Amid the Pandemic, this is a great time to remind ourselves of the long term thinking when it comes to saving money and investing. The keyword being “long term”. Those who have started very recently might be getting dissuaded by the humongous drop in the market and I am very mindful of that.
I started earning reasonable money in 2008. Anything I earned before 2008 was mostly stipends from Graduate school and minor internships here and there. When the 2008 financial crisis happened, I did not have any sizable portfolio invested in the market. I had just started a family (my daughter was born in April 2008) and my wife had started school. We were paying all those bills and were still saving money. That first year, we just saved money in our savings account since we wanted to buy a house ASAP while the market was at its knees. We bought our first home in December 2009. The next couple of years went mostly in paying the bills, child care, wife’s tuition, traveling and the new mortgage. We started stock market investing seriously only in 2012, although I was still buying ESPP (Employee Stocks) at a discount from my employer before then, which can be considered single stock investing. In December of 2014, we sold our first home and signed the contract for the new home we live in now.
I want to share from the experience of these 8-9 years of investing so that people don’t lose faith in this downturn. Yes, there will be a big reduction in everyone’s portfolio and it will hurt. But, we will still turn out to be winners in the long term.
I will use my 401K account to bring the point home. My 401K shows me that my portfolio’s return this year (YTD) has been -27.3% and that sounds horrible. Despite that, there is a silver lining. Every pretax dollar I ever contributed to my 401K is still cumulatively up by 45% (as of March 21st, 2020). There are two victories here. One, the fact that I have not paid taxes on this money and two that instead of keeping this money in my checking account (or under the mattress) or worse yet spending it away, this money has grown by 45%. If I use simpleton Math and average out my marginal tax brackets since 2012, the taxes would still have been close to 35% (remember California has high taxes). This is an 80% victory despite today’s low market valuation. For all this gain to be wiped off, the market has to fall 45% more (close to 2010 levels), which is extremely unlikely, although not impossible. For the Math folks, the reason it only takes 45% fall to wipe off 80% gain is that 45% of 1.8 is ~ 0.8.
There are a few things to remember here in summary. Always have some portion of your portfolio in cash so that during a downturn, you won’t have to touch your portfolio invested in the market. Second, money invested for the long term in the market will always win over not investing or not saving altogether. If someone started investing in 2018, their portfolios will be showing negative results since inception but if they ride out this bear market and keep investing during the bear market if they can, there will always be a bull market on the other side of the horizon (over long periods of time, the stock market only rises cumulatively (see the image), despite the peaks and troughs on its journey)). So unless it is an emergency, please don’t pull out of the market at this time.
This is a message of hope to all my readers. Take care of your health and well-being and don’t touch your 401K and your face :-), unless necessary.
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.
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.
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.
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.
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.
I have written many posts on saving for college. You can refer to them here: Simplifying saving for college, How to get your money into Roth IRA even when IRS prohibits it?, The Mother of All Personal Finance Hacks- Mega Roth, How 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.
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 college, How 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.