Crypto is probably a bad investment!

April 25, 2022 – If you remember my April Fools Day post from a few weeks ago, I poked fun at the proliferation of new crypto coins. Most of them are scams. But what about the mainstream crypto coins, like Bitcoin, Ethereum, etc.? Are they a good investment? What’s not to like about a 100%+ annualized return in some of the crypto coins between their inception and their 2021 peak?

Well, those returns are “water under the bridge”. What matters to me today is the outlook for the crypto world going forward. In today’s post, I like to go through some of the reasons why I believe going forward, crypto looks like a sub-par investment. I currently don’t invest in crypto and I don’t think that anything more than a few % of the portfolio seems prudent. Let’s take a look…

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Is an Employee Stock Purchase Plan (ESPP) Worth the Risk?

September 16, 2020 – One question I’ve gotten from readers a few times over the years is whether the participation in a so-called Employee Stock Purchase Plan (ESPP) is worthwhile.

A little bit of background: some corporations offer their employees to buy stocks of their company at a discount of up to 15%. There are some strings attached, though. For example, there are often minimum holding periods, anywhere between a few months and up to two years. The discount is also taxed as ordinary income, though the subsequent capital gains may qualify for treatment as long-term gains.

If you can liquidate the stocks right away and pocket the discount, then participating is likely a no-brainer. Take the money out of the ESPP and invest it in a low-cost index fund. It’s a nice boost to your contributions in your taxable account after you’ve maxed out all your other tax-advantaged options. 15% adjusted by your marginal income tax rate – federal and state. That would still be more than 10% for most people! Pretty sweet!

But what should you do if there’s a minimum holding period? During that time, part of your portfolio is now concentrated in one single corporation. The opposite of diversification. So, it’s a tradeoff: You get the discount but you also take on additional risk. Is it still worthwhile? This is an inherently quantitative question. Without putting hard numbers behind this we can talk about this until the cows come home. The only way to answer this question is through a quantitative exercise. And it turns out, the numbers look like it’s indeed worthwhile to participate in an ESPP, especially if you can get the full 15% discount, the maximum allowed under federal law.

Let’s take a closer look…

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Have bonds lost their diversification potential?

If you are a regular reader of this blog you’ll notice that we don’t like bonds very much:

Add to that our series on safe withdrawal rates where we found that over a long retirement horizon bonds become much less attractive. In the Trinity Study with retirement horizons of 15-30 years, you can get away with a bond share as high as 50%. But over long horizons of 40-60 years in the FIRE community, the low expected returns of bonds can jeopardize the sustainability of the portfolio as we showed in part 2 of our series.

Has anything changed since last year? Are we now a bit more optimistic about bonds? After all, yields have risen. The 10-Year Treasury yield reached 2.6% earlier this year but has since fallen again to about 2.2-2.3% just last week.

Let’s look at the numbers in more detail

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Why an emergency fund is a bad idea in one single chart

Ever since we posted our view on emergency funds, we have been thinking about a succinct, straightforward but also scientific way to debunk that bad, bad, bad advice that investors should hold large amounts of cash in a money market account. Here’s one try: Continue reading “Why an emergency fund is a bad idea in one single chart”