Why can't financial journalists give financial advice?

Become a Patron!I started this blog because the more I learned about the personal finance industry, the more I saw the same problems that are pervasive in my other line of work in the travel hacking community: people are either paid to lie, or too ignorant to know if what they're saying is true or not. So, I figured I'd start a blog where I could tell people the truth.One difference between personal finance and travel hacking is that personal finance has an unusual number of people who are not being paid to lie, but for one reason or another are also incapable of telling the truth.

Jason Zweig and the amazing disappearing advice

I started thinking about this last week while researching some recent Wall Street Journal columns by Jason Zweig. At least as early as February, he started writing about the fact that by shopping around you could earn more interest on your savings that the rate offered by the big national banks and on mutual fund settlement accounts offered by brokerage houses. This is true.But this is a meaningless observation if it does not rise to the level of advice. Consider the following passage:

"Many money-market mutual funds are paying 2% and up. Although they aren’t backed by the government, they hold short-term securities whose value tends to hold steady. (A money fund yielding much more than 2.5%, however, is probably taking excessive risk.)"At Vanguard Group this week, taxable money-market funds were yielding between 2.31% and 2.48%, and tax-exempt money funds yielded 1.19% to 1.32%. Fidelity Investments and Charles Schwab Corp., among other firms, also offer money-market funds with attractive yields."

This looks very close to advice, but the more closely you read it, the more you find it slipping through your fingers. It is true that Vanguard taxable money-market funds were yielding "between 2.31% and 2.48%." But this is an absurd way of framing the situation. Vanguard only offers two taxable money-market funds! They are:

• Federal Money Market (VMFXX), yielding 2.34% as of March 19, 2019.
• Prime Money Market (VMMXX), yielding 2.45% as of March 19, 2019.

What is the point of describing this situation as a "range" between yields on Vanguard money-market funds? If you are saving cash in a Vanguard account, and can meet the $3,000 minimum investment requirement, you should put it in the Prime Money Market fund. If not, you can use the Federal Money Market fund (which is also the settlement account for Vanguard brokerage accounts, so it's not like you have a choice). If your current brokerage offers less than that on your cash, you should move your cash to Vanguard.Zweig then turns to online savings accounts, and mentions Goldman Sachs's "Marcus" online savings product: "Savings accounts at Marcus, the online bank operated by Goldman Sachs Group Inc., are paying 2.25%, with no minimum investment required. It takes only a few minutes to open an account; U.S. deposits at Marcus grew in 2018 by 65%, to more than $28 billion."Again this at first appears to rhyme with advice. Why would he mention Marcus if he isn't advising readers to use Marcus? But 2.25% isn't the highest interest rate you can earn on an online account: All America Bank offers 2.5% on up to $50,000 in their Mega Money Market Checking accounts!

Education may be valuable, but most people need (good) advice, not education

Let's turn from the Wall Street Journal to that other bastion of financial erudition, Bloomberg Opinion. Barry Ritholtz, the namesake of extremely-online financial advisory Ritholtz Wealth Management, last week expressed his anxiety over the extremely poor protections enshrined in law for participants in retirement plans offered by non-profit organizations and state and local governments, so-called 403(b) plans (which I've had occasion to write about before).These extremely inadequate protections are no doubt a matter of serious concern. But a teacher searching the internet for information about her 403(b) account does not need to lobby Congress to extend ERISA protections to 403(b) accounts. She needs advice about what to do with her 403(b). And just in the case of Jason Zweig, you can begin to see the glimmer of advice in Ritholtz's article. He writes:

"403(b) plans tend to invest way too much money in annuities — 76 percent on average. Annuities have much higher costs than typical mutual funds."

And:

"If an employer and 401(k) plan sponsor put a high-cost, tax-deferred annuity into a tax deferred 401(k), they would be warned by counsel to expect litigation."And they’d probably lose, because paying a high fee to put a tax-deferred component into a tax-deferred account is pointless."

Now, if you squint at these statements closely enough you might be able to guess that Ritholtz is saying "don't put a high-cost, tax-deferred annuity into your 403(b)," and "invest less than 76% of your 403(b) account in an annuity."But why should it be that people are left guessing in the first place?

People who provide information don't provide advice, and people who provide advice don't provide information

This is the fundamental pattern I see over and over again in the world of personal finance. Take, for example, my favorite resource for mostly-up-to-date interest rate information, DepositAccounts. This is an excellent resource I use constantly to check on interest rates on rewards checking accounts, online savings accounts, CD's, and money market accounts. Go ahead and bookmark it, if you haven't already.But this is what the top of their "Savings Accounts" page looks like (in my ZIP code):Now, this is obviously absurd: why would anyone prefer an account with a $10,000 minimum paying 2.35% over an account with a $1,000 minimum paying 2.45%? But DepositAccounts found a couple banks willing to pay them for preferred placement, presumably because those banks, rightly or wrongly, calculated that preferred placement would attract deposits in excess of their account's objective appeal.

Conclusion: always look for what's not being said

It would be awfully odd to end a post like this without offering some concrete advice. Indeed, I'd be guilty of exactly what I accused Ritholtz of: educating without advising.So let me sum up my advice in the most concrete way possible:

• When you are reading a piece of financial journalism, pay close attention to what is not being said. If someone says you "can" increase the interest rate on your savings, or you "can" reduce the expenses you pay on your investments, check whether they also say you "should" increase the interest rate on your savings, or you "should" save money on management expenses. If not, why not? Does the publication have relationships with investment managers they don't want to jeopardize?
• When you're reading a source of information like DepositAccounts, the same rule applies. If a particular account is "sponsored," or a partner is "preferred," or a bank is "recommended," are you given any reason why that account is superior to any other account? Are there other, better accounts that are excluded because they are unwilling to pay for placement, or don't pay a commission to the site?

I've written elsewhere that many people make a grave mistake when compensating for conflicts of interest. They think, "now that I'm aware of the conflict of interest, I'll discount it by an appropriate amount." But this is incorrect. The correct response to a conflict of interest is to discount the advice given by 100%. If possible, you should even discount conflicted advice by slightly more than 100% (this is not always possible, for example in insurance sales where some kind of commission is typically unavoidable).The United States has some of the most vigorous protections for free speech in the world. It also has some of the most strict restrictions on professional speech, and a national media almost entirely in the control of a few powerful corporations and individuals. This curious contradiction often makes it difficult or impossible to know whose voice you're hearing at any one time: when is Jason Zweig speaking for Jason Zweig, when is he speaking for the Wall Street Journal, and when is his voice filtered through the Journal's legal department? But it is still possible, and necessary, to figure out when, for whatever reason, you're not getting the whole story and to try to put the pieces together for yourself.

The least-understood benefit of the 529 scam

I have written a lot about 529 college savings plans, the grotesque transfer of millions of dollars of additional wealth to the richest people in the country, which were expanded and made even more valuable in the Smash-and-Grab Tax Act of 2017 when qualified "higher education" expenses were expanded to include up to $10,000 per year in tuition at private elementary and secondary schools.In an exchange with reader calwatch in the comments to an earlier post, I touched on one of the most misunderstood elements of 529 plans, and realized it really deserved its own post.

The difference between tax-free and penalty-free withdrawals

I've gone over the basic conceit of 529 plans many times before: contributions are made with after-tax income (although some states allow tax deductions if you contribute to the plan in your state of residence), compound internally tax-free, and can be withdrawn tax-free for qualified "higher education" expenses (now including up to $10,000 in private elementary and secondary school tuition, as I mentioned above).It's essential to understand three types of withdrawals that can be made from a 529 plan:

• withdrawals for qualified higher education expenses paid out of pocket or with student loans are completely tax-free;
• withdrawals for qualified higher education expenses covered by grants and scholarships are penalty-free, but subject to income tax on the earnings portion of the withdrawal;
• and withdrawals for non-qualified higher education expenses are subject to income tax on the earnings portion of the withdrawal and a 10% penalty on the earnings portion of the withdrawal.

The key difference between tax-free and penalty-free withdrawals is this: tax-free withdrawals must be made in the year the qualified educational expenses are paid (or billed), while penalty-free withdrawals can be made at any time and "attributed" retroactively to the grant or scholarship.For folks who choose to enroll in high-deductible health plans eligible for tax-free health savings accounts, this should sound familiar: withdrawals from HSA's must be "attributed" to a qualified health expense, but they don't have to be made in the same year the health expense is incurred. Indeed, they can be made years or decades later, as long as you keep good records.

A well-timed penalty-free withdrawal is a tax-free withdrawal

What this allows you to do is time penalty-free, taxable withdrawals for years when you have low taxable income, for example if you stop working before age 70 but want to take advantage of the Social Security magic trick. During years in which you don't earn any ordinary income, you can "fill up" the bucket of your $12,000 or $24,000 standard deduction with 529 plan withdrawals attributed to decades-earlier grants and scholarships, and then meet any additional income needs with withdrawals from Roth accounts or taxable capital gains in the separate 0% capital gains tax bracket for those transactions.

Conclusion: yes, I'm trying to kill this loophole

Tax-advantaged programs like 529 accounts, while offering hilariously small benefits to the middle class and no benefits at all to the poor and working classes (who for obvious reasons are not saving anything at all) offer preposterous tax incentives to the rich, the very rich, and the ultra-rich.The answer is waiting for us whenever we're ready for it: shut down the 529 scam once and for all.

Let's all go to the movies

When Ronald Reagan needed to explain to the American people the outlandish claims of his voodoo economists, he would often reach back into his remaining intact memories of his first career, as a Hollywood star. Who could forget such iconic roles as "The Gipper," "The Gipper: Tokyo Drift," and of course "2 Gipper 2 Furious?"Reagan patiently explained to his lead-damaged voters that high marginal income tax rates on actors meant that after getting paid for two films per year, leading men and women would take the rest of the year off, knowing that each additional movie would be worth just pennies on the dollar to them.The logic is airtight: if a blockbuster takes 2 weeks to film, an actor considers two weeks of work worth $200,000, and their studio considers the actor's work worth $400,000, then at 50% tax rates the actor is willing to work but at 70% tax rates they'd rather chase starlets around the pool at the Chateau Marmont.Between 1981 and 1987, Reagan got his wish, unleashing unimagined productivity in the acting industry by reducing the marginal tax rate on top incomes from 70% to 38.5%. Or did he?

Methodology

Due to my unfortunate literal tendency, I got to wondering: if 70% marginal tax rates were keeping actors from taking on a third film each year, did lowering top marginal tax rates to 38.5% increase the number of films top actors were willing to take on?Since tax rates fluctuated wildly between 1981 and 1986, this gives us a natural disjuncture point. For each of the 25 years ending in 1980, and the 25 years beginning in 1987, I looked at the top-billed and second-billed actor in the highest-grossing film of the year, and asked a simple question: how many films did that actor appear in? There are a few obvious problems with this methodology: if actors are paid the year principle photography occurs, but the film is released in a different year, the wrong actors might be selected for a given year. Additionally, surprise hits, particularly independent films, might have high box-office receipts but not have needed to compensate their actors correspondingly. I don't think these problems should matter much, but if you do, you can do your own analysis.

Results

Having put all this data together (you can check it out for yourself), I wanted a way to easily visualize it. In each charts the number of total film credits by the top-billed actor in the highest-grossing film of that year is shown in blue, with the number of total film credits by the second-billed actor in the highest-grossing film stacked on top in red.Here are the 25 pre-reform years:And here are the 25 post-reform years:Another approach is to look at some statistical values. Pre-reform, the average number of films by both top-billed and second-bill actors was 1.8, with a range of 1 to 5 (props to Gene Wilder in 1974) and standard deviation of 0.65 and 1 for top-billed and second-billed actors, respectively.Post-reform, the average number of films dropped slightly, to 1.72 (top-billed) and 1.68 (second-billed), with a range of 1 to 4 (Sam Neill in 1993 and Billy Bob Thornton in 1998). The standard deviation rose slightly for top-billed actors to 0.94 and fell slightly to 0.85 for second-billed actors.Using the sum of both top-billed and second-billed actors, as I did in the charts above, yields a fall in the mean from 3.6 to 3 films per year, and a slight rise in the standard deviation from 1.26 to 1.29 films per year. Using the combined data, the median and modal number of films by each year's pair of actors is identical pre-reform and post-reform, as is the range, with 2-7 films being made by each year's pair, with 3 films per year remaining the most common total value.

Why did the Reagan tax reforms fail?

From the perspective of encouraging our highest paid actors and actresses to produce more films for our entertainment and enrichment, the verdict is clear: the Reagan reductions in top marginal tax rates were an abject failure. A tax reform that reduced revenue by roughly 1.1% of GDP in order to incentivize increased economic activity at the highest end of the income scale instead left that activity slightly lower than it was pre-reform!One key to understanding why is the interaction of what we can call "wealth effects" and "income effects." To clarify the difference, consider a simple case of interest rates on plain-vanilla savings accounts. If interest rates are currently at 10%, what happens if they fall to 9%?On the one hand, this will make saving marginally less attractive. You may be willing to deposit $1,000 if it will earn you $100 in interest per year, but if it only earns you $90 per year, you may prefer to spend all or part of the $1,000 instead. This is the income effect: the less net income you receive from an activity, the less incentive you have to do it. It's also the effect voodoo economists choose to emphasize.But a second effect is working in the opposite direction: the wealth effect. If your goal is to accumulate a total of $2,000, then a reduction in interest rates from 10% to 9% will not lead you to save less, but instead cause you to save more, since your previous savings will no longer let you achieve your goal in the same time frame.Likewise, the wealth effect of a higher interest rate is not increased thriftiness, but the opposite: you need to save less money to achieve your wealth goals at an 11% interest rate than at a 10% interest rate, leaving you more money to spend rather than save.Once you understand the income and wealth effects, you can see one reason why Reagan's efforts were doomed. The income effect means that post-1987, actors got to keep a far higher share of their income, increasing their incentive to work as much as possible, but the wealth effect means that it took far fewer films to accumulate the kind of wealth that puts you comfortably among the rich and famous. Not every actor struck the same balance, but a glance at the data shows that for highly-paid actors on the whole, the two effects almost perfectly canceled each other out.

Conclusion: wage slavery or capital strike?

This exercise, and generally taking income and wealth effects seriously, isn't supposed to suddenly grant you some special insight into the correct marginal tax rate on high incomes. Instead, it's meant as an invitation to think about what, exactly, we want our tax policy to achieve, and how.To give a simple example, if we believe that investment banking is a good and worthy activity that improves the peace and prosperity of the world in one way or another (allocating capital, hedging commodity prices, whatever), then should we prefer to have a large number of investment bankers working reasonable hours and making reasonable incomes or a small number of investment bankers working inhuman hours and making preposterous incomes?In the one case, high marginal income tax rates might reduce the willingness of investment bankers to work long hours in order to earn higher and higher incomes, forcing firms to hire more of them at more reasonable wages and hours. If investment banking is, instead, as specialized an activity as Guild Navigator, then perhaps lower tax rates are necessary to encourage the very highest specimens to achieve their full potential.But as The Gipper made clear, it's not enough to say that we'll "let the market decide," for the simple reason that "the market" is a product, not an input, of public policy.

The more unrealistic your goals are, the more of them you need

I got to thinking the other day, as I so often do, after seeing somebody toss off a joke on Twitter. The gag is an asset manager being told by a prospective client, "I need real, net of fee returns of 8%, so I don’t think you are a fit." The asset manager drily replies in .gif form, "Correct." My immediate response was not to the "realistic" or "unrealistic" element of an 8% return, net of fees. My response was to the idea of "needing" one return or another.

What return do you need?

If you want to operate a private space program like Jeff Bezos or Elon Musk, you need many billions of dollars. For the sake of argument, let's say ten billion of them. Now, ten billion dollars sounds like a lot of money, but it's not an impossibly large amount of money. According to Forbes's (always-suspect) list, there are about 150 people in the world with fortunes that large. The formula is simple: you start a company (or, like Eduardo Saverin, be roommates with someone who starts a company, sue him, renounce your US citizenship, and move to Singapore), hire some competent managers, wait for the stock market to get frothy, go public, and presto, you're worth $10 billion.The trouble is, there's no point in operating half a space program. That means if your managers are a little less competent or the stock market is a little less frothy, you might only walk away with $5 billion — not nearly enough to land a man on Mars. If you don't want to strand Matt Damon halfway there, then you need a different goal. For example, the University of California system budgeted the collection of $3.15 billion in tuition and fees in 2016-2017, meaning with $5 billion you could pay the tuition and fees for every student in the University of California system for a year (and still hang on to almost $2 billion).The point is not that financing public education in California is a less worthy goal than sending Matt Damon to Mars. The point is that you can't afford to send Matt Damon to Mars, so you need a backup goal.And indeed, this is a perfectly common situation to find oneself in. On a visit to a steakhouse you might prefer the $150 cut of meat to the $45 cut, but choose the $45 piece anyway because you can't afford the $150 option. It doesn't make your choice "less authentic" or "worse" in any meaningful way; it simply means you've arrived at a particular balance of your preferences and your constraints.

Your goals don't need to be realistic if you have enough of them

At this point you might object that there's a big difference between a $150 steak and a reusable rocket that can land on a platform floating at sea. But I don't see any difference at all: to afford the steak you need another $105, to afford the rocket you need another $9,999,999,955. In both cases, your ability to meet your goal depends on your starting assets, your income, your savings rate, and the return on your investments.Personal finance advice often ends up eliding this by saying the only goal worth thinking about is to acquire "as much as possible." Traditionally, that's been used to mean as much money as possible. "The Millionaire Next Door" became a classic of the genre by observing that even a middle-class income allows healthy white people to accumulate millions of dollars if they live frugally enough. In our own time, the FIRE community turns this logic on its head and says the goal is to acquire as much freedom as possible, i.e. working the least possible amount of time required to liberate oneself from the drudgery of work.If "as much (money, freedom, whatever) as possible" is the only way you know how to think about your goals, then you end up with more or less identical advice: earn as much money as possible, spend as little money as possible, and invest in the most aggressive portfolio you will be able to stick with through market volatility.But acquiring "as much as possible" is obviously not the only way to set goals. Most significantly, it takes all potential goals that decrease your net worth off the table. Giving away a million dollars may feel good for a moment, but it also reduces your net worth by a million dollars, which makes it theoretically indistinguishable from buying a new car, renovating your kitchen, buying organic groceries, or sending your kids to private schools.

Have enough goals to accommodate reality

Fortunately for them, but much to the consternation of personal financial columnists and bloggers, in the real world people seem to have no trouble organizing their lives around multiple goals. People do buy organic groceries, even though they could invest the difference in price. People do renovate their kitchens, even if the renovations cost more than any higher final sale price of their house. People even send their kids to private schools, unfortunately.While I find people are in general extremely effective at forming and executing goals within their means, they don't pay nearly enough attention to "upside risk:" the possibility that their income, savings, and return on investments will dramatically outpace their goals. Of course, setting unrealistic goals is, by definition, unrealistic. You don't want to commit to donating $1 million in 10 years, only to discover that a job loss, unexpected medical expenses, or global financial crisis leaves you with just $250,000.But you also don't want to commit to donating $250,000 and find that your investment has swollen to $1 million, leaving you with $750,000 you can't fathom what to do with. Is that a better problem to have than the reverse? Of course. But there's no such thing as a good problem, and if you find yourself suddenly on the spot trying to figure out what to do with $750,000, you're vulnerable to two serious errors.First, you might simply spend the money foolishly, or not at all. If you check your brokerage statement the same day you get a mail or phone solicitation from the Wounded Warrior Project, you might ship the money off to them to be spent on their lavish headquarters and advertising budget. Worse in its own way is simply choosing not to spend it and passing the problem on to the next generation.But the second problem is one I consider almost as dire: a big part of the pleasure of setting goals is working towards them, and experiencing satisfaction and disappointment as you draw nearer and farther away from them. In my other career as a travel hacker, I see my loyalty program balances rise towards the values I need to book the trips I want to take. Money's not entirely like that: there will always be things to spend as much or as little money as you like on. But the principle is the same: working towards a goal has a satisfaction independent of actually achieving it.

Conclusion: set unrealistic goals!

Most people have a sense of what they will do if their investments end up returning 5% instead of 8%. They'll move to a smaller house, they'll replace the car less often, they'll take fewer vacations, they'll leave less money to their children. But fewer people know what they'll do if their investments end up returning 11%, or 20%, or 100%, instead of 8%. Thinking about that problem sooner, rather than later, gives you more time to formulate the right goals and more time to relish getting closer to them, whether or not you ever end up getting Matt Damon to Mars. 

Reminder: the buyback debate is about taxes, not corporate finance

Long-time readers know that the way to tell if a financier is lying about stock buybacks is to check if their mouth is moving.But since buybacks are back in the news, meaning lies about buybacks are back in the news, I thought I'd offer a quick refresher.

If buybacks and dividends are identical, why do buybacks at all?

The lie about buybacks always starts the same way: "from a corporate finance perspective, share buybacks and dividends are identical." This concept of identity is extremely important to people lying about share buybacks.The logic goes that a firm with more cash than it is able to productively invest in operations should return some or all of that cash to its shareholders. Since a single share contains the value of the firm's productive capacity and any cash and marketable securities it has on its books, minus debt, buying back shares (increasing the proportional ownership of the firm's productive capacity for the remaining shareholders) and issuing dividends (moving cash from the books of the company to the individual accounts of shareholders) should have the same effect as buybacks on the company (less cash) and the shareholders (more cash for the shareholders who participate in a buyback, or a greater ownership stake in the operating business for the shareholders who don't). Hence, the identity that's so important to people lying about buybacks.So if this identity holds, if share buybacks are absolutely identical in every way to dividend distributions, why all the fury around banning them?

Stock buybacks are about managing individual shareholder tax liability

The fury is because dividends and share buybacks aren't identical: when held in taxable accounts, dividends are taxed in full in the year they're distributed, while only people who participate in share buybacks incur a tax liability, and only if their shares have increased in value since purchase.That means dividends create a "blended" tax rate across all shareholders (a 0% rate for tax-free institutions and individuals, a 23.8% rate for high-income individuals), while share buybacks allow shareholders to determine their own tax liability.In a stylized example, a firm issuing a $1 per share dividend on 1,000,000 shares is virtually guaranteed to distribute some of it to untaxed institutions or individuals in the 0% capital gains tax bracket, some to individuals in the 15% tax bracket, some to individuals in the 20% tax bracket, and some to individuals in the 23.8% tax bracket, while a firm buying back $1,000,000 worth of shares might not create any individual tax liability at all, if only untaxed institutional shareholders participate in the buyback.

Should wealthy shareholders decide for themselves whether to pay taxes?

This is the whole ballgame. Since only the very wealthy hold shares in taxable accounts at all (as opposed to workplace retirement, IRA, or HSA accounts), the entire propaganda operation around share buybacks is focused on allowing them to manage their individual tax liability. A lifetime of carefully selecting companies that maximize their share buybacks and minimize their dividends leaves a multi-millionaire paying virtually nothing in taxes, then passing along greatly appreciated shares with a stepped-up basis to their heirs.As I explained in my earlier post, 364 days a year financiers have no trouble explaining this in fine detail to their wealthy clients. But on the 365th day they begin to rant and rave about how there's absolutely no difference between dividends and buybacks.But the debate over share buybacks has never been about corporate finance. The debate is about whether the wealthiest people in the country should get to decide for themselves if they'll ever owe taxes on their investment returns, or whether those returns will be passed from generation to generation tax-free.

Robinhood 3-year anniversary review: I love it, but it's terrible

I just glanced at my Robinhood app and realized that I joined on January 8, 2016, which made yesterday my third anniversary of using the app. That seems like as good an opportunity as ever to take stock and share my overall impressions so far.

The company seems perfectly scrupulous

Robinhood attracted a lot of damaging, well-deserved publicity last month for the botched launch of their "checking and savings" product, but it's worth pointing out the product never launched and they never accepted any money from anyone under false pretenses (or any pretenses at all). No one got "ripped off," although some wags have speculated it may have been a deliberate stunt to acquire customer data on the cheap. If so, that would be a shame, but hardly unprecedented in the world of venture capital.Besides that hiccup, after 3 years using the app I'm constantly impressed by how well their technology works, in a field as bespoke and arcane as securities. To give a simple example: back in November, 2016, I owned three shares of EWU (the iShares MSCI United Kingdom Index Fund), which underwent a 2-1 reverse stock split. I suddenly saw my shares drop from 3 to 1, and shot them a note asking how the odd share would be handled. They replied a few hours later saying the odd share would be paid out in cash in 2-4 weeks, and it was. This is not a difficult or complicated transaction — it happens millions of times every year. But it was a transaction that Robinhood had thought of and had a system for dealing with.To give a slightly more complicated example, in 2016 I owned 20 shares of Seagate Technologies. As is my custom, I placed a limit sell order to take advantage of any price spikes. My limit order happened to be at $26.13. But when the markets opened on July 12, 2016, the price didn't just spike, it leapt. Since Robinhood knew my limit price, they could have picked off my order and then immediately sold it at the higher opening price. This would have been illegal, but so is falsifying mortgage documents and that's never stopped anyone. Instead, Robinhood executed my order at the opening price of $27.47, 5% higher than the price they knew I was willing to sell at.Operating in a scrupulous way may sound like a low bar, but it's a bar much larger, more profitable firms fail to clear on a daily basis, so the fact Robinhood meets that standard shouldn't be shrugged off.

Robinhood did two and a half innovative things no one talks about

Robinhood gets a lot of credit for their commission-free trades — everyone knows about that. What fewer people mention are two genuine innovations (plus one expensive gimmick) they introduced with little or no fanfare:

• real-time quotes. Those of you young enough to remember looking at early implementations of online brokerages no doubt remember that publicly available quotes were always accompanied by the stern admonition that "prices may be delayed by 15 minutes." My primitive understanding is that the delay on the public feeds allowed exchanges to sell real-time information to those willing to pay for them. Robinhood simply made real-time prices available to everyone, whether or not they actually invested money with Robinhood.
• commission-free options trading. Unlike real-time prices, this is genuinely unique to the best of my knowledge. I've never traded options, and I don't think you should trade options unless you have some inside knowledge it would be illegal to trade on, but if you do have some reason to want to trade options, being able to make those trades without paying a commission is obviously superior to the alternative.
• fixed-cost margin loans. Robinhood also made margin trading more widely available by offering fixed-cost margin loans. These loans are not a good deal if you're a professional trader because lower rates are available at other brokerages, but like Robinhood's  commission-free options trades, if you have some kind of trading edge you may be interested in borrowing money at relatively low rates in order to maximize your upside.

Robinhood cannot be your primary brokerage

As all the foregoing should attest, I love Robinhood, I use Robinhood every day, and I'm glad it exists. But it does not and cannot play any significant role in the brokerage space until they fix some fundamental flaws.First, they don't support retirement accounts. There is no logical reason why anyone should be investing in taxable stocks or ETF's until their workplace retirement accounts and Individual Retirement Accounts have had their contributions maximized. In this sense, Robinhood puts the cart before the horse, allowing individual investors to make small investments in individual stocks and bonds they could also make through a tax-advantaged retirement account (Vanguard now allows most ETF's to be traded commission free).Second, they don't support mutual funds. ETF's are great for taxable accounts under certain circumstances, but even if you want to make taxable investments, it doesn't make any sense to completely exclude mutual funds from your universe of investible securities. That means any mutual funds you want to hold need to be purchased in a different account with a different brokerage. That's not an insurmountable obstacle, it just means you need to continue to use other brokerage accounts alongside your Robinhood account.Finally, until Robinhood implements three changes, it will never be anything more than a stunt, as much fun as it is:

• allow specific identification of shares for sale;
• track unrealized and realized gains;
• and integrate a sensible way of tracking running gains and losses.

A brief note on the third point. When I open my Robinhood app, I see that since I joined the service 3 years ago, I've earned a return of $264.37, or 220.22%. My problem is that I have no idea what that means, and it's not explained anywhere inside the app. Is it the current balance in my account divided by the initial balance in my account, which would have no connection to the performance of any of my investments? Does it take dividends into account? Does it take into account both realized and unrealized gains, only the first, or only the second?When it comes to tax documents, I'm sure Robinhood prepares them as scrupulously as it handles all its other operations. But I don't want to consult my tax documents. I want to consult the app I use to do my gambling, and Robinhood has simply decided to make that information as difficult as possible to access and use. Compare that to Vanguard's super-primitive website and app, which nevertheless allow you to break down your account balance by contribution/withdrawal, investment income, and capital gains. 

Conclusion

Among a certain breed of venture capitalists, Robinhood is considered an exciting new business that is going to revolutionize the investment landscape. It may revolutionize the landscape, but it will never make a lasting impression as long as it's offering something for free that costs money to provide. That doesn't mean it won't be around in 10, 50, or 100 years. It may well be purchased as the investment interface for Bank of America, Chase, Fidelity, or Charles Schwab.But as scrupulous as the company has proven to be so far, the American investment landscape is too firmly shaped by the tax treatment of investment returns for a firm that offers only taxable brokerage accounts to be of much interest to anyone but gamblers. If Robinhood was intended as a proof of concept, the concept has been proven and they should look for a buyer. If it's intended to operate as an independent brokerage for the foreseeable future, they need to get their act together, and implement the kind of concrete improvements I described here as soon as possible so they can attract the amount of capital it will require to start earning a profit.Finally, let me be clear, I don't have a horse in this race: I like Robinhood, I'll use Robinhood as long as it exists, and if it goes out of business I'll stop using it. After all, I've got checking, savings, brokerage, and retirement accounts all over the place. But since Robinhood is so bad at explaining its own operations, I felt the least I could do is give new users the lay of the land: if you want to invest with Robinhood, think of it as the dessert you earn after you've already eaten the vegetables of low-cost, tax-advantaged retirement savings accounts.

Everyone should have access to the federal Thrift Savings Plan, but not for you reason you think

Shortly before his humiliation and expulsion from public life, Florida Senator Marco Rubio resurrected the idea of allowing some non-government employees to invest in the Thrift Savings Plan, which is the federal equivalent of private-sector 401(k) and non-profit 403(b) plans. The proposal got some sympathetic attention from lazy personal finance journalists, and some critical responses from bloggers serving the federal workforce.

The lazy reason to support TSP-for-all: lower costs

The narrow reason financial journalists latch onto in support of TSP-for-all is administrative costs, and it's true that TSP charges less in overhead and fund management fees than virtually all private retirement schemes, between 0.032% and 0.033%, depending on the fund.

Let me be clear: costs matter, and that's a lower cost than, for example, a Vanguard mutual fund held in a Vanguard 401(k).

But, as opponents of TSP-for-all are quick to point out, those costs are subsidized in part by fees paid by employing agencies. Universal enrollment in TSP might provide some economies of scale, but would also introduce a large number of non-subsidized workers into the system, dragging up average costs even if the final cost is lower than most workers pay today.

For that reason many TSP-for-all proposals involve replicating a second pseudo-TSP for non-federal-employees, so federal employees continue to enjoy their agency subsidies and lower costs, while non-federal-employees are shunted into a parallel system with higher, unsubsidized costs.

With costs as low as they already are in the private mutual fund industry, this strikes me as the least convincing argument for TSP-for-all.

A decent reason to support TSP-for-all: simplicity and universality

An argument for TSP-for-all that I'm more sympathetic to is that decisions over the availability of tax-advantaged retirement savings shouldn't be made by employers at all. If the federal government decides it's willing to let people shield $25,000 in earnings from income tax in 2019 ($6,000 in IRA contributions and $19,000 in workplace contributions, plus catchup contributions in both), why should your boss get to decide whether you are able to take advantage of that benefit or not? It's as nuts as companies running their own private health insurance offices.

Providing everyone, with or without their employer's permission, with access to the total retirement savings benefit they're entitled to, is a commonsense measure, although as I've said in the past, my preference would be to simply eliminate workplace retirement savings plans entirely and increase and universalize the contribution limits for individual retirement accounts (which isn't mutually exclusive with TSP-for-all).

TSP-for-all is also sometimes praised on the grounds of simplicity, and here the argument is fair enough as far as it goes. It's somewhat shocking even to me, but the "best retirement plan in the country" has just 5 investment options (plus "Lifecycle" funds that blend the 5 in different proportions): US large-cap, US small-cap, US bonds, international developed stocks, and the TSP's proprietary "G fund."

The first four are fairly standard low-cost market-capitalization-weighted index funds, while the G fund is unique in that it offers interest income based on intermediate-term US treasury rates, but with the principle guaranteed so that the fund can't lose money when interest rates rise. A neat trick!

I think between them these are excellent components in a retirement savings portfolio, and wouldn't have any serious objection if they were the only options available in a TSP-for-all plan. But there are perfectly reasonable objections to this fund lineup as well: emerging markets are completely absent, as are international bonds. Do those asset classes have a role in every portfolio? Of course not. Should they be categorically excluded from investments? That depends on the trade-off you want to make between simplicity, versatility, and diversification.

The best reason to support TSP-for-all: a simple national supplemental annuity

The primary source of retirement income for Americans is not traditional defined-benefit pensions, and it's not defined-contribution retirement plans like 401(k)'s and 403(b)'s. It's Social Security's old-age benefit, a federal program that guarantees retirement income based on your recorded earnings paid into the program during your working lifetime.

One problem with our current jerry-rigged retirement system is that under our laws, annuities are not investments at all: they're insurance contracts, sold on a commissioned basis by state-licensed agents and state-regulated for-profit companies.

If, instead, we want voluntary savings to accumulate and supplement workers' Social Security income in retirement, then there's no better solution than a federally-guaranteed annuity, available nationwide, based on a worker's balance in the federal Thrift Savings Plan.

The Thrift Savings Plan already offers a free calculator showing how your retirement savings can be converted into a single lifetime, joint lifetime, or inflation-indexed annuity (and even a few more exotic options related to non-spouse beneficiaries), and I haven't been able to find another company offering better terms. However, those annuities are still technically issued by the private MetLife corporation, and subject to state law (and bankruptcy court).

But since the federal government already runs a guaranteed income program for retirees, the greatest promise of TSP-for-all is the ability to convert accumulated savings into a supplemental Social Security benefit, guaranteed by the federal government to last as long as you do.

What do we want from our retirement system?

Nothing could be simpler than our retirement system as it exists today: the rich do what they can, while the poor suffer what they must. But this rule is not written in the stars, it's the product of very specific decisions made in the development of our retirement policy:

• Employers are allowed to decide the retirement savings options available to their employees, so low-wage employees have less access to tax-advantaged savings vehicles than high-wage employees;
• Social Security contributions are capped so high-income workers have more disposable income to contribute to tax-advantaged plans than low-income workers do;
• Low-income workers who are able to save in individual retirement accounts can be lied to by financial advisors who are not required to act in their best interests.

A simple, cheap, universal, federal Thrift Savings Plan won't solve every problem in the world. But no one defending the current system is even pretending that it's doing an adequate job providing for income security in retirement.

So how about we try something different?

What was behind Robinhood's very bad week?

Since the product was announced on Thursday I've been following with interest the drama surrounding Robinhood's "Checking and Savings" product, which has since been put on hold and rebranded as a "Cash Management" account. It's an interesting story about the brokerage and banking industries, and I think it's possible at this point to piece together what Robinhood was thinking, and what went wrong.

Cash in brokerage accounts absolutely is insured by SIPC

This is something a lot of people seemed to get hung up on in the early stages of the drama, but Robinhood was 100% correct that cash deposits with a SIPC-insured brokerage are insured by SIPC up to $250,000.

Doctor of Credit's early take on this was that SIPC insurance might somehow be less trustworthy than FDIC insurance, but there's no reason to believe that's the case. Essentially 100% ("well over 99%") of SIPC-insured claims have been paid in full over the 45 years the program has been in existence.

Despite the now-famous quote from the chairman of SIPC, it's totally normal and legal for brokerage accounts to hold cash. If you own dividend-paying stocks or ETF's in your Robinhood account, the dividends are paid out in cash and deposited in your Robinhood account as cash. No one has ever questioned, nor would it occur to them to question, whether those cash holdings are SIPC-insured in full up to $250,000.

But most brokerage accounts hold very little cash

Back in August Jason Zweig wrote usefully about how brokerages handle idle cash. Best-in-class firms like Vanguard sweep idle cash into a money market fund like the Vanguard Federal Money Market Fund, which currently has an SEC yield of 2.24%. 

Interactive Brokers, a popular choice for active traders, currently pays 1.69% on idle cash balances above $10,000, but only for accounts with a net asset value above $100,000.

As Zweig explains, even less scrupulous firms sweep idle cash balances into accounts with partner banks, where the cash is FDIC-insured but earns virtually nothing in interest, with the bank and brokerage splitting the difference between prevailing interest rates and what they pay out to customers. This is how Fidelity Cash Management accounts work, which currently share just 0.31% in annual interest with accountholders.

Money market funds are neither fish nor fowl

Money market funds are interesting because they have characteristics of both mutual funds and bank deposits. Like open-ended mutual funds, they collect money and issue shares, and are priced based on their net asset value. But like bank deposits, they seek to maintain a price per share of exactly $1. In order to achieve this, they hold very short-term, government-backed assets, precisely the kind of assets Robinhood promised to invest in.

Figuratively speaking, they use the interest from those securities to "top up" the value of shares, and pay out any excess interest as dividends in order to maintain the value of each share at $1.

Most importantly for our purposes, until 2008, money market mutual funds were not FDIC-insured, and since they were securities, their value was not insured by SIPC either. To be clear, the securities themselves were insured (so your broker couldn't run off with your money market fund shares), but if their value dropped below $1 per share, you were out of luck. Investing involves risk: it's a cliche for a reason.

Money market funds were more vulnerable than people thought

And indeed, that's just what happened in 2008, when the system broke down after the Primary Fund "broke the buck" by reporting a share price below $1.

This posed a catastrophic risk to the financial system: for years, investors had been encouraged to invest their cash in supposedly-safe money market funds instead of ordinary bank accounts or certificates of deposit in order to earn perhaps another 0.5% in interest on their balances. But if money market funds were no longer safe from market volatility, what was the point in holding them? The threat was a flood out of money market funds, a collapse in the price of short-term securities, and a spike in interest rates at the very moment they would do the most damage to the economy.

In response the federal government stepped in, temporarily extended FDIC insurance to money market funds, and provided unlimited liquidity to the financial system. The day was saved.

What Robinhood could have done

All this background is meant to illustrate the options Robinhood had available:

• they could have contracted with a bank to sweep idle cash into an FDIC-insured deposit account and passed along the interest to their customers. If they wanted to be "good guys," they could have passed along their entire share of the interest, which might add up to as much as 1.5% if they partnered with a particularly good bank or banks;
• they could have chartered a bank and swept idle cash into accounts at their own in-house bank, paying out as high an interest rate to their customers as their lending was able to support;
• they could have contracted with a mutual fund company like Fidelity or Charles Schwab to sweep idle cash into a third-party money market mutual fund;
• they could have registered their own money market mutual fund and swept idle cash into it, as Vanguard does.

Each of these options has advantages and disadvantages. But the disadvantage they all have in common is that they're expensive. Using an outside bank or mutual fund means you don't have any more interest to pay your customers than the outside firm is willing to share with you. Using an in-house bank or mutual fund would provide more flexibility but incur vastly higher start-up and regulatory costs, not something that appeals to an asset-light startup like Robinhood.

What Robinhood was thinking

So, they got clever. If they could create an account under the auspices of their brokerage, then the cash would be SIPC-insured just as it is today. Short-term treasury rates aren't quite at 3% yet, but you could imagine a blend of short- and long-term treasuries that gets you within spitting distance, which you could then top up with MasterCard interchange fees from the debit card and your investors' capital as needed, at least until it ran out.

Put this way, you can see why the CEO of SIPC was skeptical of the project: if Robinhood wants to guarantee the value of deposits from loss, then they need a bank charter and FDIC insurance, while if they want to pass along the performance of actual securities then the money is being invested and the SIPC doesn't insure the value of investments from losses.

Conclusion

There are two ways to think about the interest a depositor receives. On the one hand, it's the price banks pay for the money they need to lend out: a bank is willing to pay depositors 3% on a 10-year CD if it can loan out that money at 5%.

The other way to think about the interest a depositor receives is that it's "what's left over." A bank that lends out money at 5% and pays 3% of that in broker commissions and overhead only has 2% left to pay to depositors.

As a thought exercise, forget the 3% offered by Robinhood. Why doesn't some bank decide to pay depositors 10% on their balances? They'd immediately attract hundreds of millions of dollars in deposits and become one of the largest banks overnight, crushing their competitors.

Well, it's because no bank has 10% left over after expenses. Any bank that tried it would immediately deplete their capital reserves and the FDIC would have to step in to bail out their customers.

Whom amongst us doesn't have a brilliant strategy to turn a small fortune into a large fortune? If Robinhood thinks they can return 3% to depositors after paying their expenses and providing their investors with an expected return on capital, they're welcome to try.

But for now they're going back to the drawing board.

The SEC offers free financial planning tools. Are they any good?

This is a funny thing I was unaware of until I saw someone mention it on Twitter the other day: the SEC hosts a website offering free financial planning tools. I was surprised, since I think of the SEC as having a "hands-off" approach to investing: they don't want people to commit too much fraud or anything, but they're mostly indifferent to whether you invest well or poorly and make good or bad decisions with your money.Financial planning is a totally different animal because financial planners really do make right and wrong decisions. For example, SPICX is an S&P 500 mutual fund with an expense ratio of 1.31%, 33 times more than Vanguard's equivalent fund. That's not something that bothers the SEC (assuming the expense ratio is properly calculated and reported), but it's something that should bother a financial planner.So, I decided to find out: are the SEC's free financial planning tools any good?

401(k) and IRA Required Minimum Distribution Calculator: 3/10

The 401(k) and IRA Required Minimum Distribution Calculator is functional, but primitive. It asks for just two pieces of information: your account balance at the end of the previous year and your age at the end of the current year. From that, it calculates your "withdrawal factor," which is the reciprocal of the percentage of your assets you need to take as required minimum distributions. Finally, it calculates that amount. There are two main design problems with the tool that earn it such a low rating:

• It doesn't help you calculate the relevant year-end account balances or help you interpret the rules around them. For people with multiple IRA's, 401(k)'s, and 403(b) plans, with some Roth balances and some traditional balances, it would be helpful if the tool had multiple fields to enter each balance separately and apply the relevant rules to each account type. For example, someone with multiple 401(k) accounts and multiple traditional IRA accounts may not know that 401(k) RMD's have to be taken from each account separately, while IRA RMD's can be combined and withdrawn from a single account. And while they mention IRA and 401(k) plans, they don't even ask about 403(b) balances, which have their own slightly different rules.
• It doesn't calculate RMD's for people using the joint-life-expectancy exception. If the owner of a retirement account has a spouse more than 10 years younger, they're able to calculate their RMD's using their spouse's joint life expectancy instead of their own. The tool acknowledges this, but merely says "Note: If your spouse is more than ten years younger than you, please review IRS Publication 590-B to calculate your required minimum distribution." But the joint life expectancy rules aren't subjective, they're just a math problem — precisely the kind of math problem a tool like this should be able to solve. It also doesn't help that the site they link to is barely functional (the actual publication is here if you're curious).

Compound Interest Calculator: 8/10

The Compound Interest Calculator is pretty good and well-designed, with the one advantage over the Moneychimp calculator I normally use (because it's the first Google hit) that it is able to display 3 growth rates simultaneously.The only minor tweaks I would make is providing some default suggestions of what kinds of contributions and earning rates are realistic. For example, the IRA contribution limit of $5,500 (increasing to $6,000 in 2019) works out to about $458 a month, which they could offer as a suggested monthly savings rate.Likewise, what's a realistic interest rate, and what's a realistic range of interest rates around it?Finally, I've never seen a tool that incorporates inflation rates on both the contribution and earnings side. Someone who diligently maxes out their IRA every year will contribute $5,500 in 2018 and $6,000 in 2019...and perhaps $15,000 in 2038. Anchoring is an important feature of human psychology, and I suspect quite a few people anchor their IRA contributions on the maximum allowable contribution. It would be nice for a tool to try to reflect that.But these are quibbles. Overall, the Compound Interest Calculator is fine.

Savings Goal Calculator: 5/10

The Savings Goal Calculator suffers from the same problems as the Compound Interest Calculator, while adding no additional value. If these are financial planning tools then they need more inputs than you can get from a basic finance calculator. What is an appropriate savings goal? What is it based on? I'm not asking for the SEC to predict health or transportation expenses 30 years in the future, but a simple approach would be to look at the median savings amount of retirees today and apply a range of inflation expectations.I understand why they don't want to do this: they don't want people to say "the SEC told me I'd be alright if I saved such-and-such an amount!" But if you're going to offer a "Savings Goal Calculator," you've got to take some responsibility for its calculations.

Ballpark E$timate: 0/10

The less said about Ballpark E$timate, the better. First of all, it's not actually operated by the SEC like the previous 3 tools. Second, it requires even more speculative assumptions about the future. Why do the people who design these tools think that a person who needs an online tool to decide how much to save will have an accurate guess about future inflation rates? Whatever you think about the ability of experts to predict future inflation rates, you should have much, much less confidence in the ability of the average person to do so.

Social Security Retirement Estimator: ?/10

I have no idea if this tool works because the Social Security Retirement Estimator will only return a result if you already have 40 Social Security credits (at least 10 years of covered work earning the maximum 4 Social Security credits per year). The plus side is that it's based on your actual earning history, so should be somewhat more accurate than the back-of-the-envelope calculations I'm typically forced to use.

Mutual Fund Analyzer: 3/10

Another external tool, this time offered by FINRA, the Fund Analyzer works ok, but has some serious flaws. To test the Fund Analyzer, I plugged in the high-cost Invesco S&P 500 Index Fund (SPICX) and the low-cost Vanguard 500 Index Fund Admiral Shares (VFIAX) to see what the Fund Analyzer was able to conclude. Feel free to plug in the same funds so you can follow along with this analysis at home.

• Fund Analyzer correctly observed that SPICX would cost 30 times more over a 10-year holding period: $1,574.28 versus $51.45 for the Vanguard fund.
• Frustratingly, Fund Analyzer did not point out that if you sold SPICX within 12 months, you'd be hit with a 1% back-end load fee. To identify that, I had to reduce the holding period to 1 year, and suddenly the fee materialized. Since how long you will ultimately hold an investment is obviously a matter of speculation, those contingent fees should be displayed much more prominently.
• The annual operating expenses are not compared on a like-for-like basis. This apparently comes from the fact that Vanguard filed their fund as a "Growth" mutual fund, while Invesco filed theirs as a "Growth and Income" mutual fund. Remember, these are both S&P 500 index mutual funds.
• The visual "expense ratio bubble" graphic depiction of mutual fund expenses is useless because there's no way to zoom in and tell them apart. It also includes funds that are closed to new investors or only available through proprietary products like target retirement date funds.
• The data is out of date. FINRA still reports that VFIAX has a $10,000 minimum investment, when in fact Vanguard recently lowered the minimum investment for most of their index fund Admiral Shares to $3,000.

529 Expense Analyzer: 0/10

The final financial planning tool recommended by the SEC is the 529 Expense Analyzer, also provided by FINRA. This tool, as far as I can tell, is worthless. The instructions are:

"You can find the information you will need to input into the analyzer in the plan's program disclosure statement, program brochure or plan description. If the plan invests in mutual funds, you may also need the prospectuses for these funds. If you don't have copies of these documents, you can find electronic copies on most 529 plan websites. The College Savings Plans Network website provides links that take you to each state's 529 plan website. If you are having difficulty locating a disclosure statement or plan description on the state's website, it may be included with the 'enrollment information.' Once you download the document, check the Table of Contents for a section on fees and expenses (unlike a mutual fund prospectus, this data is often not presented in a fee table)."

This reminds me of nothing so much as the folk story "Stone Soup." FINRA makes a seemingly outlandish promise: they'll calculate the expenses of any 529 plan in the world. Intrigued, you ask what you must do to receive this extremely valuable gift. And FINRA explains: all you have to do for FINRA is one little favor. Go to the website of every 529 plan, download all the enrollment and investment documentation, carefully input it into a spreadsheet, and presto! FINRA does the rest.

Conclusion: do better, SEC

Let me be clear: I'm not trying to make some kind of abstract argument about the futility of replacing human financial planners with automated tools. On the contrary, I think it would be easy to produce online tools that actually perform the financial planning functions the SEC describes!Vanguard, for example, already has a pretty great tool showing a lot of the information you need to select the right 529 plan for you, including essential information like state-level tax benefits. The key difference is that they don't require you to hunt down the information on your own: they actually did the work to create a useful tool to help people draw correct conclusions.But you can't design useful tools with a view from nowhere. You actually have to make judgment calls, and those judgment calls might be wrong. In a mutual fund low fees are better than high fees. In an index fund, less cash on hand to meet redemptions is better than more cash on hand (the SPICX fund mentioned above has 7% of its net asset value in cash — you're paying 1.32% for someone to manage cash for you!). Lower tracking error is better than higher tracking error. Except when it isn't!A tool that tells you how much you need to save needs to have reality-based estimates of investment returns and inflation in order to produce useful conclusions, even though those estimates might be wrong. Asking people off the street "what do you think the inflation rate will be for the next 30 years?" relieves you of responsibility for the accuracy of your estimates, but it also prevents your tool from providing useful information.There are lots of potential solutions to these issues: Monte Carlo simulations, historical evidence, fundamental analysis, etc. Some of those solutions might work better than others, or perhaps a combination of them would work best of all. But if all do is throw up your hands and say "figure it out for yourself," you haven't provided a financial planning tool, you've provided a 9th grade math exercise.

Vanguard just made lower-cost Admiral funds available to (almost) everyone

While not as complicated as the offerings of some mutual fund companies, Vanguard has long sold several different share classes to the public: "Investor" shares, "Admiral" shares, and ETF shares. While all three share classes hold the same underlying assets, they can have quite different expense ratios, with Investor shares the most expensive, and lower-cost Admiral and ETF shares similarly, although not identically, priced. Certain large asset managers also have access to even-lower-cost "Institutional" shares.

Minimum investment amounts have been lowered for virtually all Admiral index shares

Effective immediately, the minimum investment required for 38 existing index mutual fund Admiral shares has been lowered from $10,000 to $3,000, which was the prior minimum investment for Investor shares.Five additional Admiral shares will become available in January 2019 with the same reduced minimum investment.

Convert your Investor shares now (or later)

Vanguard says they'll automatically convert eligible Investor share holdings above the $3,000 threshold into Admiral shares in the middle of 2019, but you can also do so manually as of today. Just log into your Vanguard account and click on the lowercase "i" next to each of your Investor share holdings, and you'll be prompted to convert any eligible index fund holdings into lower-cost Admiral shares.

This may even apply to Vanguard-administered individual 401(k) accounts

When I wrote last year about the process of setting up a Vanguard solo 401(k) account, I noted that such accounts didn't have access to Admiral shares. While going through the somewhat tedious process above of converting my Investor shares into Admiral shares, I wondered whether the change also applied to solo 401(k) accounts. I didn't execute the trade, but I also didn't run into any error messages when trying to exchange my current LifeStrategy fund for Admiral shares of an index fund.The reason you might care about this is that Vanguard's Target Retirement and LifeStrategy funds hold Investor shares as their underlying constituents, and pass those higher costs on to you. If you can reconstruct those holdings with lower-cost Admiral shares (and you don't mind periodically rebalancing), you can theoretically save some money each year due to the lower Admiral share expense ratios.I'm not sure if that's worth doing for a "set it and forget it" investor, but it's an option as long as you can trust yourself not to trade the constituent funds recklessly.

Something finally happened in the stock market. What did you do?

It's been a boring year in the stock market. If you bought Vanguard's S&P 500 ETF on October 16, 2017, and held it until this last Friday, you would have earned a mere 10% in price appreciation, and a mere 2-4% in dividends (I can't be bothered to look up the exact historical dividend yield at the moment). If you assume 2% inflation (and no, I don't know why people assume 2% inflation), you've earned "about" 10% in real returns on your investment over the last 12 months. That's a little bit above the historical average, and a lot below truly breakout years like 1933, 1954, or 2013.But it's been an interesting week in the stock market! So let's talk about it.

All of this has happened before and will happen again

The same Vanguard S&P 500 ETF has lost 3.9% of its value this week (and 5.6% of its value since September 20). Some people get upset by price swings like this, but I have exactly the opposite view: price volatility is absolutely essential, not for any economic or financial purpose, but rather as an opportunity to learn something about your own reactions to price volatility.Let's be clear about one thing up front: most Americans have virtually no assets invested in markets of any kind. The price movements of the stock market are of concern to a small number of people beginning with the upper middle class and stretching all the way up to the oligarchs, and matter not at all to workers who experience, if anything, glee when their boss's savings are wiped out.Having said that, among the sliver of people with assets invested in the stock market, it's easy to identify at least three very different reactions to price movements like this week's:

• Total indifference. My partner participates in a workplace retirement savings plan, which is invested entirely in the Vanguard LifeStrategy Growth fund (the same fund my solo 401(k) is invested in). If her payroll cycle happens to coincide with a market downturn, she buys the dip, and if it coincides with an all-time high, she buys the peak.
• Greedy buying. I don't know what path the price of the stock market will carve over the next 30 years, but I have a high degree of confidence that, with dividends reinvested, a stock market investment today will be worth between 5 and 6 times more 30 years from now. This is not a one-year prediction: a year ago, I would have been off by a full 50% (the stock market returned twice my estimated 6%). In any case, for long-term investors dips are obviously better times to buy than peaks, so one thing you might do when prices fall is use the opportunity to buy stocks you intend to hold for the long term.
• Panic selling. The only real mistake you can make when stock prices fall "dramatically" (a 5.6% decrease in a month is not, in any objective sense, dramatic), is to sell your stocks in a panic. The mistake is not selling your stocks — the mistake is selling them in a panic. The price of your stocks will fall 50% or more at least once in your lifetime. If you can't handle a 50% or more fall in the price of your stocks, you own too many stocks, and are right to sell them. But you're wrong to sell them in a panic.

A modest proposal for finding out what your "risk tolerance" really is

It's standard for investment advisors, whether you're talking about the sales teams employed by the big banks, fee-only fiduciaries, or roboadvisors like Betterment, to pose a series of standardized questions to identify your "risk tolerance," so they can recommend an asset allocation. I'm sure a lot of work goes into formulating and processing those questionnaires.But they all suffer from the same problem: they capture your "risk tolerance" at a particular moment in time. If stocks have been sailing smoothly higher, I can bet your "risk tolerance" will be pretty high. After a 50% drop in the stock market, I'm certain your "risk tolerance" will likewise be in the doldrums.Thinking about this problem led me to a modest proposal for a way to assess the amount of stocks a person should actually hold: the investment attention journal. For a period, even a period as short as a week, carry around a pad and jot down every single time you think or do anything about any of your investments. How many times a day do you check stock prices? How many times a week do you buy or sell your investments? How many times a month do you reallocate your investments?If at the end of a week, or a month, or a year, you have a blank page in front of you, you've shown yourself perfectly invulnerable to stock market movements, and might want to invest even more of your portfolio into volatile assets (which you'll never check the value of).If at the end of a day, or a week, or a month, you have a page full of timestamps showing how meticulously you track the price of all your assets, you might be too heavily invested in assets that are too volatile.

Sell down (or buy up) to the sleeping point

There's a cliche in the asset allocation field that the right place to invest your assets is the "sleeping point:" where what happens to your investments isn't keeping you up at night. The cliche usually goes, "sell down to the sleeping point." But I'm so neutral on the question that I'm willing to entertain the flip side: there are people who are sleeping too well, and need to scale up their exposure to volatile investments!In other words, your "risk tolerance" is not, or should not be, how you happen to feel about the stock market at a particular moment in time. It's how you consistently, reliably, and verifiably react to movements in actual market prices.

It's October, time to shuffle around your high-interest accounts

As I wrote last month, my favorite high-interest checking account, the Free Rewards Checking account from Consumers Credit Union, has dropped the maximum balance eligible for their highest interest rate tier from $20,000 to $10,000 (while raising that rate up to 5.09%). While the account is still more than worthwhile (it also offers unlimited worldwide ATM fee reimbursement), there's no reason to hold more than $10,000 in your account anymore, which means you may suddenly have some extra underperforming cash lying around.Here are a few suggestions for what to do with it.

Kasasa Checking

I'm not going to lie and say I know exactly who or what a Kasasa is. If I had to guess, I'd say it's a way for smaller banks and credit unions to pool their deposits and earn higher interest rates on them, part of which they pass along to their depositors in the form of higher interest rates.How high? This high:

• First Financial Bank: 4.07% APY on up to $15,000
• Park City Credit Union: 4% APY on up to $10,000
• Marshall Community Credit Union: 3.75% APY on up to $15,000
• Leighton State Bank: 3.56% APY on up to $15,000
• Texomo Community Credit Union: 3.51% APY on up to $10,000
• One American Bank: 3.5% APY on up to $10,000

All these accounts have slightly different calendar schedules and monthly requirements for triggering their interest rates, so be sure to read through the requirements carefully to make sure you will be able to trigger the advertised rates before opening an account.

Other Rewards Checking Accounts

Two additional non-Kasasa options are:

• Department of Commerce Federal Credit Union Performance Checking: 3.47% APY on up to $20,000
• and Heritage Bank eCentive Account: 3.33% APY on up to $25,000.

What to do with the rest of your cash

I love cash for its two great virtues: it doesn't go down in price (although of course it may go down in value due to inflation), and it can be exchanged for goods and services. Those are virtues I'm willing to pay something for, but I'm not willing to pay an unlimited amount for. That's why I would think twice before deciding to hold onto cash that was earning less than the 3.33% APY offered by Heritage Bank.So, what are your other options?

• Certificates of Deposit. I'm not generally a huge fan of CD's, simply because most people willing to apply a little elbow grease can get higher interest rates from rewards checking accounts. But if you've already exhausted the rewards checking accounts you're eligible for, there are a few places you can get decent rates on CD's. People's Community Bank, United States Senate Federal Credit Union, and KS StateBank all offer medium-term CD's paying between 3.37% and 3.63% APY.
• Pay down debt. If you financed a car or house at the depths of the Great Recession, you may well be paying less in interest than you can earn on the high-interest-rate accounts. But once your savings exceed the eligible balances on those accounts, you can convert your additional cash savings into savings on interest by aggressively paying down those loan balances.
• Low-cost bond funds. While I've been focusing on investments of cash that are federally guaranteed to maintain their value and liquidity, interest rates have gradually crept up enough that there are finally opportunities worth considering in the bond market. Vanguard's Short-Term Corporate Bond Index Fund (VSCSX) currently has an SEC yield of 3.41%, their Intermediate-Term Investment-Grade Fund (VFIDX) yields 3.64%, and Intermediate-Term Corporate Bond Index Fund (VICSX) yields 4.08%. The essential thing to keep in mind when investing in bond index funds is the relationship between duration and return: an intermediate-term bond fund is more volatile than a short-term bond fund over the short term, which means its higher yield can be more than outweighed by its sensitivity to interest rates if you need to sell your shares within a year or two. If you need a short-term investment, you should buy a short-term bond fund!

Conclusion

No one of these options, or any one combination of these options, will be right for everybody. But it's equally true that most Americans are not earning as much as they could be on their savings, and I'd like to help them get started.Politicians often cast the failure of Americans to save as the fault of individuals for not making sufficient contributions to their workplace retirement accounts, or not saving enough in IRA's, or HSA's, or 529 plans. My Councilmember has an insane plan to encourage people to save by deferring their tax refunds and earning a "bonus match" or some such nonsense.But it's all ridiculous. What you need to do to make your savings grow is earn as much interest as possible on your savings. High interest rates encourage people to save, low interest rates discourage people from saving, and that's the whole ballgame. If you save more money than everybody else, at higher interest rates than everybody else, you'll end up with more money than everybody else.So why not get started today?

What goes into a good active savings strategy?

A headline passed across my Twitter feed yesterday that seemed like a good bank account signup bonus: "$500 Bonus for New Money Market Account at Capital One." $500 is a lot of money, so I clicked through to check out what the requirements were. As usual, there were some deposit requirements, in this case a $50,000 deposit of outside money, held in the account for 6-8 weeks (until the signup bonus posts). $50,000 is a lot of money, certainly more money than I have, so I moved along.But, a few hours later, I circled back and started thinking: what is the right way to think about these signup bonuses, and how should you incorporate them into an active savings strategy?

How much cash do you have, and why?

I love cash. It's considered fashionable among some financial advisors to talk about how your cash is constantly losing its value due to inflation, it's not earning a high enough rate of return, it's not backed by gold, whatever. But actual people understand the great thing about cash is that it's cash. You can use it to buy things, you can give it away, you can invest it, you can do anything you want with it! Cash is great, and anyone who tries to convince you cash isn't great is probably trying to sell you something.But as great as cash is, it isn't everything. On the contrary, cash is always and everywhere a substitute for something. If you have a mortgage, car loan, or credit card debt, cash is a substitute for paying down those balances. It might be a good substitute (you might be able to earn more on your cash balances than your current mortgage interest rate) or it might be a bad substitute (unless you have a promotional rate, your credit cards are probably charging more interest than what you can earn on cash deposits). Likewise, up to the relevant balances, cash might be a good substitute for short-term bonds, but a bad substitute for long-term stock investments.

How active is your active savings strategy really going to be?

It doesn't matter how lazy you think you are, it matters how lazy you actually are.Consider the Capital One money market account I mentioned above. It offers a $500 bonus after 8 weeks, and 1.85% APY, which roughly works out to the equivalent of 8.35% APY for the 8 weeks it takes the bonus to post — a high interest rate by anyone's standards. However, it only offers that interest rate for 8 weeks. If you leave your money there for 16 weeks, your blended APY will be 5.1%. At 24 weeks, it'll be 4.01%. If you leave it there for a full year, you'll earn just 2.85% APY.Commenter Kim pointed out last week that Heritage Bank's eCentive account earns 3.33% APY on balances up to $25,000 (she also said she had three of them), while my favorite Consumers Credit Union rewards checking account earns up to 5.09% APY on up to $10,000 (starting in October).In other words, if you only muster up the initiative to actually move your cash savings or your direct deposit from bank to bank once per year in order to trigger a bonus, you're probably earning less than if you simply sat on the cash in the highest-earning accounts you have access to year-round!

Where are you getting the cash?

One tempting option is to say that instead of having a pool of cash you're constantly chasing bank account signup bonuses with, you're going to selectively target just the highest signup bonuses that come around.While it avoids the problem of decaying interest rates I described above, the problem with this strategy is that the cash still has to come from somewhere. If you already have a large cash balance, then the problem is easy to solve by moving the cash from one account to another and back again, but in that case your profit is only the difference between the bonus-inclusive APY and the basic interest rate you earn year-round. That may still be worth doing on a case-by-case basis, of course.Alternatively, you could combine chasing signup bonuses with a more comprehensive strategy of harvesting losses in taxable brokerage accounts. If you have a taxable portfolio with $50,000 in assets showing a loss, then you can sell those assets, realizing a deductible loss, then instead of immediately reinvesting the assets, deposit them in bank accounts offering the highest current signup bonuses. Since bank account bonuses typically take at least 30 days to post, this is also a convenient way to avoid the "wash sale rule," allowing you to reinvest your cash into the same investment you had originally sold (just be careful that ongoing contributions aren't being made to that investment or you're going to run into all kinds of trouble come tax time).Finally, you could borrow the money to chase bank account signup bonuses. While this may or may not be more expensive than the other two options, it's not strictly speaking "riskier." The simplest example would be funding a new account using a credit card, waiting for the bonus to post, then paying off the credit card with money from the same account. A more complicated option, popular back when money market accounts were paying 6% APY or more on liquid deposits, is to open a credit card with a 0% introductory APR and no balance transfer fees to spin up lots of cash that can be invested across a variety of accounts for the entire introductory period.

Conclusion

I love robbing banks and encourage anyone and everyone to get in on the action to the degree it makes sense for them individually. However, there are real risks to trying to dive into the signup bonus game without thinking through a strategy ahead of time:

• how active are you willing to be? The less work you put into your bank account signup strategy, the more your lived interest rate will decay compared to the advertised rate.
• how much is your cash costing you? Do you have other debt that cash could be used to pay down at a higher interest rate than a bank account signup bonus earns?
• are you integrating your cash holdings into a comprehensive investment strategy? If you have $100,000 invested in a 60/40 equity/fixed income portfolio and another $50,000 held in cash, you have just 40% of your investable assets in equities. Does that correspond to your long-term investment goals?

Once you've answered those questions to your satisfaction, there really are opportunities to get outsized returns on short-term deposits, and those opportunities are well worth considering.

Winners and losers from changes to Consumers Credit Union Free Rewards Checking accounts (and why it matters)

I've been an enthusiastic fan of high-interest checking and savings accounts ever since you could earn 6% APY on your PayPal account balance back in the early 2000's (unfortunately I was in college at the time and barely had two quarters to rub together at 6% APY). The boring reason is that the more work your risk-free assets are able to do, the less work your riskier investments have to do in order to meet your long-term financial needs.That made me immediately concerned when I saw Doctor of Credit report some Consumers Credit Union Free Rewards Checking accountholders had received notification of changes to the conditions required to qualify for elevated interest rates. Now that I received my own notification, I want to dig into the details.

Background

As long as I've been a member, Consumers Credit Union has offered three interest rate tiers for qualifying Free Rewards Checking accountholders. While the exact interest rates have bounced around a little, the basic rules were:

• Tier C: 12 signature debit transactions per month and a direct deposit or ACH credit of $500 per month to your account, plus signing up for electronic statements.
• Tier B: Tier C requirements plus $500 spent on a Consumers Credit Union credit card.
• Tier A: Tier C requirements plus $1,000 spent on a Consumers Credit Union credit card.

The three key changes they've made, starting on October 1, 2018, are:

• the debit transactions no longer have to be signature-based, i.e. they can be PIN-based instead;
• the 12 transactions must total $100 or more per qualifying period (previously no minimum);
• and the increased interest rates are only available on deposits up to $10,000 for all three tiers (previously $15,000 for Tier B and $20,000 for Tier A).

Winners: high-interest, low-balance savers

If you were already triggering the Tier B or Tier A requirements each month, but had $10,000 or less in your Free Rewards Checking account, then congratulations! Your interest rate is being raised from 3.59% to 4.09% or from 4.59% to 5.09% APY. On a $10,000 balance, you just got a $50 annual raise.And if you were stuck at Tier B, you just got another nudge to qualify for Tier A instead each month!

Losers: high-interest, high-balance savers

On the other hand, if you were holding $20,000 in your Free Rewards Checking account and meeting the Tier A requirements, your annual interest income is dropping from $918 to $529 (5.09% on the first $10,000 and 0.2% on the second $10,000).

Losers: low-cost automators

I've found that Consumers Credit Union has been pretty good about treating my microtransactions as signature purchases. For example, $0.50 Amazon balance refills and $1.00 Plastiq bill payments have all counted towards my 12-transaction requirement. On the other hand, I've had a misfire or two, like buying $0.50 in Kiva credit, which was processed as a PIN-less debit transaction and did not count towards my qualifying transactions.The new puzzle for low-cost automators is how to get to 12 total transactions with those transactions totaling to at least $100. The first 11 transactions can still be automated using a service like Plastiq, especially if you have access to fee-free dollars (you earn $500 Fee-Free Dollars when you sign up and make $500 in payments, and $1,000 Fee-Free Dollars when someone signs up with your referral code), but if you're making $100 per month in payments (eleven $1 payments and one $88.01 payment), then you'll end up paying something like $0.99 in fees (or using $100 in Fee-Free Dollars). Not ideal!The obvious solution for most folks will be to automate the first 11 transactions and then set up a monthly $89+ payment to a recurring biller like a cable or phone company. I don't have any bills that high, so come October I plan to set up my 12th payment to my student loans until I run out of Fee-Free Dollars.

Why it matters

Folks with workplace 401(k) or 403(b) plans, IRA's, HSA's, mortgages and car loans find my interest in these high-interest opportunities a distraction. But I think there are two reasons everyone should care about maximizing the return on their FDIC-insured savings.

• First, most people have no investment or retirement savings at all. For many US workers, the balance on the prepaid debit card their paycheck is deposited to is the entirety of their "savings." Simply moving from a high-fee prepaid debit card to a high-interest Free Rewards Checking account is the single most important thing most workers can do to maximize the value of their savings.
• Second, even folks who do have a comprehensive, well-rounded investment strategy should be aware that integrating a high-interest, FDIC-insured account into that strategy increases the investor's ability to take risk in the other parts of their portfolio.

To illustrate a stylized version of the second point: if someone has $20,000 of investable assets and wants to achieve the exact return and volatility of a 50/50 investment of $10,000 in US equities and $10,000 in fixed income, they could invest $10,000 in VTI and $10,000 in BND, Vanguard's total stock market and total bond market ETF's.However, substituting their $10,000 of fixed income exposure with a higher-interest FDIC-insured checking account allows them to either increase their equity exposure in order to expose more of their savings to riskier assets and try to achieve a higher overall return with the same volatility, or reduce their equity exposure in order to achieve the same overall return with fewer assets exposed to equity volatility.

Conclusion

If you consider volatility the cost you pay for investment returns, then you should try to reduce that cost just as hard as you try to reduce the costs you incur through expense ratios and trading commissions.High-interest, FDIC-insured rewards checking accounts are one of the lowest-volatility, highest-interest fixed income investments available to most people, and most people would be better off substituting them in to the degree possible for their more expensive fixed-income investments.

Index construction is the most important, least understood part of the indexing revolution

Modestly improved investor education and extensive marketing have made investors today more conscious of the costs of their investment decisions, and helped promote the use of index-tracking mutual funds and exchange-traded funds as opportunities to reduce expenses and allow investors to keep more of their investment returns.While cost-consciousness is a clear positive for investors, the move to indexing has created another source of risk investors rarely hear about: index construction.

How much exposure do you want to South Korea?

My favorite example of the risks of index construction is the FTSE and MSCI definitions of "developed" and "developing" countries outside the United States. They're almost identical, except FTSE places South Korean equities in the "developed" bucket and MSCI includes them in the "developing" index.This is fine if you're invested entirely in funds from issuers tracking the same indices: iShares' core developed (IDEV) and developing (IEMG) market funds both track MSCI indices, so South Korea's inclusion in one and exclusion from the other doesn't affect your exposure. Likewise, Vanguard's developed (VEA) and developing (VWO) market funds both track FTSE indices, so if you only own Vanguard funds you're still able to get exactly the exposure you want.The flip side of that is someone who for whatever reason invests in a developing market fund provided by one company and a developed market fund provided by another. Owning a FTSE developed market fund and a MSCI developing market fund gives you exposure to South Korean equities in both funds, while owning a MSCI developed market fund and FTSE developing market fund leaves you without any exposure to South Korea in either fund.I'm not trying to exaggerate the importance of South Korea to global capitalism (although South Korea has certainly played an important role in the development of global capitalism). I'm trying to say that if your goal is to invest in indexed mutual funds in order to reduce your need for ongoing supervision and maintenance, you need to put in more time up front to figure out exactly which indices your funds are tracking.To put a little more meat on this bone, the MSCI-tracking IEMG has returned an average of 3.86% annually since October 2012, while the FTSE-tracking VWO has returned an average of 3.27%, while the MSCI-tracking IDEV has too short a history to be very interesting, but has slightly underperformed the FTSE-tracking VEA since inception.

Fidelity launched US and international index funds that track...something

That brings me to the news hook for this post: Fidelity made a splash this summer by introducing two funds with 0.00% expense ratios. The funds are only available to Fidelity customers, so you can't buy them in Vanguard, Merrill Edge, or other brokerage accounts, but if you have some reason to invest through a Fidelity brokerage account, they're certainly the cheapest funds available to you, charging as they do no fees on the amount invested in the funds.Some people have suggested that these 0.00% expense ratio funds are being offered as a "loss leader," but that's not exactly right. In fact, they're an experiment in charging people nothing in order to invest in Fidelity's own bespoke indices, which they have the luxury of paying little or nothing for.Here's what Fidelity has to say about the "Fidelity ZERO International Index Fund:"

"Geode normally invests at least 80% of the fund's assets in securities included in the Fidelity Global ex U.S. Index and in depository receipts representing securities included in the index. The Fidelity Global ex U.S. Index is a float-adjusted market capitalization-weighted index designed to reflect the performance of non-U.S. large-and mid-cap stocks."The fund may not always hold all of the same securities as the Fidelity Global ex U.S. Index. Geode may use statistical sampling techniques to attempt to replicate the returns of the Fidelity Global ex U.S. Index. Statistical sampling techniques attempt to match the investment characteristics of the index and the fund by taking into account such factors as capitalization, industry exposures, dividend yield, P/E ratio, P/B ratio, earnings growth, country weightings, and the effect of foreign taxes."

And here's what they have to say about the "Fidelity ZERO Total Market Index Fund:"

"Normally investing at least 80% of its assets in common stocks included in the Fidelity U.S. Total Investable Market Index, which is a float-adjusted market capitalization-weighted index designed to reflect the performance of the U.S. equity market, including large-, mid- and small-capitalization stocks."Using statistical sampling techniques based on such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth to attempt to replicate the returns of the Fidelity U.S. Total Investable Market Index using a smaller number of securities."

Emphasis mine.

A bad fund can track a good index

Today, you could buy any of the following three ETF's, all based on versions of the S&P 500 index:

• SPY tracks a market-cap-weighted S&P 500 index;
• RSP tracks an equal-weighted S&P 500 index;
• RVRS tracks an inverse-market-cap-weighted S&P 500 index.

All three options require you to decide whether the S&P 500 is a "good" index or a "bad" index. If it's a bad index, you shouldn't buy any of them!But even once you've decided it's a good index, you aren't relieved of your responsibility. The existence of the three funds means you also have to decide what the best strategy is for investing in the companies that make up that index.SPY has an expense ratio of 0.09%, RSP has an expense ratio of 0.20%, and RVRS has an expense ratio of 0.29%, so even if the funds have identical performance of their underlying assets, you'd be 0.11-0.2 percentage points per year ahead using SPY. However, in order to maintain their equal and inverse-market-cap weights, the latter two funds also have to do much more trading, incurring additional costs that aren't reported in the expense ratio. That means your confidence in the investment strategy needs to be "somewhat higher" than the difference in expense ratios.

Conclusion

I'm sure Fidelity's bespoke indices are fine, I'm sure their ZERO funds will track those indices very closely, and I'm sure they'll perform similarly to the low-cost market-capitalization-weighted index funds offered by their competitors.But my point is broader: you aren't a passive investor just because you invest in low-cost, passively-managed mutual funds or ETF's. You're still making at least three very important, very active decisions:

1. which indices to track,
2. how to track them (market-capitalization, equal-weighted, inverse, leveraged, etc.),
3. and how to allocate your assets between them.

You can carefully research those decisions, you can shrug those decisions off, or you can let me or the Bogleheads forums make them for you, but careful research, indifference, and reliance on the advice of others are all decisions too.As the saying goes, it's turtles all the way down.

Vanguard commission-free ETF trading is here

I wrote last month about Vanguard's announcement of commission-free ETF trading coming "in August." Well, it's August, and commission-free ETF trading is here!

Which ETF's are commission-free to trade?

You can find the full list of commission-free ETF's here, but as a rule of thumb, it is supposed to include essentially all non-inverse and non-leveraged ETF's.

Potential uses of non-Vanguard ETF's

Vanguard already offers a suite of low-cost ETF's that are best-in-class for building blocks of a portfolio if you're inclined to use ETF's instead of mutual funds, for example in taxable brokerage accounts.But there are lots of potential investment strategies Vanguard doesn't have ETF's (or mutual funds) corresponding to, and which are now available commission-free on their trading platform.

• Country-specific ETF's. The iShares line of ETF's offers exposure to the public companies in an incredible number of developed and emerging economies, from Poland to Belgium to Malaysia to Peru. Since ETF trading is commission-free, if you have the patience and interest to do so you could even recreate the exposure of a developed market or emerging market fund, but with enough increased granularity to also take advantage of opportunities to harvest capital gains and losses in a taxable account. Note that many of these countries have very few publicly traded companies, so these ETF's are extremely concentrated bets on a small number of publicly listed companies — just 25 in the case of Peru.
• Currency-hedged ETF's. Like iShares, WisdomTree offers a number of country-specific ETF's, many of which are hedged back into US dollars. So if you think a particular country will perform well in its home currency and don't want to take on additional currency risk, WisdomTree offers a number of options that incorporate country exposure while removing currency exposure.
• Bespoke strategies. Some ETF's incorporate specific investment strategies. For example, I find Cambria's "shareholder yield" ETF's interesting, since they combine dividend yield and net share buybacks to get a more comprehensive picture of how much money is being paid out to shareholders. In other words a company that pays out a high dividend but is aggressively issuing shares (diluting current shareholders) might look worse from a shareholder yield perspective than a company that is paying a lower dividend but is aggressively buying back shares.

If you're going to invest, seek low costs and diversification

I think Vanguard funds are fine for virtually all long-term investing purposes, but I also think it's perfectly reasonable for a dividend investor to look at Vanguard's high dividend or dividend growth ETF's (VYM and VIG for US stocks) and decide they prefer Cambria's shareholder yield model (SYLD for the US). But the two options give exposure to essentially the same asset class; they're substitutes for each other, not complements, so if you own both you're not "diversifying" your portfolio, you're just adding a minuscule tilt towards share buybacks and away from dividends.Likewise there's no reason to own a low-cost Vanguard emerging markets mutual fund and a bunch of iShares country-specific emerging market ETF's.

If you're going to gamble, make bold moves with small amounts of money

On the other hand, setting aside 5% or 10% of your investable assets to make aggressive bets on particular funds seems perfectly reasonable to me, as long as you know what you're buying, why you're buying it, and what you're paying for it.I don't think you're very likely to outperform a market-cap-weighted low-cost portfolio over time, just like I don't think you're very likely to walk off a casino floor with more money than you walked on with, but unlike some scolds, I also know that gambling is fun. And, thanks to Vanguard, it's cheaper than ever.

Conclusion

As I wrote in my original post, the best thing about Vanguard offering commission-free ETF's is that Vanguard provides a full-service brokerage platform, allowing things like specific identification of shares that Robinhood currently does not. That means if you buy into a position over the course of months or years, you have more options for controlling your tax liability when you decide to exit it, either to realize taxable gains on shares during low-income years, taxable losses during high-income years, or weighting the two in order to reduce or eliminate any overall impact on your tax liability.

The stock buyback "controversy" is everything wrong with the finance sector in a nutshell

In the wake of the Republican smash-and-grab tax heist of 2017, many American corporations have had to decide what to do with their freshly repatriated profits and newly distended profit margins, so news junkies have been treated to an extended conversation about investment, payroll, and capital structure. This conversation has been complicated by the insistence of one particular party to the controversy on lying about what's going on.

What can a company do with money?

I'm not speaking specifically of profits here. Lots of companies that don't have any profits at all still have plenty of money: the money of their lenders and shareholders, for instance. Uber has money and no profits, Berkshire Hathaway has profits and money, and my sole proprietorship has profits but no money (since the profits are distributed to me every month, or whenever else I want).But once a company has money, it has to decide what to do with it.

• A company can, of course, retain the cash, as many corporations did in their "foreign" subsidiaries for years while waiting for the opportunity to repatriate it cheaply.
• A company can spend the cash, for example on expanding operations, raising wages, giving employees bonuses, or buying new equipment.
• A company can pay out the money in dividends to shareholders.
• A company can pay down or retire its outstanding debt.
• Or a company can buy back its shares on the open market.

364 days a year financiers are perfectly honest about stock buybacks

Corporate profits in the United States are supposed to be taxed twice: once at the corporation level, and a second time when profits are distributed to shareholders. Long-term capital gains and qualified dividends are taxed at preferential levels for precisely this reason: corporate profits are taxed once at the corporation's tax rate, then a second time at a rate depending on the shareholder's taxable income (as low as 0%).364 days out of the year, financial professionals are happy to tell you why they like stock buybacks: since stock buybacks are voluntary (it's up to the shareholder whether or not to participate), the second step of taxation can be avoided, managed, or minimized.A company can reduce its share count (increasing the proportional stake in the business of remaining shareholders, and their claim on future profits), without requiring the remaining shareholders to pay taxes on the increased value of their stake. In other words, share buybacks are a way for corporations to manage the individual income tax liability of their shareholders.To be clear, dividends also allow shareholders to increase their stake in a company and their share of its future profits. If a company distributes a dividend to every shareholder and half the shareholders reinvest the dividend in the company and the other half do not, the half that reinvested the dividend have a higher proportional claim on the company's future profits than the half that don't, just as shareholders that don't participate in a buyback have a higher proportional claim on future profits than shareholders that do.This is what financiers mean when they say buybacks and dividends are "theoretically" identical. The difference is that all dividend recipients, those who choose to reinvest their dividend and those who don't, are properly assessed income tax on the amount of their distribution.

On the 365th day, they tell the most preposterous lies

In the abstract of a forthcoming paper by Cliff Assmess of AQR Capital Management, titled "Buyback Derangement Syndrome," he writes:

"The popular press is replete with commentary seeking to damn the behavior of corporate managers in handing free cash flow back into the hands of shareholders. These criticisms are often, even regularly, without merit (at least merit that can be demonstrated), sometimes glaringly so. Aggregate share repurchase activity has not been at historical highs when measured properly, and when netted against debt issuance is almost a non-event, does not mechanically create earnings (EPS) growth, does not stifle aggregate investment activity, and has not been the primary cause for recent stock market strength. These myths should be discarded."

But this is nonsense. The problem with share buybacks is not that they "mechanically create earnings growth," nor that they "stifle aggregate investment activity," nor that they "cause...stock market strength." The problem with share buybacks is that they let corporations distribute profits to shareholders selectively, as Cliff would be happy to tell you the 364 days a year he's not lying about why he likes them.

If you think buybacks and dividends are the same, let's treat them the same

I don't see any reason why share buybacks should be legal, but if the sages of our engorged and indulged finance industry think share buybacks are identical to dividend distributions, then let's treat them identically. I have no objection to a company forcing all of its shareholders to sell back a certain percentage of their shares, thereby maintaining their proportional ownership of the company but reducing the number of outstanding shares — and resulting in the same tax liability on shareholders as a dividend distribution.

Conclusion

The pro-buyback propaganda sweeping the investment management space is just one recent example of a longstanding problem that has infected American discourse in a lot of different fields, and that the internet and social media have made more apparent in a lot of ways.In earlier eras it may have been possible to deliver different messages to different audiences: "buybacks are a straightforward way to avoid capital gains taxes" to your investors and "buybacks are identical to dividends in every way and you're an idiot for thinking otherwise" to any regulators who came snooping around your capital structure.But today it's a lot harder to get away with. If investment managers think the preferential tax treatment of stock buybacks is a good thing, they're going to have to start defending it on the merits, if there are, indeed, any merits to defend.Needless to say, I have my doubts.

Why I like tax-free internal compounding, and why you might (and might not)

Last month I wrote about a range of available non-retirement investment accounts and broke down some advantages and disadvantages of each. When it came to 529 college savings accounts, reader flyernick had some objections to my math:

"On one hand, you’re arguing that at withdrawal, you get to exempt $12000 in gains because of the std. deduction. Then you compare that, 'In a taxable account, meanwhile, you’d owe taxes annually on every dividend and capital gain distribution'. But, you get that same $12000 exemption every year on annual distributions. And of course, 'taxes on the sale of the asset itself' would only apply to (un-distributed) cap gains. Your example here fails to convince me that paying an additional 10% tax 20+ years down the road is a useful strategy."

I want to address flyernick's specific objection and also expand on my logic to show why I think tax-free internal compounding is valuable enough that it's worth paying some amount for under the right circumstances.

529 accounts are uniquely valuable because of the option of tax-free withdrawals

I know my readers have heard this a thousand times already, but let's do a quick rundown of the benefits of 529 plans again:

1. limited, state-dependent tax benefits;
2. unlimited tax-free internal compounding;
3. unlimited tax-free qualified withdrawals.

The state tax benefits are typically not very interesting, but high-income folks in high-tax states should certainly maximize their home-state benefits before contributing to a low-cost plan like Utah's My529 (formerly UESP) or Vanguard's Nevada-based plan.The tax-free internal compounding is a feature shared by 401(k)'s, 403(b)'s, IRA's, and even variable annuities — more on this in a moment.But the ability to make tax-free qualified withdrawals of both your contributions and your earnings turns 529 plans into super-charged Roth accounts for anyone who may ever spend money on anyone's higher education expenses: they have preposterously high contribution limits, no income limits, tax-free dividends and capital gains, and tax-free withdrawals.This is a crime against the American taxpayer, but as long as the crime is being committed for the benefit of the wealthiest people in the country, it would be irresponsible for the rest of us not to join in.

What is the value of tax-free internal compounding?

With that out of the way, we can focus on nickflyer's specific question: what is the value of tax-free internal compounding, and how much should you be willing to pay for it? Let's take two stylized, but true, historical examples.

• Between July 1, 2009, and June 30, 2018, Vanguard Total Stock Market Investor Shares had a price appreciation of about 200%: $100,000 invested at the beginning of the period would have turned into $301,900 at the end of the period, and this appreciation would be tax free under any circumstances, as long as you held your shares for the entire period, since we don't tax capital gains until they're realized. But you also would have received $32,212 in dividends and capital gains distributions, and those would have been taxed along the way. Capital gains tax rates have bounced around a little bit but if you were in the highest capital gains tax bracket (23.8%) for the entire period, you would have owed a total of $7,667 in taxes over the 10-year period. In the lowest long-term capital gains tax brackets, you would have owed nothing on those distributions.
• Between July 1, 2000 and June 30, 2009, Vanguard Total Stock Market Investor Shares had a price appreciation of negative 32%: $100,000 invested at the beginning of the period would have turned into $68,639 at the end of the period. During the same period, you would have received $12,349 in dividends and capital gains distributions, and paid a top federal tax rate of 20%, or $2,470.

Importantly, in these examples it doesn't matter if you reinvest your dividends and capital gains; the taxes are owed no matter what you do with the money.Using the same two time periods, with the same $100,000 invested in the same mutual fund, but with dividends and capital gains reinvested and allowed to compound tax-free, the corresponding final values would be $356,174 and $79,522, respectively. With the investment made in a 529 plan or other account with tax-free internal compounding, the investor has so far saved $7,667 or $2,470 in federal taxes owed, plus whatever rate their state levies on capital gains and dividends.What happens when we try to get the money out of the 529 plan? For the 2000-2009 investor, this is not a problem at all: they're allowed to withdraw their entire balance, including dividends and including capital gains, tax- and penalty-free, because the amount of the withdrawal is lower than the amount of their contribution. The 529 plan "wrapper" has saved them $2,470 in federal taxes with no downside at all (except the opportunity to harvest capital losses). Obviously they'd prefer if their decade of investing had a positive, instead of a negative, return, but that's what you get when you invest at the peak of a stock market bubble and sell at the bottom of a global financial crisis.What about the investor who put $100,000 to work in July, 2009? Sure, they've saved $7,667 in taxes along the way, but now they're facing an account balance that is 72% gains ($256,174 of their $356,174 balance). For simplicity, say they convert their Vanguard Total Stock Market Investor Shares to cash at the end of the period, so they'll face a total of $25,617 in penalties whenever they withdraw that balance: 10% of the gains on the account, plus of course their ordinary income tax rate on the share of the gains they withdraw.Based on our stylized example, we can now easily see four possible outcomes:

• The account falls in value, and non-qualified withdrawals are completely tax- and penalty-free;
• The account maintains its value, and withdrawals are completely tax- and penalty-free regardless of whether they are qualified or non-qualified;
• The account increases in value, and non-qualified withdrawals are taxed and penalized;
• The account increases in value, and qualified withdrawals are tax- and penalty-free.

Only in one of the four cases, where you have an appreciated account with non-qualified withdrawals, does the 529 account have any downside compared to the same investment in a taxable account. In the case of accounts that fall in value or maintain their value, withdrawals remain tax- and penalty-free while dividends and capital gains compound internally tax-free, and in appreciated accounts used for qualifying expenses dividends, capital gains, and price appreciation are permanently tax-free.

Conclusion

I've assembled these facts not to give nickflyer a definitive answer to his question, but to reframe it slightly.A person who has certain knowledge about the future trajectory of the stock market should invest in the stocks that are going to go up the most. In that case, tax loss harvesting, tax-deferred accounts, and other opportunities to game the tax code are a sideshow compared to the business of buying the stocks that are going to go up and selling the ones that are going to go down.But if you have no idea which stocks are going to go up and which are going to go down, then 529 plans give you the opportunity to make lop-sided bets: if they go down, you're allowed to withdraw your principle, your dividends, and your capital gains tax-free. If they go up, you only have to pay taxes and penalties on your earnings, and only for non-qualified distributions. And if you're able to make qualified distributions, your earnings, dividends, and capital gains are permanently tax-free.The 10% penalty and ordinary income taxes levied on non-qualified distributions has to be weighted by the likelihood and magnitude of non-qualified distributions of gains. And as I mentioned in the original post, you can make those odds even more lop-sided by opening multiple accounts and horse-racing them against each other: make qualified withdrawals from the most appreciated accounts, and non-qualified withdrawals from accounts that have fallen in value, maintained their value, or appreciated the least, while all your accounts compound internally tax-free.

Differences between non-retirement investment options

If you're in the right mood, there's something a little bit depressing about the subject of investing: how boring it is. An easy way to think about this is that if you make the maximum contribution to a 401(k) and IRA every year, for 20 years, at the end of that 20 years, you'll be rich. How rich you'll be depends on a lot of factors, but the fact you'll be rich doesn't depend on anything except the steadiness of your contributions and the amount of time they're allowed to compound.$24,000 in annual contributions for 20 years turns into a million dollars at 6.6% APY. If you can only manage 6% APY, it takes a year longer, and at 7% APY a few months less. But all anyone has to do to become a millionaire is max out their 401(k) and IRA contributions for around 20 years.I don't mean to say that's easy. You can't contribute more than 100% of your income to a 401(k) or IRA, so if you make less than $18,500 you can't maximize that contribution (although you can contribute your first $5,500 in income towards both accounts). I'm just saying it's boring. Max out your contributions, wait 20 years, and you'll fall somewhere in the top 10% of households by net worth.The flip side of that fact is that as long as you make your retirement accounts as boring as possible (my solo 401(k) is invested in a single Vanguard mutual fund), you can do almost anything you like with the rest of your money without posing much if any risk to your chances of ending up rich. I've written a lot in separate posts about different kinds of non-retirement investments, so I thought I'd pull those different pieces together in one place.

Taxable brokerage accounts

Pros: no withdrawal penalties, opportunities to manipulate income, cheap or free, $11.2 million estate tax exemption and stepped-up basisCons: taxable (at preferential rates), may affect financial aid eligibility, limited control over dividends and capital gains distributionsTaxable brokerage accounts have two huge advantages and a slew of disadvantages.On the plus side, you can access your money at any time for any reason. It's true you may owe taxes on any appreciated assets, but as I like to say, if you're afraid of paying taxes you're afraid of making money — you only owe capital gains taxes on capital gains, after all. Additionally, simply having a bunch of uncorrelated assets in a taxable account is a tool for managing your tax liability, since you're able to top up your income with long term capital gains in low-income years ("capital gain harvesting"), and sell losers in high-income years to reduce your taxable income by up to $3,000 in losses per year ("capital loss harvesting").The disadvantages are important to consider, however: mutual funds that are forced to pass along capital gains can trigger tax bills even if you don't sell your own shares. Unpredictable dividends can make it difficult to dial in your income precisely, for example if you intend to qualify for premium subsidies on the Affordable Care Act exchanges. If you or your kids are applying for federal financial aid using the FAFSA, you don't need to report qualified retirement savings, while assets in taxable brokerage accounts will reduce your assessed financial need (under some circumstances).One other thing taxable brokerage accounts are perfect for is gambling. If you walk into a Vegas casino and lose $500 playing roulette, you're out $500. If you buy $500 of Enron stock and it drops to $0, you might be out as little as $250, depending on your federal and state income tax situation.

Variable Annuities

Pros: tax-free internal compounding, asset protectionCons: gains taxable as ordinary income, inherited assets fully taxable, very expensive, early withdrawal penaltyI wrote relatively recently about variable annuities so I won't belabor the point here, but one point that reader Justin brought up in the comments to that post is that depending on your precise situation, annuity assets may be protected from creditors in a civil judgment or bankruptcy filing. This is, obviously, not protection afforded to taxable brokerage assets, and I think in certain circumstances an annuity might be worth considering for this reason alone.However, if your primary goal is asset protection, you should first consider shopping around for an umbrella insurance policy, since the management fees and tax consequences of a variable annuity might be substantially higher than the annual cost of comprehensive liability insurance. However, this would not apply if you're contemplating bankruptcy in a state that protects annuity assets from creditors.

529 College Savings Plans

Pros: low-cost, state-dependent tax benefits, tax-free internal compounding, flexible beneficiary designation, tax-free qualified withdrawalsCons: non-qualified withdrawal penalty, contribution limitsLong-time readers know that 529 plans are a crime committed in broad daylight against the American people. But that doesn't mean they can't still be useful. It's useful to think of 529 plans in two ways:

• qualified withdrawals are completely tax-free;
• pro-rated gains on non-qualified withdrawals are taxed as ordinary income with a 10% penalty.

While my main problem with 529 plans is the tax-free transmission of wealth between generations, it's trivial to conceive of an even simpler hack to achieve both tax-free internal compounding and tax-free withdrawals. Since 529 plan beneficiaries can be changed without any tax consequence to immediate (and not-so-immediate) relatives of the current beneficiary, who does not need to be related to the account owner, all you need to do is find a family with a bunch of kids and designate the oldest (or smartest) as the beneficiary of the account.Whenever they have any qualified educational expenses (which, thanks to Zodiac Killer and Republican Senator Ted Cruz, now include up to $10,000 in private and religious K-12 expenses per year), you can issue a qualified, tax-free distribution to the school and be reimbursed by whoever would otherwise pay their tuition.To be clear, this is completely illegal. But if you think that's stopping our plutocrats from doing it, I've got a tax-advantaged infrastructure investment in Brooklyn to sell you.The other reason to consider 529 plans as an alternative savings vehicle is that the penalty on non-qualified withdrawals just isn't that harsh. Here's an example using the 20-year investment horizon I described earlier:

1. Contribute $100,000 to the Vanguard Total Stock Market Portfolio in Vanguard's (Nevada-sponsored) 529 plan;
2. Using a 5% APY average return after fees, in 20 years the account's value will be about $265,000, representing $165,000 in gains, or roughly 62% of the account's value.
3. Assuming a standard deduction of $12,000, you can withdraw $19,354 per year without owing any income tax: 62% of the withdrawal will be taxable as ordinary income and 38% will be a tax- and penalty-free withdrawal of your original contribution. You will, however, owe a 10% penalty on the gains, or $1,200.

In a taxable account, meanwhile, you'd owe taxes annually on every dividend and capital gain distribution as well as taxes on the sale of the asset itself. Under the right circumstances, the 10% "penalty" can be lower than the taxes you've avoided on internal compounding, and over even longer time horizons that's even more likely to be the case.In other words, over long enough time horizons, 529 college savings plans function like variable annuities with substantially lower management fees and expenses, and the opportunity for completely tax-free withdrawals. In Vanguard's case, compare the 0.18% all-in fee for their 529 Total Stock Market Portfolio to the 0.42% for the same portfolio in their variable annuity product. The key point is that the higher management fees and expenses are charged on the entire variable annuity portfolio, while the 10% withdrawal penalty is only charged on the gains in the 529 portfolio.This technique even allows you to replicate the old "horse race" strategy of IRA recharacterizations. Since the gains in each 529 account are calculated separately for the purpose of non-qualified withdrawals, you could open one Vanguard 529 plan invested entirely in the Total Stock Market Portfolio, and one My529 plan invested entirely in the Vanguard Total International Stock Index Fund (and another state's plan invested in the domestic bond market, and another state's plan invested in the international bond market, etc.). Since non-qualified distributions are taxed and penalized on an individual account basis, you would always have the option of making non-qualified withdrawals from the account with the most (or least) gains, depending on your tax situation in a given year.And this, unlike the "sell your 529 plan assets" strategy mentioned earlier, is 100% legal. Hell, it's practically encouraged.

Non-traded investment scams

Pros: high "expected returns"Cons: expensive, illiquid, obviously doomedToday there are a million crowd-funded investment options, from old-school players like Prosper and LendingClub to newfangled bill brokers like Kickfurther. But the investment that most naturally lends itself to crowdfunding is real estate. Real estate is expensive (so you can raise a lot of money), it's illiquid (so you can lock investors' money up for years), and it's opaque (so no one has any idea if you're getting a "good" or "bad" price on the real estate you acquire or the management fees you charge).I have a lot of respect for these scams. They charge huge upfront fees and huge management fees for an investment they have no control over the performance of. Fundrise is one of my favorite examples: one thing you could do if you identified a promising piece of real estate is to take out a loan and buy it. Alternately, you could raise money from a group of investors who would then share ownership of it. But Fundrise has an even better idea: collect money from strangers, issue them unsecured claims on a future stream of revenue, charge your expenses against that stream of revenue, then return their money minus your own healthy share of any eventual profit.If you want to invest in a mutual fund, you ought to invest in a mutual fund. If you want to invest in real estate, you ought to invest in real estate. But if you want to get ripped off by some Silicon Valley dweebs who paid $300 for a graphic artist to design a sleek website, Fundrise is for you.

Rental real estate

Pros: generous tax treatment, stepped-up basisCons: expensive, illiquid, volatileAs a leveraged bet on the cost of housing, owning rental real estate doesn't have any advantages over simply buying a residential REIT on margin. You have all the risks of declining real estate prices, rising vacancy rates, and property damage, and none of the benefits of spreading that risk across hundreds or thousands of properties.All the advantages come from the special tax treatment real estate receives. While you own a rental property, you're allowed to deduct the interest on any mortgage you took out to buy it. You're allowed to deduct the property's depreciation. And you're allowed to sell the property and make a "like-kind" exchange for another property (in the US) without triggering taxes on the sale. Finally, like other taxable assets, your heirs will receive the property with a stepped-up basis, meaning they won't owe taxes on the appreciation of the property during your lifetime.This is especially valuable in the case of real estate if the original owner was deducting depreciation and reducing their own basis in the property: a property purchased for $200,000 whose owner deducted $100,000 in depreciation, but is worth $400,000 when inherited and sold, avoids capital gains taxes on $300,000 that would have been owed if sold during the original owner's lifetime.

Collectibles

Pros: interesting conversation piecesCons: losing all your moneySome people think the problem with "greater fool" assets, whether it's bitcoin, Beanie Babies, or Hummel figurines, is that you'll run out of fools, but I don't think that's quite right. If you try hard enough, you'll likely always be able to find someone, at some price, to take your junk off your hands. The problem isn't finding a fool, it's finding a greater fool — someone willing to pay more for your trinkets than you did.Note that there are strict rules on the tax treatment of hobby losses, so consult a lawyer and/or CPA  (again, I am neither) before starting to gamble in any of this stuff.

Start a business

Pros: preposterous tax advantages, higher Social Security benefits, larger 401(k) contributionsCons: unknownI'm here to promote entrepreneurs and entrepreneurship, so obviously I'm a bit biased. Nonetheless, the advantages of starting a business are undeniable, whether or not you also work as an employee elsewhere.First, if you don't hit the Social Security earnings cap through any other work you do, self-employment allows you to raise your annual contribution and increase the old age and disability payments you're entitled to. For folks who spent a long time unemployed or in higher education due to the late-2000's breakdown in global capitalism, the only way to make up for those missing years is higher contributions during the remaining years before retirement.Second, while your voluntary employee-side 401(k) contributions are capped at $18,500 in 2018 across all your employers and your self-employment, each employer — including yourself — has a separate cap on the amount they're able to contribute to an employer-side 401(k). That means you can take advantage of any employer matching program at your day job and make additional employer-side contributions into a solo 401(k) subject to a totally separate cap.Finally, the 2017 Republican tax heist added an additional 20% discount on the taxable income of many small businesses. This is an extremely confusing topic so, again, consult a CPA if you have any questions about whether your small business qualifies, since certain industries and legal structures are excluded under certain circumstances.

Thinking about Vanguard's no-transaction-fee ETF announcement

The finance blogosphere has been ablaze the last week with Vanguard's announcement that they'll be eliminating trading fees on an enormous swathe of ETF's that currently cost $7 to buy and sell. Reducing transaction fees is an unalloyed good for investors, but I think there are some interesting additional consequences of the change to think about.

What's happening

On July 2, Vanguard announced that "nearly 1,800" ETF's would be offered with no transaction fees through the Vanguard platform, beginning "in August."Vanguard already offered its own ETF's commission-free, so this seems like an attempt by Vanguard to move more non-Vanguard ETF trading onto their own platform; folks who used Vanguard to trade Vanguard ETF's, but used a Fidelity or Merrill Edge account to trade non-Vanguard ETF's, like iShares and SPDR's, may be tempted to move more of their assets into a single Vanguard brokerage account.

Aside: Why ETF's?

People who invest in taxable accounts sometimes prefer ETF's to mutual funds because when mutual funds see investor redemptions they're sometimes forced to sell their underlying holdings and pass along any accrued capital gains tax liability to the remaining shareholders, while ETF's use a financial engineering process called "creation and redemption" to avoid passing along capital gains to shareholders. I don't think this is very interesting but people who distribute ETF's think it's incredibly interesting, so I want to make sure you're aware of it.

This could be a Robinhood-killer

I like using the Robinhood iPhone app to trade individual shares of stocks and ETF's without commissions. But with commission-free ETF's through Vanguard, there's no reason to use Robinhood to buy and sell those shares, so Robinhood will get a smaller percentage of my recreational trading business [Disclosure: I own one share each of WisdomTree's DHS, iShares' QAT, ERUS, and TUR, and two shares of Cambria's TAIL].Robinhood has two key problems as an investment platform: it only offers taxable brokerage accounts, and it doesn't offer the benefits of a full-service taxable brokerage account. While Vanguard allows you to easily identify specific shares for sale, making it possible to harvest capital losses in some years, gains in others, or both to offset each other, Robinhood just doesn't have that functionality, at least not yet.On the flip side, while Vanguard's full-service taxable brokerage platform makes it easy to maximize the tax benefits of price fluctuations, they also charge transaction fees for non-Vanguard ETF's, meaning every time you harvest a loss or gain, or simply make a periodic contribution to a non-Vanguard ETF, you're surrendering some of the benefit of the platform back in transaction fees.

Using Vanguard as your primary taxable brokerage account is going to make more sense

While Vanguard offers a wide range of ETF's, understandably they don't offer very many overlapping, tightly correlated ETF's, which is one of the fundamental principles of tax-loss harvesting.When you sell an asset in a taxable account that has declined in value, if you want to maintain exposure to the asset class, you need to find a not-substantially-identical asset to buy in order to avoid the "wash sale" rule. But within a single fund family, those are relatively rare. Vanguard offers VTI (Total Stock Market) and VOO (Vanguard S&P 500), for example, but they don't offer a foreign total-market and foreign large-cap ETF, or emerging market total-market and emerging market large-cap ETF.What the addition of no-transaction-fee non-Vanguard ETF's brings is the ability to do far more such matching trades in taxable brokerage accounts. For example, the Vanguard FTSE Emerging Markets ETF (VWO), as you'd expect, tracks the FTSE emerging markets index, while the iShares MSCI Emerging Markets Index (EEM) tracks the MSCI index. The main difference is the exclusion of South Korea in the former and its inclusion in the latter. Since they're not substantially identical (South Korea's a big country!), they make a great tax loss harvesting trade.I don't think taxes are that interesting so I don't think you should spend too much time obsessing over this stuff, but for those who are willing to put in the work these fee-free transactions potentially offer a lot of opportunities to harvest losses during choppy markets without the friction of transaction fees.

Vanguard doesn't offer custodial services to advisors

One reason folks in the finance world have been spilling so much ink over Vanguard's announcement is that Vanguard doesn't have a full-service custodial platform for financial advisors, which creates a dilemma: in order to take advantage of opportunities to harvest losses and rebalance portfolios, advisors want to have a full-service trading platform, but in order to best serve their clients, they also want to have a low-cost trading platform.There's no one right solution to this problem, but hopefully Vanguard's aggressive move will encourage the existing custodial platforms to lower or eliminate trading fees for ETF's on their own platforms.

No-transaction-fee ETF's in qualified retirement accounts

So far I've been talking about the tax benefits of access to more no-transaction-fee ETF's in taxable brokerage accounts, but of course most people have the majority of their financial assets in qualified retirement accounts where things like capital gains distributions and tax loss harvesting are irrelevant.In those accounts I think there's opportunity for both mischief and profit. If no-transaction-fee ETF's cause people to buy too many, too-expensive ETF's from too many issuers, they're going to end up with something that looks a lot like the market's performance, minus the additional expenses paid to their menagerie of funds.On the other hand, if investors want to pursue a specific investment thesis, or execute a specific hedge, in their retirement accounts then being able to do so without the friction of transaction fees could save them tens or hundreds of dollars per year.

Conclusion

To be clear, lower transaction fees are an unalloyed good, for the obvious reason that transaction fees cost money, and the more money you spend on transaction fees, the less money you have left afterwards.But whether you, in particular, should be jumping all over no-transaction-fee ETF's starting in August instead of making steady contributions to a portfolio of low-cost mutual funds depends on your specific situation.In other words, just because you can trade for free doesn't mean you should trade for free.