Filing tax returns

As we get to wrapping up filing our tax returns for the year, I am left with one checkpoint and one reflection.

The checkpoint is the annual exercise of making the final update on the box on our accounts sheet that calculates savings for the year from Income – Expenses – Taxes. It is helpful to reinforce where we landed for 2018 and how each of these is trending from one year to the next.

The reflection revolves around everything these taxes pay for – including the infrastructure that I often take for granted. The quality of a society’s infrastructure determines the overall productivity. And, I’m grateful for the opportunity to contribute – in a small way – toward making the baseline a bit better for everyone.

The trim dashboard

One of my favorite product experiences as a user in the past year has been with Trim. Their value prop is simple – you connect your cell phone and cable accounts – and they negotiate a better rate every few months.

As they serve thousands of customers, they have the data at hand to negotiate effectively on your behalf. So, I find myself smiling every time I receive a heads up text from them that says “we’re negotiating on your behalf.” Their latest negotiation (not yet added to the dashboard) seems to have saved me another $180 for the year on my Comcast bill.

And, that’s on top of the ~$600 in savings they’ve negotiated in the past year. I’m happy for them to take 33% of this as revenue as it still means $400 in savings.

Their dashboard, thus, is a weekly reminder of the value they’ve added to my life.

As someone who attempts to build valuable products for a living, the Trim dashboard is a great example of this gold standard user experience – the ability of a product to clearly demonstrate the value it delivers.

Spending money where we spend our time

One of the better pieces of advice I’ve received when it comes to spending money was – “Money well spent is generally spent either on experiences or where you spend your time.”

The second half of the advice has been particularly helpful over the years as we’ve made purchase decisions. Investments in a nice mattress, comfortable daily wear clothes and shoes, nutritious food, and ergonomic work equipment tend to have a high return-on-investment.

The Robo Advisor follow up – 4 approaches to investment management

I spent some time through the holidays in December doing research on Robo investment advisors. Below is what I learnt from the research. For folks outside the US, the specific examples won’t be applicable – but, I hope the framework is helpful.


I think there are broadly 4 approaches to managing investments:

1. Financial advisory (High cost, Low effort): A financial adviser typically charges ~1% of funds under management in addition to the fees from individual funds. There are broadly three benefits. First, the financial adviser helps guide your entire financial life including helping you rein your expenses. Second, advisers ensure you have a few basic hygiene factors in place – emergency funds, life insurance, wills, etc. And, finally, since they manage investments for a living, they have access to a lot of information about the markets and presumably have plenty of data to make good decisions.

Now, on the flip side, disciples of John Bogle would tell you that the passive investing approach is a better, safer, bet than active management. The research would be on their side. But, on the other hand, there are many who work with financial advisers to get their financial life in control before branching out themselves. Financial advisers can also be a boon if you have a high net worth as they can help optimize your portfolio for taxes.

Finally, I lump “Personal Capital” into the financial advisory zone. Even if they claim to be a Robo advisor, fees of 0.89% are in the “high” territory. While I wasn’t on the look out for a full blown financial adviser, I did meet with them to understand their approach (I use their free product). I am admittedly a tad skeptical about their approach as I didn’t find much research to back it up. That said, 1) I’m clearly no expert :-) and 2) I’m looking forward to checking back in a few years to see how their strategy plays out over time.

2. DIY complex investing (Zero cost, High effort): This is for folks who love the art and science of investing. These folks have read the books and the research, follow investment managers and trends, manage their portfolios carefully, read SEC filings of acclaimed investors, and have earned investment experience through years of experience. Most important, their eyes light up when they talk about investing and diversification.

While this would be “high effort” for most people, folks who go down this path tend to do it because they enjoy the process. It definitely isn’t for everyone.

3. DIY simply investing (Zero cost, Medium effort): Folks in this bucket just work with a simple portfolio of Vanguard funds and invest/re-balance on a monthly/quarterly/half-yearly basis.

There are two keys to success in this approach. The first is a threshold level of interest in investing to make sure the overall strategy makes sense. And, the second is discipline. Most folks on forums like “Bogleheads” fall in this category. While I’ve seen folks in the Bogleheads community use phrases like “anyone with half a brain can do this,” I think they often mix interest and ability in their judgment of how easy this approach is to follow in the long run.

And, again, the importance of discipline and consistency in the long term success of this approach can’t be overstated. The biggest long term challenging to DIY investing success is managing your own psychology.

4. Robo advisers (Medium cost, low effort): I think there are two categories of Robo advisers. The more popular category is led by Betterment and Wealthfront. I think of both of them as Vanguard++. They take your Vanguard account, overlay it with a fancy UI that restricts you to a few index funds, optimize the mix for your long term goals, automate the process, and perform tax loss harvesting. Both claim they more than make up their 0.25% fee thanks to tax loss harvesting. Most folks who use these services seem happy – so, I think they’re doing a good job.

The second category is Vanguard’s Personal Advisory service. This service is a marriage between the robo advisers and the financial advisers. The main downsides to this service (versus Betterment and Wealthfront) are the absence of tax loss harvesting and a minimum of $50K in investments. But, on the plus side, you get access to a human advisor for 0.3% in fees. The human adviser can, thus, help you craft a reasonable overall strategy for your investments and ensure you stay disciplined.


We weren’t in the market for a full blown financial adviser as we tend to be pretty disciplined about our expenses and didn’t feel this would be as valuable. I have experimented with DIY simple investing (2013-2015, 2017) and attempted a version of DIY complex investing (2018). But, I realized that it isn’t something that I enjoy doing. While it may have been fun to spend time and learn more, time is a constraint with two kids. So, I was in the market for robo advisers for 2019.

After reading most of the reviews in the first few pages of Google searches for Betterment/Wealthfront and Vanguard PAS, we decided to experiment with Vanguard this year. We really value the presence of the human adviser and thought it would be helpful to have conversations about our overall strategy versus maximizing returns on one account. These conversations over the past 3 weeks have turned out to be very valuable and are well worth the fees in our book.

Finally, we love the simplicity of keeping investments in Vanguard as it makes it easy to just discontinue the service if we think we aren’t seeing value or believe we’ll be able to do what they do ourselves.

Looking forward to seeing how this automated approach works out in 2019. I’ll keep you posted.

PS: A big thank you to those of you who responded to my post with your approaches and notes. As always, it was much appreciated.

John Clifton “Jack” Bogle

I learnt today that John Clifton “Jack” Bogle passed away. John Bogle created the first index fund and then went on to build Vanguard.

I loved a line on Marketwatch about his impact – “Thanks to index funds and Bogle, millions today live better retirements. Millions of college funds are fuller, millions of charities are better funded, and millions of aging grandparents have better resources in their old age.”

Morgan Housel pointed out that he did all this by creating a $5T non-profit whose profits went to retirees. He may be the greatest undercover philanthropist of all time.

I can say plenty about his impact on my life. For a boy who knew nothing about the financial world, the knowledge that Vanguard had my back gave me the confidence to invest and helped me pay for graduate school.

It is hard to explain how big an impact it made on my life.

Thank you, John, for showing us the way.

Investing – To Robo or not to Robo

As you can probably tell from yesterday’s list of personal finance lessons for 2018, I/we don’t use robo advisers like Betterment or Wealthfront.

A debate I’m hoping to settle before the end of the year is whether or not to experiment with robo advisers in 2019. Most of what I/we invest in is low cost index funds on Vanguard. As the key benefit touted by the robo advisers is “tax loss harvesting,” I’m not clear yet as to whether this is worth the 0.25% management fee.

So, this is a question for you – have you had experiences with robo advisers? If so, I’d be curious to hear about your experiences. Please just hit reply if you are receiving this email or write to rohan at rohanrajiv dot com. I’d really appreciate it.

9 Personal Finance Lessons from 2018

My notes to self from 2018 with a focus on everything that happens after the paycheck comes in –

Overall

1. Make sure your expense growth is much slower than your income growth. I shared my expense tracking sheet earlier this year. A new addition to that sheet was a sheet with “yearly math.” This sheet splits income into expenses, taxes, and savings. It is a really simple view and it helps keep focus on an important high level relationship -> grow your income faster – ideally much faster – than your expenses.

Expenses

2. Keep your expenses low by consciously tracking them. This isn’t a new lesson as much as it is an ongoing commitment. I’ve come across many tools that aim to simplify expense tracking but I’ve stuck to my simple google spreadsheet for 8 years now and it has worked great. The act of adding one expense at a time has inspired a level of consciousness that I’d otherwise have missed out on.

3. Spending on experiences has very high RoI. Again, an ongoing commitment.

Savings

4. A high yield savings account is a no brainer. A high yield savings account can yield up to 2% at the moment – far better than the 0% on normal savings accounts even after you factor in taxes. The “downside” in these accounts is the absence of physical banking facilities – so, no downside if you’re comfortable with dealing with your money digitally. :)

Investments

5. Individual stock picking is really hard – if you do it, do it with less than 5% of your net worth. I tried experimenting with it this year – and mostly failed. The second half of the year has been rough on stocks. In many ways, I’m glad for the lessons I learnt this year as I will, hopefully, exhibit better judgment in future years.

One accompanying learning here is to use “limit orders” if you still decide to indulge. If you decide to buy, use target prices to capture the upside/limit your downside. I wish I’d learnt this lesson earlier!

6. Tax loss harvesting. If your picks went sideways, tax loss harvesting might help. :)

7. Manage vests/employee stock purchase plans like cash. There are stories of the employee who held Coca Cola stock/GE stock/Johnson & Johnson stock for decades and watched it multiply 100 fold. For every such story, there are cautionary tales that we don’t hear about where large portions of paychecks disappeared due to market movements. Andy Rachleff has a great post on the Wealthfront blog on the case for treating any equity pay as cash. Like a good poker move, it doesn’t always look right in the short term but it is the right move for the longer term.

8. It can all go to zero. If you put any money into crypto this year, you know what I’m talking about. See above note on tax loss harvesting.

9. Anchor around principles. I’ve come to believe that all investment advice boils down to 3 principles – diversify, be consistent and disciplined, and do your research and pick a strategy that works for you. The Ivy Portfolio and Simple Wealth, Inevitable Wealth were two interesting adds to my personal finance book reading list this year.