Shin Adachi

Target-date retirement funds

New to this blog? You can read all of my Finance series here.

Last time, we learned about what index funds are, and why they are much better alternatives to the typical mutual fund which charges a much higher fee to pay for the “professionals” who manage them. I put “professionals” in quotes because it turns out that they are no better at picking winning stocks than an average person. Remember, picking stocks or trying to time the market is a loser’s game. Your psychology will fail you. Don’t play that game!

Let’s start looking at some of those index funds so you can start putting your money in them.

I will use Vanguard’s index funds for all of my examples. Although you can find similar index funds from different companies, Vanguard was the first company to advocate for and implement the index fund idea, and they have pretty much every index fund you may ever want to invest in, all at amazingly low fees!

Specifically, we will focus today on “target-date retirement funds.” As you can guess from the name, these funds are for people who want to save for retirement, and have a specific retirement date in mind. Putting your money into a target-date fund is the easiest way to save for your retirement, because the fund will do all the work for you: staying aggressive by investing 90% of your net worth in stocks initially to take advantage of time and compound interest, rebalancing the stocks/bonds ratio of your holdings as the market fluctuates, and slowly selling away your stocks in exchange for more bonds as you approach your retirement date to make the fluctuations of the values of your investments less volatile.

You will find all of Vanguard’s target-date retirement funds here. Just click on the appropriate retirement date based on your situation, and if you’re feeling curious to see more information, click through the tabs to see the fees (often called “expense ratios”), and holdings (information on what the fund consists of: stocks-to-bonds ratio, and how much of it is invested domestically vs internationally).

While target-date retirement funds make investing for your retirement super easy, do realize that this convenience comes with a fee (still a very low 0.15%, compared to actively-managed mutual funds that can charge ten times that, how criminal!). Keep in mind that you could get even lower fees if you are willing to invest in even simpler index funds that do not do all this fancy re-balancing and re-allocating for you.

So basically, my advice boils down to this:
If you are a completely hands-off investor who just wants to keep funneling money into a retirement fund, then just go ahead and pick one of these target-date retirement funds. But if you want to take it up one notch, and are willing to do a bit more work by choosing specific funds and the ratio to hold them, as well as doing the occasional re-balancing by trading your stocks for bonds or vice-versa, you can get even lower rates by choosing the funds and managing the holdings yourself.

And final note for today since we talked a lot about retirement: you can get huge tax-advantages by doing all of your retirement investing in these special buckets that the government calls “401k” and “IRA”. Unlike regular investment accounts that charge income tax on dividends and capital-gains tax on assets that go up in value by the time you sell them, you can grow your money tax free in retirement accounts in both 401k’s and IRA’s. The government gives you this tax break because they want to encourage you to save for retirement.

Up next: What is a 401(k)?

Luxury. What does it mean?

My family started out in a tiny one-room apartment in Tokyo. My parents and my siblings (five of us total), all making do sharing the one room that functioned as the bed room, the living room, and the dining room depending on the time of day. This might be hard to imagine for someone growing up in the United States, but that was just the normal way of life for me and all of my friends. I didn’t think of it much, because I wasn’t even aware that other modes of living existed, other than by fictitious people I saw on TV.

When we moved to California, to put it lightly, the house we moved into was humongous compared to what we were used to. It was as if we had made it in life. I thought to myself, “Wow, we are rich. We are living the life of celebrities.” My perspectives started to shift. I started to think that luxury is about being able to afford nice things: a big house, a big TV, gourmet meals at fancy restaurants, a 5-star resort getaway, and the likes.

It took me a while to discover that I had it all wrong. I finally experienced true luxury when I stopped pursuing material things, and learned to appreciate every little blessing in my daily life. Or, as a wise person put it, “You can’t wear nice clothes to heaven.”

What is an index fund?

New to this blog?
Also check out my previous posts:
Stop trying to time the market.
Why Invest?

As I’ve mentioned previously, index funds that track the stock market are the recommended investment options, and a majority of your net worth should be invested in them. Let’s take a deeper look into index funds today.

What is an index fund, and why is it better than buying individual stocks or mutual funds?

An index fund is a type of mutual fund, but unlike most mutual funds that are actively managed and charge high fees to pay the salary of the people who manage them, an index fund automatically tracks the performance of an index, such as the S&P 500.

Index funds are recommended over actively-managed mutual funds because of their significantly lower fees. This makes a huge difference, because whatever you don’t pay in fees is re-invested in the market, and with the magic (or math) of compound interest, even a 1% difference in fees could mean hundreds of thousands of dollars over the long-term for an average investor. Mutual funds managed by professionals will not beat the market consistently enough to make them worthwhile. They are extremely profitable for the people who manage them, which is why they are marketed like crazy and unfortunately are still popular to uneducated investors today, but the evidence is overwhelming: investors who invest in low-cost index funds see much better results over time. So stay away from actively-managed mutual funds unless they are your only options, that is, if you are investing through your employer’s 401k or 403b plan and you have a limited choice of funds. In that case, still invest in whatever option you do have to maximize whatever employer match you can get, because that is basically free money which you should definitely take advantage of, and whenever you decide to leave that job, immediately roll them over to an IRA invested in index funds to let that money grow more efficiently.

As for individual stocks, buying them is fun but also not recommended for the sake of your future. If the professionals who manage mutual funds can’t even beat the market, what makes you think you can? However, trading stocks is far better than gambling away your money at the casino or through lotteries. At least the expected return is positive with stocks, unless you are trading so frequently to pay more in trading fees than the gain you should make through the market on average. So if you have an itch for gambling, by all means, be my guest and have fun trading stocks. Lotteries are stupid, because the more you play, the more you lose. If you do trade stocks for fun, just remember to only trade stocks with a small portion of your assets, and favor buying and holding for the long-term over trading frequently.

My grandmother actually trades stocks as a hobby, and I support her completely because this hobby is intellectually stimulating for her, and I think it is great for maintaining her sharp mental state even in her old age. I am also quite impressed to see her do it all without a computer. She watches a market-news program that shows the fluctuations of various domestic and foreign company stocks, keeps a mental state of the stocks she holds and their movements over time, and trades her shares through the phone by calling her broker. BUT!! As much as I love my grandmother and enthusiastically support this habit of hers, that is NOT my recommendation for you. My grandmother has invested wisely over her lifetime, has built up a fortune, and now she deserves to have this kind of fun even though her strategy may not be optimal. You, however, in order to optimize your investment, should avoid trading individual stocks, and simply invest in index funds instead. The problem with trading stocks is that because you are basically trying to time the market for each stock you buy or sell, you are often holding a portion of your assets in cash between the time you sell your shares and the time you decide on which company to invest in next. This gets pretty costly over time, because you are missing out on the growth of the market while your money is not invested in the market, not to even mention the fees charged for each trade you make. The overarching trend of the market is that it goes up over time. Even in the last two decades in which we’ve seen the dot-com crash of 2001 and the financial meltdown of 2008, the stock market has still gone up over time, on average. Trying to time the market is a loser’s game for that reason. You miss out on the growth that happens while you are not in the market. A far better alternative is to always be investing by keeping your assets in an index fund at all times.

Up next, we’ll take a look at the index fund that gives you the easiest, hands-off investment option: “target-date retirement fund.”

Your craft makes you badass

Yuki, my sister, works in the mechanical prototyping industry, among many other things she has gotten into throughout her life. We say that she is the adventurous one in the family. She told me about Les, a machinist she met recently.

Les is a really good machinist. Because he is so good at what he does, he gets a lot of requests from many customers to make more parts. He has to turn them down. The job comes to him, not the other way around. His current project is to make a treadmill. He’s mostly doing it for fun because he can, and unlike a treadmill that has to be plugged in, his is powered by the person running. He is pretty badass.

It’s not easy to get to where Les is, where opportunities just come your way. But we all have something to learn from him.

When you search around the internet for career advice, there’s certainly no shortage of them. I’ve read (and even written) some of them. So much of the information out there focuses on the easy things: what to say in an interview, how to craft your resume and cover letter, how to attend events and meet people. It’s as if marketing ourselves is the most important thing. But is that true? Sure those little things might matter, but to focus our conversation on those things assumes that all jobs are scarce and everybody must fight (or even beg) for them. But really, that’s only for the people who are not yet like Les. So why are we not trying to be like him first and foremost? The tragedy is, all the nuggets of advice we find all over the world in books and internet articles dilute the most important message that we all need to hear:

The single most important thing you should be doing right now is to invest the time you have in honing your craft.

This is not easy. It takes time and work. But it makes the most difference.

I am certainly no Les. I am not there yet. But I have seen over the years that the more I work on my craft, the less I have to ask for opportunities, and more that just come to me. This applies no matter your field. The concept is simple, it’s not rocket science. The higher the quality of your work, the more it is valued.

How well you do your craft matters, A LOT. Invest in it.

On rent control

Santa Ana, a city in Orange County, CA near where I live, is considering implementing rent control. This is disturbing news to me, because basic economics principles and past failed efforts to control rent in other cities convince me that this effort, if implemented, will not only fail to solve the problem of expensive rent, but will make the problem worse.

A policy’s outcome is much more important than its intention, so we should never implement a policy just because the people who proposed it had good intentions. Of course we all want affordable rent, so the question is, how do we achieve that? If we want to make rent affordable, we have to look at the root cause: why is rent not affordable in Santa Ana right now? What led to this?

Rent control is like putting a bandage on a wound, it treats the symptom, not the root cause. That’s right, high rent is merely a symptom of some other poorly-instituted policy or restriction that cause a shortage in the number of housing units available per capita, so that’s what we ought to target if we wished to actually make a difference. There also exist other factors here that we cannot control, like the great California weather, which makes this a very ideal place for people to live in. We can’t change that, and as a result rent will always take up a higher percentage of people’s income here than it would in other places. With that said, we can still optimize the policies to make housing more affordable, if not cheap.

When rent is artificially kept low in certain units below what the market is willing to pay, that leads to a smaller amount of funds available in the economy which would have been invested in more housing. That in turn causes a lack of housing and an overall rise in housing costs. It also incentivizes wasteful use of land. That’s because if market forces naturally raise the cost of housing, people who can’t afford it have one of two options. Either they will find a roommate (which alleviates the economy of the need for one extra room, which is a win), or they will move into a smaller, more affordable space, also a win for the person and the system, because the person can continue to live, and it creates an opening for someone else in the economy, helping to maintain the cost of housing slightly lower. And that’s exactly what is supposed to happen when a city has a housing shortage, short of building more units. But if that cost is artificially kept low through rent control, they will stay in that space instead just because they can. While that might be great for the person who was lucky enough to get that rent-controlled space, that leads to less space available for the rest of the population, leading to a higher overall housing cost, based on the principle of supply and demand. And no, we cannot enforce rent control in every single unit, because the only way to make that happen is through subsidies. Nobody will invest in building or managing housing units in which they are only allowed to charge a fraction of the market rate for rent, because that means a loss of money for the investor unless their work is subsidized by the government. But keep in mind that every single dollar spent in subsidy has to be funded through taxes either now or in the future, and that money comes directly from people. So the effect of rent control, if gone far enough to build new rent-controlled living spaces, is that we will have taken money away from people through taxation, and into the pockets of investors, developers, and property managers.

I am from Tokyo, a city that has become a mega-metropolis while still maintaining affordable housing for people of all income levels, and it did that primarily by not restricting land development. When you allow the free market forces to determine how much housing should be built to meet the demands of the the industries in the city and what ought to be its price, miraculously, housing stays affordable for everyone. Some of my American friends who are used to living in gigantic living spaces according to Tokyo standards may say to me, “But you can’t get the same quality of life in Tokyo for the same price. Sure housing may be affordable, but you’re living in a much smaller place for what you pay compared to California.” And that’s exactly right! That is indeed the optimal (and only) way to keep housing costs low for everyone in a city with growing industries. And guess what, that doesn’t diminish people’s quality of lives as much as forcing people to move to far away suburbs only so they can commute into the city for two hours in their gas-guzzling SUVs. So maybe California has something to learn from Tokyo. Because I live in Orange County now, this is an issue I care about deeply. I too want it to be a place where housing is affordable for all people, no matter their income. I ask that policy makers carefully consider the impact of their decisions. Please make decisions based on sound data and logic, and not just on emotions.

Why Invest?

This post is part of an ongoing series. If you haven’t already, also check out my last post: Stop trying to time the market.

Before we get into the specifics of how to invest to optimize the chance of building the largest fund for your future self, let’s talk about why it is so important for everyone to invest.

Do you love your job?

If the answer is “no”, then absolutely, you should invest. It’s the most sure way of building yourself the financial freedom to turn “work” from something you do to pay the bills and are stuck with for the rest of your life, into something that you do because you want to, when you want to.

If the answer is “yes”, first, pat yourself on the back. You must have worked diligently to get to do the work of your dreams. Well, my suggestion to you is, still, you should invest!

With the rapid rate of change in technology, the nature of work is quickly shifting. In my industry, I often feel overwhelmed by all of the new technologies I must continue to learn to keep pace, and as much as I love my job right now, there is no guarantee that the opportunities for me to continue to do the jobs that I love will always be there. Sometime in the near future, I may want to take a few years off to study. Or maybe I might decide to step away from engineering and become a doctor, a barista, a concert pianist, a carpenter, or take your pick! Maybe I’ll retire early and start a farm in a remote village. Or maybe I’ll be married, and my future wife and I decide to be stay-at-home parents. Whatever my desires happen to be, the only reason I will have these options in life is because I was taught about the importance of investing very early on. When I was a kid, my dad set up a meeting for me to meet and talk to his financial advisor (one of the greatest gifts, thank you dad). Ever since, I have been investing a portion of every one of my paychecks, even if I was working a minimum wage job (in 2004 California, that meant $6.75/hour, or $54/day, which felt like a lot of money for me back then). It was also around the time that my dad left his corporate job to pursue his goal of becoming a pastor. It was the perfect living example, to the eyes of my high-school self, that making wise financial decisions throughout your life can set you up with the freedom to pursue your passions. Again, thank you dad for the awesome life-lesson. Anyway the good news for you is, you actually don’t need a financial advisor. Investing is super easy, and I will show you how.

But first, why should you invest? It is because of the single greatest thing money buys you, which is freedom. Money allows you to live the way you want to live. It frees you from having to please your boss or to keep jobs that you hate. It frees you from the worries of losing your job one day. It allows you to give freely to charities whose causes align with your core values, or even better, quit your current job and go work with those organizations to make a difference in the world with your own hands. It allows you to work when you want to, and spend the rest of the time with your loved ones. It lets you travel the world, and should you fall in love with a place, it gives you the ability to stay there indefinitely instead of flying back. As you build your investments and slowly remove the burdens that come from your day-to-day finances, you gain the power to focus more of your life and energy on what truly matters to you.

Investing is not just for the rich. Everybody should invest. It does not matter what you do or how much money you make. Each time you get that paycheck, you have to make investing a priority before you go out for the celebratory dinner or buy yourself a nice gift.

I’m not saying you shouldn’t spend. But if you do decide to spend your money, do it with thought, and ensure that every spending decision you make is an intentional one, with a clear purpose. Just consider that throughout its history, the S&P 500 index has yielded investors an average of 11.95% annual return. With the dividend and capital gains re-invested earning compound interest, that means a $10 you invested forty years ago will be worth $914 today. Once you come to the understanding that the $10 you spend today is depriving your future self of $914 and you are ok with that, then go ahead, spend away that $10. If not, think twice before every purchase you make. That $3 latte to keep yourself awake? That’s actually a $274 cup of latte. Maybe you should just go to bed earlier so you don’t need coffee to wake you up. The nice $60 sushi dinner? That’s actually costing you $5484. Maybe you should just cook up something at home instead. The $500 weekend trip to a resort? That’s $45701, you can easily live two years off that! Maybe you can skip the trip this time and go out for an inexpensive fun night in your own neighborhood instead.

Next: What is an index fund?

Stop trying to time the market

The questions that I get asked often are:
1. “What should I invest my money in?”
2. “I feel like the current market is overpriced. When should I start investing?”

Well, I’ve got some answers for you.

This is a post that I’ve been working on for some time now, but I’ve decided to publish it since it seems like the appropriate day to do so for what the market did today. I’m sure you got a handful of investment advice from your coworkers who are trying to time the market. (Ignore them, and do your own research).

Now, if you’re like me and have read dozens of books on economics and finance, you probably know already that paying attention to the daily fluctuations of the market is just noise and should never alter the way you invest, and you likely already have an aggressive investment portfolio optimized for the long-term. If you’re that person, you can stop reading now and go do whatever you love to do on Monday nights.

Still reading? Ok, I’ll give you the answers first because I’m in a bit of a time crunch now, and will delve into the topic further in future posts.

“What should I invest in?”
Most of your assets should be invested in an index fund that tracks the performance of the U.S. stock market.

“When should I start investing?”
Don’t try to time the market. The best time to start investing is whenever you have the money to invest. This means that you are debt-free, or have at least paid off your high-interest loans (with annual interest rates over 5%), and have enough cash to handle life’s emergencies, such as a broken car, an unexpected medical diagnosis, or a job loss. Keep investing no matter what the market does. When the market takes a big hit like it did today, invest. When the market is quickly rising like it did all of last year, invest. If it completely tanks like it did in 2008, invest. Get it? It’s simple: whenever you have the money to invest (which should be every single time you get paid), invest.

Next: Why Invest?

Conducting and the Creative Process

Last week, I got to witness my friend Jojo make his orchestral-conducting debut, conducting the Brahms’ first symphony. It was an incredibly moving performance to say the least, and it was particularly special to me because Brahms’ first symphony is a work that I have always loved.

Many people think that conducting is about the motions, and understandably so because that is the obviously visible part of a conductor’s work that you see every time you witness an orchestra perform.

However, having talked to conductors, it seems to me that that is actually not what conducting is about. Even though I sometimes hear reviews that focus on the motions, such as “that conductor was so into the music” or “that conductor was a bit tense,” such reviews might be missing the most important aspect of conducting. Conductors tell me that conducting is much more about the skill to rehearse an orchestra in a limited time to unify their playing so that the group performs as one, instead of 100 independent musicians. Simply put, conducting is not about the conductor. It is about the music.

Joshua Bell once said this in an interview: “A bad conductor is someone who can get in the way of the music. I mean, the great secret is that an orchestra can actually play without a conductor at all.”

Talking to Jojo after the performance, I gained some insights that parallel my desires to produce good works as a fellow creator and a musician.

For one, a conductor’s work begins long before the first rehearsal with the orchestra. That is actually true of any genre of art, but especially important for a conductor. Conductors who show up to rehearsals unprepared are not only useless, they are almost criminal. They are essentially taking the precious time away from the lives of the members of the orchestra, and throwing it down the garbage.

In Jojo’s case, he studied meticulously the music and created in his mind the sound that he wanted, months before he even met with the orchestra for the first rehearsal.

It can be a bit misleading when you see any kind of a music performance, because all you’re allowed to witness is the final performance. But it turns out that music is actually so much more about what happened behind the scenes long before the music was produced: all the preparations and the rehearsals. For many aspiring musicians, this is a turn off. They like the idea of performing a beautiful peace of music, but do not want it enough to actually get up in the morning everyday and go through the process to develop the required skills. That is such a shame, because it is precisely in this process from which I gain my happiness and a purpose for my life.

I often hear people tell me, “I wish I could play music like you.” My response is usually the same. “Do you really? There is nothing stopping you.”

On social media

“Facebook is so toxic, it is like a happiness competition,” was the remark my coworker made during one of many casual conversations in which we discuss a wide array of topics that seem to have nothing to do with our work. I find these conversations so valuable that I make it a goal every single day to talk to my coworkers and learn about how other engineers see the world. Engineering at its core is about shaping the world to make it better, so our most important task, more so than our technical growth, is to continue to aim to understand more about society. On this particular day, this statement struck a chord with me.

It is interesting that social media has become a place where we show off how great our lives are, yet research shows that usage of such platforms seem to be negatively affecting our self-esteem.

Any happy person knows that happiness comes from the little things that happen daily. It’s not at all about some grand accomplishment that earns many “likes” on social media.

Yet so many people believe that life is about these accomplishments. I realized that a few years ago when I quit my job. People were sorry for me even though I felt that I had just made a wonderful decision that allowed me time to grow more as a musician. Then when I went back to an office job, so many people congratulated me. Why is it so deeply ingrained in our minds that life is suddenly great if a person gets a a new job, a new degree, a new house, a new car, or a new spouse? Sure these may be good things, but not because of the end result. A college degree is hopefully a sign that you have the diligence to learn something difficult, and you will continue to use that skill to develop yourself. A new job hopefully means that you worked hard at your passion and equipped yourself with a talent that an employer sees as valuable, and now you will continue to grow as a person on the job. Or a new spouse hopefully means that you have a person in your life that you really enjoy spending time with, and you will continue to support each other as you build a life together. Those are things worth celebrating every single day. But it is problematic when we idolize just the end goals and start pursuing them as if the final result are what matters. Life has so much more to offer you along the way regardless of the destination.

Although I am concerned about the harm that come from our attachment to social media, I remain optimistic and believe that a proper use of it can also be a force for good. It can unite people for a good cause, or inform people of important issues in the world. But let’s take a step back and take some time to consider what it may be doing to us, particularly our mental health. Let’s appreciate all the little moments of joy in our lives, even if they are not grand and worthy of making it to our social media feeds.

On Goal-Setting

It is the new year. It’s the time of the year when we set our “new year’s resolutions” if only to keep it going for a week or two then forget about it until next year.

For me, I haven’t set up new year’s resolutions in the past, because I find the whole idea kind of silly. If there is something I want to accomplish, I should work toward it whether it’s the new year or not. What you are is an accumulation of what you have done day in and day out. The best students study daily, not just before the test. The best engineers learn daily, not just before a job interview or when their task at work requires them to. The best artists and athletes practice daily, not just for a big concert or a game.

But if you are setting goals whether it’s the new year’s or not, here’s a helpful mindset to actually get you somewhere:

Set up a goal that is about the present, and gets to the core of what it is that you want.

Here are some examples of ineffective goals:

“I will pay off my debt.”
“I will lose 20 lbs.”
“I will get a better-paying job.”

These goals all have one thing in common, which is that they are results-oriented and not specific to guide your daily actions, starting with today.

Yes, the idea of being debt free is wonderful and I totally agree, if you or anyone you know have any outstanding debts, then absolutely, they should pay it off. It’s not so much the end result here that’s problematic, but it’s the way the goal is set.

The hidden notion under such an outcome-oriented goal is that you are unhappy with your current life, and you will be only when you reach the end. It is kind of depressing living life while constantly thinking that something is missing or not right. Such an attitude can actually pull you further away from your goal.

A goal should be much more process-oriented, and something that you can achieve every single day. What is it that you really want? If you want to pay off your debt, my guess is that what you really want is along the lines of financial literacy, responsibility, and freedom or maybe you just want to feel good about yourself. If that’s so, how about a goal like “I will increase the loan payments. Instead of paying the minimum required, I will allocate 10% of every paycheck.”

We’ve shifted the goal into something you can accomplish frequently (everytime you get a paycheck) instead of an all-encompassing thing at the very end (pay off my debt). You can even automate the process with your bank, and not even think about it, freeing your mind to focus on perhaps another goal. You’ll feel great that you’ve made the change because it focuses on the “now”, not the future and you are accomplishing it every day. Once you are feeling good about your present situation, let your optimism be the fuel to get you even closer to your goal to take the next step, whatever it may be. When it comes to personal finance, there are so many great resources from people like Dave Ramsey and Ramit Sethi. So always be educating yourself, and act on the informaton you obtain. Your life will be so much more fun when you start to enjoy the journey, not just the final outcome.

So that was just one example, but you can apply to the same principle to any goal. With that, I wish you a happy new year. Let your 2018 be filled with fun challenges.