of when they hear the term ‘mutual fund,’ is that conventional funds are open-ended. All their trading is between the investor and the fund. Thus, when you buy shares, they are created; when you sell (redeem) them, they are annihilated. In a closed-end fund, shares are not created or annihilated. They are traded between buyer and seller, neither of which is the fund. I have given lengthy criticisms of conventional funds in the past, and probably will do so again, just because they need frequent slappage.)

What I love even more is when the rebels’ complaint is that the fund is going to be kept around two years before liquidation, and should be instead liquidated immediately. I guess I should have bothered to read their semi-annual reports, or perhaps this liquidation is a more recent development. In any case, it’s good to see something other than the standard blind endorsement of management. Usually the most revolutionary thing on the ballot is some proposal put forth by an environmental group or something, demanding greater accountability or constraints on executive pay. Management always votes against all such proposals, claiming that they are already doing more than what the proposal would require. You can believe them if you like; I don’t.

So. What to do?

In my case, first I go vote for the revolt. If I were keeping the shares, I might stick around to care who wins. However, if the fund is going to be liquidated, I don’t wait to be paid out. I slap trailing stop sell orders on my shares. Whatever drama they’re going to have, they can have it without my money. I can surely find a better job for my money than a fund that is being managed toward a liquidation date.

This one (KMM) was fun. It was one of my lowest yielding CEFs, and I had a capital gain to boot. Yes, please.

The financial education millennials aren’t getting

And I find it appalling, but not surprising. Ours was not much better. However, we should have done better by the next generation, and as in all other matters of managing society, we did not. So I’m donating time to fix this by explaining the whole reasoning as clearly as I can.

Why it matters: this is how you get to retire. Without this, you work until you die. If that sounds fun, stop reading and prepare to embrace lifelong serfdom.

In retirement, the idea is that you aren’t working, but life will still cost money. Two ways one can afford that: have a big enough money pile that it lasts you to the end, or get income to replace a paycheck. Imagining any other outcome is fantasy, though it is reasonable to include cost-of-living cuts in that planning as long as you also think about unavoidable cost-of-living increases.

Therefore, in essence, your retirement planning means figuring out how to replace the work income, or how to save enough money to last you. If you do neither, plan to work until you fall apart, then eke out a living in poverty–and even that may be taken away. You can’t know what’ll happen forty years out. By now, you should be alert to the probability that the reality turns out worse than you were promised.

The two methods can work together. Your big money pile can generate income, which you then live on, with the money pile itself as some security against a real disaster.

You cannot trust Social Security (for income to live on) or Medicare (for affordable medical insurance, the number one crumple zone of retirement money disasters) to be there. That’s because my generation let the politicians steal too much, yet mine will demand that you sacrifice so that mine gets what it was promised. (We will then die off, sticking you with the bill, all the while grumbling about you. Aren’t we charming? This is why we, as a class, have no basis to look down upon you; we forfeited that right by talking a great game about your future, then doing absolutely zero to back it up. We didn’t bus the tray of our life.) But in the meantime, you need to look out for yourself, and it is safest to plan for the government to do nothing to help you in your old age. Then if they do, hurrah, but it’s a pleasant surprise.

Some employers will offer a retirement savings plan as a benefit. This is nearly always flawed, but far better than nothing, especially if the company matches some of your contributions. How you do this affects your Federal income taxes, so it’s important to understand the different kinds.

There used to be things called ‘pension plans’ that would give you retirement income someday, as a benefit of a long career with one employer. (Kindly stop laughing. My generation was the one from whom that sky-pie was yanked away.) Our precious corporations declared war on pension plans, and lacking all spine, my generation surrendered. We will be the last ones to get the last few of those, for the most part, and if it makes you feel any better about this, most of us won’t even get any. Our parents did.

Don’t get concerned about the insulting interest rates from bank savings accounts. That just means that bank savings are not the place for your retirement savings, because you retire on the money your money earns (and money in bank savings currently earns nothing of note), not on the money you save. That’s why an early start is most important: your $1 at 22 may become $10 by 62. The piddly savings you can afford in your early working years will be the dollars that work longest and hardest for you. But do bear in mind that things go in cycles, that your parents remember 7% interest rates on savings. They also remember 14% interest to buy a car. That sword always cuts both ways.

There are two basic types of retirement savings, both of which exist in employer-sponsored and private forms. You must understand these to have any potential for retirement savings. For ease of description, we’ll call them Trad(itional) and Roth. They appear both in 401k plans (work-sponsored) and IRA plans (something you usually do on your own without employer involvement). Salient difference: what you put into the Trad is deducted from your taxable income, up to a limit, but someday when you take money out, those distributions (withdrawals by you so you can live) will be taxable. What you put into a Roth is not deducted from your taxable income, but in retirement, withdrawals will be tax-free–or so they promise us now.

The skepticism you sense here is based upon three things: a long history of government ineptitude and evil, the fact that my generation will probably eat all the cookies (then blame you for not baking enough; aren’t we sweet?), and the bird in the hand outlook (once you get the benefit, it is too late to steal it back). I, myself, do not believe the Roth promises. I believe that when the time comes, government will renege on them, and count on a cowardly and supine citizenry to kneel and pay the tax. Because I do not believe the promises, I want my tax benefit now, so that it’ll be too late for government to take it away later. For me, that means that a Trad IRA is most sensible.

I also prefer the basic wager of a Trad IRA: if I retire with high income, yeah, those taxes will be brutal…because I am well off. Boo hoo. Whereas in case I retire with low income, my tax burden will be less than if I’d paid the tax up front, and in the meantime, I got many years’ use of the money to make more money.

How you feel is up to your confidence in the future and your own tax planning. Let’s say you take the Roth promise at face value. If you are low income, a Trad IRA’s tax writeoff would mostly be worthless to you. Only higher income people gain much from tax writeoffs, since tax rates are higher on higher incomes. The ideal Roth saver would be a person of low income who saves diligently all his or her life, gradually building up an impressive money pile from careful scrimping and smart investing. If you think that’s you, then by all means do so. The ideal Trad saver would be a person with higher income who accents that high income by taking the tax benefit now, ideally reinvesting the savings for still more gain, or a person who has zero faith in government promises. If either is you, then the Trad makes sense. (I wouldn’t say we are high income, but we are middle income, and I have zero faith in government promises. Advantage: Trad.)

But remember that you can do both, provided you don’t contribute to both in the same year. So if you decided to put money in a Roth while you were young and po’, and then in a Trad while you finally started to make real money, that’s fine. You just need to make a choice each year which to contribute to, and live with it. Both accounts would continue to exist, and if you handled them well, to make retirement money for you. That would also mean not putting all your eggs in one basket, a philosophy of which I approve with a mighty approving.

Okay. Here is how it works in real life practice, each of the four rough possibilities:

Employer Trad (usually also called a Traditional 401k): you agree to have your employer take money out of your paycheck. The employer may match the amount up to a preset limit. A financial institution holds onto these funds, though you remain their owner. The institution offers you a limited number of ways to invest the funds for gain. A few institutions offer great options. Most offer mediocre to lousy options. (Also, the institution gets a big fee for sitting on your money pile, and if you think you do not ultimately pay it, you are naïve. One way or another, no matter how clever the shell game, you always pay all fees, and the sooner you grasp that, the better.) However, even if the options are not great, they beat all hell out of no retirement account at all. And in a Trad, at least you get the tax bennie up front, in essence paying you a bonus every time you contribute. Always contribute at least up to the employer match, and if you can afford more, pour it on.

Employer Roth (usually also called a Roth 401k): like above, except no tax writeoff; you are planning to get to take money out tax-free when you are old. Other than that, same basic philosophy except that piling extra money in now is not getting you a greater tax benefit. Even so, you might still do it.

When you leave that employment, the vested percentage of your account is still yours. Hopefully you worked there long enough to become 100% vested. The sooner you get it away from your former employer, the sooner it is secure from some mismanagement or stupidity on their part. (That would be illegal, of course, but it happens all the time. If you saved $200K, and lost half of it due to an unscrupulous former employer, will it make you whole if the employer goes to jail? Of course not.) Because there’s a lot of stupidity and mismanagement in our precious corporate world, you want to take possession of your 401k funds at your earliest convenience. This is called a “Rollover.” In effect, it becomes (or goes into) one of the following, depending on what it was before:

Personal Trad (usually called a Traditional IRA): this is when you sign up with a bank or brokerage for your own version of the Employer Trad. You deposit some money, and you can invest it however the bank or brokerage allows. Short version: with a bank, you will make no money, so that’s stupid. A lot of people have these at Schwab, Fidelity, Scottrade, TD, or other discount brokerages.

Personal Roth (usually called just a Roth IRA): when you sign up for your own version of the Employer Roth. Same principles, different investing options. The most salient fact–the tax impact–is the same; the ‘Roth’ descriptor is key here. (Roths came along later than traditional IRAs, so if you speak of an IRA without Roth, people think you mean a traditional IRA.)

So when you leave an employer, and want to take your retirement money with you, you either have a personal account of the right type into which you can merge it (“roll it over” in industry lingo), or you will have to open one. The brokerages will be delighted to help you do that, and they’ll even go get the assets for you. Most brokerages have lower minimums for retirement accounts, because they find that profitable (since people rarely loot their retirement accounts). However, you will very likely first have to sell any mutual funds you hold. That’s fine, as they are probably subpar investments anyway. Traditional mutual funds typically are. Key thing to know: there is no salient difference between a Rollover Trad IRA and any other Trad IRA. They share the same tax issues.

You can convert a Trad IRA to a Roth, if you’re willing to pay all the associated tax on every dollar in the account. I’d have to have a good reason to do that, but everyone’s circumstances are different, so I can’t say no one would ever do that. For example, suppose you already had a personal Roth IRA, and you rolled over a relatively tiny Trad IRA, and this was a year of not very high taxable income. As a Roth believer, you might go ahead and pay the tax to roll the Trad IRA into your Roth, because this is a low income and thus a low tax year, minimizing the bite and simplifying your accounts.

Two paras ago, I mentioned mutual funds. If your mind generated the question “Wait. How is a mutual fund different from an IRA?”, and you then felt that you sounded dumb, relax; the question is natural. An IRA is at heart a form of bank account, like a regular savings account: it’s a money pile. A mutual fund is an investment option (like a stock, bond, CD, what have you) available to an account’s holder. Thus, your whole account is an IRA or 401k, in which you might or might not choose to own one or more mutual funds, depending on what you think is to your advantage. A mutual fund is basically a bunch of stocks and/or bonds bundled up together. Simplified further, it most resembles a single stock–at least, it resembles that more than it resembles a bank account.

Thus: I might say “I hold shares of the Fidelity Magellan Mutual Fund in my Trad IRA account.” However, I would never say: “I hold shares of a Trad IRA in my Fidelity Magellan Mutual Fund account.” Cart before the horse.

So how does one pile up this money? From a strategy standpoint, the goal is to make the biggest possible heap of money in the most tax-advantaged way. As my CPA has drummed into me, there is tax avoidance (which is legal), and tax evasion (which is a felony punishable by imprisonment and fines). Earlier, we went over the decision process between Trad and Roth, which is a very personal one; the math favors one or the other depending on how you forecast your life will unfold. Whatever you pick, if you’re twenty right now, I would guess that you’ll need close to $2 million to retire comfortably, but no one really knows. Safest way is to keep saving until you do know. It’s not possible to retire with too much money.

If your main retirement is with an employer, and you’re under 35, know this: conventional separately managed mutual funds (i.e., run by a trained professional with discretion as to what the fund will buy and sell) usually underperform the market. They get paid handsomely anyway, which I personally think is disgusting. Why pay someone handsomely to do worse than the market? I don’t need to hire ineptitude; I can supply all of that I might want, right, free of charge? (Gods know I often have.) There is usually an index mutual fund among the account’s investment options, which I consider nearly always the most sensible choice, because it outperforms the pros in a majority of cases simply by doing its best to achieve the market return minus very modest fees. It buys and holds the securities that are in the index, period. However, be prepared for some fluctuations in value over a lifetime, as you go through market crash cycles. Those typically occur when a lot of people are doing a stupid thing, which you can expect the public to do as soon as it forgets the lessons from the last fiasco. In my life, they were in 1987, 2000, and 2008; my guess at the next one is circa 2020. Every ten to twelve years isn’t a bad guess. The only certain way to avoid those market crash cycles is to invest so that you never really make any money, so that’s like saying the only way to stay out of the hospital is to commit suicide. True, but no way to plan your life.

If you have a retirement account that only you control–either rolled over from an employer, or started on your own–you have many options, including many that were not available to me in my callow youth. If I had it to do again today, with a full working life ahead of me, I’d put it all in several different index ETFs, and put new money into whichever was lagging the rest (on the logic that the laggard is most ripe to bounce back). It is therefore time to explain about index ETFs.

We covered my complaints about conventional separately managed mutual funds, and my preference for index mutual funds. While the latter are usually more sensible, both suffer from the outdated conventional mutual fund model. ETFs–exchange-traded funds–are technically also mutual funds, but unlike conventional funds, their shares aren’t created and destroyed daily as people buy and sell. A finite consistent number of their shares exist, one may buy those shares on the open market, and one can set a limit price. Index ETF fees tend to be very, very low–as they should be, because any non-moron owning a computer and subscribing to a market news service could manage an index ETF. An index ETF manager has the discretion/choices of a U.S. Marine recruit in boot camp.

What it means is that if a young person started a Trad IRA and put all his or her contributions into an S&P 500 index ETF, or other stock index ETF, and kept doing so all his or her working life, the following would be true:

  • That person would probably retire in comfort.
  • That person would probably not ever need any more advice from me.
  • That person would probably not stress much about it.
  • That person’s trad IRA would probably outperform any employer-ruled 401k s/he might also have.
  • I would be very happy for that person.

Oh, that person would deal with job changes and rollovers, sure; however, the rollovers would probably go to bulk up the existing IRA. The biggest issue would be the need to avoid going over one’s allowable tax-deductible annual contribution, because the limit is not per account–it is per person, per year, and exceeding it sucks. The IRS makes sure it will suck. Take whatever actions you must in order not to exceed it.

If that seems a little unfair, think on this: if your biggest problem is having to ask some questions and do some math to figure out how to put the max into your retirement portfolio every year, you are very fortunate or very thrifty. But if you already have enough basic savings to act as your crisis crumple zone, you could always just open up a taxable brokerage account (householded with your IRA for easy review and management) and invest that money however you see fit.

And some year, maybe the year you are out of work for four months and money got tight, maybe you’ll come up short of the max to put into your retirement. If so, you’ll have money in the brokerage account to move over and make the full contribution. In the meantime, if you have to sell a stock or ETF to raise that cash, you’ll pay tax on part of the gains (the dividend and capital gain part), but it’s rarely a big hit. Nothing like the three-finger shocker you’d get if you’d put it all in a conventional mutual fund that lost 20% that year, and then notified you in December that oh, by the way, here’s the amount of taxable income our realized gains and dividends will cost you. Yes. It really is that bad. Such a fund can lose a bundle, and due to tax laws, have to distribute capital gains and dividends so that the IRS can tax you on them. I trust you can see how miserable that would be. If you are wise, unlike me, you will opt out of receiving and paying that invoice.

Does it sound like this is a lot simpler than people make it out to be? I think it is. You can make it as complicated as you choose, but for most people I think simplicity and a mechanical investment discipline are best. There are no guarantees, just like there are no guarantees one won’t die in a car wreck tomorrow. Just as you maximize your odds of safe travel by driving defensively, you maximize your odds of safe and profitable investing by doing sensible things.

One last word on market trends. On any given day, you can find pundits writing articles ‘calling a top,’ ‘calling a bottom,’ predicting a crash, predicting a huge runup, anticipating a ‘correction’ (that’s marketese for ‘dropping a financial deuce’), and so on. They all have one thing in common: no one ever calls them to account when they are wrong. That’s why Jason Kelly, one of the better financial authors and a very good guide to the nuts and bolts of smart investing, calls them “Z-vals” (zero-validity predictors). They might as well be rolling dice. Since they are never fired or hanged when they are wrong, their opinions mean nothing, and should mean nothing to you. Don’t let them get you worked up or demoralized. They don’t really know; they just get paid to write articles.

And always remember: you retire not on the money you saved, but the money you made.

As for me, I’m your Robin Hood. I hate Wall Street, a snake pit full of entitled criminals that goes about buying and selling elected leaders like some cities used to sell and buy human beings. I hate all the people, and there are many, who have positioned themselves to take away more of your money than they deserve and earn. I don’t make any money from your gains. The only satisfaction I get is the moral joy from helping you game the system to your advantage.

My payoff is to sit here and do the mental math about the revenue denied to a class of criminals because of each person I tipped off.

Good hunting.