VT or VTI for Stock Allocation?

Discussion of the Stock portion of the Permanent Portfolio

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dualstow
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Wed Apr 27, 2011 12:57 pm

My wife is Chinese and would cringe at this discussion.  :D It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.
I have no idea where China's economy is going, but I am quite comfortable with having almost all of my pp stock allocation in VTI. (I've got a small piece of Vanguard's international stock index).
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 1:16 pm

Why would she cringe at the discussion?

I wasn't suggesting a full-blown communist managed economy is ideal, and not even that the government's reach is currently appropriate... simply that there are questions to ask regarding social insurance and how unfettered markets may or may not work for a sustained middle class.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Wed Apr 27, 2011 1:43 pm

moda0306 wrote: I have a feeling that our public-sector schools do a better job of instilling us with some skepticism of government than a private-based system would be of instilling us with the proper consumer/contract skills necessary to navigate as young adults.
I don't follow this line of reasoning.  Private schools (and home schoolers) already exist, so there's no need to speculate.  I don't see any evidence that these institutions are churning out vacant-eyed consumer-bots.  Anyhow, these are functions that can be performed by some government.  But what's the value in placing any of it under the umbrella of the one-size-fits-all federal government?

Remember that at the beginning of the 20th century, federal\state\local taxation combined took less than 10% of our income.  (Now it's more like 50%.)  If you're predicting dystopia, why did it fail to take shape before?  Why did the United States enjoy such a long period of prosperity (with deflation all the way, I might add!)  Are we fundamentally different creatures now than we were then?  Perhaps... but if so, in what way?
dualstow wrote: My wife is Chinese and would cringe at this discussion.  :D It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.
That's interesting.  Are there any facets of her perspective on China that you'd be willing to share?
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Wed Apr 27, 2011 2:00 pm

moda0306 wrote:Why would she cringe at the discussion?
Not to put words in her mouth, but I think page one would be something akin to seeing America judged mainly by a combination the Kardashian sisters and the average standard of living in the Appalachians. Needless to say, though, that we are both extremely critical of the CCP, and she is well aware of the many scandals and problems, from Tibet to the dam at Three Gorges to tainted pet food and toothpaste.

Lone Wolf wrote:
dualstow wrote: My wife is Chinese and would cringe at this discussion.  :D It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.
That's interesting.  Are there any facets of her perspective on China that you'd be willing to share?
There's not much I could repeat from her side that would help anyone make investing decisions. However, we have had conversations about how people have always said, "Look at the U.S. It's a rich country but there is such a huge discrepancy in wealth (among the classes)." And, I think that China is going through a lot of the ugly and awkward stages that developed countries have gone through. Nouveau riche, environmental catastrophes in the wake of industrialization, etc. City dwellers look down on those in the countryside instead of thinking about how to improve their situation. Of course it's also very different from the West because of the government and the massive population. Clearly, it could get worse before it gets better.
It's also strange how long the "communist" regime has been able to hold on to power.

EDIT: saw moda's post late. I put in a response at the top.
(also edited "three gorgeous" -- can't believe I typed that -- to Three Gorges ( ?? )

But again, I have no idea where China's economy is going and I would trust what I read here with more confidence than any estimations my wife could make.
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Wed Apr 27, 2011 2:22 pm

I have read in the Economist recently a number articles talking about the growing influence of China's population as consumers rather than mere manufacturers and exporters. The two that I can remember off the top of my head were about Canadian timber -- Canadians now shrug at American pressure because they can sell to China now, and American pecans -- prices are going up and American nut shellers are having trouble for getting their hands on these nuts (forgive the awkward phrasing) before the Chinese snatch them up. I will edit in the links in a minute.

I think a larger part of the population is living better than we think. But yeah, there is still widespread poverty and I saw it firsthand when I was there. Not pretty.
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Re: VT or VTI for Stock Allocation?

Post by AdamA » Wed Apr 27, 2011 4:02 pm

murphy_p_t wrote: Adam,

I'm curious...what gov't protection are you grateful for?
Police
Military
Interstate Highway system
FDA
FAA
Railroads
National Parks
Property Law
Ironically, It seems to me that the examples I cited above largely benefit the plutocrats aka too-big-to-fails. For example, attempting to prop up the housing market helps builders, bankers, real estate agents to the detriment of renters who would like to buy a house @ a reasonable price. The orig manipulation is also to be condemned, which led to the bubble in the first place (Greenspan keeping rates so low, etc)

Another example is Obamacare...designed to greatly increase the market size available to the insurance companies thru gov't mandate.
I know, and I can't argue with that.  I just think it's not as simple as going from one extreme to another. You have to balance the good with the bad either way.
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Wed Apr 27, 2011 4:47 pm

dualstow wrote: I will edit in the links in a minute.
Took me forever to find the pecan article, because it was at WSJ, not the Economist.
And, the Canadian timber piece. Granted, pecans are more obviously bought by individuals while timber buying could just be a sign of booming businesses. But if business is booming...
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Re: VT or VTI for Stock Allocation?

Post by KevinW » Wed Apr 27, 2011 4:58 pm

moda0306 wrote: ...it's worth the cost of a government monopoly in roads and the misallocations of resources that may occur to have a standard transportation system not subject to different tolls, widths, weight tolerances, and awkward transitions (not to mention market manipulation) that would accompany a privately run road system.
Well --- the internet has no government-mandated standards, and yet it works pretty smoothly.  People who build systems for the internet create their own standards through the RFC process ( http://en.wikipedia.org/wiki/Request_for_Comments ) or other private standards-writing organizations.  Anyone is free to follow or not follow those standards, so the good ones (e.g. HTTP) attain a critical mass and outdated ones (e.g. gopher) die off.

It's not a perfect analogy to the road network, but I think it illustrates that a lack of regulations doesn't necessarily lead to a big ball of mud.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Thu Apr 28, 2011 8:24 am

Simonjester wrote: lone wolf i love the "big ball of mud" definition! i had to copy it to use myself in the future....thanks...

the primary problem with social programs may not be so much their size, this much vs that much being the "right" size,  but their unending and irresistible ability to grow  (the effect of men voting for their own benefit to be taken from others) i wonder if there is any government system of socialism that won't eventually grow into a big ball of mud as an inherent part of its nature, and if expending the effort needed to successfully resist its growth is even possible, or a reasonable exchange for whatever benefits the government programs provide..
Glad you enjoyed the analogy.  And you raise a good point.  I can't think of much more that the Founders could have done to try to prevent what has happened.  Their safeguards worked well for a very long time.  One source of trouble is these safeguards against out of control government tend to be loosened during wartime or economic shock.  Once government has acquired these new powers (and the increase governmental girth that accompanies them), it's reluctant to let them go.

People on the whole like the idea of getting things from the government, whether they be simple checks or other goods.  What they miss is that these goodies come with a very high price and that there's not always "somebody else" footing the bill.  On a related note this interesting Gallup poll found that while 67% of those making $250k or more think that their taxes are too high, only 38% of these same people think that "upper income" individuals pay too much in taxes.  (A household income of $250k easily puts you in the top 5%, but this clearly shows that these people do not feel "rich".)

This same effect also causes the middle class to underestimate its own size and overestimate the number and earning power of the upper income group.  To raise a lot more tax revenue, you must tax the middle class.  Due to the inefficiency of government vs. the market, this is why there's a hard limit on how much you can subsidize the middle class before you punish them much more than you help them.  This is why one of the best things you can do for the middle class is reduce the overall tax burden and overall size of government.
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Re: VT or VTI for Stock Allocation?

Post by KevinW » Thu Apr 28, 2011 9:06 am

Lone Wolf wrote: I can't think of much more that the Founders could have done to try to prevent what has happened.
They did an amazing job, yes.  One thing that they could've done better, though, would've been to pin down what exactly they intended the commerce clause to mean.  Much of the ball of mud is authorized by a modern interpretation of the commerce clause which I think is very different from what the framers had in mind.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Thu Apr 28, 2011 9:27 am

KevinW wrote: They did an amazing job, yes.  One thing that they could've done better, though, would've been to pin down what exactly they intended the commerce clause to mean.  Much of the ball of mud is authorized by a modern interpretation of the commerce clause which I think is very different from what the framers had in mind.
Very good point.  I don't think that I could have asked anybody to try to predict a court decision as insane and arbitrary as Wickard v. Filburn (aka "the one that says wheat you grow and eat yourself is 'interstate commerce'").  But you are absolutely right.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Thu Apr 28, 2011 9:52 am

"General Welfare" as well is probably carried well beyond what they had intended.

LW,

I disagree with your assertion that the middle class would have to be heavily taxed.  Right now, the wealthy are paying 15% on their capital gains & dividends with no FICA or Medicare contributions necessary on those amounts, while the middle-class are paying 15-28% federal PLUS 7.65% FICA/Medicare on their wages.  Wealth appreciation also does not show up in "AGI" and therefore doesn't end up as a denominator in the "tax rate" equation. 

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government.  I am not arguing the morals of "soaking the rich" so much as I think that the idea that we've stumbled into the unfavorable realm of the Laffer Curve is a myth.  We had exhorbitant rates on the top during some of the most prosperous years for our middle class, that gave little preference to income from return on capital.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Thu Apr 28, 2011 10:27 am

moda0306 wrote: I disagree with your assertion that the middle class would have to be heavily taxed.  Right now, the wealthy are paying 15% on their capital gains & dividends with no FICA or Medicare contributions necessary on those amounts, while the middle-class are paying 15-28% federal PLUS 7.65% FICA/Medicare on their wages.  Wealth appreciation also does not show up in "AGI" and therefore doesn't end up as a denominator in the "tax rate" equation.
I hear where you're coming from.  My point was more that there are just a lot fewer wealthy than we might imagine.  I don't dispute that there are many inequities in a structure as complex as the internal revenue code.  Personally, I'd do away with taxing both income and capital gains (for a variety of reasons.)
moda0306 wrote:I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government.
It would be interesting to see this analysis broken down in detail if you happen to stumble across it again.  It could lead to some really enlightening observations.  Do you remember whether it was primarily the lower rates on capital gains that caused the low overall rate or some other factor?

Consider someone who has several billion dollars stashed away but has very little income.  They spend like crazy, living for the moment.  Despite being very wealthy, they'll face an extremely low tax rate under an income tax regime.  Under a consumption tax regime such as FairTax, this person would pay a lot more tax.

On the other hand, someone with billions stashed away who lives frugally would have very little tax burden at all (the miser.)  I'm a fan of the miser because his savings are being lent out for others to use while he consumes virtually nothing for himself.  A wealth tax regime would punish the miser (along with all other savers), which is why this is a tax regime I dislike the most out of all of them.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Thu Apr 28, 2011 10:52 am

LW,

It was probably a combination of capital gains, dividends and Muni Income, the last of which would skew things since the arbitraged interest effect of muni bonds... so maybe that 16% isn't fair... a bit crappy of me to just throw that out there without a source but I've been racking my brain as to where I read it or whether the source seemed to have a liberal bias or some backup sources/statistics.

The market affects of switching to consumption-based tax is something I've pondered on and off for a couple years now.
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Thu Apr 28, 2011 10:59 pm

moda0306 wrote:

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government. .
See #3, paragraph 2 here: http://www.wweek.com/portland/article-1 ... taxes.html
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Fri Apr 29, 2011 10:31 am

Dualstow,

That wasn't my source, but is about 10x better... maybe a little bit left-wing populist, but excellent info.

Thanks!
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Re: VT or VTI for Stock Allocation?

Post by TBV » Fri Apr 29, 2011 12:21 pm

California provides a good example of what happens when tax rates become excessively progressive.  Though it has 40 million people, half the state's income tax revenue comes from just a few hundred thousand people.  Whenever they have a bad year, the state has a fiscal crisis.  Whenever they alter the pattern of their income, the state has a fiscal crisis.  Unstable swings in revenue are less present in sales taxes, which are not progressive.  So, the lesson should be clear: stable tax revenues require a broader, less progressive tax base.  IMO, the primary purpose of the tax system is to provide stable tax revenue, not income redistribution.  Trying to balance budgets on a tiny sliver of the population produces high volatility, making it just as illusory a benefit as the asset bubbles produced by populist monetary policies.


http://www.ftb.ca.gov/forms/catxrate_exmpt07.shtml

http://www.ftb.ca.gov/forms/2009_Califo ... ions.shtml
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Fri Apr 29, 2011 1:11 pm

TBV,

I'd imagine that any Laffer-esque arguments are much more applicable at the state level than at the federal level, as moving from state to state is much easier than moving to a lower-tax country than the U.S.

I find, though, that looking at different states as "microcosms" of what should work on a national level is difficult, as there are many liberal and conservative states in completely different states of economic failure & success right now, with no clear trends as to which ideology is a recipe for prosperity.  Nevada, Arizona, the deep south including Florida (not including Texas of course) are in a REALLY tough spot right now.  But my very liberal state of MN is doing quite well with a 7.3% unemployment rate and some of the highest taxes in the country.  Some might think this is a "farmer" affect but in our twin-cities area this rate is more like 6.1%, so it hardly indicates a rural state benefit.  Our metro area is extremely liberal, high tax, but in my opinion a great place to live.
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Re: VT or VTI for Stock Allocation?

Post by dualstow » Fri Apr 29, 2011 1:38 pm

moda0306 wrote: Dualstow,

That wasn't my source, but is about 10x better... maybe a little bit left-wing populist, but excellent info.

Thanks!
It is left-wing populist. If I see one more image of a pig with a cigar in his mouth...  ;)
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Fri Apr 29, 2011 1:41 pm

dualstow,

Hahaha... Seems to be pretty accurate, though.
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Re: VT or VTI for Stock Allocation?

Post by TBV » Fri Apr 29, 2011 2:18 pm

Moda:

Touching on the relationship between prosperity and tax policy is an engaging topic all by itself.  But I was trying to focus solely on the volatility aspect, leaving the how-much-is-too-much tax question alone for the time being.  California is just one state, but the most important one economically.  For it to be perennially experiencing boom-bust fiscal cycles is very dysfunctional.  Just as excessive volatility is anathema to PP adherents, governments with large maturing payment obligations (pensions, entitlements, infrastructure, etc.) need to avoid sudden shortfalls in their revenue stream.  Incrementally exempting one's political base from taxation may be a vote-getter, but it's not sound tax policy. So, for much the same reason that the upper range of income subject to FICA tax should be expanded, so should the lower range of income subject to income taxes.

Of course, if we want maximum revenue regularity, perhaps we should try taxing toilet paper.

http://www.omaha.com/article/20110323/NEWS01/703239866

On second thought, with our luck, that would probably just lead to a sales spike for Japanese water-squirting, air-drying toilets.
Last edited by TBV on Fri Apr 29, 2011 2:24 pm, edited 1 time in total.
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