The FTX Lesson That All Investors Should Learn

Beginner, Theory

Any time there is lots of money involved in a particular market, there will inevitably be a subset of people that emerge to capitalize on the situation by exaggeration, deception, and outright theft. Madoff, Enron, Lehman Brothers, Tyco — history is littered with financial frauds that cost investors billions.

How does nobody see it coming? Unfortunately the world today isn’t as simple as obvious good guys and bad guys, and it’s sometimes impossible for normal people to tell respectable companies apart from carefully constructed marketing images. The good news is that there are a few simple steps you can take to protect yourself from the fallout when things go terribly wrong from events you never saw coming.

But before we get to the good stuff, let’s unwind the most recent example of financial corruption that every investor should educate themselves about — the rise and fall of FTX.

Bonus Points: A Time to be Thankful

Psychology

The whole world is watching the ongoing financial carnage resulting from the FTX collapse, and every revelation is truly a sight to behold. I’m definitely working on my own article discussing the situation, but an extended writeup about greed, corruption, and downright stupidity just seems painfully out of place during the week of Thanksgiving. To highlight the worst in the world completely misses the point.

So in honor of my favorite holiday, let’s take a moment to turn off the inflammatory news and appreciate the good things in life. You only get one, so don’t waste it being angry or disappointed.

Happy Thanksgiving!

Bonus Points: Election Hangover Edition

Psychology

The Tuesday after the first Monday in November seems arbitrarily ordinary when you write it out like that, but for US investors it carries a unique importance. It’s election day. That day came and went on Tuesday to much stress and fanfare depending on whether your favorite candidates or ballot measures won or lost. I don’t know about you, but I could use a break.

The beauty of asset allocation is that it transcends party affiliation. Sure, politics affects markets. But diversification is there to help no matter who is in charge, and the sovereign law of compound interest doesn’t care who the nightly news is talking about today. Wise portfolio construction is the level head that steadies the ship in both calm and stormy seas.

So as you detox from the political bender affecting all of us, maybe take a moment to appreciate the stable things in life. Find the right portfolio, turn off the news, and take a walk outside. In both politics and money, the quiet voice of calm clarity requires focus to hear over the din of loud, attention-seeking voices. But it’s worth the effort.

The Mechanics of Tax Loss Harvesting

Beginner, Theory

Investing is like riding a skateboard. It takes skill, balance, lots of practice, and a certain amount of fearlessness. You know for a fact that you’re going to fall sometimes, and yet you do it anyway because you understand that perseverance pays off. Still, even the best skaters know when and how to bail gracefully without getting hurt.

With bonds cratering this year amid rapidly rising interest rates, that portion of my portfolio is currently a sea of red. Bond purchases going back a full decade are suddenly underwater, and after surveying my options it quickly became evident that it’s time for a big change. So after much deliberation, this week I finally pulled the trigger and sold every long term bond in my portfolio. With a simple click of a button, a big chunk of my total holdings that I’ve depended on for years went straight to my cash balance and I realized a sizable capital loss in my account.

Then a few seconds later, I put all of that money into an extremely similar bond fund with much lower expenses. And I used those capital losses to also swap out my gold holdings with big capital gains completely tax free. The end result is that I took advantage of unique market conditions to maintain the same asset allocation that serves me very well while saving potentially thousands of dollars a year.

What — you thought I bailed on bonds entirely? Please. My portfolio continues to cruise on, and I landed that kickflip like a champ!

Here’s how you can, too.

The Story of the Portfolio Charts Hat

Updates

Have you ever started a relatively small task only to have it quickly spiral out of control?

A few weeks ago I decided that I’d really like to add a Portfolio Charts hat to the product lineup, mostly because I just wanted one for myself. I quickly found that the logo didn’t really lend itself to that type of application.

“No problem! I’ll just make a new logo.”

Well, as Boromir might say, one does not simply make a new logo.

All About TIPS: Real Returns and Inflated Expectations

Advanced, Theory

Now that inflation is raging at highs not seen in the last 40 years, it’s no wonder that investments which guard against inflation have been experiencing a massive influx of money. With billions of dollars of new inflows every month, Treasury Inflation-Protected Securities (commonly referred to as TIPS) have quickly become some of the hottest portfolio options for nervous investors. And since questions about TIPS on message boards and in my inbox are apparently directly proportional to those cash flows, this feels like a good time to dig into the topic and separate the measurable truth from what passes as common knowledge.

How do TIPS work? How often have they succeeded in generating a real return above inflation? And are they really better than normal bonds without the inflation protection? Stick with me, and I wager you’ll learn a few things that may surprise you.

Financial Roadblocks Require Creative Solutions

Updates

Over the past few weeks I was hit with a double whammy of bad news. First, the company that manages my online store stopped paying all creators for an extended period of time. Then on the morning I expected to see my most recent long-overdue payment, I instead learned that the same company also paused all digital download sales without warning. So pretty much overnight, the Portfolio Charts store that I’ve spent years thinking about and months getting up and running went up in smoke.

How has your week been? Because mine has been something else.

How to Replace Income in Retirement

Retirement, Beginner, Featured, Theory

I had the distinct pleasure of spending time with my wife’s family this week. Between catching up on life events and helping with a few household chores, my father-in-law (let’s call him John) took the opportunity to ask his financially-minded visitor a question directly pertinent to his own immediate goals.

“How can I use my investments to cover the bills in retirement?”

I knew that John is a CPA and a knowledgeable investor who has actively traded his family accounts for years. So as a well-educated student of retirement finance, I naturally jumped in to an explanation of safe withdrawal rates, retirement spending methods, and how portfolio theory can be used to tweak the numbers to safely spend a certain percentage of his portfolio every year without fear of running out of money over his expected lifetime. John listened intently and replied with a deceptively simple follow-up question:

How do you guarantee that level of investment income every year?

That’s a terrific question, and the simple answer is you don’t have to. But that’s the exact moment I recognized my own investing bubble. The internet these days contains more information than ever about every nuance of retirement finance, but the gap between the theory debated by eggheads and John’s completely rational income-driven paradigm is just as perfectly normal as it is surprisingly wide to bridge.

I was talking about systems theory, and he just wanted to directly replace income. Which makes perfect sense! And I imagine many of you may have the same question.

So rather than jumping into a painfully long series on every possible way to tweak the numbers, let’s start with the basics. If you’ve ever wanted to know how to safely move beyond depending on regular work income to pay the bills, this article is for you.

The Little Details Matter

Updates

One of the important lessons I learned early on as a young engineer is that it’s important to pay attention to the small things. Your assembly design may indeed be truly impressive, but if the seams between parts don’t properly align it will give the impression of poor craftsmanship. Is it sculpted perfectly for the hands? Nice! But if it’s made with flimsy materials it will still feel cheap. Details matter.

That trained fixation on the small things can also have its downsides. For example, where I spend hours experimenting with just the right layout for a spreadsheet, I also understand that when something complicated is done really well the end result can sometimes be so transparent that it occasionally goes unnoticed. From the well-executed finish of a part to the dew drops on a dandelion, just because something is beautiful doesn’t mean it’s obvious to everyone.

So after spending quite a bit of time working on several relatively small site features, I thought it might be helpful to bring them to everyone’s attention. They may be minor but they’re still useful!