Backdoor Roth IRA Contribution 2022: Tips and Vanguard Example Screenshots

Posted on April 3, 2022 // 8 Comments

The official IRA contribution deadline for Tax Year 2021 is April 15th, 2022. However, I choose to use April 15th as the informal deadline for my same-year IRA contributions (Tax Year 2022). By around April 1st, I have usually finished filing my income taxes and thus have handled any expected tax bills. I also have the first quarter of dividends arrive in my brokerage accounts, so I also have funds ready to re-invest. The optimal time would actually be make my contributions on January 1st, but sometimes we just have to settle for “good enough”.

If your Modified Adjusted Gross Income (MAGI) exceeds the limits for a direct Roth IRA contribution ($144,000 for singles and $214,000 for married filing joint for tax year 2022), you may still be eligible for the “Backdoor” Roth IRA. Christine Benz of Morningstar has a excellent summary of Backdoor Roth IRA concerns.

A backdoor Roth is simple enough and should be tax-free in many cases. An investor who earns too much to make a direct Roth IRA contribution simply opens a traditional nondeductible IRA–available to investors regardless of income level. Shortly thereafter–and here’s where the backdoor part comes in–he converts it to a Roth IRA, another move unrestricted by income limits. Assuming he has no other IRA assets, the only taxes due on the conversion would be any appreciation in the investments since he opened the account. That taxable amount should be limited, assuming he converts the money promptly and/or leaves the money in cash until the conversion is finalized.

Here’s my even-shorter version of the tips:

  • First, check if you have other pre-tax traditional IRA assets such as a rollover IRA. Converting to a Roth IRA may subject these assets to taxes on a pro-rated basis.
  • Get rid of these pre-tax IRAs, if possible, by rolling them into an employer 401(k), 403(b), or 457 plan instead. Self-employed business owners can also roll into a Solo 401k.
  • Contribute and then convert to Roth quickly. Make the non-deductible Traditional IRA contribution, invest for a day or two in cash, and then quickly convert to Roth. The IRS has clarified that no waiting period is required, making it better to do it right away to avoid any tax complications.
  • Repeat at the beginning of every year. Just keep doing it every year, as soon as you can, and build up that precious Roth IRA balance that can grow tax-free forever with no required minimum distributions. Ignore news about the option “maybe” going away until it actually goes away.

Here’s our simple three-day process at Vanguard.

Day one: Make non-deductible contribution to a Traditional IRA account. You could fund in various ways, I exchanged from funds within my Vanguard taxable brokerage account. Just put it in Vanguard Federal Money Market temporarily.

Day two: Go to “Balances & Holdings” page and find the “Convert to Roth IRA” link. Complete required steps.

Day three: Your traditional IRA balance is now $0. Invest the funds that are now in your Roth IRA. In this case, I would have a taxable gain of just $0.03, which simply rounds to zero.

Note: There is still some debate about how much time should pass between the non-deductible Traditional IRA contribution and the Roth conversion. Some people believe that the 2017 Tax Cuts and Jobs Act (TCJA) officially signaled acceptance of this move. Others still want you to wait either for a monthly statement or even a full year in between the steps. I’m not a tax attorney and this is not tax advice. This is just what I did and I don’t lose any sleep over it.

Filed Under: Investing, Retirement //

Optimal Target Date Fund Glide Path, Per Deep Learning AI

Posted on April 1, 2022 // 2 Comments

The WSJ article Why Target-Date Funds Might Be Inappropriate for Most Investors (free gift article) discusses new research using “deep learning” artificial intelligence to find the optimal asset allocation over time. There are several interesting insights that also agree with common sense. For example, one size doesn’t fit all. Wealthier investors can withstand the volatility from holding a much higher stock allocation, whereas lower net worth investors need to be more conservative to avoid a hitting zero due to a bad sequence of returns.

Here is how the optimal glide path for the average investor differs between Deep Learning analysis vs. actual Target Date Funds:

Though the primary insight of this modeling is that one size doesn’t fit all, the research did reach one conclusion that does apply to all of us on average: The typical glide path used by target-date funds is too conservative starting at the age of 50. In contrast to an equity exposure level that drops to 50% by retirement age and to as low as 30% during retirement, the average recommended equity exposure in the researchers’ model never falls below 60%.

While I don’t know the details regarding the underlying assumptions of this research, the red AI line caught my eye because I also don’t plan on going below about 60% stocks ever in my lifetime. My reasoning is that I am going for a “perpetual withdrawal rate” scenario where my I just live off a base of growing dividends and interest. (I’m not talking about owning only extreme high-yield products like closed-end ETFs, junk bonds, and leveraged REITs). After reaching the “safe withdrawal rate” number that is based on a very high likelihood of not dying with zero, I wanted even more margin of safety. It can be counterintuitive, but over the long run owning businesses can be “safer” than just own a big bag of cash that is constantly exposed to inflation risk.

Filed Under: Investing, Retirement //

Schwab Starter Kit: $101 in Free Stock (or Cash) For New Customers

Posted on March 22, 2022 // 7 Comments

I’m a old fart now, but if I am going to keep most of my net worth somewhere, I want it somewhere that if I called their phone number, I’d be confident to have a knowledgable human pick up the phone and help me with my problem. That means Vanguard, Fidelity, and Schwab over Robinhood. Still, competition is good. I like trying out new interfaces and features, and the best of those new apps usually flows down to everyone else. The Robinhood era has helped make everyone’s apps more user-friendly. Commissions are lower. And now even the big boys have are willing to pay you cash to try them out!

Schwab has a Schwab Starter Kit that includes $101 in free fractional shares of stock (“slices”) plus some educational resources. The $101 will be split equally across the top five largest companies in the S&P 500 index – currently Apple, Microsoft, Alphabet/Google, Amazon, and Tesla. (If you do not want the stock shares and just want the $101 in cash, see the fine print quoted below for the short window of time when you can cancel the trades.) To qualify, you must be a new customer opening a Schwab account through that page and deposit at least $50 within 30 days. Emphasis mine:

After you enroll in the offer, here’s what will happen:

Two business days after your account is opened, Schwab will begin checking for qualifying deposits every business day. Once your qualifying deposit has been received, Schwab will credit the $101 cash bonus to your brokerage account at approximately 6:00 p.m. Eastern Time the next trading day. (If you make your qualifying deposit after 8:30 p.m. Eastern Time, Schwab will credit the $101 cash bonus at approximately 6:00 p.m. Eastern Time two trading days later.)

Schwab will send you an email about your 5 trade orders the night before the orders are placed.

Schwab will place the 5 orders for you ($20.20 fractional share orders for each of the top 5 stocks in the S&P 500) at approximately 8:00 p.m. Eastern Time the day the cash bonus is credited to your account, provided you maintain at least $50 in your brokerage account at that time.

You will have a short period of time (from approximately 8:00 p.m. Eastern Time until approximately 9:25 a.m. the next trading day) to cancel the orders.

To cancel the orders, you will need to go to the Order Status page on schwab.com or on any of Schwab’s other trading platforms or call a Schwab representative at 800-435-4000.

If you cancel your orders, you will keep the $101 cash bonus and can save or invest it however you want.

If you take no action, the orders will be executed shortly after market open the next trading day. You will then see the stocks reflected in your account and Schwab will send you trade confirmations for the trades.

Filed Under: Deals & Offers, Investing //

Historical Asset Class Correlations: Stocks vs. Bonds, International Stocks, Commodities, Gold

Posted on March 20, 2022 // 5 Comments

Morningstar has published their 2022 Diversification Landscape (direct link?, but free with email), another useful whitepaper for DIY investors that looks closer at the correlations between different asset classes. The first three sentences quoted below are important:

The problem is that correlation coefficients shift over time, so what worked in the past won’t necessarily work in the future. In addition, adding asset classes to reduce volatility can also drag down returns, sometimes over multiyear periods. Moreover, correlations between many assets spike during periods of market crisis—in other words, exactly when you need diversification the most. The catalysts for crisis periods that lead to equity-market declines can also vary dramatically. Macroeconomic stress can drive declines (as it did during 2008 and early 2020), but so can rising interest rates, geopolitical uncertainty, and so on. Those underlying conditions can have an impact on which diversifiers fare best.

In this paper, we dig into the diversification benefits of adding various assets to a U.S. equity portfolio, including taxable bonds, municipal bonds, international equity, commodities, alternatives, sector-specific indexes, investment styles, factor indexes, and cryptocurrency.

I’m not very interested in correlations over a recent 1-year timeframe, but I am interested in stepping back and seeing how asset classes behave over longer periods of time.

The lower the correlation between asset classes (the less they move in the same direction), the greater the reduction in volatility you get by combining assets. As long as you combine asset classes with correlations below 1, you get some degree of volatility reduction.

Here are a few selected charts from the research paper, along with my quick takeaway.

Takeaway #1: In terms of diversification benefits, staying as safe as possible is still the way to go. The best is still US Treasury bonds. Even the popular US “total bond” indices which include corporate bonds have shown positive correlations with stocks at times.

Takeaway #2: High-quality muni bonds have also kept their correlations negative, but high-yield “junk” muni bonds spike at the exact wrong time (market crashes).

Takeaway #3: International stocks offer a little diversification benefit, but are usually strongly correlated with US stocks. You must have faith that international stock returns will at times exceed US stock returns for periods of time to invest in this asset class.

Takeaway #4: Commodities go through boom and bust cycles as part of their nature, and the correlations with US stocks can also stay high or low for years at a time. I find it all very unreliable and unpredictable.

Takeaway #5: Gold has shown a consistently low correlation with US stocks. For myself, it’s not the correlation I’m concerned with, but the long-term returns.

Filed Under: Investing //

S&P 500 and Global Stock Market Dividend Yield 2000-2020

Posted on March 16, 2022 // 3 Comments

Here is an article about dividends by Capital Group. I didn’t really find the analysis very actionable, but I did like their chart that tracked the historical yields of the S&P 500 index, the MSCI ACWI index, and 10-year US Treasury bonds from 2000 to 2020.

The MSCI ACWI Index is a global stock index that tracks ” large- and mid-cap stocks across 23 developed and 24 emerging markets.”. Basically, a world stock market index that includes US and all other global stock markets.

I know that the total performance of international stocks has underperformed the S&P 500 for a while now, but holding international stocks does seem to consistently boost your overall dividend yield. In addition, I don’t see a strong direct relationship between dividend yields and interest rates.

Filed Under: Investing //

Major Asset Class 10-Year Return Forecast 2022 Collection From Huge Investment Management Firms

Posted on March 14, 2022 // 1 Comment

Christine Benz at Morningstar has helpfully compiled the 7 to 10-year forecasts for major stock and bond asset classes from some huge investment firms that collectively manage trillions of dollars.

The problem is… they are all over the place?! US stocks return predictions vary from 1.6% to 6.7% annualized. Developed international stock return predictions vary from 2.6% to 9.2% annualized. US Bond return predictions are close together, but these are easy to predict for everyone including even “dumb money” like me.

I used to keep track of these 10-year stock return predictions because they made me feel better about owning lagging asset classes. Now I mainly keep track of them with the expectation that I will look back in 10 years and realize how pointless they were, even though these are smart people trying their best.

Filed Under: Investing //

10-Year S&P 500 Returns Tend To Cluster Around Triple-Your-Money Runs… or Stagnation

Posted on March 13, 2022 // Leave a Comment

[Programming note: This week is our Spring Break, so I have scheduled some interesting charts that I’ve put aside as they provided interesting “food for thought”. Comment moderation and e-mail replies will be delayed.]

Here is an interesting observation from Klement on Investing. If we chart the frequency of annual (1-year) returns of the S&P 500 index, we get something familiar and close to a (statistically) normal distribution around the average of about 10% (red added by me):

However, if we chart the frequency of the 10-year annual returns of the S&P 500, we see slightly different behavior (red added by me). Klement notes a “trimodal” distribution, but I still see two main peaks. Over this longer timeframe, we see clumping around periods of “bear markets” and “bull markets”.

The big hump on the left is marked “secular bear market”. Note that anything between -35% and +35% in a 10-year return works out to between -3% and +3% annualized. Not much movement. Meanwhile, the other big hump on the right is spread out between +100% to +300%. That means you end up with somewhere between double and quadruple your initial amount, with the peak of the “secular bull market” hump around triple.

This post is from early 2020, and we know that we had a big crash and even bigger recovery in the markets since then. For the most part though, our current secular bull market kept going for all of 2021. Klement closes with a warning:

However, we need to be aware that while the last decade was a run of the mill secular bull market, this also means that the next decade will likely be a mixed period where we experience the tail end of the current secular bull market and the front end of the next secular bear market. Why? Because there has not been a single secular bull market in history that has lasted for two full decades. We know that the current bull market is already the longest bull market in history so it is only reasonable to assume that it will end sometime in the next decade. And then, we should expect that market returns move into the mixed zone of mediocre returns.

My takeaway is that we have to be prepared for some prolonged streaks. Averages can be deceiving. Some people expect a crash after just a few good years, but often we should just ride that wave. At the same time, we need to expect and prepare to survive periods of stagnation (not the same as permanent capital loss).

Filed Under: Investing //

Best Interest Rates on Cash – March 2022 Update

Posted on March 7, 2022 // 4 Comments

Here’s my monthly roundup of the best interest rates on cash as of March 2022, roughly sorted from shortest to longest maturities. I look for lesser-known opportunities available to individuals while still keeping your principal FDIC-insured or equivalent. I use this information for both my cash reserves and as possible bond substitutes. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 3/7/2022.

Significant changes since last month: Pretty quiet. 7.12% Savings I Bonds still available if you haven’t done it yet. Treasury rates around the 1 and 2 year terms are rising, as with CD rates overall. In general, there still doesn’t seem to be much upside to locking in any length of CD at somewhere around 1% APY when there are so many short-term options nearly as good (or better). I like keeping my options open while waiting to see how much rates rise in 2022.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 4% APY on $2,000/$6,000. Current offers 4% APY on up to $2,000 on each of their “savings pods”. Free users get 1 savings pod, while premium users get 3 savings pods. Potential promos include $50 bonus and “Premium free for life”. Please see my Current app review for details.
  • 3% APY on up to $100,000, but requires direct deposit and credit card spend. HM Bradley pay 3% APY if you open both a checking and credit card with them, and maintain $1,500 in total direct deposit each month and make $100 in credit card purchases each month. Please see my updated HM Bradley review for details.
  • 3% APY on 10% of direct deposits + 1% APY on $25,000. One Finance lets you earn 3% APY on “auto-save” deposits (up to 10% of your direct deposit, up to $1,000 per month). Separately, they also pay 1% APY on up to another $25,000 with direct deposit. New customer $50 bonus via referral. See my One Finance review.
  • 3% APY on up to $15,000, requires direct deposit and credit card transactions. Porte requires a one-time direct deposit of $1,000+ to open a savings account. Porte then requires $3,000 in direct deposits and 15 debit card purchases per quarter (average $1,000 direct deposit and 5 debit purchases per month) to receive 3% APY on up to $15,000. New customer bonus via referral. See my Porte review.
  • 1.20% APY on up to $50,000. You must maintain a $500 direct deposit each month for this balance cap, otherwise you’ll still earn 1.20% on up to $5,000. They also pay 4% on USDC stablecoin, but I avoid this as it is not FDIC-insured (and you can get higher rates elsewhere if you did want to hold USDC.) New customer $50 bonus via referral. See my OnJuno review.
  • 1.00% APY on up to $50,000 per account. SoFi is now offering 1% APY on the first $50k each of their checking, savings, and Vault accounts ($150k total possible). You must maintain a direct deposit each month of any amount. Convenient if you already have a relationship with them. $25 new Sofi Money account bonus. See my roundup of current SoFi bonuses.

High-yield savings accounts
Since the huge megabanks pay essentially no interest, I think every should have a separate, no-fee online savings account to accompany your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • T-Mobile Money is still at 1.00% APY with no minimum balance requirements. The main focus is on the 4% APY on your first $3,000 of balances as a qualifying T-mobile customer plus other hoops, but the lesser-known fact is that the 1% APY is available for everyone. Thanks to the readers who helped me understand this. Unfortunately, some readers have reported their applications being denied.
  • AdelFi (formerly ECCU) is offering new members 1.01% APY on up to $25,000 when you bundle a High-Yield Money Market Account & Basic Checking. (Existing members can get 0.75% APY.) To join this credit union, you must attest to their statement of faith.
  • There are several other established high-yield savings accounts at closer to 0.50% APY. Marcus by Goldman Sachs is on that list, and if you open a new account with a Marcus referral link (that’s mine), they will give you and the referrer a 1.00% APY for your first 3 months (a 0.50% boost). You can then extend this by referring others.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (plan to buy a house soon, just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CFG Bank has a 13-month No Penalty CD at 0.70% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.50% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 0.65% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Comenity Direct has a 1-year CD at 1.00% APY ($1,500 min). Early withdrawal penalty is 180 days of interest.

Money market mutual funds + Ultra-short bond ETFs
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). Unfortunately, money market fund rates are very low across the board right now. Ultra-short bond funds are another possible alternative, but they are NOT FDIC-insured and may experience short-term losses at times. These numbers are just for reference, not a recommendation.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.01%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.97% SEC yield ($3,000 min) and 1.07% SEC Yield ($50,000 min). The average duration is ~1 year, so your principal may vary a little bit.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.85% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.86% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 3/7/2022, a new 4-week T-Bill had the equivalent of 0.17% annualized interest and a 52-week T-Bill had the equivalent of 1.05% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.05% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.05% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit for electronic I bonds is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between November 2021 and April 2022 will earn a 7.12% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-April 2022, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are severely capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore, as I feel the work required and risk of messing up exceeds any small potential benefit.

  • Mango Money pays 6% APY on up to $2,500, if you manage to jump through several hoops. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • Lafayette Federal Credit Union is offering 2.02% APY on balances up to $25,000 with a $500 minimum monthly direct deposit to their checking account. No debit transaction requirement. They are also offering new members a $100 bonus with certain requirements. Anyone can join this credit union via partner organization ($10 one-time fee).
  • Quontic Bank is offering 1.01% APY on balances up to $150,000. May be useful for those with high balances. You need to make 10 debit card point of sale transactions of $10 or more per statement cycle required to earn this rate.
  • The Bank of Denver pays 2.00% APY on up to $10,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a Kasasa savings account that pays 1.00% APY on up to $25k. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 2.25% APY on balances between $500 and up to $25,000, if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Evansville Teachers Federal Credit Union pays 3.30% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • NASA Federal Credit Union has a special 49-month Share Certificate at 1.70% APY ($10,000 min of new funds). Early withdrawal penalty is 1 year of interest. They also have a 15-month special at 1.05% APY and 9-month at 0.80% APY.
    Anyone can join this credit union by joining the National Space Society (free). However, NASA FCU will perform a hard credit check as part of new member application.
  • KS StateBank has a 5-year CD at 1.90% APY ($500 min). Early withdrawal penalty is 18 months of interest.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year CD at 2.00% APY. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CD at 2.40% APY vs. 1.77% for a 10-year Treasury. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 3/7/2022, the 20-year Treasury Bond rate was 2.29%.

All rates were checked as of 3/7/2022.

Filed Under: Banking, Deals & Offers, Investing //

Big List of Free Stocks For New Commission-Free Brokerage Apps (Updated)

Posted on March 3, 2022 // 23 Comments

Updated. I have the strange hobby of trying out new fintech apps while also collecting their sign-up incentives. Here are several different brokerage apps that offer some variation of free stock trades, modern user interface, real-time quotes, and social sharing. Many are structured like a free lottery ticket with a minimum payout – the odds are that you’ll get a stock valued on the lower end of the ranges mentioned, but I have gotten a few big shares like AAPL before the recent split. They usually require a referral link, which means I can get some free stocks as well. A couple are offering 2X to 4X their usual bonuses right now.

WeBull 12 Free Fractional Stocks Offer

  • Open a Webull brokerage account Open an account and get 2 free fractional shares. Deposit any amount and get up to 10 free fractional shares..
  • WeBull will also reimburse you for a transfer fee up to $100 if you transfer at least $2,000+ value to WeBull from another brokerage.
  • WeBull offers free stock trades, free options trades, free crypto trades, and a full-featured brokerage account. This is a limited-time offer, the standard offer is only one free share of stock.
  • I have done this deal and gotten my free share of stock as promised without issue. See my WeBull review for more details.

SoFi Invest Free $25 in Stock Offer

  • Open a SoFi Invest account and deposit at least $10 to get $25 worth of stock.
  • SoFi offers free stock trades, free fractional trades, and free crypto trades.
  • I have done this deal and gotten my free share of stock as promised without issue.

TradeUP Free Stocks Offer

  • Open an account for a free stock worth up to $30. Fund your account to draw additional free stocks, depending on how much you deposit. See link for details.
  • TradeUP will also reimburse you for a brokerage transfer fee up to $200 if you meet their requirements.
  • TradeUP is a backed by Marsco Investment Corporation and offers free stock trades, free real-time quotes, and a full-featured brokerage account.
  • I have done this deal and gotten my free stocks as promised without issue.

Public Free Stock Offer

  • Open a Public account via referral download link (open in mobile) and get a free stock slice. No deposit required.
  • Public app offers free fractional stock trades, in additional to the ability to share your portfolio.
  • I have done this deal and gotten my free share of stock as promised without issue. Be sure to open the link in a mobile web browser, which will redirect you to the app download.

Robinhood Free Stock Offer

  • Open a Robinhood account and link a bank account to get a free share of stock (up to $200 value). No deposit required.
  • Robinhood app offers free stock trades, free fractional trades, and free crypto trades.
  • I have done this deal and gotten my free share of stock as promised without issue.
Filed Under: Deals & Offers, Investing //

Notes on Berkshire Hathaway 2021 Annual Letter to Shareholders by Warren Buffett

Posted on March 1, 2022 // 3 Comments

Berkshire Hathaway (BRK) released its 2021 Letter to Shareholders over the weekend, which is how Warren Buffett updates his fellow shareholders annually on the status of the business. Direct ownership of Berkshire Hathaway shares (above my passive index fund allotment) was one of my first “explore” investments where I set aside a percentage of my portfolio to buy something that wasn’t an index fund for both educational and profit purposes. The education has been very valuable, possibly worth more than the investment gains. This year’s letter is only 10 pages long. Here are my personal highlights.

Investing is not always about pure optimization. It is better to have a reasonable plan that you understand and can keep the faith in times of stress. I think about my index fund portfolio and BRK shares the same way: The price may fluctuate in the short-term, but earnings power will continue to increase in the long-term and there will be as close to 0% chance of permanent loss as possible.

To a truly unusual degree, however, Berkshire has as owners a very large corps of individuals and families that have elected to join us with an intent approaching “til death do us part.” Often, they have trusted us with a large – some might say excessive – portion of their savings.

Berkshire, these shareholders would sometimes acknowledge, might be far from the best selection they could have made. But they would add that Berkshire would rank high among those with which they would be most comfortable. And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises.

Owning quality businesses, either wholly or partially. BRK seeks to own only quality businesses. They find the needles in the haystack. Index funds own the whole haystack.

Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

Easier to find mis-pricing amongst common stocks.

One advantage of our common-stock segment is that – on occasion – it becomes easy to buy pieces of wonderful businesses at wonderful prices. That shooting-fish-in-a-barrel experience is very rare in negotiated transactions and never occurs en masse. It is also far easier to exit from a mistake when it has been made in the marketable arena.

Personal asset allocation varies between 80% and 100% stocks. Here was an interesting peek about his personal stock allocation over the last 80 years. Buffett has never been shy about owning stocks where he believes that there is a good margin of safety because he paid a a price below intrinsic value.

Nor have Charlie and I lost our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago, on March 11, 1942, when I purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings. (The Dow Jones Industrial Average that day closed at 99, a fact that should scream to you: Never bet against America.)

After my initial plunge, I always kept at least 80% of my net worth in equities. My favored status throughout that period was 100% – and still is. Berkshire’s current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for long- term holding.

Most stocks are too expensive right now. That will eventually change.

Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital. Read on.

The only thing attractive was Berkshire stock itself. So they bought that. Existing shareholders own ~10% more of Berkshire than they did a couple years ago. Side note: You know when I buy some more BRK shares? When WEB does.

Periodically, as alternative paths become unattractive, repurchases make good sense for Berkshire’s owners. During the past two years, we therefore repurchased 9% of the shares that were outstanding at yearend 2019 for a total cost of $51.7 billion. That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses, whether these are wholly-owned (such as BNSF and GEICO) or partly-owned (such as Coca-Cola and Moody’s).

The orangutan effect. I found this quote very true, as writing on this blog helps me develop and clarify my thoughts. But did I just get called an orangutan?

Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.

Past shareholder letters.

  • 1977-2021 are free on the Berkshire Hathaway website (PDF). 1965-2020 are $2.99 at Amazon (Kindle). Three bucks seems pretty reasonable for a permanent digital copy with the ability to search text and maintain highlights.
  • 2020 Letter notes
  • 2019 Letter discussed why BRK will continue to do fine without Warren Buffett around.
  • 2018 Letter discussed using debt very sparingly and the importance of holding productive assets over a long time.
  • 2017 Letter discussed patience, risk, and why they have so much cash.
  • 2016 Letter touched on the rarity of skilled-stock pickers and some insight on his own stock-picking practices.
  • 2015 Letter discussed his optimism in America and his “Big 4” stock holdings.
  • 2014 Letter discussed the power of owning shares of productive businesses (and not just bonds).
  • 2013 Letter included Buffett’s Simple Investment Advice to Wife After His Death.

The annual shareholder meeting will be in-person this year. Unfortunately, this will not be the year I finally get to go. CNBC will livestream it on Saturday, April 30th. I’ll try to watch it while eating some See’s peanut brittle and bridge mix.

Filed Under: Inspirational, Investing //

Schwab Lifetime Adjustable Income: Flexible Withdrawal Rules Based On Portfolio Survival Chances

Posted on February 23, 2022 // 3 Comments

One of the perpetual debates in retirement planning circles is withdrawal rates, AKA how much monthly income can you take from a portfolio. Once you nail down a withdrawal rate and retirement spending target, then you get Your Number – how much you need to have saved to retire (after backing out Social Security and other income streams). It’s common to start with the static 4% rule, but that rule also includes some drawbacks. An alternative is a flexible withdrawal rule that adjusts based on market returns. When your portfolio grows, you can spend a little more. If it shrinks, you cut back a little. Sounds reasonable, right?

However, I haven’t seen many real-world examples of flexible withdrawal rules. Schwab has helpfully outlined one proposed method in this memo: Lifetime Adjustable Income vs. the 4% Rule: Can You Spend More in Retirement with Less Risk? This provides the underlying basis behind their robo-advisor feature called Intelligent Income where you can pick a comfort level and the software will tell you how much you can withdraw each year and from which type of account (IRA, Roth IRA, taxable, etc).

In this memo, we compare a flexible withdrawal strategy to the static 4% rule. We recommend a lifetime adjustable income strategy, described in this paper, that can be put into action using an annually updated financial plan, using technology or an advisor. Doing so may help increase spending early in, and over a long, retirement and help ensure your money lasts.

Here’s their example structure for flexible withdrawals:

  • Set an initial withdrawal rate that delivers an 80% probability of success (savings lasting).
  • Adjust spending amounts after each year based on if the probability of savings lasting falls outside the range you decide: here it is below 75% or above 99%. If these thresholds are crossed, increase or decrease spending by the amount that brings the financial plan back to a 99% probability of savings lasting. This results in fewer but more drastic cuts.
  • Add “guardrails”. A minimum and maximum acceptable annual (real) spending amount of $25,000 and $60,000, respectively, meaning that we will always withdraw at least $25,000 (or at most $60,000).

Using these flexible rules, the initial withdrawal rate was about $43,000 instead of $40,000. Across all of the simulated scenarios, the average annual withdrawal was basically 20%, or $10,000 a year, higher: $50,000 a year instead of the $40,000 a year (in today’s dollars). Even better, the likelihood of running out of money dropped.

However, you must look past the averages and see that you are now exposed to the extremes. Look at that wide expanse of grey. A significant number of the scenarios involved some extended deep cuts to spending, hitting and hovering just above the $25,000 minimum guardrail. You’ll have to decided if you like this trade-off between probably getting more income but possibly enduring some big cuts. This is why many financially-conservative people would prefer to simply start out at a lower 3% or 3.5% withdrawal rate and adjust upwards if the portfolio keeps growing.

In any case, I found it interesting that Schwab used the probability of portfolio survival rate as the factor used to adjust withdrawal rate. DIY investors can implement a similar system themselves. Here are some tools to estimate portfolio survival probability:

Filed Under: Investing, Retirement //

Have You Agreed to Pay the Price Required For Long-Term Stock Returns?

Posted on February 22, 2022 // 5 Comments

On March 6, 2009, the S&P 500 index hit 666.80, shedding 13 years of gains. 13 years! Guess how long it has been since March 2009? 13 years! Something to ponder as the possibility of more war looms ahead.

I remember my portfolio being halved at the time and thinking… how can it not eventually be back at at 1,000? Should I double down on stocks? Meanwhile, Goldman Sachs released “analyst research” that warned the S&P could fall as low as 400. People were panicked and “get out now and wait until things calm down” started to sound more and more like solid advice. The best I could do was not sell anything.

I am re-reading The Psychology of Money by Morgan Housel. In this book of timeless advice about controlling your behavior, he points out that the long-term stock returns that we all expect is not free. There is a price that must be paid.

Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.

We should accept this price volatility as an expected cost of doing business, not something to be avoided:

It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor. Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline. But if you view volatility as a fee, things look different.

From A Wealth of Common Sense, we can get a better understanding of How Often Should You Expect a Stock Market Correction?

I would add one thing. Accepting price swings after looking at a chart may sound okay in isolation. However, you should also prepare for the fact that there will always be a great reason for those drops. We’ve had housing bubbles and dot-com bubbles and now worldwide pandemics. But the next reason will likely be different. And it will be a widely-accepted, legit, scary reason. I will be scared. You will be scared.

If I mentally agree to pay this price now, hopefully it will help me when the next scary thing inevitably comes along.

Filed Under: Investing //
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