Can You Margin an IRA? - Budgeting Money

How the TFSA works

(Updated August 9th, 2020)

Background


You may have heard about off-shore tax havens of questionable legality where wealthy people invest their money in legal "grey zones" and don't pay any tax, as featured for example, in Netflix's drama, The Laundromat.

The reality is that the Government of Canada offers 100% tax-free investing throughout your life, with unlimited withdrawals of your contributions and profits, and no limits on how much you can make tax-free. There is also nothing to report to the Canada Revenue Agency. Although Britain has a comparable program, Canada is the only country in the world that offers tax-free investing with this level of power and flexibility.

Thank you fellow Redditors for the wonderful Gold Award and Today I Learned Award!

(Unrelated but Important Note: I put a link at the bottom for my margin account explainer. Many people are interested in margin trading but don't understand the math behind margin accounts and cannot find an explanation. If you want to do margin, but don't know how, click on the link.)

As a Gen-Xer, I wrote this post with Millennials in mind, many of whom are getting interested in investing in ETFs, individual stocks, and also my personal favourite, options. Your generation is uniquely positioned to take advantage of this extremely powerful program at a relatively young age. But whether you're in your 20's or your 90's, read on!

Are TFSAs important? In 2020 Canadians have almost 1 trillion dollars saved up in their TFSAs, so if that doesn't prove that pennies add up to dollars, I don't know what does. The TFSA truly is the Great Canadian Tax Shelter.

I will periodically be checking this and adding issues as they arise, to this post. I really appreciate that people are finding this useful. As this post is now fairly complete from a basic mechanics point of view, and some questions are already answered in this post, please be advised that at this stage I cannot respond to questions that are already covered here. If I do not respond to your post, check this post as I may have added the answer to the FAQs at the bottom.

How to Invest in Stocks


A lot of people get really excited - for good reason - when they discover that the TFSA allows you to invest in stocks, tax free. I get questions about which stocks to buy.

I have made some comments about that throughout this post, however; I can't comprehensively answer that question. Having said that, though, if you're interested in picking your own stocks and want to learn how, I recommmend starting with the following videos:

The first is by Peter Lynch, a famous American investor in the 80's who wrote some well-respected books for the general public, like "One Up on Wall Street." The advice he gives is always valid, always works, and that never changes, even with 2020's technology, companies and AI:

https://www.youtube.com/watch?v=cRMpgaBv-U4&t=2256s


The second is a recording of a university lecture given by investment legend Warren Buffett, who expounds on the same principles:

https://www.youtube.com/watch?v=2MHIcabnjrA

Please note that I have no connection to whomever posted the videos.

Introduction


TFSAs were introduced in 2009 by Stephen Harper's government, to encourage Canadians to save.

The effect of the TFSA is that ordinary Canadians don't pay any income or capital gains tax on their securities investments.

Initial uptake was slow as the contribution rules take some getting used to, but over time the program became a smash hit with Canadians. There are about 20 million Canadians with TFSAs, so the uptake is about 70%- 80% (as you have to be the age of majority in your province/territory to open a TFSA).

Eligibility to Open a TFSA


You must be a Canadian resident with a valid Social Insurance Number to open a TFSA. You must be at the voting age in the province in which you reside in order to open a TFSA, however contribution room begins to accumulate from the year in which you turned 18. You do not have to file a tax return to open a TFSA. You do not need to be a Canadian citizen to open and contribute to a TFSA. No minimum balance is required to open a TFSA.

Where you Can Open a TFSA


There are hundreds of financial institutions in Canada that offer the TFSA. There is only one kind of TFSA; however, different institutions offer a different range of financial products. Here are some examples:


Insurance


Your TFSA may be covered by either CIFP or CDIC insuranceor both. Ask your bank or broker for details.

What You Can Trade and Invest In


You can trade the following:


What You Cannot Trade


You cannot trade:

Again, if it requires a margin account, it's out. You cannot buy on margin in a TFSA. Nothing stopping you from borrowing money from other sources as long as you stay within your contribution limits, but you can't trade on margin in a TFSA. You can of course trade long puts and calls which give you leverage.

Rules for Contribution Room


Starting at 18 you get a certain amount of contribution room.

According to the CRA:
You will accumulate TFSA contribution room for each year even if you do not file an Income Tax and Benefit Return or open a TFSA.
The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the years 2016 to 2018 was $5,500.
The annual TFSA dollar limit for the year 2019 is $6,000.
The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500.
Investment income earned by, and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html
If you don't use the room, it accumulates indefinitely.

Trades you make in a TFSA are truly tax free. But you cannot claim the dividend tax credit and you cannot claim losses in a TFSA against capital gains whether inside or outside of the TFSA. So do make money and don't lose money in a TFSA. You are stuck with the 15% withholding tax on U.S. dividend distributions unlike the RRSP, due to U.S. tax rules, but you do not pay any capital gains on sale of U.S. shares.

You can withdraw *both* contributions *and* capital gains, no matter how much, at any time, without penalty. The amount of the withdrawal (contributions+gains) converts into contribution room in the *next* calendar year. So if you put the withdrawn funds back in the same calendar year you take them out, that burns up your total accumulated contribution room to the extent of the amount that you re-contribute in the same calendar year.

Examples


E.g. Say you turned 18 in 2016 in Alberta where the age of majority is 18. It is now sometime in 2020. You have never contributed to a TFSA. You now have $5,500+$5,500+$5,500+$6,000+$6,000 = $28,500 of room in 2020. In 2020 you manage to put $20,000 in to your TFSA and you buy Canadian Megacorp common shares. You now have $8,500 of room remaining in 2020.

Sometime in 2021 - it doesn't matter when in 2021 - your shares go to $100K due to the success of the Canadian Megacorp. You also have $6,000 worth of room for 2021 as set by the government. You therefore have $8,500 carried over from 2020+$6,000 = $14,500 of room in 2021.

In 2021 you sell the shares and pull out the $100K. This amount is tax-free and does not even have to be reported. You can do whatever you want with it.

But: if you put it back in 2021 you will over-contribute by $100,000 - $14,500 = $85,500 and incur a penalty.

But if you wait until 2022 you will have $14,500 unused contribution room carried forward from 2021, another $6,000 for 2022, and $100,000 carried forward from the withdrawal 2021, so in 2022 you will have $14,500+$6,000+$100,000 = $120,500 of contribution room.

This means that if you choose, you can put the $100,000 back in in 2022 tax-free and still have $20,500 left over. If you do not put the money back in 2021, then in 2022 you will have $120,500+$6,000 = $126,500 of contribution room.

There is no age limit on how old you can be to contribute, no limit on how much money you can make in the TFSA, and if you do not use the room it keeps carrying forward forever.

Just remember the following formula:

This year's contribution room = (A) unused contribution room carried forward from last year + (B) contribution room provided by the government for this year + (C) total withdrawals from last year.

EXAMPLE 1:

Say in 2020 you never contributed to a TFSA but you were 18 in 2009.
You have $69,500 of unused room (see above) in 2020 which accumulated from 2009-2020.
In 2020 you contribute $50,000, leaving $19,500 contribution room unused for 2020. You buy $50,000 worth of stock. The next day, also in 2020, the stock doubles and it's worth $100,000. Also in 2020 you sell the stock and withdraw $100,000, tax-free.

You continue to trade stocks within your TFSA, and hopefully grow your TFSA in 2020, but you make no further contributions or withdrawals in 2020.


The question is, How much room will you have in 2021?
Answer: In the year 2021, the following applies:
(A) Unused contribution room carried forward from last year, 2020: $19,500
(B) Contribution room provided by government for this year, 2021: $6,000
(C) Total withdrawals from last year, 2020: $100,000

Total contribution room for 2021 = $19,500+6,000+100,000 = $125,500.

EXAMPLE 2:
Say between 2020 and 2021 you decided to buy a tax-free car (well you're still stuck with the GST/PST/HST/QST but you get the picture) so you went to the dealer and spent $25,000 of the $100,000 you withdrew in 2020. You now have a car and $75,000 still burning a hole in your pocket. Say in early 2021 you re-contribute the $75,000 you still have left over, to your TFSA. However, in mid-2021 you suddenly need $75,000 because of an emergency so you pull the $75,000 back out. But then a few weeks later, it turns out that for whatever reason you don't need it after all so you decide to put the $75,000 back into the TFSA, also in 2021. You continue to trade inside your TFSA but make no further withdrawals or contributions.

How much room will you have in 2022?
Answer: In the year 2022, the following applies:

(A) Unused contribution room carried forward from last year, 2021: $125,500 - $75,000 - $75,000 = -$24,500.

Already you have a problem. You have over-contributed in 2021. You will be assessed a penalty on the over-contribution! (penalty = 1% a month).

But if you waited until 2022 to re-contribute the $75,000 you pulled out for the emergency.....

In the year 2022, the following would apply:
(A) Unused contribution room carried forward from last year, 2021: $125,500 -$75,000 =$50,500.
(B) Contribution room provided by government for this year, 2022: $6,000
(C) Total withdrawals from last year, 2020: $75,000

Total contribution room for 2022 = $50,500 + $6,000 + $75,000 = $131,500.
...And...re-contributing that $75,000 that was left over from your 2021 emergency that didn't materialize, you still have $131,500-$75,000 = $56,500 of contribution room left in 2022.

For a more comprehensive discussion, please see the CRA info link below.

FAQs That Have Arisen in the Discussion and Other Potential Questions:



  1. Equity and ETF/ETN Options in a TFSA: can I get leverage? Yes. You can buy puts and calls in your TFSA and you only need to have the cash to pay the premium and broker commissions. Example: if XYZ is trading at $70, and you want to buy the $90 call with 6 months to expiration, and the call is trading at $2.50, you only need to have $250 in your account, per option contract, and if you are dealing with BMO IL for example you need $9.95 + $1.25/contract which is what they charge in commission. Of course, any profits on closing your position are tax-free. You only need the full value of the strike in your account if you want to exercise your option instead of selling it. Please note: this is not meant to be an options tutorial; see the Montreal Exchange's Equity Options Reference Manual if you have questions on how options work.
  2. Equity and ETF/ETN Options in a TFSA: what is ok and not ok? Long puts and calls are allowed. Covered calls are allowed, but cash-secured puts are not allowed. All other option trades are also not allowed. Basically the rule is, if the trade is not a covered call and it either requires being short an option or short the stock, you can't do it in a TFSA.
  3. Live in a province where the voting age is 19 so I can't open a TFSA until I'm 19, when does my contribution room begin? Your contribution room begins to accumulate at 18, so if you live in province where the age of majority is 19, you'll get the room carried forward from the year you turned 18.
  4. If I turn 18 on December 31, do I get the contribution room just for that day or for the whole year? The whole year.
  5. Do commissions paid on share transactions count as withdrawals? Unfortunately, no. If you contribute $2,000 cash and you buy $1,975 worth of stock and pay $25 in commission, the $25 does not count as a withdrawal. It is the same as if you lost money in the TFSA.
  6. How much room do I have? If your broker records are complete, you can do a spreadsheet. The other thing you can do is call the CRA and they will tell you.
  7. TFSATFSA direct transfer from one institution to another: this has no impact on your contributions or withdrawals as it counts as neither.
  8. More than 1 TFSA: you can have as many as you want but your total contribution room does not increase or decrease depending on how many accounts you have.
  9. Withdrawals that convert into contribution room in the next year. Do they carry forward indefinitely if not used in the next year? Answer :yes.
  10. Do I have to declare my profits, withdrawals and contributions? No. Your bank or broker interfaces directly with the CRA on this. There are no declarations to make.
  11. Risky investments - smart? In a TFSA you want always to make money, because you pay no tax, and you want never to lose money, because you cannot claim the loss against your income from your job. If in year X you have $5,000 of contribution room and put it into a TFSA and buy Canadian Speculative Corp. and due to the failure of the Canadian Speculative Corp. it goes to zero, two things happen. One, you burn up that contribution room and you have to wait until next year for the government to give you more room. Two, you can't claim the $5,000 loss against your employment income or investment income or capital gains like you could in a non-registered account. So remember Buffett's rule #1: Do not lose money. Rule #2 being don't forget the first rule. TFSA's are absolutely tailor-made for Graham-Buffett value investing or for diversified ETF or mutual fund investing, but you don't want to buy a lot of small specs because you don't get the tax loss.
  12. Moving to/from Canada/residency. You must be a resident of Canada and 18 years old with a valid SIN to open a TFSA. Consult your tax advisor on whether your circumstances make you a resident for tax purposes. Since 2009, your TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. Note: If you move to another country, you can STILL trade your TFSA online from your other country and keep making money within the account tax-free. You can withdraw money and Canada will not tax you. But you have to get tax advice in your country as to what they do. There restrictions on contributions for non-residents. See "non residents of Canada:" https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
  13. The U.S. withholding tax. Dividends paid by U.S.-domiciled companies are subject to a 15% U.S. withholding tax. Your broker does this automatically at the time of the dividend payment. So if your stock pays a $100 USD dividend, you only get $85 USD in your broker account and in your statement the broker will have a note saying 15% U.S. withholding tax. I do not know under what circumstances if any it is possible to get the withheld amount. Normally it is not, but consult a tax professional.
  14. The U.S. withholding tax does not apply to capital gains. So if you buy $5,000 USD worth of Apple and sell it for $7,000 USD, you get the full $2,000 USD gain automatically.
  15. Tax-Free Leverage. Leverage in the TFSA is effectively equal to your tax rate * the capital gains inclusion rate because you're not paying tax. So if you're paying 25% on average in income tax, and the capital gains contribution rate is 50%, the TFSA is like having 12.5%, no margin call leverage costing you 0% and that also doesn't magnify your losses.
  16. Margin accounts. These accounts allow you to borrow money from your broker to buy stocks. TFSAs are not margin accounts. Nothing stopping you from borrowing from other sources (such as borrowing cash against your stocks in an actual margin account, or borrowing cash against your house in a HELOC or borrowing cash against your promise to pay it back as in a personal LOC) to fund a TFSA if that is your decision, bearing in mind the risks, but a TFSA is not a margin account. Consider options if you want leverage that you can use in a TFSA, without borrowing money.
  17. Dividend Tax Credit on Canadian Companies. Remember, dividends paid into the TFSA are not eligible to be claimed for the credit, on the rationale that you already got a tax break.
  18. FX risk. The CRA allows you to contribute and withdraw foreign currency from the TFSA but the contribution/withdrawal accounting is done in CAD. So if you contribute $10,000 USD into your TFSA and withdraw $15,000 USD, and the CAD is trading at 70 cents USD when you contribute and $80 cents USD when you withdraw, the CRA will treat it as if you contributed $14,285.71 CAD and withdrew $18,75.00 CAD.
  19. OTC (over-the-counter stocks). You can only buy stocks if they are listed on an approved exchange ("approved exchange" = TSX, TSX-V, NYSE, NASDAQ and about 25 or so others). The U.S. pink sheets "over-the-counter" market is an example of a place where you can buy stocks, that is not an approved exchange, therefore you can't buy these penny stocks. I have however read that the CRA make an exception for a stock traded over the counter if it has a dual listing on an approved exchange. You should check that with a tax lawyer or accountant though.
  20. The RRSP. This is another great tax shelter. Tax shelters in Canada are either deferrals or in a few cases - such as the TFSA - outright tax breaks, The RRSP is an example of a deferral. The RRSP allows you to deduct your contributions from your income, which the TFSA does not allow. This deduction is a huge advantage if you earn a lot of money. The RRSP has tax consequences for withdrawing money whereas the TFSA does not. Withdrawals from the RRSP are taxable whereas they are obviously not in a TFSA. You probably want to start out with a TFSA and maintain and grow that all your life. It is a good idea to start contributing to an RRSP when you start working because you get the tax deduction, and then you can use the amount of the deduction to contribute to your TFSA. There are certain rules that claw back your annual contribution room into an RRSP if you contribute to a pension. See your tax advisor.
  21. Pensions. If I contribute to a pension does that claw back my TFSA contribution room or otherwise affect my TFSA in any way? Answer: No.
  22. The $10K contribution limit for 2015. This was PM Harper's pledge. In 2015 the Conservative government changed the rules to make the annual government allowance $10,000 per year forever. Note: withdrawals still converted into contribution room in the following year - that did not change. When the Liberals came into power they switched the program back for 2016 to the original Harper rules and have kept the original Harper rules since then. That is why there is the $10,000 anomaly of 2015. The original Harper rules (which, again, are in effect now) called for $500 increments to the annual government allowance as and when required to keep up with inflation, based on the BofC's Consumer Price Index (CPI). Under the new Harper rules, it would have been $10,000 flat forever. Which you prefer depends on your politics but the TFSA program is massively popular with Canadians. Assuming 1.6% annual CPI inflation then the annual contribution room will hit $10,000 in 2052 under the present rules. Note: the Bank of Canada does an excellent and informative job of explaining inflation and the CPI at their website.
  23. Losses in a TFSA - you cannot claim a loss in a TFSA against income. So in a TFSA you always want to make money and never want to lose money. A few ppl here have asked if you are losing money on your position in a TFSA can you transfer it in-kind to a cash account and claim the loss. I would expect no as I cannot see how in view of the fact that TFSA losses can't be claimed, that the adjusted cost base would somehow be the cost paid in the TFSA. But I'm not a tax lawyeaccountant. You should consult a tax professional.
  24. Transfers in-kind to the TFSA and the the superficial loss rule. You can transfer securities (shares etc.) "in-kind," meaning, directly, from an unregistered account to the TFSA. If you do that, the CRA considers that you "disposed" of, meaning, equivalent to having sold, the shares in the unregistered account and then re-purchased them at the same price in the TFSA. The CRA considers that you did this even though the broker transfers the shares directly in the the TFSA. The superficial loss rule, which means that you cannot claim a loss for a security re-purchased within 30 days of sale, applies. So if you buy something for $20 in your unregistered account, and it's trading for $25 when you transfer it in-kind into the TFSA, then you have a deemed disposition with a capital gain of $5. But it doesn't work the other way around due to the superficial loss rule. If you buy it for $20 in the unregistered account, and it's trading at $15 when you transfer it in-kind into the TFSA, the superficial loss rule prevents you from claiming the loss because it is treated as having been sold in the unregistered account and immediately bought back in the TFSA.
  25. Day trading/swing trading. It is possible for the CRA to try to tax your TFSA on the basis of "advantage." The one reported decision I'm aware of (emphasis on I'm aware of) is from B.C. where a woman was doing "swap transactions" in her TFSA which were not explicitly disallowed but the court rules that they were an "advantage" in certain years and liable to taxation. Swaps were subsequently banned. I'm not sure what a swap is exactly but it's not that someone who is simply making contributions according to the above rules would run afoul of. The CRA from what I understand doesn't care how much money you make in the TFSA, they care how you made it. So if you're logged on to your broker 40 hours a week and trading all day every day they might take the position that you found a way to work a job 40 hours a week and not pay any tax on the money you make, which they would argue is an "advantage," although there are arguments against that. This is not legal advice, just information.
  26. The U.S. Roth IRA. This is a U.S. retirement savings tax shelter that is superficially similar to the TFSA but it has a number of limitations, including lack of cumulative contribution room, no ability for withdrawals to convert into contribution room in the following year, complex rules on who is eligible to contribute, limits on how much you can invest based on your income, income cutoffs on whether you can even use the Roth IRA at all, age limits that govern when and to what extent you can use it, and strict restrictions on reasons to withdraw funds prior to retirement (withdrawals prior to retirement can only be used to pay for private medical insurance, unpaid medical bills, adoption/childbirth expenses, certain educational expenses). The TFSA is totally unlike the Roth IRA in that it has none of these restrictions, therefore, the Roth IRA is not in any reasonable sense a valid comparison. The TFSA was modeled after the U.K. Investment Savings Account, which is the only comparable program to the TFSA.
  27. The UK Investment Savings Account. This is what the TFSA was based off of. Main difference is that the UK uses a 20,000 pound annual contribution allowance, use-it-or-lose-it. There are several different flavours of ISA, and some do have a limited recontribution feature but not to the extent of the TFSA.
  28. Is it smart to overcontribute to buy a really hot stock and just pay the 1% a month overcontribution penalty? If the CRA believes you made the overcontribution deliberately the penalty is 100% of the gains on the overcontribution, meaning, you can keep the overcontribution, or the loss, but the CRA takes the profit.
  29. Speculative stocks-- are they ok? There is no such thing as a "speculative stock." That term is not used by the CRA. Either the stock trades on an approved exchange or it doesn't. So if a really blue chip stock, the most stable company in the world, trades on an exchange that is not approved, you can't buy it in a TFSA. If a really speculative gold mining stock in Busang, Indonesia that has gone through the roof due to reports of enormous amounts of gold, but their geologist somehow just mysteriously fell out of a helicopter into the jungle and maybe there's no gold there at all, but it trades on an approved exchange, it is fine to buy it in a TFSA. Of course the risk of whether it turns out to be a good investment or not, is on you.
Remember, you're working for your money anyway, so if you can get free money from the government -- you should take it! Follow the rules because Canadians have ended up with a tax bill for not understanding the TFSA rules.
Appreciate the feedback everyone. Glad this basic post has been useful for many. The CRA does a good job of explaining TFSAs in detail at https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf

Unrelated but of Interest: The Margin Account

Note: if you are interested in how margin accounts work, I refer you to my post on margin accounts, where I use a straightforward explanation of the math behind margin accounts to try and give readers the confidence that they understand this powerful leveraging tool.

How Margin Loans Work - a Primer

submitted by KhingoBhingo to CanadianInvestor [link] [comments]

Rule of 55: Withdrawing from 401k and (maybe) IRA before 59.5

I will be 58 years old in October but this is my last week of work; I am retiring. I have approximately 5 weeks of vacation left, then will continue on severance until mid-march.
The rule of 55 states that I can withdraw from my 401k (if these funds were not rolled over from a previous employer) without the 10% penalty. I want to move all my money from my 401k to a traditional IRA to allow me more investment opportunities as well as the ability to trade with margin (I am a day trader). However, after reading about this rule on the IRS.gov it appears I cannot withdraw from a traditional/rollover IRA before 59.5, only the 401k. Therefore, I would need to leave the money in my companies' 401k (which I really don't want to do) until I am 59.5 so I don't incur the 10% penalty.
Is my interpretation of the rule correct? Is the 401k the only account where I can withdraw penalty free before 59.5?
submitted by drmantis-t to personalfinance [link] [comments]

Back to Basics: Real Estate Investing

Hi All,
First of all, I’m a data scientist by profession but a history major by training. So I’ve tried to cite all relevant data points with a () tag. This allows us to separate debating the data vs. the analysis. I’m also a complete newbie to real estate investing. One of the main goals in fact of this post is to organize my thoughts so far and solicit feedback from more knowledgable individuals.
As part of a balanced portfolio, I've invested passively in real estate for several years (both public REITs and a small amount in a private platform). As my assets have grown and I'm entering the age to buy a primary residence, I've been trying to educate myself on the housing real estate market. After all, even if you don't own any investment properties the purchase of a home is the largest single financial transaction you'll likely ever make. In fact, if you look at the chart linked below (1, see Sources below) you'll see housing is the single largest asset for households with net worth below 1 million dollars, i.e. ~90% of Americans (2). In fact, even in 2010 (in the midst of the Great Financial Crisis): "The primary residence represented 62% of the median homeowner’s total assets and 42% of the median home owner’s wealth" (3). In fact, reading the Economist recently (obviously in my slippers) I was surprised to discover housing is the world's largest asset class. This HSBC report (avoiding the Economist paywall) cites housing as a $226 trillion (!) asset class at the end of 2016 (4) out of a total net worth in 2018 of ~$360 trillion according to Credit Suisse.
 
Even with my casual research, it's clear that real estate is divided into multiple segments including residential, commercial, industrial, farm land, etc. Even the subsector of residential is divided into single family, multi-family, commercial, mobile homes, etc. These segments are further divided across geographies with wildly different tax, capital, and regulatory regimes. So far I’ve limited my research to the US residential sector: single family homes, multifamily, and small commercial apartment buildings. Therefore moving forward when I say real estate I will limit the scope to the above US residential housing market, i.e. acquiring individual or personal portfolio of US housing properties.
 
More formally, the purpose of my analysis below is:
Note: I considered posting this in /realestateinvesting, but ultimately my goal is to evaluate real estate vs. other asset classes. Obviously some people will simply prefer real estate for a variety of reasons, but personally my goal is to achieve the greatest return for the least risk and work. I should stress that I love my career (data scientist) and have no intention of quitting, so the last point is particularly important.
 
Analysis
 
One thing that immediately strikes me as an investor accustomed to public securities, e.g. bonds / stocks, is how odd the real estate market (in particular housing) is in comparison. Having a margin account from a broker, i.e. getting leverage, is often a difficult process reserved for “advanced” investors. In residential real estate, it’s considered “conservative” for an individual to have leverage of 4-5 to 1 (FHA loans, for example, only require 3.5% down in some cases!) . What’s even crazier is that the loan is often issued at only 2-4% over the 10 year US treasury rate. For example today, April 26th, the 10 year treasure is 0.606% while NerdWallet has a rate of 3.3% for a prime credit score, single family home, primary residence 30 year loan.
 
Perhaps because real estate is the only avenue available for newer investors to take on large amounts leverage immediately, I've seen extreme and, in my opinion, irrational positions on the subject. Even a cursory glance at BiggerPockets, /realestateinvesting, etc. uncovers multiple posts along the lines of either "real estate investing is the best investment ever!" vs. "the real estate market is a massive bubble and will crash soon". I've summarized a few of the common tropes I've seen below with my analysis.
 
Real estate is a huge bubble, and is going to collapse any day!
As noted above, real estate / housing has numerous segments that are further divided across geographies with wildly different tax, capital, and regulatory regimes. Saying that "real estate" will crash is like saying the “food industry” will crash. What segment and where? US soybean growers? Fast Food? Argentinian ranchers? McDonalds in particular?
Limiting our discussion to US housing: the Case-Shiller national price index (7) shows that home prices dropped ~27% from peak to trough in the Great Financial Crisis over a period of almost 6 years (Mid 2006 to early 2012). The reason this was such a catastrophic event is that housing had never decreased nationally in a significant way before in the modern era (see Case Schiller home price index). Of course, it’s worth noting that housing had rarely increased rapidly against inflation before.
Let’s assume we had an equivalent event occur. The Jan 2020 index was at 212, so home prices would decrease by 27% to ~155 (mid 2008 levels). Crucially though, this price drop would be expected to play out for years! During that time vested interests (more on that later) would lobby governments extensively for support, foreign and US investors could form funds to take advantage of the situation, etc. As a reference point there is ~$1.5 trillion available in US private equity funds alone as of January 2020.
However, it is worth pointing out that this is at the national level. Local real estate markets, particularly those dependent on select industries or foreign investors, could easily see more dramatic price movements. The US census has a really cool chart (22) that shows the inflation adjusted (as of year 2000) median home values every decade by state from 1940 to 2000. We see that Minnesota home values actually dropped from $105,000 in 1980 to $94,500 in 1990, a fall of more than 10%.
 
Everyone needs a place to live, therefore housing can never go down
Everyone needs a place to eat, but restaurants and grocery stores are famously low margin businesses (5). Farms supply an even more basic need, but many go bankrupt (6). The question isn’t whether housing will go down or not, but whether it will return an attractive rate of return compared to alternative investments.
It’s also worth pointing out that for most “retail” US housing real estate investors, they are investing in a narrow geographic area. Migration and births/ deaths can play a huge role in the need for housing in a given area. Case in point, NYC may have actually begun losing population to migration in 2017 / 2018 (23). Even more interesting, NYC has experienced a substantial loss due to domestic migration which is almost balanced by foreign immigration / new births (24). If foreign immigration decreases in the post-COVID we would expect NYC’s population to decline more rapidly given current trends.
It is entirely possible for national housing prices to modestly increase while expensive coastal markets decline significantly, for example.
 
It's supply and demand. There's a nationwide housing shortage so prices can only go up!
This one has some factual basis. Freddie Mac put out a study in Feb 2020 (18) which indicated that there is a shortage of housing units between 2.5 - 3.3 million units. Some interesting notes about this study is that they consider the “missing” household formation and extrapolate interstate migration trends. As noted below, the US builds ~1.3 million housing units a year, so this reflects ~2 years of housing construction. It’s also worth noting the geographic variation, with “high growth” states like Massachusetts, California, Colorado, etc. seeing ~5% housing deficits vs. states like Ohio, Pennsylvania, etc. seeing housing surpluses of ~2-4%.
However, a Zillow analysis on our aging population (11) points to a slightly different conclusion. Based on their analysis, an additional ~190,000 home will be released by seniors between 2017-2027 compared to 2007-2017. That number increases by another 250,000 homes annually between 2027-2037. Combined, this is about ~50% of the average annual homes constructed in the US between 2000-2009 at ~900,000.
Given these slightly conflicting reports, let’s get back to basics. First, let's separate housing into single family homes, multi-family units, and large apartment buildings. Single family homes, particularly near dense and economically vibrant metros, are far more supply constrained. In contrast, multi family units / apartment towers are, barring regulatory issues (see California), less constrained by available land. See Hudson Yards in NYC, the Seaport area in Boston, the Wharf in DC, etc. It's worth noting that due to costs / market demand most of these developments cater to the entry level luxury category and above, but they are new supply.
I actually wound up looking at US Census projections to get a sense of the long term outlook. By 2030 the Census estimates the population will grow from 334.5 million to 359.4, for a total increase of 24.9 million or an annual increase of 2.49 million (8). In 2019 the Census estimated 888,000 private single family units and 403,000 units in buildings w/ 2+ units were constructed for a grand total of 1,291,000 units (9). The average number of people per US household is 2.52 (10). Some simple math suggests that if we assume each new single family home contains the average number of Americans and each apartment conservatively contains only a single person we get 888,000 * 2.52 + 403,000 = ~2.64 million.
Now, talking about averages in a national real estate market reminds me of a joke about Mars: on average it's a balmy 72 degrees. But the point still stands that at a high level, theoretical sense there is sufficient "housing" for the US population. The question, as always, is at what price and location?
 
Real estate is a safer investment than the stock market!
This one honestly irritates me. While there are many advantages to real estate I can see, safety is not one of them. It is a highly leveraged, illiquid, extremely concentrated asset when bought individually (i.e not in a REIT). Let’s use an example here. Is there a financial advisoy in the world who would recommend you put your entire investment portfolio in Berkshire Hathaway? Of course not, diversification is the bedrock of modern personal finance. And yet Berkshire Hathaway is an extremely diversified asset manager with well run and capitalized companies ranging from Geico to Berkshire Homes to Berkshire Energy. Oh, and it also has $130 billion (with a B) in cash equivalents.
I honestly think this impression stems from 3 factors:
 
You won’t build your wealth in the stock market
One common theme I’m already noticing listening to podcasts, reading blogs, etc. is that many people started investing in the aftermath of the Great Financial Crisis (2009 - 2011). And, in retrospect, it was clearly a great time to buy property! But it was also a great time it turns out to buy almost every investment.
I plugged in the average annual return of the S&P 500 from December 2009 to December 2019 with dividends reinvested (and ignoring the 15-20% long term tax on dividends) (12). It was 13.3%. If you managed to buy at the market bottom of Feb 2009 it was 15.8%!
The long term annual average of the S&P 500 from 1926 - 2018 is ~10-11% (with dividends reinvested). (13). The S&P has never lost money in a 30 year period with dividends reinvested, see the fantastic book Stocks for the Long Run (14). In fact, if you’re investing before 30 the worst 35 year period (i.e. when you would turn 65) is 6.1% (15).
Housing, in general, has tracked at or slightly above inflation ( 16). Even a click bait CNBC article (17) about “skyrocketing” home prices states that homes are rising 2x as fast as inflation (i.e. ~4%). If you look at the CNBC chart for inflation adjusted prices, you’ll see a compound annual growth rate (CAGR) of 2.3% from 1940 to 2000. Let’s do this same exercise again with the Average Sales Price of Homes from Fred (i.e. Fed economic data) (18). In Q1 1963 the average sales price of a house was $19,300. In Q4 2019 it was $382,300. That is a CAGR of ~5.38% over ~57 years.
Another thing to keep in mind is that while real estate does have some tax advantages, there are also property taxes, maintenance, etc.
But it’s harder than that. Because real estate is an illiquid asset. In general, illiquid assets require higher returns than the equivalent liquid asset because of the inconvenience / risk of not having the ability to transact frequently.
 
Case study of real estate purchase:
I’d like to focus the rest of my analysis on an area that many members of BiggerPockets, /realestateinvesting, etc. seem to gloss over: credit. I was surprised to see that for first time home buyers, 72% made a down payment of 6% or less according in Dec 2018 according to (27). This would imply prices only have to decrease 6% to put these new homebuyers underwater, i.e. owe more after a sale than their mortgage. But this fails to take into account costs associated with buying a property, which are substantial at 2-5% for closing according to Zillow (28). Costs for selling a property are even more substantial, ranging from 8-10% according to Zillow (29). This means that sellers only putting down 6% could be underwater (in the sense that they couldn’t sell without providing cash during the sale) with even modest price decreases when taking into account these transactional costs.
 
Obviously there are ways to reduce these costs, so let’s walk through a hypothetical example of the median valued home of ~$200,000.
 
A young, first time home-buyer puts down 10%, or $20k, and takes out a mortgage for $180,000. They also pay (optimistically) closing costs of 2% for $4000. Luckily, they bought in a hot housing market and prices increased 5% (real) over the next 5 years. Their house is now worth ~$255,000. They sell their house and again, optimistically, closing costs are only 4%. This means they pay $10,200. Consequently, after netting out costs we calculate naively that they would make $255k - $10k - $4k - $200k (original purchase price of home) = $41k. Given they only invested $20k of their own money, this is a compound annual growth rate (CAGR) of ~15.4%, which is handily above the S&P 500’s average. This is the naive calculation I first made, but as we’ll see it is deeply flawed. First, let’s look at costs.
 
WalletHub has a really nice chart that shows (conveniently) property taxes on a $205,000 home across all 50 states (30). The average American household spends $2375 on property taxes, so let’s assume a little less and go for $1500. So 5 years x $1500 = $7500.
 
For home maintenance, the consensus seems to be ~1% annually for home maintenance with wide variation. We’ll assume that’s $2000 off the base price, so $2000 * 5 = $10,000. (31).
 
For homeowner’s insurance, Bankrate (32) provides a nice graph that shows the average annual cost for a $300,000 dwelling across all states and then a separate chart for costs based on dwelling coverage. For a $200,000 dwelling coverage we have a figure of $1806 per year, so over 5 years we have $1800 * 5 = $9000.
 
Finally we need to calculate the interest on the debt. One thing that I didn’t realize until I looked at an amortization table how front-loaded the interest payments are. Case in point, I plugged in the $180,000 loan into the amortization calculator (34) using a 3.5% interest rate and saw that we pay on average ~$6000 each year in interest vs. only ~$3800 to principal.
 
So lets’s run the new numbers.
You sell your home still for $255,000. After 5 years, your mortgage is now ~$160000 (i.e. you paid off 20,000 over 5 years, or ~$4k per year). So after the sale you are left with ~$95,000. The buying and selling costs remain the same as before, so we subtract the $14k for $81,000. We also then subtract $7500 (property taxes), $10,000 (home maintenance), $9000 (homeowners insurance) which gives us $54,500.
 
We paid ~$9,700 each year in mortgage interest + principle (~6000 interest and $3700 principal). So 5 * 9700 = $48,500.
 
So, net of everything we get $255,000 - $160,000 (remaining mortgage) - $48,500 (mortgage payments over 5 years) - $14k (buying / selling costs) - $7500 (property taxes) - $10,000 (home maintenance) - $9000 (home insurance) = $6000. And we put down $20,000 as a downpayment, for a net compound annual growth rate (CAGR) of negative $21.4%.
 
That is truly an astounding result. We had 10x leverage on an asset that went up 5% each year for 5 years and we somehow lost money on our “investment” of a down payment? Keep in mind we also used fairly optimistic numbers (particularly home price appreciation) and didn’t factor in PMI, etc. On the flip side, this home provided shelter, i.e. you didn’t pay rent. That’s a massive “avoided” cost and I don’t mean to minimize it. But the point here is that many homebuyers I’ve spoken to fail to account for the substantial costs of home ownership and expect their primary resident to generate a substantial return.
 
Now, of course, for real estate investing you would likely either a) hold the property for less time and attempt to flip it via forced appreciation or b) have tenants in the property. Let’s focus on b) because frankly that’s more of my interest. From what little research I’ve done flipping houses requires much more time that’s incompatible with my day job.
 
I went ahead and used the rental price calculator I found online at (36) to calculate the return. I used a rent of $1300 monthly, a bit lower than the average national rent of $1476 (35) because our home price was also lower than the national average. I assumed a low vacancy rate of 5%, and no other expenses beyond the ones cited above (i.e. I didn’t assume property management, higher loan interest rate, higher property taxes).
 
The calculator spit back a 5 year internal rate of return (a metric in this case useful to compare against the securities markets) of 27.79% return, i.e. a profit of $63k on an initial investment of $20k. The IRR as I understand it captures the time value of money, basically accounting for when you made various returns (37). E.g if an investment over 30 years pays nothing then gives you a lump sum payment at the end that’s very different than if it pays 1/30th of that lump sum every year. It’s useful in this case for comparing against the stock market because the IRR takes all future cash flows back to a net present value of 0, i.e. as if we invested all the money immediately.
 
&Now let’s do some scenario modeling (originally we had 10% down, 3.5% interest rate for an IRR of ~28%):
This scenario for me demonstrated a number of interesting properties.
 
 
401k analysis
As I mentioned above, one of the big questions around real estate investing that I rarely see asked is “is it an appreciably better investment than the alternatives”? For W2 workers, which is ~50% of private sector workers, this question becomes even more pertinent because 401ks have massive tax benefits. In fact, only 33% of US households own taxable accounts outside of a 401k, which means the vast bulk of US households either have no accounts, 38%, or own only a retirement account like a 401k, 29%, according to (39). Let’s assume we have a middle to upper middle class worker making ~70k (this puts them roughly at the 75% percentile). They want to invest, and see two options:
 
At a salary of $70k and assuming you took the $12k standard deduction, you would still see much of your income fall into the 22% tax bracket. While certain states charge no income tax, they generally make it up in much higher sales / property taxes, so let’s also assume a 3% state income tax (40). This means that if you invest $19,500 in a 401k (the maximum in 2020) that’s equivalent to only $14,625 post-tax (because the $19,500 would be taxed ~25% before it got to you). That leaves almost $6000 when compared with the down payment figure above, which is coincidentally the exact IRA contribution limit for 2020! The math for deductions for the IRA gets painful, but we can assume a deduction of ~$1500 (i.e. 25% of 6000). Now, if your work offers an HSA it gets even better, because those contributions are tax-free even from social security (which is typically a 6.2% tax) + medicaid (1.45%). This means that if you contribute the $3500 limit, that’s equivalent to only $2300 post-tax.
 
This is getting rather long, so for the sake of simplicity we can basically say that in lieu of putting down a $20,000 post-tax downpayment on an investment property you could instead invest $19500 + $6000 + $3500 = $29000 into the stock market. What’s more, fees for well managed 401ks through Vanguard, Schwab are often ~0.25% (i.e. $72 annually on the $29k above).
 
If we assume the average S&P 500 index returns of 10% (we’ll ignore the $72 annually in expenses and of course there are no taxes), we would see $29k compounded over 5 years = $47,809. Since we’re investing the money all immediately, this is (I believe) more or less equivalent to the IRR rate.
 
So, what do we need to achieve to beat that return with our investment property? Well, we previously assumed a blistering 5% real home price appreciation. With inflation at ~2%, that’s a nominal 7% home price appreciation. According to both Zillow and Core logic, Idaho is the state with the fastest home appreciation values pre-COVID at ~9%. We’re essentially predicting close to this level for 5 years, which is quite rare. In August 2019, US home prices nationally were gaining ~2.6% according to (41).
Let’s plug those numbers into our rental property calculator from above. At a 10% down payment, 3.5% interest rate, and 2.6% home price appreciation we see an IRR of 18% per year. Game, set, match, real estate, right?
 
Well, sort of. Right now we are assuming optimistic projections about maintenance (1%), closing costs (2%), and selling costs (4%). What if we bump those up to the averages cited by Zillow (3% and 8%)? Uh-oh, now we’re down to 12.38%. Okay, but what if we assume rent goes up by the same amount, ~2%? Great! Now we’re back up to 14% IRR. But if we assume all the other expenses like home insurance and maintenance go up 2% a year as well, we’re back down to 11%.
 
We could go on forever, but the point is that real estate (particularly for rental properties) are extremely sensitive to assumptions you make on a number of factors. Given the risk, illiquidity, and work involved with a real estate property I would want to see a substantially higher return than the tax advantaged, hands off 10% my 401k gives me. I didn’t even include the typical 3% match for the 401k, which would have added $2100 to the initial investment amount and increased the 5 year return to $51,272.
 
The bottom line in my mind is that for most W2 workers who have access to pre-tax investments, they should max them out first. If you’re lucky enough to be able to max out all of the above pre-tax accounts + get a 3% match (i.e. $31k total) every year, after 15 years at a 10% return you’ll have $1.2 million. In 30 years you’ll have $6.8 million. And again, keep in mind that maxing out your pre-tax accounts only “costs” you ~$20k, because that’s what you would get after taxes. And you’ll have “made” those millions without spending a single hour outside of your day job working.
 
Based on the above analysis and calculations, here’s what I’ve come away with as a newbie to real estate investing:
 
Some thoughts on the future:
Forecasting is always risky, but at the same time we all have to form an opinion on where the future is headed. My general thoughts are that crisis tend to accelerate existing trends rather than create new ones. There were already recession concerns in late 2019, and US GDP growth expectations had been downgraded to ~2.0% by the OECD even before COVID (45), albeit with slight optimism around the Phase 1 trade deal with China. Geopolitical tension and capital controls in China had led to mainland Chinese investors slowing their investments in US real estate and increasing dispositions (47).
From my point of view, I’m interested in seeing how the market reacts over the next 3-6 months. Do sellers react by rapidly putting properties on the market before it’s “too late”? Are there enough prime buyers given the tightening credit, particularly for expensive coastal markets, to absorb a spike in listings? As Warren Buffett once said: “"At rare and unpredictable intervals...credit vanishes and debt becomes financially fatal. A Russian-roulette equation--usually win, occasionally die--may make financial sense for someone who gets a piece of a company's upside but does not share in its downside.” We shall see.
Sources:
submitted by cooleddy89 to investing [link] [comments]

Getting back on the options trading horse after 20 years away?

OK, there's a lot of preamble here so if you're not in it for the long haul, skip to the end.
I used to day trade options in 1998-2001, before decimalization, when dinosaurs ruled the planet. I was fresh out of college and started an account at with IB with $1000. IB was relatively new and was by far and away superior to all of the other retail brokers at the time. I also had a friend that worked for a hedge fund; he let me use their data feed for L2 quotes - again, at that time, a significant advantage over your average retail schmo. Options prices often lagged significantly behind stock prices back then. I could read the tape on L2 and see a particular move coming, buy a call or put @ IB (sometimes even hand picking the slowest option exchange), pay SUPER cheap $1 contract commissions when the norm was $14.95, and could either get a good scalp at minimum or get really good entries on chart breakouts, all day long. I had an IT job that didn't demand much of me, so I could watch things all day and just move in and out of whatever the momentum stocks du jour. I devoured tons of books about the market, technical analysis, etc. during this time and learned quite a bit. At the time, I was too green to do anything involving options strategies more complicated than simple directional calls/puts and wasn't even allowed to with an account that small, if I remember right. Even so, I grew my initial $1000 significantly.
It all ended in February 2001, when a little rule called the pattern day trader came about, as I didn't have anywhere close to $25k. My option trading hobby was over.

In early January 2020, now with an established career, family, and all that jazz, I decided that it was time to dust off my old trading skills. I've been passively investing for years in standard retirement vehicles and wanted to speculate. I ended up funding a Merrill Edge account with $5k in early March.
Good lord, what a terrible platform. I couldn't make sense of it, it looks like it was designed specifically to stop you from making money. The IB interface from 2000 was legitimately better. Anyway, I messed around on Merrill for about a month, took my requisite lumps from IV crush in SPY puts (except I only YOLO'd 2.5% of my account instead of 100%) , before finally deciding that I'd had enough of that trash. I then revisited my old ThinkorSwim account circa 2012 from an old IRA that I opened but never funded. I liked TOS much better, but it was still a bit intimidating to come into "cold".
One thing that I've read a lot over the past couple months is that it's just not a good time to be buying OTM directional options for swing trades because of IV crush. I started to look into the concept of selling premium in risk defined trades and it just sounded reasonable to me, given the current climate and my account size. That led me to Tastytrade and Tastyworks.
I was attracted to TW because I've read good things about the platform and was intrigued that it was a brokerage specializing in options. This alone was a novel concept to me. So, I opened an account and figured I'd give it a spin.
After using it for a couple days and watching a few tutorial videos, TW does seem to have many bells and whistles around options orders and graphical representation of risk, but a lot of that is lost on me at the moment because I'm still trying to get my head around the fundamentals of operating the software. My first impressions have soured me a little. The charting is hot trash. The client periodically crashes on my Mac and can sometimes peg my CPU on PC. The desktop client has a pretty serious rendering bug and is unreadable on a 3440x1440 monitor. I have to use 125% font scaling. I'm not sure how to pop any section of the UI out for multi monitor approaches, and it doesn't seem like you can look at a chart AND submit an order at the same time.
Despite all this, I started the TW trading challenge today. I'm not expecting to make anything on it, and it's weird that you're limited to stocks and ETFs, but whatever. I thought $250 would be easy trading /CL today, haha. Hey, I'm short 300 USO @ 2.96, maybe I'll wake up tomorrow and it'll be $1.

TL;DR -
If you made it to the end, congrats. Please help an old man get back on the horse!
submitted by bogglor to options [link] [comments]

Why can'ta sell calendar spreads in my ira?

I own Nov 20 $200 calls in GLD in my ira and today I was trying to sell Aug 21 $205 calls, but I got an error saying "rejected: -1 shares prohibited" my normal margin account allowed me to make this same trade, does anyone know why I'm not allowed to make this trade in the ira? It shouldn't require any margin bc risk is fully covered by the long calls
submitted by qwertyf1sh to tdameritrade [link] [comments]

Book Review: Lee Kuan Yew's From Third World to First [Part One]

Hey, /singapore! I'm not Singaporean, but awhile back, I started taking interest in your country and particularly Lee Kuan Yew, and ended up writing a comprehensive review of his work From Third World to First. I've hesitated to post it here since I expect much of what was so striking to me is old news to you all, but in the wake of the fifth anniversary of his death, my thoughts have drifted back towards him and curiosity got the best of me. With that in mind, perhaps some of you will enjoy an American's look at Singapore's ah gong, one of the most remarkable leaders the world has seen.
Since I have no personal experience with Singapore and only his word to go on for much of the detail provided, I'd be particularly interested to hear where I oversimplified things or got something wrong. If there's interest, I'll post the other portions of the review here; otherwise, you can find them in my userpage if you're curious.
Cheers!

Intro

We believed in socialism, in fair shares for all. Later, we learned that personal motivation and personal rewards were essential for a productive economy. However, because people are unequal in their abilities, if performance and rewards are determined by the marketplace, there will be a few big winners, many medium winners, and a considerable number of losers. That would make for social tensions because a society's sense of fairness is offended. ...Our difficulty was to strike the right balance. (95) (Page numbers listed throughout for reference)
What happens when you give an honest, capable person absolute power?
In From Third World to First, Lee Kuan Yew, in characteristically blunt style, does his best to answer that question.
Lee Kuan Yew's politics--and by extension Singapore's, because he really did define the country--are often, I feel, mischaracterized. In We Sail Tonight For Singapore, for example, writer Scott Alexander characterizes it as reactionary. This is agreeable to the American left, because it's run so differently to Western liberal ideals, and agreeable to reactionaries, because Singapore is preternaturally successful by almost any metric you care to use.
The only problem is that the claim reflects almost nothing about how Lee Kuan Yew actually ran the country or who he was.
[EDIT: piotrgravey, below, reasonably points out that my terminology here relies on somewhat US-centric definitions. When I refer to the left, I'm thinking of those promoting policies that angle heavily towards equality, government welfare, redistribution, and social justice. Liberals blur together with the US left a bit, but I use it in addition to focus on people who prioritize things like an unrestricted press and permissive social policies (drug use, LGBT, etc.). The reactionaries I refer to are people who prioritize tradition and social conservatism and are prone to focus on (and aim to undo) perceived damage from modern liberalism.]
I get the impression it's a mistake to frame Singapore alongside a partisan political axis at all, because the second you do, half of what the country does will seem bizarre. Lee, personally, is open about his party's aim to claim the middle ground, opposed by "only the extreme left and right." (111) With that in mind, what works best to predict Lee's choices? In his telling, he is guided continually by a sort of ruthless pragmatism. Will a policy increase the standard of living in the country? Will it make the citizens more self-sufficient, more capable, or safer? Ultimately, does it work? Oh, and does it make everybody furious?
Great, do that.
From Third World to First is the single most compelling political work I've read, and I'd like to capture as much of Lee's style and ideology as possible. He divides the book (or at least the half I'm reviewing; I'll leave his thoughts on world affairs alone because there's so much to cover as is) into sections based on specific policy problems and how he approached them. I'll focus my attention on a few:
At the end, I will link to my notes in full, and those who are interested are welcome to ask for more details. Note especially that LKY spends huge chunks of the book praising the politicians working alongside him and emphasizing their role. Ultimately, though, the decisions for the country flowed through him and so I am comfortable approaching all these as his policies.
LKY's writing is thoroughly readable and often hilarious, so I will quote it extensively throughout.

Citizen welfare & development

I.
To even out the extreme results of free-market competition, we had to redistribute the national income through subsidies on things that improved the earning power of citizens, such as education. Housing and public health were also obviously desirable. But finding the correct solutions... was not easy. We decided each matter in a pragmatic way, always mindful of possible abuse and waste. If we over-re-distributed by higher taxation, the high performers would cease to strive. (95)
There are two major questions LKY had to answer when it came to developing Singapore. First, how could the country develop a strong economy? Having achieved that, how could they ensure the welfare of all citizens? Or, as he put it, he wanted to leapfrog the region and then create a "First World oasis" (58).
LKY's strategy for the first was simple: provide goods and services "cheaper and better than anyone else, or perish." (56) He was proudly adamant about his country's refusal to beg, describing on every other page how he would go to his citizens and say things like "The world does not owe us a living." (53) or "If we were a soft society then we would already have perished. A soft people will vote for those who promised a soft way out, when in truth there is none. There is nothing Singapore gets for free." (53)
This is one of many areas where he was adamant about rejecting conventional wisdom. In his telling, development economists and other third world leaders of the 60s described multinational corporations as "[neocolonialist] exploiters of cheap land, labor, and raw materials... but... we had a real-life problem to solve and could not afford to be conscribed by any theory or dogma." (58)
So, instead, he threw his country's arms open and said, "Exploit us!" Image was everything. To attract tourism, they invented the merlion symbol and scattered it through the country. Places were renamed. My favorite--"Blakang Mati" (behind death), an island formerly used by a British battalion, was reinvented as "Sentosa" (tranquillity), a tourist resort. (54) To inspire confidence and demonstrate his country's discipline and reliability, LKY focused on planting trees and developing parkland in the center of the city and between the airport, his office, and hotels. For one Hewlett-Packard visit, when an elevator wasn't yet powered to take them to the sixth floor of their planned headquarters, Singaporean officials extended a cable from a nearby building to power it day-of. (62)
In the 70s, as the country's economy stabilized, that confidence manifested in other ways, as with this interaction:
When our... officer asked how much longer we had to maintain protective tariffs for the car assembly plant owned by a local company, the finance director of Mercedes-Benz said brusquely, "Forever," because our workers were not as efficient as Germans. We did not hesitate to remove the tariffs and allow the plant to close down. Soon afterward we also phased out [other protections]. (63)
The whole thing, at least from a distance, follows a pattern of initial tight control, caution, and centralized planning, followed by a slow move towards a freer economy as long as everything seemed to be working. Worried about government starting industries and running them at a loss, LKY insisted that state-run corporations stay in the black or shut down. As they succeeded, they privatized--telecommunications, the port, and public utilities all started within the government and became independent profitable companies over time. (67)
II.
From a Labour Party meeting in June 1966: "Lee Kuan Yew [is] as good a left-wing and democratic socialist as any in this room." (34)
I could go on for a while longer outlining Singapore's growth, and part of me wants to, because the story is fascinating. It's hardly unique, though, just the story of a well-managed economy. Everyone already knows about the growth of Singapore's economy. The work it took is worth noting, but much more compelling for me is what they did with all that new wealth. The United States had a hundred years or more to manage a jump Singapore went through in a couple decades. Growth brings all sorts of questions: How do you shift people to a new way of life? How do you get people invested in their country's success? How do you handle welfare, health care, transport? This is where Singapore excels.
Not without controversy, though, aided and abetted by Lee Kuan Yew himself. As much as I tend to appreciate his approach, his bluntness sometimes gives me pause. Here's a sampling of his thoughts on welfare:
We noted by the 1970s that when governments undertook primary responsibility for the basic duties of the head of a family, the drive in people weakened. Welfare undermined self-reliance. People did not have to work for their families' well-being. The handout became a way of life. The downward spiral was relentless as motivation and productivity went down. People lost the drive to achieve because they paid too much in taxes. They became dependent on the state for their basic needs. (104)
And:
There will always be the irresponsible or the incapable, some 5 percent of our population. They will run through any asset, whether a house or shares. We try hard to make them as independent as possible and not end up in welfare homes. More important, we try to rescue their children from repeating the feckless ways of their parents. We have arranged help but in such a way that only those who have no other choice will seek it. This is the opposite of attitudes in the West, where liberals actively encourage people to demand their entitlements with no sense of shame, causing an explosion of welfare costs. (106)
So--welfare bad. Got it. What's his alternative?
Funding Prosperity
The foundation for his strategy was laid before Singapore left colonial rule: an compulsory 5% pension fund (the CPF) with employers matching 5%. This fund became a major tool to support LKY's value of self-sufficiency. As he says, he "was determined to avoid placing the burden of the present generation's welfare costs onto the next generation" (97). So how did he fund welfare plans?
As Singapore's economy grew year by year, workers' wages went up. As wages rose, knowing that people would "resist any increase in their CPF contribution that would reduce their spendable money", he increased mandatory CPF contribution rates with part, but never all, of that increase. At its peak in 1984, mandatory contribution increased to 25% with full matching. Every working citizen was automatically saving at a 50% rate. This decreased to 40% over time. (97)
Every aspect of citizen welfare becomes easier when every worker has that large a guaranteed savings account.
Following the pattern of initial strictness, followed by expanding rights, the government expanded CPF investment options over time. One illustrative example: when they privatized bus services, they allowed citizens to spend up to S$5,000 to buy initial shares in the new transport company so "profits would go back to the workers, the regular users of public transport" ...and, as LKY adds in the same tone a moment later, to reduce incentive to demand cheap fares and government subsidies. (103)
This strategy repeated when they privatized Singapore Telecom, as they sold shares at half price to all adult citizens, with bonus shares every few years provided people held onto initial shares. Again, LKY describes this desire to redistribute surpluses and provide people a tangible stake in their country's success. He reports that 90% of the workforce owned Singapore Telecom shares. (103)
Neither the CPF fund nor HDB housing, incidentally, can be taken by creditors.
Sense of Ownership
Aside from pensions, LKY's initial major vision for the fund was a way to allow citizens to buy their own houses. He talks a lot about the value of people having a stake in their country, how a "sense of ownership [is] vital for [a] society [with] no deep roots in a common historical experience," (96) the ways home ownership increases civic pride and a sense of belonging. So the government constantly bought land up, built high-rise public "HDB" housing (up to 50 stories!), and then sold apartments to citizens. At its peak, 87% of Singaporeans lived in this public housing.
Some design decisions of HDB housing are worth examining. In some, LKY asked developers "to set aside land... for clean industries which could then tap the large pool of young women and housewives whose children were already schooling" (98). When older housing started decaying, the government created a program to upgrade and refurbish older apartments at the cost of S$58,000 per home, charging owners S$4,500 of that cost (100).
It's easy to get lost in policy details: decisions, reasoning, numbers. What about the humanity behind those policies, though? What was life like on the ground for the farmers and market vendors who abruptly found themselves moving from wooden huts to modern high-rises in the middle of a rapidly developing city? There was exciting progress, yes, but much of the time it was tragic, hilarious, and absurd.
LKY highlights some of these moments. Pig farmers, nudging their pigs up staircases to raise them in high-rise apartments. A family, gating off their kitchen for a dozen chickens and ducks. People walking up long flights of stairs because they were afraid of using elevators, using kerosene instead of electric bulbs, selling miscellaneous goods from ground-floor flats. (99) He grows somber as he talks about resettling older farmers, how even generous compensation money didn't matter next to losing "their pigs, ducks, chickens, fruit trees, and vegetable plots," and how many of the older farmers never really stopped resenting the change. (180)
He's quick to point out other changes, though: In riots in the 1950s and early 60s, he recalls, people joined in, breaking cars, lighting fires, reveling in chaos. Later in the decade, after home ownership started to spread, he mentions seeing people carrying scooters to safety into their HDB apartments. In his words, "I was strengthened in my resolve to give every family solid assets which I was confident they would protect and defend, especially their home."
"I was not wrong." (103)
I laughed when I got to that line, because I'm pretty sure this picture holds pride of place in LKY's mind. He presents this blithe sense of self-assurance throughout the book, with every controversial policy and scornful dismissal.
Health care
Speaking of blithe self-assurance and scornful dismissal, he dismisses the British National Health Service as idealistic but impractical and destined to cause ballooning costs, then takes a shot at the American system with its "wasteful and extravagant diagnostic tests paid for out of insurance." He reports that at least in Singapore, the ideal of free health care clashes with human behavior. Doctors prescribe free antibiotics, patients take them for a few days, don't feel better, and toss them out. Then they go to private doctors, pay, and take the medicine properly. (100)
The first solution was a token 50-cent fee to attend outpatient dispensaries. The full solution, and part of the reason Singapore's per capita health care costs are half the UK's and less than a quarter of the US's, once again went through the CPF pensions: 1% set aside into "Medisave" for health care costs at first, gradually increasing to 6%, capped at S$15,000. "To reinforce family solidarity and responsibility", LKY reports, accounts could be used for immediate family members as well. (101)
That's not to say he wanted no subsidies. At government hospitals, patients chose wards subsidized up to 80%, moving to more comfortable and less subsidized wards as they desire. Medisave funds could be used for private hospital fees in order to compete with government hospitals and pressure them to improve, but not for outpatient clinics or private general practitioners. Why? LKY didn't want to encourage people to see doctors unnecessarily for minor ailments. (102) This constant tinkering and fine-tuning around incentive systems is core to LKY's planning.
From there, Singapore added optional insurance for catastrophic cases, then added a fund from government revenue to provide total waivers for those who lacked Medisave, insurance, and immediate family. Per LKY's reporting, "no one is deprived of essential medical care, we do not have a massive drain on resources, nor long queues waiting for operations." (102)
Pragmatism.
Taxes
So how does this welfare structure reflect in taxes?
Every few pages in The Singapore Story, Lee Kuan Yew makes some grandiose statement about Singapore's successes, and so every few pages I would rush online to see what was exaggerated or cherry-picked and what has faded in the years since LKY's time. The tax structure was the point where this yielded the most fruit--not because of any cherry-picking, but because almost everything has gotten better in the 19 years since LKY wrote his book.
Here are some details on Singapore's tax structure, both as LKY reported and at present, in pursuit of an overall goal to shift from taxing income to taxing consumption:
In addition, they collect nontax revenue from a range of charges, aiming for "partial or total cost recovery for goods and services provided by the state" to "check over-consumption of subsidized public services and reduce distortions in the allocation of resources." (107)
How has this reflected on overall government expenditures?
At the time of LKY's book in 2000, annual budget surpluses had been recorded every year but the 1985-1987 recession. Since then, 2002-2004, 2009, 2015 also recorded deficits, but the government is still running at a comfortable surplus overall.
Here's what the budget looked like in 2016.
Ultimately, as LKY points out, his strategy relied heavily on a unique set of circumstances leading to steady growth, but they capitalized on that growth, made long-term decisions early, and set themselves up well for the foreseeable future as a result. I don't share a ton of his skepticism towards Nordic-style welfare states, particularly since they remain comfortable and successful twenty years later, but I'll admit to more than a twinge of envy when I compare Singapore's approach to welfare with that of the US.

Interlude

Having made the claim that Singapore really isn't reactionary, I'm left to defend it after a string of quotes and choices that, if not reactionary, at least seem tailor-made to pick fights with leftist thought. This is one reason I quoted the British Labour Party members at the start of section II. Lee Kuan Yew started the PAP as a socialist party, driven by trade unions, opposed to British colonialism, aligned with British progressives. Again and again throughout the book, you see LKY pause to note potential unintended consequences of a choice, to approach major decisions with caution, and to change his approach when presented with sufficient evidence, but threads of progressive ideals are persistent throughout and essential to his decision-making.
Those threads should become more apparent as I progress through more of the review, fitting naturally with Lee's overall bluntly pragmatic approach.
Part two: You are free to agree
Part three: Race, language, and uncomfortable questions
Part four: The pathway to power
submitted by TracingWoodgrains to singapore [link] [comments]

Yale economists argue that "the most financially responsible" long-term investment is a leveraged index. Article in description. What do you think?

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1149340
ABSTRACT: By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies?both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.
__
EDIT: Assuming you want to take this 20-year bet in an IRA investment (which means you cannot trade on margin), do you think SSO would be the best low-cost, 2x S&P500 index investment? Is there a lower cost, more reliable ETF? Does Vanguard (what I view as the gold standard of low cost indexes) have anything?
submitted by 123wanderlust to investing [link] [comments]

[Small boy story time] $500 to $32,000 in 2 months.

Dear fellow degenerates,
This is just another tale of small boy with $500 swept in this crazy market.
You guys ever get on a streak so big you make up everything you ever lost in your life? But casino knows the gambler. will never walk out with the money.
Until this year I had lost over ten thousand in the market.
Scottrade sucked me in when I got my first paycheck, and I bet away maybe 1~3k a year. I always knew I was gambling, and never allowed myself to touch margin or rent money.
So I came back for my fix in Dec with $500.
Then in December that cute $500 turned into 1000. I can't even remember what I bought, but no biggie. I've been here many times before. Then I won big on amzn.
Reverse Guh
Then Tesla happened. I suddenly had 15k in Robinhood and I was like jesus it's happening. I'm here again. In 6 years, I've been to 10k from 3 digits 5 separate times, and never managed to keep them. I always got overconfident and all-in something that'd go bust.
I immediately transferred winnings into IRA, hoping to slow myself down and mitigate taxes after seeing WSBGod's IRA (maximized 2019 and 2020)
I was there when Tesla broke its ankle.
Then Corona happened.
It's been an insane year. Part of me feel like I should've been more aggressive, but I kept to my rule of sizing.
I am now up total 32k (8k in robinhood, 6k in another IRA untouched) since December 2019. 6400%.
Only 18k is taxable.
All time chart
Right now I am holding 4k worth of short leaps into weekend.
Part of me is like wow am I gonna make it to freedom?
Part of me is like this money isn't real.
I feel so high right now it's unreal. Even if I lose everything tomorrow, I think this experience was worth it.
Thanks for reading. I told my dad and he was like can I have 3k? I was like uh I'm not spending any til I hit 2 milly. He told then me to stfu about your gains until then lol.
My autistic trade logs. Look at those accidental sell to opens that TDA blocked for me lmao
submitted by Always_Excited to wallstreetbets [link] [comments]

Options Trading in an IRA

What brokerages would you recommend that have good options trading features in an IRA (traditional or Roth)? I'm with TD Ameritrade on ToS in a taxable account. Does TD allow trading options using margin in an IRA (up to and including writing naked options with the same margin allowances in taxable accounts )?
Looking to do this with a small fraction of my Roth portfolio, not 100% of my retirement savings, with the appropriate risk mitigating strategies using methods that have been successful in a taxable account.
[Insert disclaimer about how trading options is risky, and you can lose more than your initial investment, etc. etc.]
submitted by dreadnought89 to options [link] [comments]

Lessons and Mistakes Learned in My 15-Month Adventure So Far

Like Buffett says: "You don't know who's swimming naked until the tide goes out." Meaning: In a rising market-- everyone looks like a genius and posts monster returns. It's only during a crash do we see what separates the professionals from the amateurs.
And full disclosure-- for the past three weeks since Feb 21, I have been positively reamed from every which way in my positions (long AMD & MU). I'd started day-trading Jan 2019 (after being inspired by the show, Billions) and had been doing pretty until Feb 21 but the past three weeks have been totally humbling and has revealed to me that I am a total amateur. If I get out of this alive, I'll know now it was completely luck and that I'm totally not a genius.
All that said, I thought I'd take this opportunity to share some hard-learned lessons I've learned these past 15 months. This stuff more applies to active traders (as opposed to investors, which is why I'm not posting this in /investing).
Humble Advice from a Beginner re Active Trading
Things I did Wrong
Things I did Right
My Personal Future Outlook (aka, Guess)
Good luck and Godspeed out there.
submitted by eowobble to stocks [link] [comments]

Upside: I found a way to trade tax free. Downside: Someone you love must die.

When my mother passed away a few years ago, I got her 401k and put it into something called a Beneficiary Deposit Account, AKA a inherited IRA. At first I just put the money into boring mutual funds, but lately I have been (slowly) investing into the options market as well as owning individual equities. I have just realized though, that I will not be paying capital gains on these transactions. Ok, yes, I will have to pay taxes on the money as I withdraw it from the IRA, but I have to take only a specific amount of money out per year, called a required minimum withdrawal, which is calculated by my aged divided by the blah blah blah....
The long and the short of it is, i can take all sorts of short positions and not have to pay any taxes on it until i actually withdraw money from the IRA.
Money withdrawn is taxed at my normal tax rate, so I am not capturing any long term capital gains or dividend tax rates (15% currently I think). However, all short term cap gains are taxed at my marginal tax rate anyways so thats not a huge deal, and the advantage is that the gains are shielded from taxes this year, allowing me to compound them more efficiently.
So how can this work for you?
I am not versed in tax law enough to know if losses in a BDA can be used to offset cap gains elsewhere, so don't lose money, m'kay?
This is not investing advise, don't take financial advice from random internet assholes. Check with your accountant before doing anything like this. If you do this and lose cash don't come crying to me. The entire point of this post was for humor and to get capital gain of useless internet popularity points.
submitted by arkham1010 to wallstreetbets [link] [comments]

Buying power for SPX spreads in cash account

Let's say I'm trading in a cash account (Roth IRA), not margin.
I want to open a long put debit spread.
As an example :
Buy May 15 2450 Put at $123.20
Sell May 15 2150 Put at $56.60
Net debit is $66.20
When I preview the trade, E-Trade tells me that I don't have enough buying power for this, even though my buying power right now is $94,000.
From what I understand with this spread, the worst case is that the SPX is above both strikes at expiration. Thus, the most I can lose is the net debit of $66.20 . Given that one contract is 100 options, a buying power of $6620 should be sufficient, and I am well above that.
Since SPX options are European and settled in cash, there is no possibility that the short put option may be assigned early. And as long I hold on to the long put, my short put is always covered.
So why can't the broker accept this order ? It seems to be insisting that my short put be covered only by cash, which would indeed cost $2150 x 100 or $215,000, which I indeed don't currently have in cash buying power. Ie. E-trade is ignoring the fact that there is a long put in the order.
I can think of one reason why they do this : if I subsequently sell the long put, but hold on to the short put, then I would require the cash to be held. Why couldn't E-trade just prevent me from selling the long put alone in this case, if it's actually needed to cover the short put ? Ie. the brokerage should only allow closing the short position, or both positions, but not closing just the long position.
Is there any other brokerage that will deal with this in a more flexible way in a cash account ? I'm not willing to use a taxable account due to being in a high tax bracket, and tax complications. And I don't have the appetite for using margin. The only way I want to use leverage is with options that are always covered.
Edit : and to further expand, using SPY spread instead of SPX doesn't solve the problem. I can buy about 3 to 4 contracts due to per lower share price. However, that will still consume all my $94k buying power. So, I won't actually be able to leverage at all. And SPY adds the risk of early assignment for the short put, and I don't want to have that.
submitted by madbrain76 to options [link] [comments]

Ally Invest Frustrations: Index Spreads and Margin Call Issues

I trade mostly in options in an IRA, and I've been doing it for about 10 years. I started with Tradeking, and they were bought by Ally. Lately my frustration with Ally has reached a breaking point, and I would like to get suggestions from the community for an alternative.
Years ago I used to be able to trade a spread on the SPX index. But they took away that ability, about 2 years ago I think. So I switched to SPY options. I already used SPY for more granular purchases, so I didn't think it would be a big deal.
The problem is that sometimes I get busy, or distracted, or whatever, and fail to close out a position before getting assigned. Then it causes problems that are unreasonably frustrating to get fixed.
Getting assigned means I now have a huge short position, say -3500 SPY shares, and I have a huge amount of cash, say 1.2 mil. Now, to be clear, I don't have that kind of money normally, it's just when the options get assigned. So, normally I would grumble and curse myself for not catching it in time. Then I would pay a small "stupid tax" of whatever the spread was for SPY to close the position and go about my business.
But Ally Invest won't let me do that. My account is immediately frozen for trading. So even though I have the cash right there, I can't close the position. Then I'm in trouble with the margin desk, and they take away my ability to resolve the issue. How does that make any sense? So I have to call them, and they have to place the order on the phone to close the short position. And they can't, because they need special permission for large orders. Finally, after a substantial amount of time (during which the market has moved, possibly wreaking havoc), they break the order up into smaller parts and sell it for me, and then unlock my account for trading. Then when you throw in dividends that may occur in this time period that I will have to pay, and it's just a frustrating mess.
So I am hoping I can switch to a broker that will either allow me to trade SPX index spreads, and/or not lock me out whenever options get assigned.
Does anyone have any ideas?
submitted by Baccayarro to investing [link] [comments]

Book Review: From Third World to First, by Lee Kuan Yew [PART ONE]

Intro

We believed in socialism, in fair shares for all. Later, we learned that personal motivation and personal rewards were essential for a productive economy. However, because people are unequal in their abilities, if performance and rewards are determined by the marketplace, there will be a few big winners, many medium winners, and a considerable number of losers. That would make for social tensions because a society's sense of fairness is offended. ...Our difficulty was to strike the right balance. (95) (Page numbers listed throughout for reference)
What happens when you give an honest, capable person absolute power?
In From Third World to First, Lee Kuan Yew, in characteristically blunt style, does his best to answer that question.
Lee Kuan Yew's politics--and by extension Singapore's, because he really did define the country--are often, I feel, mischaracterized. In We Sail Tonight For Singapore, for example, Scott Alexander characterizes it as reactionary. This is agreeable to the American left, because it's run so differently to Western liberal ideals, and agreeable to reactionaries, because Singapore is preternaturally successful by almost any metric you care to use.
The only problem is that the claim reflects almost nothing about how Lee Kuan Yew actually ran the country or who he was.
I get the impression it's a mistake to frame Singapore alongside a partisan political axis at all, because the second you do, half of what the country does will seem bizarre. Lee, personally, is open about his party's aim to claim the middle ground, opposed by "only the extreme left and right." (111) With that in mind, what works best to predict Lee's choices? In his telling, he is guided continually by a sort of ruthless pragmatism. Will a policy increase the standard of living in the country? Will it make the citizens more self-sufficient, more capable, or safer? Ultimately, does it work? Oh, and does it make everybody furious?
Great, do that.
From Third World to First is the single most compelling political work I've read, and I'd like to capture as much of Lee's style and ideology as possible. He divides the book (or at least the half I'm reviewing; I'll leave his thoughts on world affairs alone because there's so much to cover as is) into sections based on specific policy problems and how he approached them. I'll focus my attention on a few:
The first section, in my estimation, deserves more space than a joint review would permit, so I will split it off and post it before the others.
At the end, I will link to my notes in full, and those who are interested are welcome to ask for more details. Depending on interest level, I may write a follow-up review of topics I don't have space to cover here. Note especially that LKY spends huge chunks of the book praising the politicians working alongside him and emphasizing their role. Ultimately, though, the decisions for the country flowed through him and so I am comfortable approaching all these as his policies.
LKY's writing is thoroughly readable and often hilarious, so I will quote it extensively throughout.

Citizen welfare & development

I.
To even out the extreme results of free-market competition, we had to redistribute the national income through subsidies on things that improved the earning power of citizens, such as education. Housing and public health were also obviously desirable. But finding the correct solutions... was not easy. We decided each matter in a pragmatic way, always mindful of possible abuse and waste. If we over-re-distributed by higher taxation, the high performers would cease to strive. (95)
There are two major questions LKY had to answer when it came to developing Singapore. First, how could the country develop a strong economy? Having achieved that, how could they ensure the welfare of all citizens? Or, as he put it, he wanted to leapfrog the region and then create a "First World oasis" (58).
LKY's strategy for the first was simple: provide goods and services "cheaper and better than anyone else, or perish." (56) He was proudly adamant about his country's refusal to beg, describing on every other page how he would go to his citizens and say things like "The world does not owe us a living." (53) or "If we were a soft society then we would already have perished. A soft people will vote for those who promised a soft way out, when in truth there is none. There is nothing Singapore gets for free." (53)
This is one of many areas where he was adamant about rejecting conventional wisdom. In his telling, development economists and other third world leaders of the 60s described multinational corporations as "[neocolonialist] exploiters of cheap land, labor, and raw materials... but... we had a real-life problem to solve and could not afford to be conscribed by any theory or dogma." (58)
So, instead, he threw his country's arms open and said, "Exploit us!" Image was everything. To attract tourism, they invented the merlion symbol and scattered it through the country. Places were renamed. My favorite--"Blakang Mati" (behind death), an island formerly used by a British battalion, was reinvented as "Sentosa" (tranquillity), a tourist resort. (54) To inspire confidence and demonstrate his country's discipline and reliability, LKY focused on planting trees and developing parkland in the center of the city and between the airport, his office, and hotels. For one Hewlett-Packard visit, when an elevator wasn't yet powered to take them to the sixth floor of their planned headquarters, Singaporean officials extended a cable from a nearby building to power it day-of. (62)
In the 70s, as the country's economy stabilized, that confidence manifested in other ways, as with this interaction:
When our... officer asked how much longer we had to maintain protective tariffs for the car assembly plant owned by a local company, the finance director of Mercedes-Benz said brusquely, "Forever," because our workers were not as efficient as Germans. We did not hesitate to remove the tariffs and allow the plant to close down. Soon afterward we also phased out [other protections]. (63)
The whole thing, at least from a distance, follows a pattern of initial tight control, caution, and centralized planning, followed by a slow move towards a freer economy as long as everything seemed to be working. Worried about government starting industries and running them at a loss, LKY insisted that state-run corporations stay in the black or shut down. As they succeeded, they privatized--telecommunications, the port, and public utilities all started within the government and became independent profitable companies over time. (67)
II.
From a Labour Party meeting in June 1966: "Lee Kuan Yew [is] as good a left-wing and democratic socialist as any in this room." (34)
I could go on for a while longer outlining Singapore's growth, and part of me wants to, because the story is fascinating. It's hardly unique, though, just the story of a well-managed economy. Everyone already knows about the growth of Singapore's economy. The work it took is worth noting, but much more compelling for me is what they did with all that new wealth. The United States had a hundred years or more to manage a jump Singapore went through in a couple decades. Growth brings all sorts of questions: How do you shift people to a new way of life? How do you get people invested in their country's success? How do you handle welfare, health care, transport? This is where Singapore excels.
Not without controversy, though, aided and abetted by Lee Kuan Yew himself. As much as I tend to appreciate his approach, his bluntness sometimes gives me pause. Here's a sampling of his thoughts on welfare:
We noted by the 1970s that when governments undertook primary responsibility for the basic duties of the head of a family, the drive in people weakened. Welfare undermined self-reliance. People did not have to work for their families' well-being. The handout became a way of life. The downward spiral was relentless as motivation and productivity went down. People lost the drive to achieve because they paid too much in taxes. They became dependent on the state for their basic needs. (104)
And:
There will always be the irresponsible or the incapable, some 5 percent of our population. They will run through any asset, whether a house or shares. We try hard to make them as independent as possible and not end up in welfare homes. More important, we try to rescue their children from repeating the feckless ways of their parents. We have arranged help but in such a way that only those who have no other choice will seek it. This is the opposite of attitudes in the West, where liberals actively encourage people to demand their entitlements with no sense of shame, causing an explosion of welfare costs. (106)
So--welfare bad. Got it. What's his alternative?
Funding Prosperity
The foundation for his strategy was laid before Singapore left colonial rule: an compulsory 5% pension fund (the CPF) with employers matching 5%. This fund became a major tool to support LKY's value of self-sufficiency. As he says, he "was determined to avoid placing the burden of the present generation's welfare costs onto the next generation" (97). So how did he fund welfare plans?
As Singapore's economy grew year by year, workers' wages went up. As wages rose, knowing that people would "resist any increase in their CPF contribution that would reduce their spendable money", he increased mandatory CPF contribution rates with part, but never all, of that increase. At its peak in 1984, mandatory contribution increased to 25% with full matching. Every working citizen was automatically saving at a 50% rate. This decreased to 40% over time. (97)
Every aspect of citizen welfare becomes easier when every worker has that large a guaranteed savings account.
Following the pattern of initial strictness, followed by expanding rights, the government expanded CPF investment options over time. One illustrative example: when they privatized bus services, they allowed citizens to spend up to S$5,000 to buy initial shares in the new transport company so "profits would go back to the workers, the regular users of public transport" ...and, as LKY adds in the same tone a moment later, to reduce incentive to demand cheap fares and government subsidies. (103)
This strategy repeated when they privatized Singapore Telecom, as they sold shares at half price to all adult citizens, with bonus shares every few years provided people held onto initial shares. Again, LKY describes this desire to redistribute surpluses and provide people a tangible stake in their country's success. He reports that 90% of the workforce owned Singapore Telecom shares. (103)
Neither the CPF fund nor HDB housing, incidentally, can be taken by creditors.
Sense of Ownership
Aside from pensions, LKY's initial major vision for the fund was a way to allow citizens to buy their own houses. He talks a lot about the value of people having a stake in their country, how a "sense of ownership [is] vital for [a] society [with] no deep roots in a common historical experience," (96) the ways home ownership increases civic pride and a sense of belonging. So the government constantly bought land up, built high-rise public "HDB" housing (up to 50 stories!), and then sold apartments to citizens. At its peak, 87% of Singaporeans lived in this public housing.
Some design decisions of HDB housing are worth examining. In some, LKY asked developers "to set aside land... for clean industries which could then tap the large pool of young women and housewives whose children were already schooling" (98). When older housing started decaying, the government created a program to upgrade and refurbish older apartments at the cost of S$58,000 per home, charging owners S$4,500 of that cost (100).
It's easy to get lost in policy details: decisions, reasoning, numbers. What about the humanity behind those policies, though? What was life like on the ground for the farmers and market vendors who abruptly found themselves moving from wooden huts to modern high-rises in the middle of a rapidly developing city? There was exciting progress, yes, but much of the time it was tragic, hilarious, and absurd.
LKY highlights some of these moments. Pig farmers, nudging their pigs up staircases to raise them in high-rise apartments. A family, gating off their kitchen for a dozen chickens and ducks. People walking up long flights of stairs because they were afraid of using elevators, using kerosene instead of electric bulbs, selling miscellaneous goods from ground-floor flats. (99) He grows somber as he talks about resettling older farmers, how even generous compensation money didn't matter next to losing "their pigs, ducks, chickens, fruit trees, and vegetable plots," and how many of the older farmers never really stopped resenting the change. (180)
He's quick to point out other changes, though: In riots in the 1950s and early 60s, he recalls, people joined in, breaking cars, lighting fires, reveling in chaos. Later in the decade, after home ownership started to spread, he mentions seeing people carrying scooters to safety into their HDB apartments. In his words, "I was strengthened in my resolve to give every family solid assets which I was confident they would protect and defend, especially their home."
"I was not wrong." (103)
I laughed when I got to that line, because I'm pretty sure this picture holds pride of place in LKY's mind. He presents this blithe sense of self-assurance throughout the book, with every controversial policy and scornful dismissal.
Health care
Speaking of blithe self-assurance and scornful dismissal, he dismisses the British National Health Service as idealistic but impractical and destined to cause ballooning costs, then takes a shot at the American system with its "wasteful and extravagant diagnostic tests paid for out of insurance." He reports that at least in Singapore, the ideal of free health care clashes with human behavior. Doctors prescribe free antibiotics, patients take them for a few days, don't feel better, and toss them out. Then they go to private doctors, pay, and take the medicine properly. (100)
The first solution was a token 50-cent fee to attend outpatient dispensaries. The full solution, and part of the reason Singapore's per capita health care costs are half the UK's and less than a quarter of the US's, once again went through the CPF pensions: 1% set aside into "Medisave" for health care costs at first, gradually increasing to 6%, capped at S$15,000. "To reinforce family solidarity and responsibility", LKY reports, accounts could be used for immediate family members as well. (101)
That's not to say he wanted no subsidies. At government hospitals, patients chose wards subsidized up to 80%, moving to more comfortable and less subsidized wards as they desire. Medisave funds could be used for private hospital fees in order to compete with government hospitals and pressure them to improve, but not for outpatient clinics or private general practitioners. Why? LKY didn't want to encourage people to see doctors unnecessarily for minor ailments. (102) This constant tinkering and fine-tuning around incentive systems is core to LKY's planning.
From there, Singapore added optional insurance for catastrophic cases, then added a fund from government revenue to provide total waivers for those who lacked Medisave, insurance, and immediate family. Per LKY's reporting, "no one is deprived of essential medical care, we do not have a massive drain on resources, nor long queues waiting for operations." (102)
Pragmatism.
Taxes
So how does this welfare structure reflect in taxes?
Every few pages in The Singapore Story, Lee Kuan Yew makes some grandiose statement about Singapore's successes, and so every few pages I would rush online to see what was exaggerated or cherry-picked and what has faded in the years since LKY's time. The tax structure was the point where this yielded the most fruit--not because of any cherry-picking, but because almost everything has gotten better in the 19 years since LKY wrote his book.
Here are some details on Singapore's tax structure, both as LKY reported and at present, in pursuit of an overall goal to shift from taxing income to taxing consumption:
In addition, they collect nontax revenue from a range of charges, aiming for "partial or total cost recovery for goods and services provided by the state" to "check over-consumption of subsidized public services and reduce distortions in the allocation of resources." (107)
How has this reflected on overall government expenditures?
At the time of LKY's book in 2000, annual budget surpluses had been recorded every year but the 1985-1987 recession. Since then, 2002-2004, 2009, 2015 also recorded deficits, but the government is still running at a comfortable surplus overall.
Here's what the budget looked like in 2016.
Ultimately, as LKY points out, his strategy relied heavily on a unique set of circumstances leading to steady growth, but they capitalized on that growth, made long-term decisions early, and set themselves up well for the foreseeable future as a result. I don't share a ton of his skepticism towards Nordic-style welfare states, particularly since they remain comfortable and successful twenty years later, but I'll admit to more than a twinge of envy when I compare Singapore's approach to welfare with that of the US.

Interlude

Having made the claim that Singapore really isn't reactionary, I'm left to defend it after a string of quotes and choices that, if not reactionary, at least seem tailor-made to pick fights with leftist thought. This is one reason I quoted the British Labour Party members at the start of section II. Lee Kuan Yew started the PAP as a socialist party, driven by trade unions, opposed to British colonialism, aligned with British progressives). Again and again throughout the book, you see LKY pause to note potential unintended consequences of a choice, to approach major decisions with caution, and to change his approach when presented with sufficient evidence, but threads of progressive ideals are persistent throughout and essential to his decision-making.
Those threads should become more apparent as I progress through more of the review, fitting naturally with Lee's overall bluntly pragmatic approach. No other section will likely be as long as this one, but I felt it would be doing Singapore's welfare structure a disservice if I didn't go in depth. Singapore is unlike any other country in the world, and while nothing done there can copy 1:1 over to different settings, there's a lot worth noticing.
Until next time.
Part two: You are free to agree
Part three: Race, language, and uncomfortable questions
Part four: The pathway to power
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Who executes options ahead of time, really?

This has been a constant thorn in my side. I like to sell options, both puts and calls to keep my positions balanced. Selling puts is great, simple and easy. But the calls have this weird tendency to get executed way in advance.
Every book I've read said that this virtually never happens. Except those books are clearly wrong based on my experience. Even months ahead of time, call options get executed. It also seems to almost always happen on a friday, which means my brokerage makes a margin call while I'm at work (I often use my IRA which isn't allowed to have certain positions which occur after execution, or in many cases because these are shit companies there are no shares to borrow). Then I get home to find my position has disappeared and my investment has done little but incur trading fees.
Usually this happens with call options deep in the money. I like selling these for stocks I'm pessimistic on because they're like buying a put option without the premium. They do carry a small premium though, so it makes no sense for someone to execute them months ahead of time, when they could just re-sell the option for a higher price.
So what's going on? Is the stock market just trying to give me a hard time? Could it be that executing put options is a way to manipulate the market (i.e. keep the price artificially high)?
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The Finance Primer

Introduction:
Part of making your mission yourself is ensuring you have your personal finances in order. Even if you don't build a monumental empire or sell a software company for millions, while money doesn't buy happiness it does pay for your healthcare and peace of mind, especially once you have "Freedom Money". And to paraphrase a line from Bruce Lee, money helps you live a life worth remembering, which is the key to immortality. People like Gary Vee, Hugh Hefner, and Gainluca Vacchi will never be forgotten, especially by those they influenced, and for good reason.
Similarly, if you want to have an amazing lifestyle well into old age, then frankly you are going to need to be wealthy as we all get older someday and the ability to trade time for money winds down. This is just the way the world works.
Building your empire and developing multiple streams of passive income through entrepreneurship, investing, and sound personal finance decisions is the name of the game.
   
Step 1: The Reading List
IMO the "must reads" are:
The latter 2 above educated me on what's known as "value investing". More on that later...
   
Step 2: The Budget
Why is this important? Well, you need to know where your money is going to minimize waste to enhance your savings. This will ultimately keep you out of trouble and help you stay focused on what's important.
   
Step 3: Building Wealth
This is when you take that budget you've created and start putting that excess cash to work for you. 74% of building wealth with investments is simply starting to invest. If you're more than 10 years out from retirement, then time in market > timing the market. Fees, returns, all of that is secondary to actually starting the process of investing. And it's never been easier! The best time to invest was yesterday. The second best time to invest is today! As Einstein famously once said, compounding interest is the 8th wonder of the world. Those who don't understand interst pay it, and those who do, earn it.
M1 Finance, Robinhood, and almost all of the other big boy brokerages now offer free trades and fractional shares. You're a fool not to take advantage of the opportunities this creates.
To wit, the typical millionaire has on average 7 passive income streams. This could be dividends form investments, a course you put together and sell on Udemy, a YouTube channel, or real-estate a la Robert Kiyosaki or Graham Stephan. You name it, the sky is the limit.
I mentioned value investing above. What you need to know about that is that it's how Warren Buffett became a billionaire. The core principles of value investing are finding wonderful companies that are:
Regarding "margin of safety", it just means the company's price is currently about half of what they should be valued. This happens frequently because the market is emotional. Some companies core functions, values, and performance may not change, but an external event could push down their price making them a good buy. An example of this was when Chipotle was getting people sick a few years back because of a supply chain issue or the market as a whole taking a giant dump like it did during Q4 2018.
Re: Chipotle, what happened was a couple of their suppliers sourced them tainted ingredients which got people sick and the news knocked their price down from about $750 a share to a low of about $250 in January 2018. You know what they're worth today? $828.29 at the time of this writing. The company itself didn't change, it was just a couple of shady suppliers that they quickly replaced and were back to business as usual. But... people are emotional and sold their stock that drove prices down lower and lower. Well their loss could have been your gain.
   
Step 4: Continuing Education
I'm a big fan of personal finance YouTube channels and the ones I watch the most frequently are (in no particular order):
   
Step 5: The Financial Order of Operations
This is right out of The Money Guy Show:
Deductibles Covered: You need to have enough money saved to cover basic emergencies Match from Employer: Everyone who has access to a retirement plan that provides a match should work to take advantage of that “free money.” Credit Card: The order of priority between employer match and credit card debt is a coin toss. Consumer credit card debt and punitive interest rates charged should be avoided if you are going to be on the path to financial independence. Emergency Reserves: You need to save three to six months of living expenses for a rainy day and the unexpected events that can make life scary. Roth and HSA Contributions: The thought of tax “free” growth is exciting. Currently, you’re allowed to save $5,500 per year in a ROTH IRA if you’re under 50. If you’re over 50, you can save up to $6,500. Max-Out Retirement Options: Retirement accounts are great for building wealth for the future. We share the max-out numbers for each type of account in this episode. Hyper-Accumulation: You should aspire to reach hyper-saver status by saving 15-20% of your gross annual income. Pre-paid future expenses: You need to make sure you have your retirement squared away FIRST and then prioritize the other financial goals you can prepay and fund. Debt Prepayment: The desire to be master of your financial life includes being completely debt-free. We share exactly how you can do this and how to prioritize which debts to pay off first.
If all this sounds familiar, it's probably because there's a flowchart similar to this over on another sub. https://i.imgur.com/lSoUQr2.jpg
Here's a down and dirty example based on my own income, savings, and debt situation...
Deductibles Covered: - Home = $3145 for total coverage - Car = $500 for collision - Health = $1200
Total deductibles = $4845 if everything goes wrong all at once. Done.
Match from Employer: - Mine gives 5% match so I need to contribute at least $7900/year ($329.17/pay period) to get this squared away.
Credit Card: - $5/mo paying off Spotify just to build up a good credit score by showing I pay on time every month, and only doing so with a monthly $5 charge ensures I keep my debt to income ratio and the amount of used credit as low as possible.
Emergency Reserves: They didn't go into details, but this means save up 3-6 months worth of expenses (for me that's $4000/mo) while working. Once you're retired you want to save up 18 to 36 months (to preserve capital during market downturns). This cash should be in high interest savings and NOT invested in the stock market.
  • $24,000 done. I have it saved in a 1.5% Spend Plus account on M1 Finance. I could probably get higher elsewhere, but I like having my money in one place so I can use it to buy a major dip should the market crater.
Roth and HSA Contributions: - HSA = In my case this is N/A as my HSA account is 100% fully funded by company to cover the deductible for our medical plan.
Max-Out Retirement Options: - In progress. I'm converting $6,000 per year from my traditional IRA (that I rolled over a traditional 401K into a while back) and putting it into a Roth IRA. This is called a backdoor Roth conversion. I need to fund my Roth IRA this way because I make too much to contribute to one directly.
Hyper-Accumulation: Ideally the Roth, HSA, and 401K (with company match) will add up to what they call "hyper saving", which I personally choose to aim for 25% rather than their figures.
  • Rest of Roth 401K is being funded up to the maximum $19,500/year (additional $483.33/pay period = $812.50/mo total). That's $19500 of my own savings, plus another $7900 from the company match for a grand total $27,400.
Note: If you have the option between a traditional 401K and a Roth 401K, IMO I'd choose the Roth like I did. You will pay a little bit more every year in taxes, but the long-term goal of building wealth will come out on the back-end as 100% tax-free.
Note 2: If you plan to join the FIRE movement, then you'll realistically need to be investing 50-70% of your monthly income for about a decade.
Pre-paid future expenses: This is saving up for a new car, your kid's 529 college plan, weddings, custodial accounts/trusts, etc. - $1188/mo into my M1 Finance Capital Growth account. I intend to build a house in a few years, so I'm heavily investing trying to build up that nest egg.
Debt Repayment: Yes, I changed this. Now is the time to start pouring more money into those really long-term low interest debts like a home mortgage. Generally speaking you will get a far better bang for your buck by doing the above steps and investing than you will by paying off your mortgage early. - N/A; no additional debts since renting.
   
Summary: The intention of this thread was to give you a quick primer on personal finance and provide some critical food for thought as it's incumbent on each and every one of us to get our financial houses in order.
submitted by SavingsMadeSimpleYT to SavingsMadeSimpleYT [link] [comments]

Return and Risk with Margin Accounts Trading 101: What is a Margin Account? - YouTube How To Trade Strangles (Options) In Your IRA Managing an IRA Trading Account Comparing IRAs To Margin Accounts

Although you can use IRA funds to invest in the stock market, the IRS restricts the use of margin trading in IRAs -- meaning the use of borrowed money, In addition, the law bars you altogether from using the account as collateral. In particular, the use of margin in IRAs is tightly restricted, and only a certain type of limited margin is available for IRA investors. Let's go into more detail about why IRAs make it tough to ... As a result, an IRA brokerage account must be a cash account, not a margin account. Some stock trading strategies require the leverage provided by a margin account to generate acceptable profits. While IRAs don't allow for traditional margin trading, some brokerage firms do allow limited margin-style trading in IRAs. These come with certain account restrictions and warnings that you should be aware of. Margin trading isn’t allowed in retirement accounts, such as an IRA. Applying for a margin account may generate a hard inquiry to your credit.

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Return and Risk with Margin Accounts

--~-- What is Margin is a question many retail investors ask along with what is a margin account and what is margin trading. Today I am going to tell you wha... Tom Sosnoff and Tony Battista look at the differences between an IRA account and a Margin account. They discuss how using a margin account allows you to implement different option strategies and ... All this information and- more can be found in The Self Directed IRA Handbook; for your own copy of the book, call 1-800-642-7167 to learn about Self Directed IRA Investments Allowed, Loading... Trading in an IRA: Selling Puts in Inverse ETF's Can Reduce Directional Risk.. - Duration: 13:58. tastytrade 6,361 views. 13:58. Sunday Futures Market Open tastytrade's First Call - Duration ... But does trading in an IRA account vs. a traditional margin make or break successful traders? Given all of the favorable tax advantages that an IRA account has, it'd be rash to write them off as ...

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