Watching these YouTube videos (link 1, link 2, link 3) on options trading, I view options trading as an anti-thesis of normal stock investing where the judgement is based on the value of the stock price fluctuations rather than the value of the company.

DISCLAIMER: I’m not a financial planner. The opinions stated in this blog post are my opinions based on my current financial portfolio and the hours of reading and research. I suggest everyone to also perform your own research since everyone’s financial portfolio are uniquely different.

Last year (2020), I did a deep dive into my current retirement portfolio and adjusted my investments to mainly have small, mid and large cap value and also large cap growth. This balance seemed reasonable at the time. This past year, I opted to hire a financial planner for just 1 year basis to check on how I’m doing with my overall portfolio and to suggest on areas I might need improvement on. Overall, he was fairly impressed at the state of my portfolio and had a few suggestions that I plan on adopting. One of these suggestions is to fund a non-deductible IRA account.

What is a non-deductible IRA? If do you a google search, many of the website talk about non-deductible IRA as a step to for the back door Roth IRA. Specifically, you’re transferring after tax (non-deductible) money into an IRA account which will immediately be converted into the Roth IRA. The money in the Roth IRA will grow and more importantly not be taxed during withdrawal. Keep in mind, some of the search results may point you towards funding a deductible IRAs and then a conversion into a Roth IRA. There are some key differences and I spent a good amount of time reading and re-reading to try to understaand these differences.

1) The total allowable contribution to an IRA (Individual Retirement Account) or a Roth IRA (or any combination of the two) is currently $6000 for 2021. If you’re older than a certain age, you can contribute more.

2a) An IRA comes in two types: deductible and non-deductible. A deductible IRA allows a person to take tax deductions whereas a non-deductible does not allow for tax deductions.

2b) To fund a deductible IRA, a person must meet certain income requirements for the tax deduction. The amount of tax deduction is determined by the income level. Since a person contributed pre-tax dollars into an IRA during working years, the distributions during retirement are then taxed accordingly to the income tax brackets during retirement. This assumes that retirement income in during retirement will be at lower tax bracket than during a person’s working years.

2c) To fund a non-deductible IRA, a person will need to contribute “after-tax” money into the IRA. Since this person is outside the income requirements, he/she can no longer benefit from the tax deduction. Form 8606 must be sent to the IRS in order to note the after-tax contributions. It is important to keep a record of all the Form 8606s so that proper accounting can be done during retirement and distributions. Any growth in the IRA are subject to taxes. However, the original contribution amount will not be taxed (as long as you keep a record of form 8606).

2d) Reading up on deductible and non-deductible IRAs, it seems from a tax perspective funding only non-deductible IRAs make sense. There’s some tax liability associated with mixed deductible and non-deductible accounts

3) To fund a Roth IRA directly, a person must also meet certain income requirements. The direct contribution amount also varies by income requirements. Roth IRAs are slightly different than IRAs in that Roth IRAs are funded with after-tax contributions. Furthermore, during retirement, the distributions from Roth IRA are NOT taxed regardless of growth. This makes Roth IRAs one of the best types of retirement investment accounts. For a young person just starting their working career, I recommend to fund a Roth IRA yearly and invest in mutual funds that are indexed (follow) the S&P500. Using time and the safe mutual fund growth, the account value will grow exponentially over time.

4) To fund a backdoor Roth IRA, a person must first fund a non-deductible IRA and then immediately convert the amount into a Roth IRA.

There are actually some difficulties associated with non-deductible IRAs. The main issue seems to be the record keeping needed to keep the account in order. To add more difficulty, if a person also has a deductible IRAs, the tax liabilities in maintaining both types of IRAs come into play via the “Pro-rata rule” which from my understanding will start to tax a part of the contribution/rollover becuase of the total deductible IRAs in the account. Fortunately, I don’t have any deductible IRAs.

I wish I had known more about Roth IRAs much earlier. Being able to start earlier would have been nice especially since there would be more time for the investments to grow. In this case, time = money truly is accurate. If at all possible, always try to invest in Roth IRAs or leverage non-deductible IRAs for backdoor Roth IRAs. The tax free withdrawals is an amazing tool for maximizing retirement income.

DISCLAIMER: I’m not a financial planner. The opinions stated in this blog post are my opinions based on my current financial portfolio and the hours of reading and research. I suggest everyone to also perform your own research since everyone’s financial portfolio are uniquely different.

A few weeks ago, I posted a “Vanguard Mutual Fund Reference Guide” and actually wrote quite a bit afterwards intending the guide and this post to be a mini-FAQ for any readers interested in investing or anyone not sure how to pick mutual funds. Although everything mentioned is strictly related to Vanguard, other financial institutions will have similar mutual fund options that I’ve listed. Remember, do your own research and retirement planning and investing is a long term endeavor!

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Vanguard is one of the top financial institutions that provide retirement accounts.  Many investors recommend opening up a Vanguard account for retirement since Vanguard offers a wide variety of options for investing.  However, the number of funds that they offer can be overwhelming.  Over the past 15 years, I’ve come to learn a lot about personal finance and investing. In this post, I will try to explain and simplify these mutual fund choices based on the research that I have done.  

Mutual funds are an investment diversification tool.  Within their portfolio, the funds can contain various asset classes such as stocks, bonds, real estate, or even cash that appeal to the investors. Generally, mutual funds are populated with stocks. Most mutual funds also focus the portfolio investments around a certain “theme.” One of the most common “themed” mutual funds is based off an index (S&P 500, Whole Market, etc) which seeks to mirror the stocks listed in these indexes. These types of funds are generally known as “index funds” and are relatively solid investments if you’re not sure what funds to invest in. Another common “themed” based mutual fund is known as a Target Date Mutual Fund. This type of fund simply targets a retirement year (the Target Date) and adjusts the amount of risks the portfolio is exposed to as retirement approaches. This is a common “one stop shop” for many people who do not wish to perform their own research. Other common themes would include assets classes that focus on a particular sector of the economy (finance, healthcare, real estate) or focus on social movements like social injustice and climate change. I find there will always be some mutual fund that satisfies an investor’s goal or personal beliefs.  

Diving into more details, mutual funds will contain a blend of asset classes (bonds, real estate, stock, etc) while other funds will only focus on stocks.  Generally, the mutual fund will list the type of asset class that it’s categorized in.  In the case of stocks, investors have subdivided stocks into three categories depending on the market capitalization (i.e. how big a company is): small ($0.3B to $2B), mid ($2B to $10B) and large ($10B+).  There are various risks and rewards associated with market capitalization to be aware of.  Small cap offer greater growth/value but also greater risks. Large cap offer consistent value but also offers minimal risks.

In addition to different asset classes, mutual funds are also divided into three distinct stock types: growth, value and blend.  Growth funds contain a portfolio where a company prioritizes growth (and increased market capitalization) while Value funds contain a portfolio where a company might be undervalued relative to the market.  Blend funds are a combination of both types.  There is also a fourth option where the fund focuses on companies that consistently provide dividends to also consider as well.  I’ll call these out as “Dividend funds” but they seem to be classified as Value.  Dividend funds are a unique type of fund since they invest in stocks that provide consistent dividend income to the investor. There is a whole investment thought process that is devoted to investing only in dividend stocks such that at some point in the future, an investor could live off the income generated by these stocks. Overall, investors will need to read the fund objectives to determine which asset stock type is best for them.

Finally, mutual funds are not free.  They charge an operating expense that’s known as an expense ratio.  This ratio is the fee charged over the total fund amount.  The fee is usually taken out of the return on investment.  Why does this matter?  Funds that have low expense ratios generally mean more money for your dollar.  For example, a fund with a 0.4% ratio means the fund charges $4 for every $1000 invested.  But a fund with 0.04% charges only $0.4 for every $1000 invested.  Over time and compound interest, more of your money is invested and working for you.  I also look at this ratio as a factor of whether or not the fund might be worth looking into.

If you recall, here’s the table of the various Vanguard mutual funds. If you only had enough money to invest in one fund, I suggest investing in either VFIAX/VOO or VTSAX/VTI. The VFIAX mirrors the S&P 500 while VTSAX mirrors the total market. A quick Google search will show you that funds mirroring large index funds like VFIAX will generally net positive returns in the long run.

Large, reputable retirement plans will offer a mix of growth, value and blend funds as well as large, mid and small cap funds. The company generally determines which funds to invest in but I suspect they follow the general advice of the retirement plans. Since retirement plans vary, doing your own research is important for your own specific plan. Just remember two key points. 1) Select one of the proven types of mutual funds like S&P 500 index funds or a similar large cap blend mutual fund. History has shown these types of fund have had consistent growth. 2) Retirement planning and investing is a long term endeavor. I recommend a “set it and forget it” mentality since you you won’t start to see gains immediately. But come back after 5, or 10 years, the compounding effect will be very apparent.

DISCLAIMER: I’m not a financial planner. The opinions stated in this blog post are my opinions based on my current financial portfolio and the hours of reading and research. I suggest everyone to also perform your own research since everyone’s financial portfolio are uniquely different.

Every two or three years, I evaluate and analyze my current financial portfolio. I take a deep dive into my credit cards, checking accounts, savings account, and even retirement accounts as well too. This analysis helps me understand my current portfolio but also helps me decide if I need to make any changes. The last time I did this (late 2019), I discovered that my online savings account was *only* giving me an interest rate of 1% whereas other similar online savings accounts was offering 2.2%! I transferred the majority of the principal to this new online bank and the interest income was worth the switch.

There’s not much I can do with savings account. Across the board, the interest rate for savings accounts have gone down to 1% or less due to COVID-19. Even CD rates are dismal.

For the checking account, I do see cash back incentives at various banking institutions in order to “get new customers.” In fact, I already have two checking accounts. Having more accounts provide no added value. And why do I have two? Apparently, opening a mortgage with this bank also required me to also open a checking account. If you Google enough, you’ll find out how a particular bank forced customers to open unwanted accounts in order to hit internal goals.

With credit cards, I’ve been pretty happy with what I currently have. I have three cards… one Visa, one MasterCard (MC) and one American Express (AMEX). I think everyone should have at least one card from each financial services (Visa, MC, AMEX) and that these cards provide some value. Also, everyone should pay off the card in full every month. Since I believe cards need to provide value, the card I use helps me with my goal of aspirational travel. If you look on YouTube, you’ll see many suggestions on “best (travel/rewards/cash back) credit card” videos. I listen to these every so often because they do a good job summarizing the benefits of the latest cards and how it compares to existing cards. Some people enjoy earning rewards benefits by maximizing credit card trifecta systems. Other people (like me) find that maximizing benefits is a chore and are content in just using one card that works towards a goal. In my case, my goal is still aspirational travel and I’m content that my current credit card earns me travel points that I can redeem later. Looking at other travel rewards programs that I am involved in, I’ve apparently also been unintentionally building up hotel rewards from a major brand too. To be honest, I was surprised I had so much (6 digits worth) that had not expired yet and my current membership level too. Because I had so much, I decided to apply for this hotel brand’s credit card and was approved. Let’s see where and what this card can do for me in the future.

This year I did a deep dive into my retirement accounts. I have a company 401K, Roth IRA and stock accounts that hold the employee stock purchase program (ESPP). I contribute the max amount to my 401K every year. My Roth IRA contributions vary mainly because of income limitations. Looking more closely at all my current funds that I hold, I realized that I failed to really consider the benefits between funds categorized as “growth, value, and blend.” Most of these selections were from quick Google searches of the best type of mutual funds and then cross referencing the recommended mutual fund against what was available to me. I am overall quite surprised at the selections that I made given the lack of information. I don’t think any of the decisions are bad but just surprising. I spent some time learning about the 401K funds available to me and then adjusted my portfolio and future contributions. With my Roth IRA, it’s a Vanguard account and have a lot more funds available to me. Since Buffet won the bet by using Vanguard S&P 500 Admiral Shares (VFIAX) as the tool to demonstrate the differences between active vs passive investing, I’ve been pretty intrigued at the concept of selecting funds that mirror the S&P 500. Going into a deep dive, I found that Vanguard more of these funds as growth, value and blend. In addition, there’s also ETF versions (VOO) of the funds. In addition, I also considered the expense ratio and tried to look for funds with lower ratios within my portfolio. Ultimately, I opted to adjust the retirement holdings to predominantly contain large cap value and large cap blend mutual funds.

If people are looking for a “set it and forget it” type of mutual fund, I recommend to evaluate three factors. 1) the type of fund… growth, value, or blend. 2) the market capitalization… large-cap, mid-cap, small-cap… as a proxy for risk and volatility factors. 3) the expense ratio. I think the large cap value like (VVIAX) or (VFIAX) with low expense ratios are worth the investment and should be a guaranteed buy in your retirement portfolio. However, each company’s 401K plan offer different funds but evaluating on the three factors should at least lead to a solid portfolio.

This turned out to be a really long post. I hope some of this helps you in the future.