Don’t Let Trading Fees Eat Your Profits Away

stacked round gold-colored coins on white surface

There’s no point to keeping extra expenses in your life, it just weighs you down in the end. Like we said before, a dollar saved is a dollar earned. Get rid of cable and pay for streaming services of what you watch, get a credit card tailored to your most popular purchase category, cook more, etc. There’s a lot that can be done. Your portfolio is a steak, do you want a fatty piece or a lean piece that will marble when its cooked and not char? In today’s day in age, when you’re managing your investments, the same thing can be done.

Traditionally, there were very high broker and platform fees. You’d even pay commissions if you were placing orders for stocks over the phone or online. Fees have gotten lower for discount online brokerages where now instead of commission, platform fees, or managing fees, you’re paying per trade. Sometimes as little as $5 per trade. And while this seems cheap, for most people starting out these trading fees can really add up and significantly decrease your invested capital.

Younger investors in their 20’s and 30’s have flocked to Robinhood which uses Apex Clearing Corp. as their clearing house because it charges $0 in fees overall. It doesn’t offer all the bells and whistles like other online brokerages such as extended trading hours or research but you can upgrade to premarket and after market hours for a minimal sum. You even have the ability to leverage your capital up to 3x which is a nice feature for more experienced investors and people looking to amplify their returns. Quick disclaimer: Leverage trading is highly risky and we do not recommend it.

So now you have an online brokerage that you hooked your bank account to for free. But businesses need to make money and now you’re probably wondering how they make theirs. To keep it simple, they invest your uninvested capital. Don’t worry, your capital is still yours to invest as you wish whenever you wish. It’s also been rumored that they also sell your order flow and trading information to High Frequency Trading firms (HFTs or firms that trade using algorithms). If these rumors are true, they sell this information for a higher premium than your traditional brokers. This shouldn’t change your investing habits unless you are trading large blocks of shares at once.

For us at The Modern Piggy Bank, we use Robinhood for our discretionary accounts and allocate only a fixed percentage towards it after allocating into our other investment accounts like a Roth IRA and 401k’s using more traditional platforms like Fidelity which recently just announced that that they were offering zero fee ETF’s from Ishares in what will be direct competition to Robinhood.

Just know your cost of investing is less than what your father paid, and less than his father. You don’t have the excuse of having hidden costs or that you’re paying fees for x,y, and z. So don’t make excuses when you can make money. We truly do trust Robinhood implicitly when it comes to our money and our accounts. While we would like to see more features added in the future if you see us on our phones, it will most likely be us with the Robinhood app open checking our portfolios.

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The Questions You Should Be Asking About Your 401k

If you are a young professional like us you probably never put much thought into a 401k plan.  Sure you figured it was part of a good job offer, but now that its finally here you are not sure if you are getting the best deal.  I recently went through the process of setting one up and I will share with you what I learned.

First, what is a 401k?

A 401k is a retirement plan offered by employers.  It works by deducting a portion of your pretax earnings into an investment account, usually a mutual fund or target date fund, of your choice.  More often than not employers choose to match a certain portion of your contributions into the plan.  And while your investments grow you do not have to pay any taxes on them.

When you reach 59 1/2 you are free to withdraw your money without incurring any penalties or fees.

Now for the questions I asked before setting up my account.

What is the employer match?

I surveyed a few friends and I found employers will usually match about 3-6% per paycheck and sometimes ofter an increased rate the longer you stay with the company.  This is rare but if your employer is not matching your contributions I would not even bother.  It takes minutes to set up an IRA at any brokerage which works very similar to a 401k and probably has more options as to where you can park your money.

How long does it take to become fully vested?

This is important as it will tell you when your employer match is received.  I do not plan to leave my company anytime soon, but things happen and you want to know what happens if you do choose to leave.  If you choose to leave before you are fully vested your employer can choose to withhold the money owed to you which can result in a significantly reduced account value.

What are my investment options?

So say you have the job, you are making money, and putting away $200 a month ($400) with employer match for retirement.  It does not mean anything if you do not have good options to park your money in.  Make sure you have a breadth of funds to decide from and ask about management fees because the last thing you want is a high fee mutual fund that doesn’t do anything.

Side note: if you do not have good options you might want to consider making your 401k a portion of your overall retirement portfolio.  For example, I can almost guarantee that most plans have a S&P 500 index tracking fund.  So you could contribute the minimum amount to get the match and use that for your US equity strategy and set up a global diversified portfolio in an IRA wrapper.

Do you offer a Roth 401k?

I actually enrolled in this myself, essentially its betting that you will be in a higher tax bracket come retirement.  The Roth and traditional differ as to when you pay your taxes.  In traditional, like we discussed, you contribute pre tax and defer your taxes to retirement.  Withdrawals are taxed as regular income.  The problem is that a young 20 something year old professional is going to be in a lower tax bracket than a 55 year old executive.  Its like having the money you contributed when you were in a 15% tax bracket is now being withdrawn at 25-30% tax bracket (these are just ballpark numbers to illustrate the point).

The Roth allows you to contribute post tax paycheck money to your 401k and you can withdraw that money tax free in retirement.  In my opinion this is the superior option.  Make a little less today when you are young and it doesn’t matter and make a lot more when you are old enjoying the fruits of a successful career.

I covered mainly the basics here, but this should give you a good start.  If you have any questions, as I am sure you do, feel free to reach out to us and we’ll be more than happy to provide our two cents. You can reach us at founders@themodernpiggybank.com. Make sure to follow us on twitter @themodernpiggy2 and definitely make sure to subscribe on our website! We’ve got new content coming out every day.

What 3.9% Unemployment Really Means

I feel like every day I read about how the economy is teetering on the edge due to trade wars, tariffs, and soaring equity prices.  While it is true these things have the potential to threaten the economy that doesn’t mean you can’t enjoy the good times while they last.  I guess that kind of news just doesn’t sell well.

Now, I am not saying to spend your raise or bonus lavishly.  I am not telling you to go all in on stocks, in fact I would advise against that.  I am simply talking about how now is the time opportunity knocks.  The labor market is stretched really thin right now while people are lining their pockets with cash.  Don’t have a job? Apply.  Want to change industries? Do it.  Want to launch that business or super successful personal finance and investing blog?  There is no better time to do it than right now.   (oh wait thats us)

From my personal experience, during my job search a lot of opportunities were presented to me that probably would not have if firms were not scrambling for talent.  Additionally, during the interview process multiple hiring managers from some of America’s most competitive firms told me its a job seekers market, meaning the supply of jobs is outpacing demand, and to be aggressive when negotiating an offer.  Seniors in college especially apply for that job you don’t think you’re qualified for!

Further evidencing this claim is the Bureau of Labor Statistics Employment Situation report published each month.  You’ll notice over the past year unemployment has steadily declined and seems to have leveled off around 3.9-4.1% range.  Firms are simply running out of talent to recruit.

source: tradingeconomics.com

If you want to learn more about what sectors are benefiting the most and the BLS outlook for unemployment you can access them at BLS.gov in the news release section.  You can find last months (August 2018) here.

I urge you to take the leap now that times are good instead of waiting and regretting what could have been.

Take Advantage of Apple’s Student Sale

I was recently in the market for a new MacBook because my college laptop finally died on me.  While I was thankful that it died after I graduated navigating the laptop market can be intimidating and spending a lot of money on a product that may not be of high quality can be quite discouraging.  I am here to tell you about the great deal I got from Apple.

I love Apple products.  I find them very user friendly and capable of quite a lot.  Their OS is linux based and the Python programming language comes preinstalled on all laptops.  In fact, my advanced programming professor in college swore by his MacBook for all his personal computing needs.

I was originally turned off by the price tag this time around, but a quick talk with a genius in one of their stores brought me right back. Since I graduated college I do not need to run larger engineering programs anymore so I opted for the smaller MacBook Air.  It comes standard with 8 GB RAM which is all you should need for personal computing.  For those of you who are wondering what that means you would probably know if you needed any more RAM for your computing needs.

DISCLAIMER: Everyone qualifies for the sale not just students.

Anyways, I got a brand new MacBook Air for $900 total which includes any upgrades and taxes, but the catch is that Apple is throwing in a free pair of Beats with every order.  So I essentially got a $300 pair of headphones for free.  If you’re willing to try your luck at the resale market this means you just scored a brand new Apple laptop for $600 which is inline with even the Microsoft Surface line of products.

In my personal opinion I think Apple makes a superior product.  This presents a unique opportunity to buy a laptop for ~30% below market price in my case.  Also, if you like high quality headphones you get a FREE pair of beats.  If this sounds like something that interests you the sale is going on until 9/25 so act fast.

Take Advantage Of Your Local Public Library Now

I’ll admit I have not been to a local library in years, but recently there was some work I needed to get done and it was the quietest place I could find to be productive.  The library system has changed so much over the years I was quite amazed.  In the old days it was just rows of books and a reading area which consisted of some inexpensive tables and chairs.  Now they have added to the library with state of the art computers, a collaborative work area, private study rooms, and even a makerspace with a new 3D printer.

Now you’re probably wondering what does this have to do with my personal finances and let me tell you it has everything to do with it.  I recently found that my local library has so many resources to help you succeed, I’ll name a few so you get the idea.

  • Personal finance and tax preparation course
  • Entrepreneur resources
  • MakerSpace
  • Access to business databases including Morningstar Investment Research
  • Guest speakers
  • Software courses like Microsoft Excel
  • And many more resources to help you sharpen your skills

Morningstar Investment Research costs $200 per year and a good 3D printer can run you into the thousands of dollars.  Additionally, if you live near a big city’s library you will have even more at your disposal.  To give you an idea I looked at the New York and Boston Public library system website and found that their members get access to things like private job boards and a Bloomberg terminal.  If you’re not familiar with the Bloomberg Terminal let me explain how big of a deal it is.  You’re standard Terminal will run you $24,000 per year and is the most expensive among financial data providers.  Its capabilities are seemingly endless.  You can track down financial professionals, download excel models of your favorite stocks, look up any economic indicator, and even have access to private job boards.  One day in college my friend was teaching me how to use it and he pulled up a map of every oil pipeline in America.  Its an amazing resource to have at your disposal if you are interested in serious investing.

If you are a human I strongly believe you can better yourself by taking full advantage of resources at your local library.  It is so much more than just access to books nowadays.  Whether you are an entrepreneur, investor, inventor, or just a regular person looking to better their finances or learn a new skill it is worth checking out your local library.

Starting The Dreaded Student Loan Journey

Paying down your student loans? Yeah, us too.

College? Awesome. Student loans? Absolutely not.

I have student loans. And I hate student loans. I hate paying them every month and only watching the principal balance drop minutely. It’s a problem a lot of people have and one that is not going to be fixed anytime soon. What we’re here to discuss is how you, as a Modern Piggy Bank reader, can pay them down as quickly and as painlessly as possible. But to really understand student debt and paying them back, we’re first going to dive into some facts about it.

If you read my article on budgets, you’ll notice that I consider student loans a major category and a main part of my overall budget. And yet that’s really not enough. Sure, I make the minimum payment every month but do I really want to be in a mountain of debt forever? Of course not! I, like you, want to be debt free. Did you know according to Forbes and Credit Suisse if you have $10 in your pocket and zero debt you are richer than 15%-25% of Americans respectively.

“If you’ve no debts and have $10 in your pocket you have more wealth than 25% of Americans. More than 25% of Americans have collectively that is.”

That’s actually astonishing. So if I go up to my 18 year old cousin and hand him a $20 bill he is now in the top 75% of American households. Wake up people! Credit is great, debt can be great. Bad debt is not great. Use it wisely.

And education debt is the United States is massive and current trends only show it increasing. According to Forbes which cites MakeLemonade student loan debt in the US has reached $1.5 trillion. If you get a free minute and want to blow your mind look at these pictures to see what $1trillion would look like in cash. Crazy stuff. And we have that and more just in student debt. Forget mortgages, credit cards, car loans, and anything else you can possibly purchase on credit, student loans dwarfs them all.

Don’t go into $100,000 of debt for a $40,000 job. -Some Random NYC subway advertisement

For example purposes, Jeff Bezos (CEO and Founder of Amazon and recently anointed richest man alive) has approximately $150billion. THAT WOULD NOT EVEN MAKE A DENT IN TOTAL US STUDENT LOAN DEBT. Nor would I want Mr. Bezos to waste his money on attempting to eradicate student debt. That would just be stupid.

But let’s face it, student loan debt is a huge issue. And I’m not talking about the overall student loan debt now, I’m talking about your personal student loans that you took out to go to college.

I’ll be honest, I never really thought about my loans until senior year. I would go to school, have a great year, and then just sign whatever the school sent me for my loans and whatever my parents put in front of me. I thought they knew what they were doing. And then senior year I logged onto my account and saw the debt I was truly in.

Sure, I had known about it in the back of my mind that this debt was piling up but it wasn’t real. It was an idea floating on the outskirts of my thoughts. Let me be the first to tell you that it becomes real, real fast.

So now I’m here, staring into what seems like an insurmountable abyss of debt and just trying to figure out how to climb out of the whole that so many Americans find ourselves in. But I have a plan.

I mentioned before that I had a goal to live off one paycheck a month and save/invest the other one entirely. Unfortunately besides building a cash reserve for emergency purposes I don’t plan on saving or investing much beyond some meager contributions to a Roth IRA. And that’s because most of my excess money will be going towards student loans. I want that debt out of my life forever. I want no debt, no credit card debt, no car payments, yes a mortgage but really nothing else besides that. Don’t buy something unless you can afford it is something I truly want to live by.

So how am I getting there? I’m allocating as much as I possibly can a month towards my loans without sacrificing my health, both mental and physical. I’m riding my bike to work so I can save money on gas and put that towards student loans (I highly recommend biking or walking to work if it’s feasible for you since it not only saves money but is healthier as well).

I’m making sure I’m only eating out when it’s truly a special occasion or a time to hang out with friends. Any money left over from my social life budget goes right into loans at the end of the month.

I’m also making payments more frequently than just the once a month timeline that everyone is on. If you get a gift or a bonus in the middle of the month, use it right then to pay down your debt. I know how tempting it is to go out and get the newest and coolest thing or that item you’ve been eyeing for a while but take the temptation away. Get your money and pay your loans right there and then. You can still make your normal payment but you’ll feel so much better about paying twice or more in a month.

Something that never made sense to me was buying name brand food. Now I completely understand buying a brand for certain items, they simply taste 100x better and I won’t blame anyone for choosing the name brand, but if it’s something simple go for the generic brand. This has led me to have excess money in my grocery budget every month and the extra, you guessed it, goes right into student loans.

There are so many plans you can utilize to pay off your student loans. I’ve already started looking at refinancing my loans and consolidating them to simplify my payments. I highly advise you all to do the same. If you need some guidance, feel free to reach out to us in the Contact Us page and we will personally get back to you and help you navigate. Also make sure to share this article so your friends know they aren’t alone and there are strategies to dealing with your student loans.

Remember, student loans isn’t a debt that will disappear for you tomorrow, but follow us and you may just pay them down quicker and be debt free sooner than you ever thought possible.

Main Street’s Edge

One thing that new investors, myself including, usually grapple with is the belief that investing is a zero sum game.  There is a winner and loser on every end of a trade.  Furthermore, another hesitation plaguing retail investors is the belief that Wall Street has the edge with their superior research and execution ability.

The bad news is Main Street is completely right.  In the short term, trading is a zero sum game, there will be a winner and loser on either side of a trade.  This is especially true when we look at the options and futures markets.  If that’s not bad enough, fund managers have armies of PhDs at their disposal to conduct cutting edge research and legions of engineers designing computer systems to place trades in nano seconds essentially cutting the line in the execution queue.

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If you’re still reading good!  There may be hope for Main Street yet.  First, I would challenge you to think long term.  Investing education is fundamentally flawed in the sense that most people learn that the best way to invest is to pay close attention to a handful of hand selected stocks.  This causes us to over trade and exposes us to a lot of unnecessary risk.  If we look at the major indices we see a steady increase over time.  This makes sense because as the economy expands due to things like population growth which increases the labor force, technological advances which makes workers more productive, etc.  All of this steadily increases corporate earnings which is reflected in the steady increasing of major indices like the S&P 500.

In the past 90 years an investor could expect a 10% return annually on average from the S&P 500, though don’t take this at face value because annual returns fluctuate widely.  A modern investor could capture this utilizing the ETF SPY or the Vanguard 500 fund which have both minimal tracking error and costs.  You would continue to collect dividends, eliminate single company risk, and significantly outpace inflation in the long term all at a cost of less than 20 basis points per year.

So why doesn’t Wall Street just buy and hold if it’s that easy?  If you look at a hedge fund’s fee structure you may see that most charge 2 and 20.  2% on your total account value and 20% on returns.  The truth is Wall Street relies on investor money to pour in to make money.  To attract that money they have to outperform the benchmark S&P 500 and unfortunately few managers can consistently outperform ultimately resulting in being canned by their investors.  This is not to say that all money managers don’t deserve their paychecks.  In fact, there are countless managers who provide amazing strategies that outperform with low correlation to the equity markets you just have to do your due diligence to find them.

The edge that the small investor has is that they can buy and hold over long periods without having to answer to stakeholders.  While money managers were begging people to stay in 2008 the average investor could smile and pour more money into their IRAs buying US equities at huge discounts.

“Our favorite holding period is forever” -Warren Buffet

A prime example of this is Warren Buffet.  AQR published a paper on how he generates his alpha, a measure of market outperformance.  They concluded that Buffet’s philosophy of buying and holding great companies trading at fair prices outperforms because of two main factors. First, Buffet believes in his strategy as his market holding period is “forever.”  If you’re still not convinced, Buffet has seen his holdings decline by over 50% on two separate occasions in his career.  His sheer ability to sit through massive drawdowns is a big reason he is regarded as the greatest investor of all time.  Second, he is able to strategically apply leverage, a concept we’ll discuss in articles to come.

So there you have it.  As a retail investor you have the luxury of not answering to stakeholders who want consistent outperformance and are less tolerant of drawdowns which every portfolio is subject to.  Of course you have to have the discipline to sit through them, but being able to accept market returns over long periods of time is usually all the edge an investor needs to build wealth.