Even without considering the extremely low odds of winning, lottery tickets are a terrible investment. People continue to buy tickets though, hoping to score the now $640 Million dollar jackpot. While the prospect of spending $1 and receiving $640 Million is exciting, the expected value of each $1 ticket is only 63.2 cents! That means that, on average, every dollar spent on the lottery only turns into 63.2 cents of winnings.
Where does all that money go?
Fees. Besides taxes on winnings, there are taxes and sales costs of each ticket, and about 28 cents of each dollar goes to state education funds. Those are high fees!
High fees are a common feature of terrible investments. After all, if an investment was compelling, it would sell itself - you wouldn't need a high-commission salesperson pushing it on you. Management fees on actively managed funds are a drag on returns. Trading fees take a little out of each buy or sell you make, lowering returns more. Keeping costs down is the surest way to boost your returns.
If you do buy a lottery ticket - have fun with it! If you win, contact a Registered Investment Advisor for some advice on what to do with it.
Independent, Fee-Only Financial Advisor
Friday, March 30, 2012
Thursday, March 29, 2012
the pain of a $100,000,000 IRA
This WSJ article gives a great look at how Mitt Romney and other Bain Capital partners were able to invest in private equity deals in their IRAs, making huge, tax deferred, profit.
So, Mitt Romney may have $100,000,000 in his IRA. Wow. This combines a two really awesome things - retirement savings, and absolute piles of money. Great, right?
Not quite.
There are two types of IRA accounts: Traditional and Roth. In the traditional kind (include SEP, SIMPLEs and rollovers) money goes in and reduces your income for tax purposes. You don't pay taxes on the money going in, just when it comes out - you pay taxes like it is income. In a Roth IRA, you pay taxes on the money when you pay it in, but you withdraw it completely tax free in retirement. In both accounts, all gains, interest and dividends are sheltered from taxes as long as they are in the account.
Mitt Romney has a SEP-IRA (like a traditional IRA). When he withdraws that money, it will taxed as ordinary income - not carried interest, dividends or long term capital gains. He will pay a higher rate on the in retirement than he would if he were selling in a taxable account today. Private equity investments pay the 15% long term capital gains tax thanks to the carried interest 'loophole'. The top income rate is 35%.
Of course, tax law was different when he opened his IRA. At the time, it may have been a good idea to defer the taxes on those gains. Also, it is fairly well known that Romney and his accountants are rather good about keeping his tax bill down.
But having $100,000,000 in an IRA is not all its cracked up to be.
Too bad he didn't have a Roth IRA.
So, Mitt Romney may have $100,000,000 in his IRA. Wow. This combines a two really awesome things - retirement savings, and absolute piles of money. Great, right?
Not quite.
There are two types of IRA accounts: Traditional and Roth. In the traditional kind (include SEP, SIMPLEs and rollovers) money goes in and reduces your income for tax purposes. You don't pay taxes on the money going in, just when it comes out - you pay taxes like it is income. In a Roth IRA, you pay taxes on the money when you pay it in, but you withdraw it completely tax free in retirement. In both accounts, all gains, interest and dividends are sheltered from taxes as long as they are in the account.
Mitt Romney has a SEP-IRA (like a traditional IRA). When he withdraws that money, it will taxed as ordinary income - not carried interest, dividends or long term capital gains. He will pay a higher rate on the in retirement than he would if he were selling in a taxable account today. Private equity investments pay the 15% long term capital gains tax thanks to the carried interest 'loophole'. The top income rate is 35%.
Of course, tax law was different when he opened his IRA. At the time, it may have been a good idea to defer the taxes on those gains. Also, it is fairly well known that Romney and his accountants are rather good about keeping his tax bill down.
But having $100,000,000 in an IRA is not all its cracked up to be.
Too bad he didn't have a Roth IRA.
Monday, March 26, 2012
reliance on a star
Back in May 2011, the Nasdaq-100 index rebalanced to make Apple less of an influence on the index. At the time, AAPL took up 20.5% of the index, and it was cut down to 12.3%. Since then, AAPL has returned roughly 72%, QQQ, the ETF tracking the Nasdaq-100 has returned around 17%. An equal weighted version of the Nasdaq-100 (rebalanced quarterly) has returned just over 8% since then. The equal weighted ETF, QQEW would obviously not be able to participate as fully in the rise in AAPL, as each quarter they would cut it back down to 1% of holdings.
Apple has contributed 8.9% to the performance of QQQ since the rebalancing, putting the return of QQEW roughly equal to the return of QQQ ex AAPL. While the superior performance of QQQ may be impressive, one shouldn't make an investment decision based on that alone. The performance boost appears to be due solely to one company. Equal weighting indices has been shown to increase performance and lower volatility elsewhere.
If you are looking to form a portfolio with an allocation to the Nasdaq-100, being bullish on AAPL may make QQQ attractive, with its 17.5% weighting in AAPL. However, that same exposure can be captured simply by going long AAPL and QQEW (or the brand new, cheaper, QQQE) - a move which may reduce volatility, and give more meaningful exposure to the smaller components of the Nasdaq-100.
Disclosure: I am long AAPL, QQQ and other components of the Nasdaq-100 in accounts that I manage.
Apple has contributed 8.9% to the performance of QQQ since the rebalancing, putting the return of QQEW roughly equal to the return of QQQ ex AAPL. While the superior performance of QQQ may be impressive, one shouldn't make an investment decision based on that alone. The performance boost appears to be due solely to one company. Equal weighting indices has been shown to increase performance and lower volatility elsewhere.
If you are looking to form a portfolio with an allocation to the Nasdaq-100, being bullish on AAPL may make QQQ attractive, with its 17.5% weighting in AAPL. However, that same exposure can be captured simply by going long AAPL and QQEW (or the brand new, cheaper, QQQE) - a move which may reduce volatility, and give more meaningful exposure to the smaller components of the Nasdaq-100.
Disclosure: I am long AAPL, QQQ and other components of the Nasdaq-100 in accounts that I manage.
Tuesday, March 13, 2012
keeping up standards
The US equities markets are revered worldwide for their transparency and general fairness. Companies report on their finances every quarter and issue audited financial statements annually. Investors with large holdings in a single company are disclosed publicly and large money managers disclose their individual holdings as well. The amount of disclosure is large, but for companies wanting access to the best equity capital market in the world - it is the price to pay.
Recent proposals have proposed eviscerating shareholder protections for small companies. Under the new proposals, small companies would have 5 years before they needed to furnish audited finances. 5 years is an awful long time to commit fraud.
Committing money to an investment requires confidence in your information, if that information is not there, or has never been verified, there can be no confidence. De-Regulation of this sort is NOT the right thing to do at all.
Recent proposals have proposed eviscerating shareholder protections for small companies. Under the new proposals, small companies would have 5 years before they needed to furnish audited finances. 5 years is an awful long time to commit fraud.
Committing money to an investment requires confidence in your information, if that information is not there, or has never been verified, there can be no confidence. De-Regulation of this sort is NOT the right thing to do at all.
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