Why Rewards?

An interesting thing happened to me last week. I found a white iPhone on my way home from work. I looked around to quickly see if anyone was looking around for one, but I didn’t see anyone who seemed to be looking around. The phone was locked, so I pocketed it and made my way home. Once home I checked the phone. There was a missed call and a couple emails. I started to look up how to return a locked phone to someone, as I was doing so a call came through. I picked up.

“Hello?”

“Hi, um, you have my phone?”

I replied that yes I did (I was talking on it) and that I’d like to return it. Could I meet him somewhere? He said a spot right around where I had found the phone. I biked over and returned the phone to a very thankful mother and son. As I was getting ready to leave, the mother offered me a small folded $20. I refused to take the money multiple times but she ultimately shoved it in my hand saying “I know it’s not much, but thank you.”

Returning an item without knowledge of a reward is a strange concept when you think about it. I did not see a posted sign offering a reward for this lost iPhone, so it had no bearing on my decision to either keep or return the phone. In fact, if I had been a purely rational, self-interested actor I would have kept the phone and sold it. The fact that I returned the phone means that I wasn’t looking to get anything out of the transaction except for some good karma.

I did a little digging in the concept of the reward and quickly found that etiquette, one of my pet interests, had something to say about the matter. (Recently a friend of mine let me borrow the literal book on the subject, Etiquette, which I highly recommend.) I did a little digging as to what it says on the subject and, well it depends.

But I don’t think it should. The reward is not something that should be expected in our society. Making a good faith effort to return a misplaced item should be the norm. It makes sense from looking at it from an Utilitarian perspective: for most people the gratification from returning an item far outweigh the search costs to find the rightful owner, whose utility will be greatly increased by the transaction.

So, next time you find a missing item and return it to the owner out of good faith try your hardest (barring any physical violence) to refuse any reward. Tell them that as a way to pay it forward they can do the same when they find a missing item. That will be how we’ll build a society where doing the right thing is the norm and not something that has to be rewarded with anything beyond a profuse thank you.

Comments or questions? Send them to me @jeremysjacob

Starting to Invest Pt. 1

Disclaimer: I am not an registered investment advisor and am not compensated either directly or indirectly for any investment advice.

I’ve been an amateur investor for a while now, and what used to only be a personal hobby has slowly turned into a casual, pro-bono consulting service. It all started after I gave a presentation to a class at the end of college encouraging my peers to start investing now (at the beginning of their careers) for retirement rather than waiting a few years (or even a decade). This post has been adapted from a recent email conversation I had with a friend who wanted some advice on how she should go about her first investment.

First off, many friends want to know how they should start thinking about investing. The world of investing can be daunting, so not knowing where to start is enough to leave many on the sidelines. As we’ll see below not thinking about investing at an early age can translate into big differences later in life! This “investment hierarchy of needs” chart details the most widely accepted view of the order of importance with which you should pursue investments. There’s a clear place to start: opening a retirement account.

1. Open either a Regular or Roth 401k (or IRA)

There are two big reasons why, if your employer offers a 401k, it’s by far the best place to start for young, employed investors: taxes and time.

Paying taxes isn’t any fun (for most people), and paying the capital gains tax is even less fun than the money that comes out of your paycheck every other week. That’s because it doesn’t matter who you are, if you make above $33,000 a year, you’ll pay 15% of any capital gains you make (that is if you buy a share of Google at $40 a share and then sell it at $50 a share, you’ll pay $1.50 of the $10 you made in taxes). Given the long-term fiscal outlook of the US, it’s likely that this number will only increase with time. Here’s where a retirement account comes in. The beauty of a retirement account is that it’s protected from the capital gains tax. You can think of these retirement accounts as armored cars, your investments (stocks, bonds, etc.) as the bags of money inside, and any armed thieves are capital gains taxes.

The second reason, time, is just as important. Take a look at the chart below and you’ll see why time (even 2-3 years) can make a huge difference when you get to retirement. The chart takes two scenarios, one person who starts contributing each year at 25 and another who starts at 35. The difference is substantial.

If you’re a young person looking to invest but either a) aren’t employed or b) your employer doesn’t offer a 401k you can always start an IRA, which has a lower annual limit (we’ll get to that later) and no employer match.

via Fidelity

via Fidelity

So, should you start a Regular or a Roth account? This will depend on your situation. With a Roth account you put post-tax dollars into the account and when drawing the income at retirement it won’t be taxed (neither income tax, nor capital gains tax). With a Regular account you put in pre-tax dollars and when drawing the income out at retirement it will be taxed (income tax, but remember, not capital gains tax). So if you think you’ll be in a higher tax bracket in retirement (either due to increased income or increased taxes, or both) then a Roth account is the way to go. If the opposite, then a Regular account is for you.

2. Invest in a Target Retirement Fund

These types of funds are an amalgamation of several different index funds (funds that track an index of securities) with a very low expense ratios (the amount an investment manager takes out as a fee). I recommend the Vanguard target retirement 2055 fund to most millennials. Vanguard has the lowest expense ratios by far. In addition, target funds will automatically shift its distribution of stocks vs. bonds as you move closer to retirement. For example, the 2055 fund is currently about 90% stocks and 10% bonds, this distribution will slowly start shifting more heavily towards bonds as 2055 gets closer. Stocks are generally more volatile in the short-term, but have a greater return in the long-run than bonds. This is of course assuming that you’re a passive, buy and hold investor who’s looking to be as diversified as possible at the lowest costs.

3. Contribute to your account often and early

As we saw in the graph, this is key! If your employer offers a match, even better! The best way to incentive this is to automatically route a percentage (at least the amount your employer matches, even better if you can put away more) of your paycheck to your account. If you can, put the maximum of $17,500 into your 401k or $5,000 a year into an IRA. One thing that a lot of people don’t know is that you can add to your retirement account for the past year all the way until taxes are due (so you have until April 15, 2014 to contribute towards your 2013 retirement account limit).

If you’ve already gotten all of that taken care of and you’re still hungry for more you can move up to the next level of the hierarchy, opening a brokerage account. I’ll go into some general strategies and guidelines on how to get some exposure to more specific industries or firms using your brokerage account in the next installment. But using the strategies in this post is all most people will need to start saving for retirement effectively.

Comments or questions? Send them to me @jeremysjacob

Welcome to jeremysjacob.com!

I’ve had this site up for a couple years now, but I’ve never been able to put it to good use. But that changes today!

First, I hope this site will help me better consolidate my online identity. In this day and age of growing social media and interconnectedness, establishing an online identity and brand will only grow in importance in the coming years. So it will be a place to log my achievements (and failures), chronicle my adventures, and connect with others.

Secondly, I hope that this will also be a medium where I can provide commentary on what I find interesting/fascinating/troubling/etc. in the world around me. I’ve been a faithful follower of many bloggers for many years, but have never thought I could actually do it myself. To that end, I also hope it provides a way for me to better articulate and keep track of my thoughts as they occur. My ultimate goal is that this becomes a repository and (subsequently a testing ground) for the random fleeting thoughts and ideas that pop in and out of my head throughout the day.

Comments or questions? Send them to me @jeremysjacob