Generally, yes, and in this case he has significant funds in the stock market, which are earmarked for retirement. We specified these gifted funds not just be put into an investment account to ignore. The funds are expected to be put to use in a way that will be better than waiting for us to retire. If the funds were simply to be invested and used for retirement, inheriting those funds when we die would have been sufficient.
I’m veering away from the primary topic, but this interaction with Youngest is what triggered my comment on the younger generations never seeing a seriously down market. The intent of gifting this money is to learn more about money management, developing and implementing goals. It’s hard to set goals if you don’t have the ability to achieve them, but simply stuffing cash into mutual funds is a great way not to really think about setting goals. We want to pull that crutch. For Eldest the gift put realizing his existing goal of down payment on a home in place sooner than he expected, and while we already felt he was in a good place, there is no way would we treat them differently. We’ve already seen Youngest move forward towards replacing his less than dependable car, and had great discussions with him, when asked, about want vs need and how to measure value for $ spent. He has rejected the idea of going to grad school, which had once been of interest. Brain is moving and he is communicating, which is awesome.
Mostly just trying to make sure they have a good handle on money management when they do inherit. While we don’t intend to pass on for decades, given the amount of time DH and I spend together driving, that’s not necessarily in our hands. Gifting a bit of money now also has had the unexpected additional benefit of giving us more freedom, as we know they are in good hands, their own, with the tools they need to move forward.
All in all this gifted cash, money they would have eventually inherited anyway, has been a great investment in their futures and our peace of mind.
This has only been true for 1 1/2 out of the last 20+ years.
Also, if you are so clever that you can find an “option strategy” that will continuously provide a decent return using only 5% of your assets at risk, then you are surely clever enough to time the markets. This is obviously facetious as both are impossible to do reliably for 99.9999% of the people.
I’ve also thought this for a long time. But it isn’t true at all. It is far better to gift each child 2 x $18,000 a year while you still can. That way your (the heirs, the estate, etc) choices could potentially be less constrained at death, perhaps even far less constrained.
There are, of course, also negatives to this strategy. Kids being kids might blow the money on stuff you don’t approve of. That’s a risk. But again, if this is a continuous program, there’s a lot of incentive for a kid to NOT do that … so that the annual gifts don’t stop.
I agree and am ever so slowly getting to that point. I am indeed a control freak so for all the years I have kept all the money under my control, but I think it is time to relinquish some of that control.
Not at all; options and timing the market are quite different things. As for what options strategy, it doesn’t really matter; as long as you can’t lose more than 100% of the 5% then you won’t be subject to a market crash (which was the object).
A simple option strategy that could be used in a bull market is buying long-term calls on your favorite stock(s) such as NVDA, MAR, BRK, your choice. If the bull market continues you make money with this leveraged approach; if the market crashes you don’t make any money that year.
Our best lessons are often learned through our mistakes. We would rather they learn from mistakes made with smaller sums than their whole inheritance after we pass on. That said, while we wish to give them some tools with which to dream, we don’t want to stifle their motivation to do well in their careers. I don’t see making this an ongoing thing. I think it’s better that we train ourselves to spend more, or start gifting to charity, though that’s more likely via QCDs when we start having to do RMDs.
Let’s turn the time machine back and look at the last three years where the market was down one year and up two. Here are the prices and returns for at-the-money calls that expire in two year on Marriott stock. They will be held for one year, sold and replaced by new calls two years out.
December 2021
155 call, expiring in Jan 24 $30.50
Price one yr later in Dec '22 $25.30
Return: - 17%
December 2022
160 call, expiring in Jan 2025 $34.10
Price one yr later in Dec '23 $70.80
Return: 107%
December 2023
230 call, expiring in Jan 2026 $37.30
Price one yr later in Dec '24 $75.00
Return: 101%
If we assume a 4% return on money market funds (not too far of the mark) then…
For 2022
(0.96 x 1.04) + (0.04 x 0.87) = 1.03
For 2023
(0.96 x 1.04) + (0.04 x 2.07) = 1.08
For 2024
(0.96 x 1.04) + (0.04 x 2.01) = 1.08
So, a total return of 20% with no chance of a market crash or even a negative return.
Do you know what we call this? Yes, it’s called “market timing”. How will you know that the two year period for your option will be a bull market?
First off, 3 years for a “backtest” is essentially useless. Second, it’s especially useless when using assumed numbers. 2022 money market funds were something like 1.5% or thereabouts. See here for a good money market fund that beats the averages. Third, as mentioned earlier, we only had 2 years out of 20 years with any real return from money market funds. And fourth, it results in a flat inflation-adjusted return, and negative if you account for the taxes that have to be paid on all the ordinary income each year.
2022 - 1.5% money market, 1.1% after tax
2023 - 5% money market, 3.7% after tax
2024 - 4.7% money market, 3.5% after tax
Now apply income taxes to the option earnings and sum it up, and subtract inflation and you’re going backwards. May as well just buy an index or Berkshire and ride out the crashes over the years AND choose when to take capital gains (or never take them and have their taxes evaporate upon death), AND make them long term at a somewhat lower tax rate, AND that historically beat inflation by a bit.
Remember, your strategy requires two forms of timing, one, timing when money market rates are positive or close to positive in real terms, and two, timing the market by selecting an options strategy for “bull markets” and one for “bear markets”. And heck, you need to also choose one for “flat markets” as well (though that is quite rare) because options time value decays in that case.
It’s a one-year hold, and you don’t. The point I’m trying to make is that with the overwhelming portion in money market funds, you can’t lose money no matter whether the market goes up or down. Thus, no market timing.
With the remaining small percentage you can invest in bitcoin, leveraged ETFs, options, index funds…whatever, just not shorting. Overall, your return for the year won’t be negative (you can’t lose more than 100% of the small amount not in money market funds. Even in a multi-year market crash you don’t lose money but you don’t lose any except for inflation.
It wasn’t a backtest, but an example to show you what I was talking about. Obviously, I didn’t do a good job.
The recent era of zero interest rates is an anomaly. At any rate, you know what current interest rates are and can adjust the allocation. At this time it would be 4.3%. Of course, that is with a zero-loss scenario. If losing a few percent is acceptable then you can change to amounts.
Well, yes, you will own taxes on any profits. That is true of any approach, unless you just keep the money in a checking account. By the way, option income is taxed at a 60% long-term/40% short-term rate. Money market interest is all at the higher short-term rate, IIRC.
But that is something you don’t want to do here, as IP wrote the money was going to be needed for something else in two or three years.
Yes, and I explained that that doesn’t work in real terms. For 15+ out of 20 years, you are losing money year by year … in real terms (the only terms that really count).
I don’t know why you keep saying this. Overall your nominal return will vary from about -4.95% to +X% each year. And your overall real return will be that number minus inflation.
Nope, it isn’t true for all approaches. The thing we are discussing here is to either invest in index funds (or a diversified portfolio, etc) and ride out the crashes OR use an investment scheme that avoids crashes. When you invest long-term, you pay lower taxes for 3 reasons:
The dividends/capital gains distributions are relatively low as the value rises.
You choose when to sell for a gain and then pay the tax due.
Everyone eventually dies, and [their heirs] can enjoy a capital gains tax holiday via basis step up.
I don’t think this is true for stock option traders. When you buy an option and sell it, if held for 366 days, it is a long-term gain or loss, if held for less time than that, it is a short-term gain or loss. When you sell (“write”) options, it is always a short-term gain/loss. This is both assuming no exercise/assignment as those are calculated differently. At least, that is my experience over my decades of casually trading stock options. I think the 60/40 thing is for non-equity options (like commodity future options) which I don’t trade.
Yes, this is correct. And I would further say that for short-term money (absolutely needed in under 5 years), you don’t invest in stocks or in combo option strategies, you just invest in short term instruments like money market funds. Even better is simply using a ladder of treasury bills that terminates when the money will be needed. The latter is exactly what I do to provide monthly funds for my expenses in retirement. I have various treasury bills maturing every week, and after keeping cash to cover the expenses, I reinvest the remainder into new treasury bills that same week (same day usually unless a federal holiday interferes). Once this big ladder completed, I had perhaps close to 100 different T-bills in my account at any given time (12 or 13 52-week bills, 26 26-week bills, 17 17-week bills, 13 13-week bills, 8 8-week bills, 4 4-week bills, and assorted CMB (cash management bills) of varying lengths, usually 42-day, but sometimes some other random number). This ensures that at any given time, there is money maturing to cover expenses (which are rather bumpy across the year).
I am guessing we will have demand side economics for as long as we fuel it with deficit spending and monetary policy instead of serious infrastructure buildouts and productivity. We pretend to talk about metal, but the Fed is running the economy in the absence of a functioning Congress. I see no evidence that we will change this formula in the next four years. We are going to double down on deficit spending our way to prosperity.
Except that isn’t what we’re discussing. IP posted that her son had some funds that he wanted to put to use but that he would need them in about three years. I think we agree that it is not a situation where one should invest in equities and ride out the crashes.
Since the money will be needed one wants to avoid losses, especially significant losses. If you put 95+% of the money in CD/money market type vehicles then that money will still be around three years from now (less inflation and taxes, but that is true of any approach).
I have been pointing out that the small percentage not in secure funds can be used by the son in any way he likes as long as it can lose more than he put in. I don’t know what is of interest to him, but it can provide some of the educational experience that IP was talking about. He could by the Westinghouse stock that Steve likes. He could buy shares of QQQ or COIN or BRK.
Yep, that was exactly the suggestion I gave in my first reply to @inparadisehere, except I said hold 80% back and allow him to experiment with 20%.
But after that, the conversation morphed into “how to avoid crashes”, and since crashes only happen every decade or so, we obviously aren’t talking about a 2 or 3 year period anymore.
Demand side economics is spending to create more wealth. More taxable wealth. The debt to real GDP ratio drops. We saw that from 1949 to 1980. It does not matter if the debt rises if the ratio is falling.
We optimized the US economy during that period. You need to start there with studying economic optimization, cost/benefit analysis. It works.
The reason for your wealth and our wealth is the economic thrust of deficit spending. It creates military power. The entire system is self propagating. But it can be badly abused by poorer policies.
Cutting taxes in 2025 will be ruinous.
adding because the central work I have elsewhere this morning is done.
It is not the tax cuts or the debt ensues that is all that bad. It is the austerity program that will be ruinous. That is why I object to your terming it as “deficit spending”. The austerity will create what Liz Truss created in the UK bond market. The austerity program is linked to the tax cuts in people’s minds.
I give up. I did not intend for my post in this subthread to suggest or imply that our deficit spending was a result of overspending as opposed to undertaxing. Deficit spending just means spending at a deficit.
Honestly I have some background in Econ and take to it like a duck in water.
Regardless of your intent the larger intent of the discussion is austerity.
It is not “deficit spending”. The dialog is controlled with that phrase.
The budget has a set of purposes. The deficit has a purpose to project power. Austerity will be counter productive.
We may even need the larger deficits TFG is offing. Metrics and forecasts may suggest that.
Was the mortgage on your home deficit spending? Or a future asset towards a better retirement? Did you need to house your children? Or did you want to push one of your kids out into the street to save a buck???