SAT: Tips and Techniques

SAT/ACTs are important for college admissions. That begs the question if parents should be heavily involved in the SAT prep or not? I have always enjoyed standardized tests because I have always been good at them. However, standardized tests are not fun for everyone. Hence, we have to be careful about how we approach the topic of SAT with kids.
My daughter is finishing up her 5th grade and has six more years before she takes the test. However, I have my own experience with standardized tests and I will use that in addition to the numerous books I have read on this topic, to shine some perspective on this important process.

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Responsibility: First and foremost, it should be very clear that the test prep is the child’s responsibility and not the parents’. This is very important because this creates a sense of control in the child’s mind which is very healthy for internal motivation. Fear tactics might work in the short run but for the long run, a healthy sense of self-motivation is a much better alternative. And we as parents, need to let that blossom by not taking on our child’s responsibility as ours. Of course, that doesn’t mean not being involved, it just means that our job is to provide information, exposure, and tools but it’s the child’s job to decide whether he/she wants to use them. There are tons of worldly successful people battling depression and anxiety. They made it to the Ivy League schools but were robbed of their control and creativity by years of regimented instruction. And there are others who made it to the Ivy Leagues with a very healthy sense of self-motivation and self-discipline. We want our children to be self-disciplined, not well-disciplined.
Stress: The neuroscientist Sonia Lupien uses an acronym for stress generators called N.U.T.S.We all agree that a small amount of stress is necessary for good performance but a lot of stress will clearly undermine performance. So, the parents’ role here would be to cut out the large stressors.
N- Novelty: Anything new or Novel tends to create some amount of stress in human beings. For eg. going to the test center for the first time on the day of the test, finding parking, trying to find the way from the parking to the exam room, etc. Another example could be not taking a practice test so the test seeming very novel on the day of the test. Here, parents can help by taking the child to the test center a day or so before the test day so that the child can familiarize herself with the surroundings. Parents can also suggest that their child take some practice tests before the real test.
U- Unpredictability: Unpredictability is also a known stress generator. A child could have practiced all sorts of problems and could have prepared to answer questions in a predictable manner by following certain processes. However, she could get surprised by a completely unpredictable type of question. In that event, children should be able to try other techniques like “plugging numbers in”, trying to eliminate answers which look unlikely and other creative strategies. In simple words, children should know that the tests, like life, are not always predictable and they should be ready with some creative strategies on the fly to deal with them. Also, parents should try to keep the atmosphere at home fairly predictable in the days leading to the test day.
T- Threat to Ego: This is probably one of the most important issues to handle in the context of SAT tests. Parents should have a clear understanding with children that SAT scores are not a reflection of their intelligence and self-worth. Parents should themselves not try to derive any self-worth from their children’s SAT scores. When humans feel a threat and are under stress, their cognitive capacity diminishes. In a wonderful book called The Self-Driven Child, the authors suggest that the kids should be in the predator mode instead of the prey mode on the test day. They can prep for this by listening to uplifting, motivational music and feeling confident and ready for the kill (not literally please!).
S- Sense of lack of Control: Control is fundamentally important to living anxiety and stress-free lives. Unless you are spiritually enlightened, lack of control could induce a lot of stress in you. We talked about control in our discussion of responsibility. Kids should know that they are in control of their future and the outcome of the test and college admissions is partially in their control as well. It’s important here to note that we can never be fully in control of everything but partial control or even an illusion of control helps in cutting down stress. Talk to your child about the fact that doing well at SAT is well within the child’s control. The child should also feel that she is driving the decisions around the test prep and test taking so that she feels internally motivated to put in the hours needed to do well on the test.
At a later point, I will post some specific tips around the preparation material itself. It’s more important to first lay down the psychological framework before talking about the technical framework. So, stay tuned.

Who is bribing their way to college?

This article is in the wake of Hollywood celebrities buying their children’s way through college admissions. It is probably not surprising at all. However, its egregious to cheat the system, at least until these institutions change their rules. It’s like it’s acceptable in America for lobbyists to literally propose laws so we cannot question the lobbyists since they are not doing anything illegal. Just like that, there are countless such schools where it’s pay to play. However, the schools on the list are not pay to play. They are some of the better private and public schools of America. And that’s why this is so problematic. These schools are not NPU, Fremont but Yale, Stanford, UCLA and USC. However, it is not the schools themselves that committed crimes, it’s the people employed in different areas of the entire college admission process and the parents of children who played foul.

LoriLoughlin

Not to single out Lori but she and her husband Mossimo Giannulli agreed to pay $500,000 to get their two daughters into USC

So, are there any better solutions than the subjective American college admissions scheme? It depends on the objective of college. Is the objective of college, life experience and networking? Or is it strictly building hard skills and employ-ability? Or is it a mixed set of both? Most will agree that it’s a mixed set of both and that’s why we have landed at this subjective college admissions procedure in America.

To throw some international perspective, when I was growing up, there were clearly three kinds of colleges- the pay-to-play types, the strict admission criteria types and the admission criteria types with pay-to-play under the table.  I went obviously to the “strict admission criteria type”. There used to be a college entrance exam for this college with 1% selection rate. In my year, 300,000 students appeared for the test, 3000 got selected (strictly based on the test score) and my rank was 981 (in the top 0.33%).  To compare, Stanford and Harvard have 5% acceptance rates. Let’s say if Harvard and Stanford just look at SAT scores and GPAs as admission criteria, somebody like me can get in with my work ethic and education focused mindset.

However, the story is different in America. There is no strict formula for undergraduate admissions. It’s a combination of SAT scores, GPA, letters of recommendation, personal essays, legacy and a more holistic resume with volunteer/entrepreneurship/leadership experience or otherwise some exceptional talent/performance in one area. I could have still eked into Stanford or Harvard, based on SAT scores, GPA, letters of recommendation and personal essays; had I applied for undergraduate admissions in the US and had I taken the SAT. I can say this because I have always been good at academics and understanding how things work conceptually has never been a problem for me because of my reading habits. However, to achieve this, I should have gotten perfect scores at SAT and an extremely high GPA to balance out my lack of holistic resume. Most kids from my socioeconomic and geographic background lacked the holistic resumes we speak of today. The only “paid” extracurricular classes I ever went to was “cricket practice classes” at the neighborhood park for a season or two. In contrast to that, just to check out my daughter’s interest, I have taken her to ballet, voice lessons, basketball, cross country, track and field, golf and martial arts, to name a few and she is just 10. Of course, I am not imposing any of these “paid” extracurricular activities on her. We are taking her for the experience to see if she can develop interest in anything particular. From trial and error, we did find out that she truly enjoys “long jump”  (and track and field in general) and does very well at them.

Despite the lack of this holistic resume, I was able to attend the best engineering school in India and this is because the school’s admission criterion was extremely objective- the test score of their entrance examination. This makes sense since the objective of the school was to produce technical engineers. However, once we were at the school, we realized that the school had much more to offer than a great engineering degree, it offered us life experience, holistic education and awesome networking opportunities in addition. The school has since (I went there in 2002) changed it’s admission criteria but I am sure it’s still somewhat more objective than American schools.

So which schools in America are somewhat like my school in India? I think the schools which come closest are California Institute of Technology aka Caltech and Massachusetts Institute of Technology aka MIT. I am not saying that these schools don’t look at subjective things but their objective criteria are so strong that few students make the cut. I am adding some videos to this post to make the knowledge gathering session more “holistic” instead of an objective reading.

60 minutes segment on IITs

Shashi Tharoor’s somewhat exaggerated take on IITs

So the premise of this post is that if the objective of a school is specialization, the admission criteria will be more objective than subjective and if the objective leans more towards a holistic well-rounded education, the admission criteria will be more subjective. Foul play can happen with objective criteria as well (you can pay someone to fudge the scores, who knows) but it is more likely to happen with subjective criteria since “subjective” is a matter of perception. One of the universal rules of life is: “whenever performance is not clearly measurable, networking plays a bigger role in success”.

So every society is free to decide what kind of schools they want and what kinds of graduates they want. We need both kinds- we need the well-rounded, people savvy sales guys and we also need the uber specialized engineers, doctors and scientists. We either send them to the same schools with same criteria or different schools with different criteria, that’s our call. There are other things to think about though- privilege, legacy and endowments. Social currency has always been one of the most important currencies since humans existed; hence we will never be able to eliminate the “who we know” phenomena. But we have to think creatively about leveling the playing field. Ideas are welcome. Remember, life is not fair but we can try to make it fairer, not always, not everywhere, but at least when and where we can.

Can you pay federal income taxes at Warren Buffet’s tax rate?

The US tax code gives a massive advantage to one group of people: long-term investors. This is how people like Warren Buffet keep their taxes low. I am here to tell you that you can take advantage of that as well.

You would be surprised to know that if your AGI (Adjusted Gross Income) is less than $77,200 and if you are married and filing taxes jointly, you don’t pay any federal taxes on your long-term capital gains. Surprising, isn’t it?

LongTermCapitalGains

Source: NerdWallet

And let’s say your AGI is $600,000 and let’s say all of that income is from long-term capital gains, then you pay only $84,470 in federal taxes. To simplify, I have ignored standard/itemized deductions.

However, if $600,000 of AGI came from a W2 job, can you guess what your federal tax bill will be? It will be a whopping ($1905+$7002 + $19,272 + $36,000 + $29,350 + $70,000) = $163,529, yes roughly $80,000 more. You need to also remember that to make AGI of $600,000 via your job, your real gross income has to be probably closer to $700,000, to fund social security, Medicare and Disability Insurance.

If we were to compare the overall tax rate with the $600,000 example above, the investor pays 14% while the wage earner pays 27.25% (roughly double tax rate). And that’s how Buffet’s secretary pays a higher tax rate than Buffet himself.

You can devise your life around long-term capital gains. Invest as much as you can in long-term investments. Then reap the rewards later by dropping off the job bandwagon early and live off your investments, paying very little taxes on your way.

If you find saving taxes like this morally discomforting, then ask your lawmakers to change the tax code. Well, most of them won’t listen to you but you can try nonetheless!

Why the startup won’t make you filthy rich?

At the outset, this sounds like a negative post. However, it is not. This post centers around the reasons to start that startup you have been pining to start (this is probably the only sentence I have seen with the incessant use of the word “start”).

“Start” is a very positive word and we all love starting something new.  I have started a company in the past and have started a small business with my wife. What I want to talk about here are the reasons why one should start a company or even join an early stage startup.

startup-1018511_960_720

You should start a “traditional startup” (I define it as any startup which takes funding from outside and has an exit goal of either IPO or acquisition) or join an early stage startup if you have the following traits/goals:

  • Have developed Interest and passion in the area.
  • To accelerate your career by learning a lot in a shorter amount of time.
  • Love creating jobs and creating a difference in people’s lives.
  • Entrepreneurship feels meaningful to you.
  • Making a reasonable living but not necessarily aiming to become filthy rich.

I think people understand the first four points well. For eg., if you work for a decent startup for a few years and then move to a bigger company later, you are more likely to score a better position for yourself.  Interest and passion are no-brainers because once you have developed interest and passion in a certain area, the process is more exciting than the goal itself. (To clarify, I don’t believe that people have innate interests and passions. What they have innately are predispositions which are honed into interests and passions over time). For eg., an entrepreneur should think: will I be ok building this product/service even if I don’t end up making tons of money but don’t devastate myself financially either? If the answer is yes for sure, then that’s a go. However, if the answer is: no, the only reason I am doing this is to make tons of money, then it’s surely a red flag.

My fifth bullet is the bone of contention. You keep hearing about acquisitions like Instagram and WhatsApp and IPOs like Facebook and you wonder why the author is leading you away from billions of dollars. The answer to that question is the statistics. If you are of the mentality of “Go big or go home”, then you might attempt a traditional startup (eyeing for an acquisition/IPO as an exit strategy) for money reasons. Otherwise, if you are interested only in making decent money, you can focus on small businesses, high-income jobs, and asset building, instead of the traditional startup path, as an alternative.

Here are some stats to support my claim (the best place for double checking these stats is Rand Fishkin’s book- Lost And Founder. You can read/buy the book here: Book: Lost And Founder):

  • only 25% of tech startups survive past year 5 of operation.
  • Roughly 40% of the high potential US startups fail completely (completely means investor lose all the money).
  • Only 5% of US startups deliver the expected return on investment for VCs(yes, Instagram, you know you did it).
  • The target is to beat S&P 500 very handsomely over the period of 10 years as far as VC funding is concerned. If we take 12% as average return for S&P 500, the target is to return more than $300 million on a $100 million investment in 10 years.
    • Only 5% of startups succeed at this target.
    • A further 10% startups will return between $200 million and $300 million. (The VC was better off invested in an index fund.)
    • The next 35% return between $100 million and $200 million. (The VC was better off keeping his money in a high yield CD/bond/savings account in this case.)
    • The remaining 50% return less than the initial investment. (A checking account with 0% interest rate would have done better in this case)
  • The founders and employees in a startup make lesser income and get worse benefits compared to their big company counterparts on average. The rationale for this is that they get equity (common stock for founders and employee options for employees; the VCs keep the preferred stocks for themselves).
  • The equity is illiquid, hence worthless if the company does not go through an exit event, like IPO or acquisition.

Entrepreneurship is supremely important for innovation, creating jobs and keeping the economy vibrant. However, for an individual, being an entrepreneur with a traditional startup with VC money might not be the “get rich quick” scheme they were hoping for, even though it could be their best life decision. So, go start that startup of yours, but for the right reasons.

Strategies for winning college financial aid

I have written many posts on saving for college. You can refer to them here: Simplifying saving for collegeHow to get your money into Roth IRA even when IRS prohibits it?The Mother of All Personal Finance Hacks- Mega RothHow much to save for college?

If you have read the above articles, you know where, how and how much to save for college. However, what if you just cannot save enough for college. Maybe your income is too low or your expenses too high. Then, you might have to rely on Financial Aid and Scholarships/Grants.

financial-aid

First, terminology distinguishing different kinds of Financial Aid (FinAid):

  • Scholarships: Usually, merit-based, sometimes merit cum means.  They are given out by private institutions, colleges, and the Government. The student does not have to return this amount.
  • Grants: Means based. Given to students who qualify based on income and assets. The student does not have to return this amount. Again, given by private institutions, colleges, and the Government.
  • Loans: Usually means based, sometimes merit cum means. This could be a subsidized or an unsubsidized loan for education. The students have to return this amount, however, the terms of these loans vary.  The source of these loans is usually the Government.

Now, if you were to qualify for any of these FinAid opportunities, you will have to fill out one or both of the forms:

  • FAFSA: This is Free Application for Federal Student Aid (FAFSA).
  • CSS: This is the financial aid profile offered by College Board ( CSS).

Most colleges accept FAFSA but some colleges like Stanford want you to specifically fill out CSS. So, what’s the difference between the two?

  • CSS Profile is just used for private, non-federal aid while FAFSA is required for any Federal Aid.
  • FAFSA excludes the value of your equity in the primary residence and also the value of your small business, while CSS does not.
  • CSS asks for the financial information of the non-custodial parents.
  • CSS asks for the expected income and expenses (medical expenses, elementary school tuition for your other children and any other circumstances) of the academic year to better judge your ability to pay college tuition.

Now, let’s see what our strategies could be to win the financial aid.

Let’s say you belong to the following category:

  • You have low income.
  • You have no equity in your primary residence and no small business and no investments.
  • You show that in the academic year, you will not have any money leftover to be able to fund your child’s college.

In this case, from both CSS & FAFSA perspective, you don’t need any strategy. You will qualify for financial aid anyway.

So, we need strategies for people in the following groups:

  • High income, high assets.
  • High income, low assets.
  • Low income, high assets.

I am not going to deal with the question if it is moral or ethical for High-income folks to strategize for FinAid or not. I will leave this moral dilemma to the reader. 

Here are the main tenets to keep in mind:

  • FAFSA and CSS don’t look at your retirement accounts (IRAs, 401Ks). Again, if you have read my articles  Simplifying saving for collegeHow to get your money into Roth IRA even when IRS prohibits it? , The Mother of All Personal Finance Hacks- Mega Roth, you know that I am a big proponent of Roth IRA for college saving, precisely for this reason.
  • FAFSA and CSS both primarily look at a prior year’s tax return to assess your income. For eg., my daughter will go to college in 2026. Both FAFSA and CSS will look at my 2024 tax return. Note, they have recently changed the rule. With the earlier rule, they would have looked at my 2025 return.
  • FAFSA does not look at the equity in your primary residence nor does it look at the value of your small business.

For the purposes of a case study, let’s assume the college starting year to be 2026.

Low income, high assets strategy:

  • The main strategy here is to sell off all your investments in your taxable accounts/real-estate and pay off/down the mortgage on your primary residence with the money. For the case study, this has to be done in the year 2023 so that the capital gains don’t mess with your 2024 tax return.

High income, low assets strategy:

  • If this person does not have any assets whatsoever, including Retirement Accounts like Roth IRA, there is not much this person can do.  He will automatically get benefited by the fact that he does not have any assets in his investment accounts though.

High income, high assets strategy:

  • This person has to show reduced income as well as reduced assets.
  • Reduced assets can be shown by “selling your assets in investment accounts and paying off/down your primary residence mortgage” in 2023 strategy.
  • Since this person has a large number of assets including big sums in retirement accounts, this person can quit working (or take a break) at the end of 2023 and live off his Roth IRA. If you have read my prior post, you know the flexibility of Roth IRAs.  Of course, this works only for those people who:
    • Want to change careers so want to go back to school themselves or start something new, OR
    • Are done working and this happens to be a good sweet spot to quit, OR
    • Always wanted to take a break for a few years (or one year) and this happened to be the sweet spot.
    • It’s important that this should not be a financial strategy in isolation. This has to be holistic life decision. This is because since you are high-income, it makes more financial sense to keep your income and pay for college without financial aid than to rely on financial aid and stopping your income as a financial strategy.

I hope you enjoyed these strategies. Please share any other strategies which I can add to the list.

Good luck!

 

 

How much to save for college?

I have been writing a lot about how to get into college and how to save for college. Now is the time to write about how much to save for college.  This is an important question to ask so that we are well prepared when it’s time to pay those tuition bills.

The first question comes to people’s mind is: should the children not pay for college themselves? By paying for their college, are we not setting them up for an entitlement trap? That’s a good question. I am of the opinion that the responsibility can be shared. I, as a parent, am willing to pay for my kids’ education, provided the kids exhibit good performance, discipline and an eagerness to share the burden.

How can kids share the burden? The kids can share the burden by working harder in High School and/or in the first years of college. There are many things they can do. Here are a few items (what works best depends on the temperament of the child):

  • Go to a community college for the first two years and then transfer to a 4-year school at the end of their sophomore year.
  • Take college credits in High School by attending a community college while also attending High School and then transfer some of those credits to their 4-year college. This requires understanding what classes their prospective colleges will accept.
  • Take AP (Advanced Placement)/IB (International Baccalaureate) classes in High School and transfer those credits to college when starting the 4-year program.  Again, which classes will be accepted at the prospective college, has to be found out in advance.
  • Enroll in a Middle College instead of a traditional high school in the 11th grade. This way, the child will earn a lot of college credits while in middle college. An example of such a program in my area is Tri-Valley ROP.

The moral questions aside, let’s run the worst-case and best-case numbers, provided you are a high-income family who will not receive any means based scholarship. I will write a separate post regarding the means based scholarship strategy.

Starting with worst-case:

Let’s say, my son who is 3 right now, will attend Stanford University (private, expensive school) when he goes to college at 18. I have already saved a lot for his college but for the purposes of this worst-case simulation, let’s assume that I am starting with ‘0’. Running the numbers on  Vanguard College Cost Estimator,

NirvanhCollege

Worst case scenario for someone whose child is 3 and will be going to Stanford eventually. 

It seems that I will need $407,640 to cover his cost of college. Again, assuming the worst-case that he does not receive any scholarships and he does not get any credits transferred, I will have to save $13,176 every year, invested in an index fund with 6% returns, while the college cost is increasing by 3% every year. $407,640 includes tuition, books, room, board and everything else.

Now, the best case:

Let’s say, my daughter who is 10 right now, first goes to a community college for the first two years and then transfers to an in-state school the University of California- Berkeley for the remaining two years. Let’s also say that somehow she manages to stay with us at home this entire time and also get’s some partial merit scholarship (say 25%), while at University of California- Berkeley (we live fairly close to Berkeley). The math will work out like this:

Cost for 2 years of community college eight years from now: $9180. Need to save $720/year for that in the 6% Rate of Return index fund.

FreyjaaCommunityCollege

Best case scenario for someone whose child is 10 and will be going to a community college first.

Cost for 2 years of University of California Berkeley: $36857 (tuition & fees only) Only $27,758 needed to cover 75% of the tuition if she gets a 25% scholarship. Let’s say I am starting from 0 (which I am not), I only need to save $1710/year to cover this.

If you are having your child now, you only need to save $348/year for the first two years of community college and $1176/year for the two years of UC Berkeley, totaling ~$1500/year.

FreyjaaCollegeFinal2Years

Best case scenario for someone whose child is 10 and will transfer to UC Berkeley for the last two years of college, also scoring a 25% scholarship. Note that I selected 20 for “Age Starting College”

Hence, in this best-case scenario for a family like mine, we need to save $2430/year for the next 8-10 years, if we are starting when our child is 10 years old and has everything working out for her. The total amount needed is roughly $37,000.

The worst-case scenario for a high-income family is that you have to save $13,176/year for the next 15 years if you are starting out when your child is 3 years old and has to stay on the campus and does not get any scholarships and goes to an expensive private school for all 4 years. The total amount needed is $408,000.

You can see that this is a big range $37K-$408K, so what should you target for?  Of course, the paramters I chose were a little arbitrary as well. For the purposes of this analysis, I chose the ages of my children and started with “0” as the starting point. I chose a 3% increase in college costs annually and I chose a conservative 6% index fund return. However, the important point is that you can use the tools above and estimate your target costs. You should first look at your target schools and their costs and go from there. In general, in today’s dollars, $90,000 is the average cost of a 4-year college degree at an in-state public school (room and board included) and the corresponding number for a private school is $200,000. It is worth highlighting that the average out of state cost at a public school will be roughly $160,000 in today’s dollars.  Now, depending on your children’s ages, you might have to save either conservatively or aggressively.

Let’s say your parameters are:

  • Average 4-year in-state public school.
  • Room and Board included.
  • No scholarships expected.
  • Starting when your child is born.
  • 3% increase in college costs expected annually.

Putting the numbers in a regular FV calculator in an excel spreadsheet will give you ~$153,000. (18 is the number of years, 1 is the number of terms/year since I am using annual rate increase)

College Cost
$90,000
3.00%
18
1
$153,219

However, assuming a more aggressive annual increase of 5%  in college costs, the numbers bloat to ~$217,000.

College Cost
$90,000
5.00%
18
1
$216,596

So, this is tricky. It is better to oversave than undersave. The right number depends on various parameters and you have to estimate those parameters based on your judgement and the information available and put them in some of the calculators suggested above.

My next post will be on how to win scholarships for college, so stay plugged in. Having high income works against you for scholarships and we will go over some of the options with both low income and high income.

Cruise through College Admissions

What if I told you that all the pundits who are asking you to drown yourself and your kids in activities for college admissions are dead wrong.  What if there is a simpler and a more organic way to cruise through college admissions. I read a book written by Cal Newport on this topic and I totally buy this new philosophy. Buy the book here: How To Be A High School Superstar. Read below to find out how this works.

HighSchoolSuperstar

The basic premise of this philosophy is that admission officers are bored to death by looking at the same kinds of applications over and over again, with lots of activities in different fields. Nobody will disagree that SAT scores and GPAs are important but how should kids approach the extracurriculars. Cal Newport argues that there are three main laws to follow, to position yourself as an interesting candidate for college admissions.

  • The Law of Underscheduling.
  • The Law of Focus.
  • The Law of Innovation.

These laws can be explained with examples.

  • The Law of Underscheduling
    • This law argues that there should be plenty of time in High School for unstructured and leisurely exploration.
    • This kind of unstructured exploration has the potential of making you interesting. 
    • He gives the example of Olivia, who earned a prestigious full-scholarship at the University of Virginia. She was exploring marine animal life in her leisure time, which led to an internship at a Marine Biology Lab because a neighbor worked there and she had shown interest. This led to her exploring the behavior of Horse Shoe Crabs. When the scholarship committee interviewed Olivia, they were amazed by her depth of understanding of her research topic and she won full scholarship even when her competition was with other high school students with more activities under their belts. The scholarship committee found her very interesting. 
    • He also gives the example of a relaxed kid, who took a gap year after high school, published a book and became a public speaker at radio shows and universities. This guaranteed his admission at a good college.
  • The Law of Focus
    • The main premise of this law is that one should not be distracted by too many activities. This will lead to a better outcome and again, will make you more interesting. Also, one should NOT use the law of under-scheduling to be lazy and play video games all day.
    • Cal gives the example of a boy Michael, who while being in High School, focused on Clean Energy initiative (and nothing much else in the way of extracurriculars) and ended up prototyping and deploying solar-powered golf carts. He made it to a good college easily.
    • Cal suggests that when the kids start practicing “The Law of Focus”, three effects start showing up in their lives:
      • The Superstar Effect: There is plenty of research that suggests that the best beats the second best by big margins in overall outcomes, even if the two are separated by a very small margin in their performances. The Law of Focus helps you in getting the Superstar Effect.
      • Matthew Effect: This just means that Good Begets Good. When you focus on one or a small number of things and get good at it, many other good things start happening to you. An example would be that if you focus on your ability to help other kids at school, you will be naturally selected for many or all leadership roles at school.
      • Countersignaling: This suggests that once you get really good at what you are interested in, you don’t have to talk about your abilities and your work. Others start paying attention to you and your work and hence your side channels and your references do the talking for you (which is way better), instead of you yourself.
  • The Law of Innovation
    • The main premise of this law is that the Law of Underscheduling and Law of Focus have given you the opportunity to first explore and then hone skills in a particular area and with the Law of Innovation, you can innovate in that area, which will put you in a much better position, compared to the other children who are drowning themselves in myriad different activities to fill their resumes.
    • Failed Simulation Effect: Cal suggests that your innovation should lead to a Failed Simulation Effect. This means that when people read your accomplishments, it should not be easy for them to simulate in their minds as to how you would have achieved the results.  For eg., somebody won a violin competition. This does NOT create a Failed Simulation Effect since it’s not very hard to understand what a violin player would have done to reach such skill levels.  A lot of practice and a lot of training. However, if you hear that Kara designed a health curriculum for tackling diabetes, which was adopted by a few organizations; that leads to the Failed Simulation Effect.
    • Cal proposes three rules for innovation, for high schoolers:
      • Don’t think up innovations from scratch.
      • Innovators join closed communities and pay their dues.
      • Innovators leverage their way up to the innovation.
    • An example to explain the rules of innovation:
      • Kara’s curriculum for tackling diabetes was a revamping of a previous anti-drug curriculum of an organization where she was working.
      • Kara joined the organization in question and did a lot of small tasks for them (paying her dues).
      • Kara first finished a reasonably important project with full commitment before proposing the revamping of the curriculum project. Hence, she leveraged her way up to the innovation.

The overall summary is that if you follow the three main laws properly- Underscheduling, Focus and Innovation, you will come out with some interesting achievements, which will strongly differentiate you in the college admissions marketplace.

Financial Outlook 2018

2018 is here and people are excited about their families, careers and education. The underlying foundation of all these pillars is their personal finance. For most Americans, the foundation of personal finance is the stock market.

We have been talking lately about the asset bubble formation and the bloated P/E ratios. (For introductory readers, P/E stands for Price to Earnings ratio and is one of the many indicators of the value of a stock). To understand where we stand, I attended Vanguard’s Financial Outlook Seminar with the new CEO Tim Buckley, Chief Investment Officer Gregory Davis and Head of Corporate Marketing and Communications, Rebecca Katz.

Vanguard

CEO Tim Buckley, Chief Investment Officer Gregory Davis and Head of Corporate Marketing and Communications, Rebecca Katz

Let’s look at various areas of the market as was discussed at the meeting.

P/E Ratios

While the panel members agreed that the cyclical P/E ratios are high at around 31, they also mentioned that under the light of low interest rates and low inflation, this is not over the top. (People are willing to pay more price for future earnings since the Future Value of Money is good in a low interest, low inflation environment)

Equity Outlook

The panelists suggested that they are looking at around 4.5%-6.5% for annualized return over the next 10 years. For 2018 specifically, the probability of recession stands at mere 5%, a mild recession at 10% and a slowdown at 15%. On the other hand, odds for the Trend to continue lie at about ~20% and the odds of growth lie at about ~50%.

Fixed Income Outlook (Bonds etc.)

The panelists pinned the 10-year annualized outlook for bonds at 2%-3%, mostly for high quality Corporate and Government bonds. Since the current interest rates are low, long term investors are encouraged to invest in short/intermediate term bonds since when the coupons mature, they can be reinvested in the higher yield bonds.

Diversification

Unsurprisingly, the panelists suggested that you should have a good mix of equities and fixed income vehicles so that if and when the market dips, you could trade your bonds with new equities. We will cover international market later in this article.

Inflation

An uptick in inflation is expected. However, it will depend on whether new money goes towards hiring more people (inflation increases) or incurring capital expenditure or financial engineering. Inflation is in check, thanks to some extent to technology because with technology, you can get more with less.

Interest Rates

The FED has indicated that it will increase interest rates in the next two years. Somewhere between 40 to 80 basis points in increase is expected.

GDP Growth

Again, unsurprisingly, the panelists mentioned that a GDP growth of ~2% in the US is expected.

Unemployment

They asked to watch this closely since unemployment is at a multiple decade low. This could lead to increase in wage pressures or using of more technology to replace humans (more capital expenditure).

Tax Cut/Bill for corporations

Begets the same question. Will the additional money  be used towards Financial Engineering (buyback stocks, a sugar rush of not much use) or expanding businesses and hiring, to increase the income potential of the corporations. However, the deficit generated is of concern because it reduces US’s credit rating, by increasing US’s debt/GDP ratio. This would mean that US will have to pay a higher interest on its new debts. Hopefully, the country does not get caught in a vicious debt cycle where a higher interest debt is serviced by another high interest debt.

Bitcoin/Crypto-currency

Vanguard will not offer anything with Bitcoins/Crypto-currency since it is a speculative thing like Gold. There is no underlying income stream/potential. However, the underlying “Blockchain” technology is being closely watched.

International Market

  • Europe
    • Affected positively by Global Economy.
    • Less political uncertainties now, leading to better valuation.
    • ~2% GDP growth expected.
  • China
    • A cooling off expected.
    • China is moving from capital intensive economy to consumer society. Capital intensive economy leads to better GDP growth, hence a fall in GDP growth to a level around 6%-6.5% is expected.

I hope I was able to convey the 2018 outlook in layman terms. Please let me know if you need further clarifications.

Happy investing!

What’s the point of education if you cannot protect your brain’s health?

I write mostly about education because education can serve two purposes, improving the quality of life by providing access to resources and increasing intellectual appetite and capabilities, which also leads to a qualitative improvement of life.

However, we don’t do a very good job at protecting our intellectual abilities. Protection of brain health involves behavior changes and behavior changes are difficult. We tend to incline towards some easy solutions like pills and supplements but pills and supplements don’t do justice. Even better, we blame the genes and so does Popular Science and hence we don’t have to do anything about it since it is not in our control.

But the truth is that it is within our control. Just like managing your finances is within your control, so is managing your health.

Brain gets two major problems: Strokes and Alzheimer’s. This leads to dementia and eventual death. Below is an image which shows the regions of high death rates because of dementia in 2012

Alzheimer's_disease_and_other_dementias_world_map-Deaths_per_million_persons-WHO2012.svg

Deaths per million persons in 2012 due to dementia including Alzheimer’s disease (Red=high)

You can clearly see that western countries are at more risk, countries like USA, Canada, Australia and several countries in Europe.

Are genes responsible for the greater risk? Interestingly, no. Presence of a specific gene called ApoE4 increases your risk for Alzheimer’s but there are countries/populations with much larger densities of ApoE4 presence but far fewer cases of Alzheimer’s. One example is Nigeria (this phenomenon is also touted as the Nigerian paradox).

There are also studies where Japanese people living in Japan have far lower cases of Alzheimer’s compared to the Japanese people living in America, ruling genes out as the major cause of the disease.

Then, what is the reason for high risk? It’s the diet. Higher the presence of animal based products and lower the presence of whole plant-based foods in your diet, higher the chances of strokes and Alzheimer’s.

Let’s delve a little deeper into both Strokes and Alzheimer’s.

  • Strokes: Clogged artery cuts off the supply to a part of the brain, killing that part and rendering that part rather useless, in a stroke. The causes of the strokes are high blood pressure and cholesterol. Here are the steps to prevent strokes:
    • Fiber: eat plenty of fiber. 97% of Americans eat fiber deficient foods. Berries, oatmeal, beans and other whole plant-based unprocessed foods have plenty of fiber.
    • Potassium: eating potassium rich foods like greens, beans and sweet potatoes will cut down the risk of strokes tremendously.
    • Citrus: citrus fruits are antioxidants and they beat the free radicals, hence preventing strokes. Think oranges and limes/lemons.
    • Optimal sleep: sleeping between seven or eight hours a night reduces the chances of strokes.
    • Other antioxidants: herbs and spices play a major role in cutting your risk of strokes. Think oregano, cloves, cinnamon and other spices.
    • Reducing meat, dairy and trans/saturated fats: meat and dairy have no fiber and meat has hardly any antioxidants. Reducing meat and dairy will also lead to reduction in cholesterol.
  • Alzheimer’s: It is believed that Alzheimer’s is caused by the clogging of the arteries inside the brain with atherosclerotic plaque. ApoE4 gene has some role to play since ApoE4 makes the protein which is the principal cholesterol carrier in the brain. However, as mentioned earlier, lifestyle choices have far greater role to play.  Here are the steps to prevent Alzheimer’s:
    • Whole plant-based unprocessed foods: replacing meat, oils high in trans/saturated fats and dairy in your diet with  vegetables, legumes, fruits and grains will lower your risk for Alzheimer’s by lowering your cholesterol and helping with other things as well. Just like stroke prevention, plants and berries have more antioxidants, which combat the free radicals.
    • Spices: Saffron and Turmeric have been found to be helpful in the prevention of cognitive decline.
    • Reducing Gerontotoxins:  Advanced Glycation End products or AGEs accelerate the aging process and elevated levels of AGEs has been found in the brains of Alzheimer’s victims. Meat products have a high amount of AGEs versus the plant products. The style of cooking also matters. Boiling and stewing leads to less AGEs versus the dry heat cooking.
    • Aerobics: Aerobics has been shown to reduce the risk of developing Alzheimer’s.

This post will receive some backlash similar to posts which encourage saving money instead of spending. This is because any lifestyle change like eating less meat and dairy is hard. For starters, human beings are naturally attracted to high fat products like meat and dairy, just like sugar, and meat and dairy products are tastier than the average vegetables and fruits. The other aspect is that there are lots of commercial interests in promoting meat and dairy, hence the popular science brainwashing is that animal based products are your only sources of protein. Unsaturated fats are not bad at all and unsaturated fats are available mostly only from plants, hence, this is absolutely not a war against fat. Cutting both bad carbs and bad fats are important. Whole plant-based unprocessed foods will give you both good fats and good carbs and keep your brain healthy for a longer time.

The source of research for this article is the book “How Not To Die” written by Michael Greger, M.D. You can read/buy it here: How Not To Die.