Personal Finance 101 for Young Lawyers Forum

[nealric]

I guess this is the opposite of what people want to talk about in this thread, but what kinds of fun stuff, if any, have people blown their biglaw paychecks on?

I'm in-house now, but I had a good equity event recently and bought a 1967 Alfa Romeo GT (to compliment my 1986 Spider).

Nice, but I coulda sworn you were a Subaru guy!

I have a Subaru STI for a daily driver. If I didn't have a day job, I might have a GC8 rally car project too.

[Joachim2017]

Gotta love the objectively terrible advice being given out with the qualifiers like the most “rational” - most rational thing to do is ALWAYS lump sum, throw it all in as soon as you get it to broad based mutual fund, don’t ever try to time the market. Spreading it out over time is for the weak, sensitive pearl-clutchers who can’t handle the thought of an investment going down. All you’re doing it playing to irrational emotional fears which should be confronted and ignored, not enabled. You are missing out on market returns the longer you stay on the sidelines. Don’t be a pussy - and definitely don’t be like the poster above me who claims this idiotic approach is “the most rational thing” - no you’re just acting like a timid coward, because you are one.

Because I know people will rush to defend themselves: NO, I’m not saying invest all your money all the time. Obviously keep out an emergency fund, and shorter term goals. But for the money that you do plan to invest, INVEST IT - keeping it sitting in cash is pure idiocy. I am constantly impressed at the level of abject stupidity on this board when it comes to basic financial advice.

This (somewhat deranged?) post is a nice illustration of the difference between economics and behavioral economics. One is for textbooks and classrooms; the other is for actual human beings. You decide which type of advice is more useful *in real life*.

[DisappointedSummer]

One is right, and one is wrong. Because the market always goes up in the long term, you are objectively worse off dollar cost averaging your way into the market instead of lump sum all at once, unless you think you know something the market doesn’t. And if that’s the case, why aren’t you buying puts and shorting everything?

Here’s a tip: don’t take financial advice from anyone who caters to irrational psychological impulses. The previous poster could make for a typical (non fiduciary) “financial advisor” trying to sell you shitty whole life insurance because “you never know what can happen!” If you listen to these morons, you will miss out on returns and be less wealthy. They are the personal finance equivalent of astrologists reading horoscopes. They don’t deserve your attention.

[Joachim2017]

One is right, and one is wrong. Because the market always goes up in the long term, you are objectively worse off dollar cost averaging your way into the market instead of lump sum all at once, unless you think you know something the market doesn’t. And if that’s the case, why aren’t you buying puts and shorting everything?

Here’s a tip: don’t take financial advice from anyone who caters to irrational psychological impulses. The previous poster could make for a typical (non fiduciary) “financial advisor” trying to sell you shitty whole life insurance because “you never know what can happen!” If you listen to these morons, you will miss out on returns and be less wealthy. They are the personal finance equivalent of astrologists reading horoscopes. They don’t deserve your attention.

You're missing the point. Irrational psychological processes are part of what it is to be human. You can't tell people to just not be irrational. Sure, ideally, we can mitigate and control for that. But that's life. The whole point of behavioral economics is to incorporate psychological realities so that we can *approximate* the fully rational thing to do in various situations. Dollar cost averaging is, in part, a recognition of that reality. If you're writing an algo for a program to invest money, sure, do the 100% rational thing. If you're doing to advise real human beings, your approach needs more nuance. Your framework is too rigid to be useful, it seems from the few posts you've made here.

[DisappointedSummer]

I think you’re missing the point. Just give people what is objectively the correct advice. They can choose to take it or not.

[Ultramar vistas]

I think you’re missing the point. Just give people what is objectively the correct advice. They can choose to take it or not.

I think that you are missing the point. The poster I responded to expressed that he or she had a large sum of cash that they want to invest, but a worry about timing the market.

My response to that concern is to suggest investing it all the same, but spreading the investment out over time to avoid that (normal human) concern about dumping in your life savings directly before another global financial crisis.

DCA is not “wrong”, it’s just less likely to be the most optimal outcome in most modeled scenarios. It’s also a dramatically better outcome than being paralyzed by fear of when to invest and as a result not investing, so for a lot of folks, simply turning on an auto-invest feature with their broker is going to lead to better long term outcomes.

I get that you’re very angry and very keen to show your superior economic knowledge, but try writing like an adult, and people might listen to you.

[DisappointedSummer]

“Try writing like an adult” says the poster whose “advice” to misinformed investors is to do something that he admits is “less likely to be the most optimal outcome in most modeled scenarios” simply as a way of coddling irrational fears rather than confronting them and providing optimal investment advice. Do everyone reading this a favor and go back to whatever hole you crawled out of. You are doing a disservice to anyone who considers your BS advice.

[nealric]

Guys, let's keep the tone respectful. I'm not sure I understand why the topic of lump sum vs DCA arouses such passion.

Unless you get a once in a lifetime windfall, it's probably not going to have a material impact one way or another. Lump sum has a higher EV over a lifetime of investing, but few investors are truly Vulcan-like in their behavior. Even if you intellectually know that just plunking the whole bonus into VTI is objectively the best decision, that may be just too difficult emotionally for some folks, especially if they've put in a bunch of money right before a downturn in the past.

[ukjobsonwetton]

"Proponents of DCA almost always base their case on the claim that by reducing the average cost of investing it must increase expected returns. This paper shows that this claim is based on a false comparison"
DOLLAR COST AVERAGING - THE ROLE OF COGNITIVE ERROR
Simon Hayley
Cass Business School
This version: 14 January 2012
at page 21
Several papers on this topic on SSRN site, available for free download

[Wanderingdrock]

"Proponents of DCA almost always base their case on the claim that by reducing the average cost of investing it must increase expected returns. This paper shows that this claim is based on a false comparison"
DOLLAR COST AVERAGING - THE ROLE OF COGNITIVE ERROR
Simon Hayley
Cass Business School
This version: 14 January 2012
at page 21
Several papers on this topic on SSRN site, available for free download

I wasn't really reading much about investing theory in 2012, but I personally have never heard a proponent of DCA say that it increases expected returns in any way. The only arguments I've ever heard for it are the psychological benefit and risk reduction (with commensurate reduction in returns). I don't understand why this argument is happening; DCA works for some folks even though we all rationally recognize that lump sum investing will, in the average case, result in slightly higher returns. This is the only correct position in this discussion, it's the one Nealric confirmed while urging civility, now let's move on.

[ukjobsonwetton]

Yes. I think there are 5 articles on dollar cost averaging on SSRN, some are journal articles by economists. These people go into this topic in great detail. SSRN is an open-access online repository of pre-prints papers dedicated to Social Sciences such as Accounting, Economics, Finance, Humanities, Law and more. You'll be amazed at what you can find there.

[Platopus]

What's the general consensus on how much cash should be kept in an emergency fund? I'm 30 y/o 1st year M&A associate, not married and have no kids. My rent is a very reasonable $2350 per month and I otherwise live fairly modestly. I have about $180k in student loans and about $60k in cash split between a couple of different accounts. I'm looking to buy a house in the next 2-3 years and therefore want to stay some what safe/liquid, but would also like to put some of the cash to work. I also have about $50(k) in my 401(k)'s and max out my 401(k). Thoughts?

[nealric]

What's the general consensus on how much cash should be kept in an emergency fund? I'm 30 y/o 1st year M&A associate, not married and have no kids. My rent is a very reasonable $2350 per month and I otherwise live fairly modestly. I have about $180k in student loans and about $60k in cash split between a couple of different accounts. I'm looking to buy a house in the next 2-3 years and therefore want to stay some what safe/liquid, but would also like to put some of the cash to work. I also have about $50(k) in my 401(k)'s and max out my 401(k). Thoughts?

I don't know if there's a "general consensus", but I would say 3 months living expenses is bare minimum, and 6 months is decent. More than that may depend on whether you have other sources of liquidity (such as a taxable brokerage account or HELOC), and what your asset allocation in the brokerage account is.

I suppose whether you want to invest down payment money may depend on how firm your home buying plans are. If you really need to buy a house in two years for a specific reason (anticipated kids, move, etc.), then it's more important that those funds are safe now. If the timing and amount are flexible, you may decide your risk tolerance favors investing.

[Anonymous User]

What's the general consensus on how much cash should be kept in an emergency fund? I'm 30 y/o 1st year M&A associate, not married and have no kids. My rent is a very reasonable $2350 per month and I otherwise live fairly modestly. I have about $180k in student loans and about $60k in cash split between a couple of different accounts. I'm looking to buy a house in the next 2-3 years and therefore want to stay some what safe/liquid, but would also like to put some of the cash to work. I also have about $50(k) in my 401(k)'s and max out my 401(k). Thoughts?

I don't know if there's a "general consensus", but I would say 3 months living expenses is bare minimum, and 6 months is decent. More than that may depend on whether you have other sources of liquidity (such as a taxable brokerage account or HELOC), and what your asset allocation in the brokerage account is.

I suppose whether you want to invest down payment money may depend on how firm your home buying plans are. If you really need to buy a house in two years for a specific reason (anticipated kids, move, etc.), then it's more important that those funds are safe now. If the timing and amount are flexible, you may decide your risk tolerance favors investing.

One small financial change I made a few years ago as a result of reading this forum was migrating my emergency fund into I-bonds. It's not a miracle money maker or anything, but I realized that the most likely outcome was that emergency cash would sit in a "high yield" savings account for years, untouched, earning almost nothing. The bonds are liquid after a year, and it takes a little of the sting out of not using that cash for something more productive, like my genius bonus-fueled purchase of S&P index funds in January 2022.

[nealric]

What's the general consensus on how much cash should be kept in an emergency fund? I'm 30 y/o 1st year M&A associate, not married and have no kids. My rent is a very reasonable $2350 per month and I otherwise live fairly modestly. I have about $180k in student loans and about $60k in cash split between a couple of different accounts. I'm looking to buy a house in the next 2-3 years and therefore want to stay some what safe/liquid, but would also like to put some of the cash to work. I also have about $50(k) in my 401(k)'s and max out my 401(k). Thoughts?

I don't know if there's a "general consensus", but I would say 3 months living expenses is bare minimum, and 6 months is decent. More than that may depend on whether you have other sources of liquidity (such as a taxable brokerage account or HELOC), and what your asset allocation in the brokerage account is.

I suppose whether you want to invest down payment money may depend on how firm your home buying plans are. If you really need to buy a house in two years for a specific reason (anticipated kids, move, etc.), then it's more important that those funds are safe now. If the timing and amount are flexible, you may decide your risk tolerance favors investing.

One small financial change I made a few years ago as a result of reading this forum was migrating my emergency fund into I-bonds. It's not a miracle money maker or anything, but I realized that the most likely outcome was that emergency cash would sit in a "high yield" savings account for years, untouched, earning almost nothing. The bonds are liquid after a year, and it takes a little of the sting out of not using that cash for something more productive, like my genius bonus-fueled purchase of S&P index funds in January 2022.

Ibonds are a great deal. Only problem is the requirement to buy them with a separate Treasury Direct account, and the $10k/yr cap. It means that it would take a few years to make them your primary e-fund holdings (unless you have really low fixed costs and don't need a big e-fund).

At least the "high yield" savings accounts rates are starting to tick up, though still far below inflation. Regular savings accounts from major banks still pay laughably small amounts of interest to the point I don't know why anybody uses them.

[Chubbyleaous]

Be careful with bonds since it's been the worst year for them since about 1930. If you bought a bond fund and interest rates are going up, the fund loses value since when you bought it you got, for example, 2%. Now the prevailing rate is much higher, so the fund you're in can magically lose half it's value. Yes, down 50%, and you thought it was safe because it was a diversified bond fund. Down 50% in a few years.

[nealric]

Be careful with bonds since it's been the worst year for them since about 1930. If you bought a bond fund and interest rates are going up, the fund loses value since when you bought it you got, for example, 2%. Now the prevailing rate is much higher, so the fund you're in can magically lose half it's value. Yes, down 50%, and you thought it was safe because it was a diversified bond fund. Down 50% in a few years.

Just to be clear: I bonds are not the same thing as corporate bonds. They are inflation-linked treasuries. You don't trade them in the secondary market, so the value is never going to go down in nominal terms unless the U.S. government defaults on its debt. In real terms, they should basically maintain their value.

As for buying bonds, trying to time the bond market is no different from trying to time the stock market. They are typically less volatile than stocks. The Vanguard total bond fund is down ~15% YoY, while vanguard total stock market is down 20%. So owning bonds over stocks has provided some protection in this down market, just not a lot. Short dated bond funds also react differently to interest rate risk than long-dated funds. A raising rate and high inflation is a much lower risk if you hold short term bonds than long term bonds.

[Anonymous User]

Be careful with bonds since it's been the worst year for them since about 1930. If you bought a bond fund and interest rates are going up, the fund loses value since when you bought it you got, for example, 2%. Now the prevailing rate is much higher, so the fund you're in can magically lose half it's value. Yes, down 50%, and you thought it was safe because it was a diversified bond fund. Down 50% in a few years.

Just to be clear: I bonds are not the same thing as corporate bonds. They are inflation-linked treasuries. You don't trade them in the secondary market, so the value is never going to go down in nominal terms unless the U.S. government defaults on its debt. In real terms, they should basically maintain their value.

As for buying bonds, trying to time the bond market is no different from trying to time the stock market. They are typically less volatile than stocks. The Vanguard total bond fund is down ~15% YoY, while vanguard total stock market is down 20%. So owning bonds over stocks has provided some protection in this down market, just not a lot. Short dated bond funds also react differently to interest rate risk than long-dated funds. A raising rate and high inflation is a much lower risk if you hold short term bonds than long term bonds.

To the extent anyone else is interested in the strategy of parking your emergency fund in Ibonds, the purchase limit of 10k is per calendar year. Because it's almost the end of the year already, if you want to migrate over $30k in savings you can do it back-to-bank in Dec, Jan, and then again in the following Jan, so it only takes 13 months. The bonds are only liquid after a year, though, so that's a limitation to keep in mind. I'm sure many/most people on here are comfortable with more aggressive investing, or intend to actually use those savings for other purposes (e.g. a home purchase), but if like me you expect for that cash to just sit unused for the foreseeable future (potentially quite a few years), it will at least maintain its real value.

[Anonymous User]

I invested a ton of money (my bonus for last few years in Big Law) in a tech-heavy ETF (think VTI, VT, VOO) at the beginning of this year and so far, on net, have just lost a lot of it. Everything in my portfolio is red. I got an email from a Fidelity professional asking me to meet and talk about "loss harvesting".

I googled this, and from what I understand, it's about offsetting your losses with your gains for a tax benefit. But I literally don't have any gains -- I've just lost money. And I thought you should not pull out of an investment at a loss just b/c the stock market is bad. And that you should stick with the investment even through bad times. Is this guy just wasting my time with this 'harvesting' strategy he's offering? Or something I should look into (and possibly pay Fidelity for their services for?). I'm a novice, obviously

[Anonymous User]

I invested a ton of money (my bonus for last few years in Big Law) in a tech-heavy ETF (think VTI, VT, VOO) at the beginning of this year and so far, on net, have just lost a lot of it. Everything in my portfolio is red. I got an email from a Fidelity professional asking me to meet and talk about "loss harvesting".

I googled this, and from what I understand, it's about offsetting your losses with your gains for a tax benefit. But I literally don't have any gains -- I've just lost money. And I thought you should not pull out of an investment at a loss just b/c the stock market is bad. And that you should stick with the investment even through bad times. Is this guy just wasting my time with this 'harvesting' strategy he's offering? Or something I should look into (and possibly pay Fidelity for their services for?). I'm a novice, obviously

Dunno about this guy in particular, but the basic idea behind tax loss harvesting is sound. Basically, say you invested 100k in VTI and it's down 10%. You can sell it, then reinvest in, like, VOO. They're really similar, so it's economically not much different. There is a tax difference though. You get to write off the 10k on your taxes.

There are IRS regulations on how similar the new thing you buy is, but I don't think they're very strict (you can't sell VTI then immediately buy it back, but a similar index fund is probably fine).

[Anonymous User]

I invested a ton of money (my bonus for last few years in Big Law) in a tech-heavy ETF (think VTI, VT, VOO) at the beginning of this year and so far, on net, have just lost a lot of it. Everything in my portfolio is red. I got an email from a Fidelity professional asking me to meet and talk about "loss harvesting".

I googled this, and from what I understand, it's about offsetting your losses with your gains for a tax benefit. But I literally don't have any gains -- I've just lost money. And I thought you should not pull out of an investment at a loss just b/c the stock market is bad. And that you should stick with the investment even through bad times. Is this guy just wasting my time with this 'harvesting' strategy he's offering? Or something I should look into (and possibly pay Fidelity for their services for?). I'm a novice, obviously

Dunno about this guy in particular, but the basic idea behind tax loss harvesting is sound. Basically, say you invested 100k in VTI and it's down 10%. You can sell it, then reinvest in, like, VOO. They're really similar, so it's economically not much different. There is a tax difference though. You get to write off the 10k on your taxes.

There are IRS regulations on how similar the new thing you buy is, but I don't think they're very strict (you can't sell VTI then immediately buy it back, but a similar index fund is probably fine).

Thank you! I had thought loss harvesting was only useful if you had some losses but also some gains (to then offset the former with the latter). Sounds like you can just leverage the fact that you lost money for the tax write-off. But it's only $3k (which is not nothing). So would I sell $3k of my ETF, buy a different (but somewhat similar ETF), and then report/claim the $3k as a write-off on next year's taxes? Or can you sell more than $3k, but only claim $3k worth of write-offs?

[DisappointedSummer]

You can only claim 3k in TLH per year, but you can carry forward an unlimited amount of losses indefinitely so you can repeat that 3k loss every single year. In other words, if you’ve lost 21k, you can (and should) TLH that amount, and then for the next 7 years claim 3k in losses each year, which amounts to a 3k deduction in taxable income. If you’re in a typical big law tax bracket that’s about $1k savings/year, for 7 years. All you have to do is swap out for a similar mutual fund one time, which takes maybe 5 minutes.

You can also swap back to the original fund after 60 days if you prefer it. You just have to avoid the “wash sale” exception which prevents you from switching back too quickly (google it if you’re concerned).

TL;DR Every single investor should do tax loss harvesting, it takes no time, saves you ~$1k/year (in a big law tax bracket), and has no impact on your returns. In an abnormally down year like this year, you can “bank” future losses to carry forward for 5-10 years. If you are hesitant or ignorant, you’ll lose your chance and will have to wait for another black swan type event to bank a similar amount of losses.

If you haven’t done it yet, do it. If you read all this and still don’t do it, you may as well be lighting $1k/year on fire because that’s essentially what you’re doing.

[Anonymous User]

You can only claim 3k in TLH per year, but you can carry forward an unlimited amount of losses indefinitely so you can repeat that 3k loss every single year. In other words, if you’ve lost 21k, you can (and should) TLH that amount, and then for the next 7 years claim 3k in losses each year, which amounts to a 3k deduction in taxable income. If you’re in a typical big law tax bracket that’s about $1k savings/year, for 7 years. All you have to do is swap out for a similar mutual fund one time, which takes maybe 5 minutes.

You can also swap back to the original fund after 60 days if you prefer it. You just have to avoid the “wash sale” exception which prevents you from switching back too quickly (google it if you’re concerned).

TL;DR Every single investor should do tax loss harvesting, it takes no time, saves you ~$1k/year (in a big law tax bracket), and has no impact on your returns. In an abnormally down year like this year, you can “bank” future losses to carry forward for 5-10 years. If you are hesitant or ignorant, you’ll lose your chance and will have to wait for another black swan type event to bank a similar amount of losses.

If you haven’t done it yet, do it. If you read all this and still don’t do it, you may as well be lighting $1k/year on fire because that’s essentially what you’re doing.

Just to clarify the mechanics of what you mean when you say we should "TLH that amount" -- the amount you should sell is the amount you've lost in value? For example, let's say I put $100k in VT, and now the account is worth $70k. So I've lost $30k worth of money in the account since I started investing earlier this year. It's all in the same ETF, and there's still $70k in the account. So to tax-loss-harvest, I should sell $30k worth, and buy that same amount in a different ETF, right? And then claim $3k each year in taxes for x number of years on my annual returns?

The thing I was confused about is how much to sell from the account and buy in a different ETF given that I haven't lost the full amount.

[DisappointedSummer]

Google is a great tool here, but if you’d rather take advice from TLS: assuming it’s all in brokerage, sell it all and then buy an equivalent mutual fund. The losses are based on the price per share when you bought it. So if you sell at a loss that will be reflected in the final share price. You can run into some issues if you try to TLH tax advantaged accounts; I’d only do it for brokerage.

[1biglawandme]

You can only claim 3k in TLH per year, but you can carry forward an unlimited amount of losses indefinitely so you can repeat that 3k loss every single year. In other words, if you’ve lost 21k, you can (and should) TLH that amount, and then for the next 7 years claim 3k in losses each year, which amounts to a 3k deduction in taxable income. If you’re in a typical big law tax bracket that’s about $1k savings/year, for 7 years. All you have to do is swap out for a similar mutual fund one time, which takes maybe 5 minutes.

You can also swap back to the original fund after 60 days if you prefer it. You just have to avoid the “wash sale” exception which prevents you from switching back too quickly (google it if you’re concerned).

TL;DR Every single investor should do tax loss harvesting, it takes no time, saves you ~$1k/year (in a big law tax bracket), and has no impact on your returns. In an abnormally down year like this year, you can “bank” future losses to carry forward for 5-10 years. If you are hesitant or ignorant, you’ll lose your chance and will have to wait for another black swan type event to bank a similar amount of losses.

If you haven’t done it yet, do it. If you read all this and still don’t do it, you may as well be lighting $1k/year on fire because that’s essentially what you’re doing.

Just to clarify the mechanics of what you mean when you say we should "TLH that amount" -- the amount you should sell is the amount you've lost in value? For example, let's say I put $100k in VT, and now the account is worth $70k. So I've lost $30k worth of money in the account since I started investing earlier this year. It's all in the same ETF, and there's still $70k in the account. So to tax-loss-harvest, I should sell $30k worth, and buy that same amount in a different ETF, right? And then claim $3k each year in taxes for x number of years on my annual returns?

The thing I was confused about is how much to sell from the account and buy in a different ETF given that I haven't lost the full amount.

No. You should realize the entire $30k loss now (to claim the $3k loss each year for 10 years, and save $1k/year for 10 years). To realize that $30k loss, you would need to sell the entire $70k (assuming your cost was $100k).