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June 22, 2021

Course 6 Plan

Day 1

Stocks

  • market-cap — market capitalization of a company (the company's value that the stock market agrees on).
  • earings — annual company's profit.
  • EPS — earnings per share.
  • DPS — dividends per share.
  • market-cap = stock-price・shares-outstanding.
  • EPS = earnings / shares-outstanding.
  • P/E-ratio = stock-price / EPS.
  • P/E-ratio = market-cap / earnings.
  • DPS = annual-dividends / shares-outstanding.
  • Yahoo Finance
  • Financial Dictionary
  • WolframAlpha: Apple vs. Microsoft vs. Tesla vs. Amazon

Stockbrokers

Compound Interest & Retirement Planning

Account Types

  • main accounts: taxable, IRA, Roth, 401k, HSA.
  • Taxable account: individual or joint.
  • Individual retirement accounts: IRA/Roth, Rollover IRA, 401k, Roth 401k.
  • Fidelity: all accounts

Assets Classes

Question 1

  • Analyze two stocks: MSFT and AMZN.
  • Find out stock-price, market-cap, shares-outstanding, EPS, DPS.
  • Calculate annual earnings, P/E, annual dividends.
  • Compare the PE-ratios of two of them.

Question 2

  • The investment portfolio grows 4% annually.
  • Living costs $50,000 a year.
  • How big must the portfolio be to satisfy the needs?
  • What if we decide to live off the dividends only (assume: 2%)?
  • How are the answers changed if the taxes are 15%, 30%?

Question 3

Day 2

Portfolio Construction

  • Conservative Portfolio: 100% T-Bills => low risk & low expected return.
  • Aggressive Portfolio: 100% Stocks => high risk & high expected return.
  • The higher the expected return is, the higher risk is taken => no free lunch.
  • High expected return & low risk => scam/fraud.
  • 5-year interval means nothing on the stock market — due to huge noise (high volatility)!
  • 10, 15, 20 years — normal investment horizon for the stock market.
  • Risks: high volatility, crash, total loss, bankruptcy, default.
  • High volatility => investors tend to make more (costly) mistakes, like cash-out in the dip (when they may need money or are stressed too much).
  • What may help to avoid mistakes:
    the appropriate emerging fund,
    accurately measured risk-tolerance,
    education (!),
    longer experience staying on the market,
    better fit investment portfolio (less aggressive if feel uncomfortable on high volatility).
  • PortfolioVisualizer: Warren Buffett's recommendation: 90:10
  • PortfolioVisualizer: Stocks vs. T-Bills vs. 50:50

Stock Market Indexes

Investment Funds

  • A fund holds a group of securities (stocks, bonds, other funds).
  • Funds have expense-ratio (management fee) for managing the securities.
  • expense-ratio = 0.12% => investment of $10,000 will cost $12 a year as management fee.
  • Managed: actively (by a stock-picker manager) or passively (by following a stock market index).
  • Index funds have lower expense-ratio (0-0.50%).
  • Actively-managed funds have high expense-ratio (0.50% and up, 1%, 1.5%, etc).
  • Mutual funds vs. ETF (Exchange-Traded Funds).
  • ETF may be used for speculations.
  • ETFs do not have transaction fees.

S&P-500

US Total Market

Tax rules in a taxable account

  • taxable events on taxable account: realized gains (sale with profit), receiving dividends, DRIP.
  • hold period <= 1 year => short-term capital gains, taxed as ordinary income.
  • hold period > 1 year => long-term capital gains, taxed on lower tax brackets.
  • qualified dividends => taxed as long-term capital gains.
  • unqualified dividends => taxed as ordinary income.
  • Налоговый инвестиционный счет (taxable brokerage account)

Bonds

  • The issuer: Government, Corporate, Municipal, or Agency.
  • Credit rating: investment-grade (AAA-BBB) and junk (high-yield, BBB-).
  • Term: short (1-5 years), mid (7-15 years), long (20-30 years).
  • Agencies create: ABS (asset-based securities) and MBS (mortgage-based securities).
  • The coupon (dividends) is usually fixed.
  • dividend-yield = coupon / bond-price.

Question 1

  • Which ETF is the best choice for long-term investing through a taxable account?
  • Which ETF is the best for speculations?

Day 3

Compound Interest

  • c・1.07^n; c — initial capital, n — number of years, 7% annual growth.
  • If the management fee/expense ratio: 1%, then the capital will grow: c・1.06^n.
  • The total loss due to 1% management fees: 1 - (1.06/1.07)^n.
  • 10 years: the loss is 9%.
  • 20 years: the loss is 17%.
  • 30 years: the loss is 24%.
  • 40 years: the loss is 31%.

ETFs

  • Two Fund Portfolio (Vanguard): VTI + BND.
  • Two Fund Portfolio (BlackRock): ITOT + AGG.
  • Stocks = 100 - Age (or 110 or 120).
  • For a 20 years old investor: Stocks=80-100%.
  • For a 30 years old investor: Stocks=70-90%.
  • For a 40 years old investor: Stocks=60-80%.
  • For a 50 years old investor: Stocks=50-70%.
  • For a 60 years old investor: Stocks=40-60%.
  • Warren Buffett to his wife: "90% S&P-500 + 10% T-Bills".
  • PortfolioVisualizer: US Stocks vs. T-Bills vs. US Stocks + US Bonds
  • For taxable accounts, important properties: Expense Ratio, Tracking Error, Turnover, Tax Cost Ratio.
  • For IRAs, Turnover and Tax Cost Ratio are not that important.
  • For trading: Volume and Bid/Ask Spread are important.
  • Vanguard ETF list
  • Style Box for Equity Fund (Market Cap vs. Investment Style). For example, for VTI:
  • Style Box for Fixed Income Fund (Credit Quality vs. Sensitivity). For example for BND:

Bonds

International Stocks

  • Total International: VXUS, IXUS.
  • Total World Excluding US: VEU, ACWX, CWI.
  • Total World: VT, ACWI, SPGM.
  • Developed Markets: VEA, IDEV, SPDW, SCHF.
  • Emerging Markets: VWO, IEMG, SCHE.
  • Total World = US Total + Total International.
  • Total International = Developed Markets + Emerging Markets.

Three Fund Portfolio

Balanced ETFs & Funds

Questions: BND vs. AGG

  • Which to pick: BND vs. AGG?
  • Decompose BND.

Question: muni

  • MUNI vs. VTEB?
  • Does your state offer tax benefits for muni of other states?
  • Is there a muni-fund for your state?

Question: VT

  • What's the difference between VT, VTI, VXUS?
  • Decompose VT.

Question BNDW

  • What's the difference between BND, BNDX, BNDW?
  • Decompose BNDW.

Question: Three Fund Portfolio

  • Create a three-fund portfolio such that during 2000-2021, the max drawdown to be 25% (VTI was down 50%).

Question: balanced ETF

  • Pick a balanced ETF (AOK, AOM, AOR, AOA) and create a three-fund portfolio that mimics the ETF.

Question: Vanguard LifeStrategy funds

  • Create a three-fund portfolio that mimics one of Vanguard's LifeStrategy target-risk funds

Day 4

Mutual Funds vs. ETFs

Transaction Fees, NTF funds

  • Buy Vanguard's funds only through Vanguard since other stockbrokers may charge transaction fees!
  • Buy Fidelity's funds only through Fidelity since other stockbrokers may charge transaction fees!
  • Always first look at NTF (no transaction fee) funds.
  • Avoid load funds (they have sales charges).
  • TF (transaction fee) might be in the range of $20-80 per transaction (purchasing or sale).
  • Load fees might be in the range of 1-5% (as front-end or backend fees).
  • 3% of front-end fee => 3% loss in final capital!

Mutual Funds

Retirement Plans

  • Individuals may open a traditional IRA or Roth IRA.
  • Employees may be offered 401k, Roth 401k, HSA.
  • Businesses, self-employed may open solo-401k, SEP IRA, SIMPLE IRA.
  • For education: ESA, 529.
  • Selling securities (stocks, bonds, funds) or receiving dividends inside retirement accounts are not taxable events!
  • IRA Rollovers: IRA -> IRA, 401k -> IRA.
  • Roth Rollover: Roth 401k -> Roth IRA.
  • Reverse Rollover: IRA -> 401k.
  • Not allowed: Roth IRA -> Roth 401k.
  • Roth Conversions: IRA -> Roth IRA, 401k -> Roth 401k, 401k -> Roth IRA

Roth IRA, Roth 401k

  • Contributions to Roth are after-tax (nondeductible).
  • Qualified distributions from Roth are tax-free!
  • There are MAGI limits for directed contributions to Roth IRA (workaround: Backdoor)
  • Roth Conversion, Backdoor, and distributions from Roth are taxable events, file the form 8606.
  • Roth or not Roth

IRA vs. 401k

  • 401k allows loans up to 50% of the balance (not more than $50,000).
  • 401k contribution limits are much higher: $19,500 vs. $6,000.
  • Catch ups (50+ y.o) in 401k is much higher: $6,500 vs. $1,000.
  • 401k may offer matching, profit sharing, Mega Backdoor.
  • Overall limit for contributions to 401k: $58,000 + catch up!
  • 401k does not have limits on the income or MAGI (IRA and Roth have).
  • RMD applies to IRA and inactive 401k (both traditional 401k and Roth 401k).
  • Mega Backdoor in 401k vs. Backdoor in IRA.
  • 401k vs. IRA
  • IRA Rollover

SDIRA

  • IRA, Roth, solo 401k, SEP, HSA ESA may be opened as Self-Directed.
  • SDIRAs allow investing in alternative asset classes, like crypto, real estate, businesses, precious metals (but not collectibles!), tax liens.
  • Loans from retirement accounts are not allowed if the collateral is the account or if the owner is responsible personally for the loan.
  • Non-recourse loans are allowed.
  • Pay attention to UBIT!

Question 1

  • Which S&P-500 fund is the best?

Question 2

  • What do you think about such a social-responsible portfolio from an investment company?

Day 5

DCA — Dollar-Cost Averaging

Target Mutual Funds

The 4%-Rule of Withdrawals

Day 6

Assets Classes and Factors

Robo-advisors

Robo-advisors Platforms

Extras

Tests

Recordings

Forms

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Thank you!

Slava Chernoy
June 22, 2021, 15:59
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