In 2007 Warren Buffett made a famous million dollar bet that the S&P 500 index, an investment open to anyone and requiring no management or expertise, would beat a collection of hedge funds selected by and managed by Wall Street ‘experts’ over the next 10 years. Not only did Buffett easily win the bet, it wasn’t even close.
Vince McMahon could’ve been a hedge fund manager.
In the past decade, the S&P has trounced hedge funds in 9 out of 10 years (see table below.) The S&P returned over 440% greater gainscompared to hedge funds from 2011 through 2020 compared to hedge funds:
Hedge funds have been infamous for their ‘2 and twenty’ formula, meaning many of them took 2% of assets under management, regardless of their performance, AND 20% of any profits they generated for their clients. This disastrous formula– for the clients; the hedge fund managers love it– is the reason Buffett won his bet. It was also why he was so confident that he would win at the time he made it in 2007.
Hedge fund fees have moved very slightly downward over the past 10 years– so have index funds’ already-low fees— but they are still massively large, especially when compared to the miniscule fees charged by index funds, often under 0.10%.
The bottom line: cut your investing costs to the bone
Never hire an ‘advisor’ (aka salesperson/broker) that receives commissions to sell you high-priced products, or charges you a percentage of AUM. Instead, go with a fee-only (= no-commission) advisor who charges you a reasonable flat fee for advice and investment management, like me.
Further reading on the hedge fund manager problem
Morgan Housel from the Motley Fool wrote this humorous article called ‘Two hedge fund managers walk into a bar‘ detailing the paradox of hedge fund managers’ brilliance compared to their awful returns. (It’s not really a paradox at all, it’s a simple agency problem: what’s good for high-fee money managers is bad for investors, and always has been.)
I’m not an accountant, and this is NOT tax advice, and you should double-check all this with an accountant! With the Travel nursing boom going on and my wife having many travel nurse friends, I get some travel nurse taxation questions.
TL;DR – To get tax-free stipends legitimately (it’s the IRS, not your employer, that matters here!), you need to maintain a ‘tax home’ while you travel, like an apartment you still pay the rent on (without renting it out!) or a home you own and pay the expenses on while you’re gone. You must also ‘duplicate expenses’ such as rent another place at your travel work location, like an apartment or hotel. The IRS assumes you’ll eat and drink, so no need to keep proof of that. All your per diems for the tax-free stipends must come as reimbursements for expense reports you submit to your employer with this key information:
The business purpose of the trip
The date and place of the trip
Receipts for any actuals for lodging (if not getting it per diem as a stipend)
The employee must file the expense report with the employer within a reasonable period of time (60 days). If any of these requirements are not met, the payment is taxable to the employee.
You can read more about this in IRS Publication 463, or consult your accountant.
Resources on tax rules for travelers and some key points
I’m only going to address the issue of tax-free stipends (aka ‘per diems’, the IRS kind, not the nurse shift kind!) for nurses who maintain and pay for another residence while temporarily on travel assignment. Other’s can read this site’s handy advice:
For true “travelers” as defined above, the tax rules allow an exception to the tax home definition. Instead of looking at the primary place of income/business, it allows the tax home to default (fall back on) the permanent residence. For this to apply however, the travel nurse must meet 2 out of 3 of the following criteria.
1. Does the individual have significant income at home?
2. Does the individual has substantial expenses maintaining their primary residence that are duplicated when on assignment
Since most traveler’s do NOT meet criteria one, they need to qualify for tax-free stipends by meeting BOTH criteria 2 and 3. So, if you own your home-away-from-work and pay all the expenses, or pay market rents there, you should be good. Don’t try to cheat by claiming your parent’s home where you don’t pay market rent, or your friend’s house where you crash a fews times and pay some grocery bills. This will NOT count as meeting criteria #2! There’s a lot of bad advice that goes around with people trying to fudge this one.
The other key thing is that to get the housing tax-free stipend, ‘“you need to sleep or rest to meet the demands of your work while away from home.” It does not set a specific distance.’ Thus, there’s no ’50 mile rule’ in the IRS’s eyes even if that’s a common threshold used by many staffing agencies. You must also actually incur expenses for housing!
It is against the rules to take the housing stipend if you do not actually pay for housing. For example, if you have family or friends who live in the assignment’s area and you stay at their home for free, then you do not qualify for the housing stipend.
If you meet these criteria, you should be eligible for housing and meals and incidentals (M&IE) reimbursements on a per diem basis. You must submit and keep your expense reports to your employer for these per diem reimbursements, and keep your expense report copies, your traveler’s contract that spells out your compensation, and any travel lodging (lease/hotel receipts) in case you ever get audited!
For meals (M&IE), the IRS doesn’t appear to require proof that you actually ate or drank while traveling (they just assume you must, as a biological being.) That said, it never ever hurts to keep additional info for tax purposes, so consider keeping receipts anyway, even if it’s just electronic credit card statements.
For lodging, you apparently just need proof that you spent SOMETHING, but it’s totally ok if you spent less than the per diem amounts for M&IE as well as lodging while traveling. For most people, you’ll probably need to rent an apartment for the entire assignment. But if you do only pay for, say, hotels while you’re working, you likely cannot get reimbursed tax-free for the days you’re back at home in the IRS’s eyes, since you don’t have any travel housing expenses then.
Again, if it’s reasonable for you to just rent a monthly apartment, then even if you return home you still have duplicate expenses and it’s fine to accept the full housing stipend for the entire time.
The financial services industry is rife with conflicts of interest. The standard MO for companies such as Edward Jones/Ameriprise/Raymond James/your bank/insurance companies is to hire salespeople (aka ‘brokers’), give them trustworthy-sounding titles like ‘Financial Advisor’ or ‘Wealth Management Advisor’*, and then pay them commissions to sell people expensive investment and insurance products while calling the process ‘financial planning’.
“Hi, I’m Chad. I flunked out of my Communications program in college, but I’m a Financial Advisor!”
Anyone can call themselves an ‘advisor’
A ‘financial advisor’ has NO legal meaning at all. It’s the financial equivalent of saying food has ‘all natural‘ ingredients. It means NOTHING!
Fees, fees, and more fees
Not only will your advisor put you in expensive products, they might add financial insult to injury by charging you 1% or more of your entire investment each year just to do what a simple Target Date retirement fund will do better for cheap. Do the math: if you have $500,000 invested with your advisor charging you 1%, you’re paying them $5,000 every single year, and that fee is going to increase as the market increases, so it’ll just keep going up over time. Is this really worth it for you?
Percentage-based AUM advisors even have the audacity to take the money quietly out of your account automatically without calling attention to the expense, making sure you’re paying big dollars without ever feeling the loss. (Until you compare your investment balance with what it COULD have been if you avoided all those fees for all those years, which most people never do.)
These tricks infuriate me because they are dishonest, deceptive, terrible for the clients, and yet all perfectly legally. Clients don’t even realize they’re being taken advantage of. Upwards of 25% or more of your wealth can get siphoned away over the years from typical sneaky fees.
Extra advisor + mutual fund fees of 1.5% eat up 29% of your wealth during 35 years of investing! That adds up to $230,000 in today’s dollars lost for someone who starts with $10,000 at 30 and saves $6,000 per year in the stock market until 65.
You might be wondering, “why doesn’t anyone stop these practices?” The SEC rarely steps in to protect consumers against anything other than outright fraud thanks to the tremendous lobbying and political power of the Wall Street firms that get rich ripping off Americans every year.
Every year Wall Street steals at least half of all US economic growth
One study from Forbes— not exactly a Socialist rag– estimated that the out-sized profits from Wall Street cut US GDP growth by 2% per year, meaning the growth of our economy is being cut in half, or even by 2/3s, because of how large our financial industry is compared to what it is in other modern nations like Britain.
What should you do?
Cut through the BS by avoiding ANY financial salesperson by asking if they are a fee-only Registered Investment Advisor. To my knowledge, this is the ONLY designation that means the financial advisor in question is legally obligated to be a fiduciary.* ‘Fee-only’ means they do not take commissions from selling financial products. This is essential so that they can give you objective advice.
So, how do you know someone is an Investment Advisor? Easy. FINRA, the body that governs brokers and investment advisors, runs BrokerCheck, a site that lets you punch in a name– or a firm’s name– and find out whether that person is a Broker or an Investment Advisor. (Or is practicing illegally if they’re not in there at all!)
For example, here’s my individual page, which clearly states that I’m an Investment Advisor– a fiduciary, who MUST put your interests ahead of theirs— not a Broker– a salesperson, who does NOT have to put your interests ahead of theirs or their firms. You’ll have to dig deeper by simply asking your advisor if they are fee-only. So do that after you’ve confirmed they are an Investment Advisor, and get the answer in writing! (I am, of course, fee-only. Reach out if you need excellent and comprehensive financial advice at a fair price.)
Yep, my middle name is Lynn.
*The Certified Financial Planner (CFP) certification is NOT enough if the person is merely a broker with a CFP, and not a RIA, because the CFP board is NOT the government, and therefore its requirements for CFP’s to be fiduciaries are, in my opinion, without any teeth.
Where should you put your next investable dollar? This is a key question I answer for clients. Clarifying this for yourself will do wonders for your financial situation. Here’s where I think most people should put their money in order of priority. You should generally max out the first item on the list before going down to the others, but your situation could vary, so make your own assessment or get help from a competent advisor.
2) You are not endangering your health, have proper levels of insurance, and aren’t making yourself miserable by living like a total pauper because you’re following my wealth-building suggestions to the extreme.
3) You’ll tailor this order to your own personal situation. That said, I strongly recommend following items 1 & 2 in that exact order.
Where you should be putting your money
Okay, ready? Numero Uno for where your money should go is….
1) Employer 401k matching
If you’ve read my articles on retirement, you’ve heard me say this before: don’t leave free money on the table! What type of return do you historically get from a risk-free investment? Treasury bonds return about 5% as of writing. What is your employer match return? If you get matching of 50 cents on the dollar up to 6% of your salary, your return on that first 6% saved is an instantaneous, risk-free 50%!!! There’s no better investment in the world that I’m aware of. Max this out no matter what!
2) High-interest debt, like a credit card
Some readers might quibble with this as #2. I can hear them now: “What!? Paying off your credit card balance is always the first thing you should do!” There may be emotional benefits to making this #1 that you should consider, but if your employer matching is 50% instantly, and your credit card rate is 25% annually, you’ll do way better to first max out your 401k matching. After that, put the rest of your cash towards that VISA balance.
Other readers might take the opposite tack: “I’ve saved for X instead, why should I ‘lose’ that money paying off my debt?” Paying off high-interest debt is the best investment you can make. Where else can you get a guaranteed return of double-digit interest? You can’t! You should do this immediately even if it means depleting a cash cushion such as an emergency fund, having to build back up a house downpayment (you’re not ready to buy if you have credit card debt!), or postponing some other purchase. You can always put things back on your credit cards if you must.
3) Emergency fund (a couple months’ living expenses + your auto and health insurance deductibles)
You need to have some money socked away for unforeseen expenses or losses of income. A short-term stash of cash to tide you over if you lose a job, get sick, or have to replace something valuable, like a car, is invaluable for financial stability. The general rule for insurance is to insure things which you wouldn’t be able to replace relatively quickly and that would cause you hardship if you had to go without them. This includes your home, life, health, and your car or jewelry, depending on the retail value of these items and your personal savings. (Make sure to avoid useless insurance.)
Expenses you can afford should be ‘self-insured’ by your emergency fund or other savings. Raising insurance deductibles and banking the difference in premiums is a good way to self-insure against small losses ranging from a few hundred to a few thousand dollars. Store emergency money for unexpected car repairs, insurance deductibles (which can be large if you have catastrophic, HSA-eligible health insurance), or high vet bills for your disgustingly-cute Cavalier King Charles spaniel.
Whether you need more or less living expenses saved depends on how steady your income is– and whether you have a spouse/partner that is also earning–, how far below your means you’re living, and how many liquid assets you already have (like non-retirement stocks that you could tap, or Roth IRAcontributions you could get at.) The more financially secure you already are, the less of an emergency fund you need: a single, self-employed person with young kids and few liquid assets needs more emergency funds than a married, union schoolteacher with adult children, 25 years seniority and a sizable investment account.
Like all short-term (less than 3-5 year) savings, your emergency fund should be invested in cash or a short-term bond fund. High-interest savings accounts like this excellent one are great for very short-term savings since the principal is guaranteed by the FDIC. Bond funds, which may vary slightly in principle but generally yield a higher return than savings accounts, may work better for money that might sit there longer than a year.
For those with incomes low enough to be able to contribute directly to a Roth IRA, I strongly recommend dumping your emergency fund into a Roth IRA and investing in cash to kill two birds with one stone: simultaneously taking advantage of tax-advantaged retirement savings but also giving yourself the ability to withdraw the contributions (but NOT the earnings) at any time with no penalties or taxes. I describe this tip in more detail here.
4) Tax-advantaged retirement accounts (HSAs, 401ks, Roth or Traditional IRAs)
HSA
If you have a HSA-eligible health insurance through work, I recommend maxing out your HSA before amping up your 401k or IRA investments because it’s more tax-advantaged that those account if used later for health expenses. Read more about the HSA here.
After you’ve maxed out your employer retirement matching, paid off your high-interest debts, stored money for emergencies, and maxed your HSA IF you’re eligible to contribute to you, it’s time to go back to saving for your retirement.
Roth IRA/ROth 401(k) or pre-tax 401(k)
In rough numbers, if you’re making less than $130 K as a couple or $65 K as an individual (i.e.: likely in the 12% tax bracket for 2025), max out your Roth IRA and/or Roth 401k at work. If you make more than that (and are therefore in the 22% or higher income brackets), I would max our your regular pre-tax 401k first, then switch to maxing out your Roth IRA next.
If you make too much to contribute to a Roth IRA, use the backdoor Roth IRA method IF you either have no Traditional IRAs with pre-tax money in them or can put all your Traditional/Rollover IRA money into your 401k plan to avoid paying taxes on it.
If you don’t have a retirement plan at work, use the appropriate IRA (Roth or Traditional) instead. If you’re self-employed, open an Individual 401k.
Putting money into a tax-free retirement vehicle is critical to building up a nest egg for the future. Assuming you’re in the 24% tax bracket, an investment in a tax-advantaged retirement account made when you’re 25 will be worth about 50% MORE in real dollars when you’re 65 than would an equivalent investment in a taxable account.
To complete step 4, if you’re under 50, in 2021 you’ll be investing $20,500 in 2021 in your 401k if you’re under 50, $6,000 in your Roth IRA, and $3,200 in your HSA if you have single coverage, or $7,200 if your family is covered by your HSA insurance for the entire tax year in question (generally speaking.)
That’s around $30 K in annual savings, which is rarefied territory for more Americans, but very doable for anyone making at least $75 K or more as an individual, or couples making more than $150 K. You just gotta save more.
Mega backdoor Roth 401k
After you’ve maxed out your HSA, 401(k) and Roth IRA, check if your 401k supports the mega backdoor Roth, and max that out next if you still have more to invest.
529 plan for education savings
If you’re saving for your child’s education, read this to see if a 529 plan is right for you.
5) ‘Regular’ taxable investment accounts & short-term savings for big purchases
After you’ve maxed out your retirement options, it’s time to open a plain ol’ taxable investment account for long-term savings. I like to think of these as early retirement accounts; the more you sock away now, the quicker you can exit the rat race.
You should also be saving regularly for big purchases like a house, wedding, vacation or new car. For these shorter-term items, use the banking system I recommend and create a savings account for each major purchase, and label it accordingly.
You might rank a short-term savings goal as higher priority than maxing out your retirement accounts. For example, maybe you want to buy a house and can’t save up the downpayment while maxing out all your tax-advantaged sources. That’s fine, but do NOT neglect your retirement. Investing early, even with just a little bit of money, is the most important factor to building wealth. Saving for retirement will be way easier if you start today with whatever you can.
UTMA for general child’s savings
If you are willing to put in extra work to potentially save several hundred a year in taxes per child, AND you’re comfortable making irrevocable gifts to your minor children, you could open & fund a UTMA.
Now go do it!
Take each step one at a time until you’ve finished it, then move on to the next one. If you’re maxing out steps 1 – 4 and contributing something in step 5, you’re doing very well and on your way to financial independence.
Now that you know where to put your money, find out WHAT to invest it in here.
