12. A Fitness Manual for Random Walkers and Other Investors

Dated Jun 3, 2020; last modified on Sat, 06 Nov 2021

Exercise 1: Have a regular savings program.

Start investing early because compound interest and time are you greatest resource.

When it comes to setting saving accounts' interest rates with regard to the interest rate that banks enjoy from the fed , banks are downwards-flexible and upwards-sticky. Depositors lose the tune of $100b when interest rates are rising.

One is better off with special accounts such as Marcus by Goldman Sachs (1.05% APY) or Ally (1.00% APY) or PNC High Yield (1.00% APY) . Some of these accounts are limited to US citizens.

Exercise 2: Cover yourself with cash reserves and insurance.

3 months of living expenses is a good target.

Insurance involves a lot of shopping around. Avoid sales commissions and get it yourself.

In insurance, know when bells and whistles are worth. Unless you’ve maxed out other tax-deferred savings, it’s not worth it to have a deferred variable annuity.

Exercise 3: Let the yield on your cash reserve keep pace with inflation.

Your cash reserve should keep pace with inflation (typically 2%), otherwise you’re losing purchasing power. Money Market Mutual Funds have low yields.

Bank Certificate of Deposits (CDs) typically outperform money funds, and are surprisingly safer. However, there are penalties for early withdrawal, and the yield is subject to state and local income tax.

As of June 2020, top CDs have an annual percentage yield of \(\approx\) 1.3% for a 1.5 year term. So if I took 4 consecutive CDs and let them compound, the effective rate would be \(1.013^4 = 1.053 = 5.3\% APY\), but I still have taxes to pay in between. No wonder people don’t do CDs that much.

Internet banks offer better rates than typical savings accounts and money funds. FDIC member banks can also provide guarantees.

Treasury Bills (T-bills) are safe, and their yields are exempt from state and local taxes.

Tax-Exempt Money-Market Funds have lower yield than the taxable ones. However, if you’re in the highest tax brackets, then the earnings might be more attractive.

Exercise 4: Learn how to dodge the tax collector

Strive to let your savings and investments grow tax-free. Individual Retirement Accounts (IRA) allow $5,500 per year. You only pay taxes when you withdraw, and that usually leaves you with more.

Roth IRA doesn’t have an up-front tax deduction, but your withdrawals will be tax-free. If your income is below certain thresholds, you can convert your IRA into a Roth IRA. If you expect to be in a lower tax bracket in the future, don’t convert because you’ll pay more taxes now.

And now, Peter Thiel who grew his Roth IRA account to +$5b tax free. The recipe is: buy 1.7m PayPal shares for $1,700 in 1999 (you can’t get this deal, unless you’re some Peter Thiel); PayPal goes public and your Roth IRA is worth $28.5m by 2002; selling the shares is tax free because you’re in a Roth IRA; invest proceeds in more companies (preferably startups' shares at sweetheart deals, e.g. Facebook); Roth IRA keeps growing; wait until you’re 59.5 years old; cash out tax free.

There are levels to this shit! But seriously though, this game needs new rules.

Employers tend to match some percentage of pension profit-sharing plans (e.g. 401(k)). Contributions limited to $18,500 annually for people under 50, as of 2018

Self-employed individuals can establish retirement plans and contribute up to $55k annually, as of 2018.

529 plans allow their investments to be withdrawn tax free if they are used to pay for college. $75k max for an individual. If the proceeds aren’t used for college, then you pay tax plus a penalty.

Exercise 5: Understand your investment objectives

Asset 2018 Expected Pre-Tax Return Time to get expected return Risk level
Bank accounts 0 - 2 N/A $100k guaranteed. Sure loser with high inflation.
Money-market funds 1 - 2 N/A Most funds do govt securities.
Certificate of Deposit (CDs) .5 - 2.5 Specified in CD Penalty for early withdrawal
Treasury Inflation-Protected Securities (TIPS) .5 - 1 plus inflation +5yrs Prices vary if sold before maturity
High quality corporate bonds (prime-quality public utilities) 3.5 - 5 5 - 30 yrs Prices vary if sold prematurely. Junk bonds are riskier
Diversified portfolios of blue-chip developed country common stocks 5.5 - 7 the longer the better; depends on current conditions wild swings e.g. 25% loss, but a good inflation hedge in the long run
Real Estate and REIT Similar to common stock If REIT, similar to common stock Similar to common stock, but REITs help diversify and hedge inflation
Diversified portfolios of smaller growth companies the longer the better; depends on current conditions wild swings e.g. 50% loss, but a good inflation hedge in the long run
Diversified portfolios of emerging-market stocks 8-9 plan for +10yrs fluctuate wildly, even 75% in a year
Gold Unpredictable Greater fools and speculative crazes Good hedge against doomsday inflation

Exercise 6: Don’t rent; own

The real estate market is less efficient than the stock market. RE tends to outperform stocks during accelerating inflation.

Buying a home is better tax-wise, e.g. interest on up to $750k in mortgage debt & property taxes up to $10k are tax deductible; First $500k from sale is tax-exempt.

Real Estate Investment Trusts (REITs) reduce risk in a portfolio because of moderate correlation w/ other assets.

Exercise 7: Walking Through Bond Country

Zero-Coupon Bonds allows you to lock in yields for a pre-determined period of time. They are purchased at a discount and do not pay interest. Useful for funding future liabilities.

Unfortunately, their yearly income must be declared annually to the IRS.

No-Load Bond Funds have no guarantee that you can reinvest your interest at constant rates. However, they offer long-run stability, and thus suitable for individuals who plan to live off interest.

Because bond markets are as efficient as stock markets, go for low-expense bond index funds. Don’t buy a load fund with a commission fee because you can get it for free yourself.

Tax-Exempt Bonds are useful for high tax bracket investors. These are typically issued by state and local governments and port authorities.

If buying bonds directly (rather than through mutual funds) buy new issues to get better yields and avoid transaction charges. Stick to issues rated at least A by Moody’s and Standard & Poor.

If interest rates go up, the price of your bonds will go down. If interest rates go down, the issue may repay the debt early and issue new bonds at lower rates. Make sure your long-term bonds have protection against the issuer refunding bonds at lower rates.

Bonds from emerging markets have a bad rep of being risky and of poor quality. However, many emerging economies have lower debt:GDP and better government fiscal balances. Diversify your bonds.

Exercise 7A: During financial repressions, use bond substitutes for part of the aggregate bond portfolio.

Governments (especially those with large entitlement programs for aging populations) tend to keep interest rates artificially low to reduce the real debt burden and restructure the debts on the backs of bondholders.

Sometimes do stock, e.g. if AT&T’s 15-year bonds yield 4.5% and common stock yields 6%, then AT&T stock is better. However, only do this substitution for a portion of your bond portfolio.

Exercise 8: Be careful about gold, collectibles and other investments.

In times of inflation, gold is king. Have a modest slot for it. Diamonds involve large commission costs and judging quality is best left for an expert.

Buy collectibles because you love them, not because you want them to appreciate. In 1519, the Salvator Mundi sold for ~500k, but sold for $450m in 2017. However, that is a paltry 1.35% return from 1519 to 2018.

Commodities futures contracts are good for professionals. Amateurs can easily get clobbered.

Steer clear of hedge funds, private equity and venture capital funds. The average performance is disappointing. Unless you’re an institutional investor with a preferential position, your chances of investing with the best is realistically zero. Fund managers will pocket large management fees and 20% of the profits too.

Exercise 9: Remember that investment costs are not random

Don’t let low commission rates fool you. Day traders tend to be unsuccessful.

Avoid wrap accounts where, for a single fee, the broker obtains the services of a professional money manager. Brokerage commissions and advisory fees are wrapped in, and can be up to 3% per year.

Exercise 10: Diversify your investment steps.

Remember the Enron employees that had nothing but Enron stock in their retirement plans.


  1. Best CD Rates for June 2020 | Bankrate. https://www.bankrate.com/banking/cds/cd-rates/ .
  2. Sticky Deposit Rates. John C. Driscoll; Ruth A. Judson. https://www.federalreserve.gov/pubs/feds/2013/201380/201380pap.pdf . Oct 1, 2013.
  3. Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank. Justin Elliott; Patricia Callahan; James Bandler. https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank . https://yro.slashdot.org/story/21/06/26/0440241/peter-thiel-turned-a-6000-a-year-retirement-account-into-a-5-billion-tax-shelter?sbsrc=md . Jun 24, 2021. Accessed Jun 27, 2021.