Wednesday, March 26, 2014

The Order of Allocation

I’m not all that good at “allocating investments.” However, I have come up with some ideas that are at least good enough to write a blog about.

Allocating your investments is very much like shopping for Pesach. It’s very stressful and there are no guarantees. However, the better you plan your menus, the more likely it is that you will be successful at avoiding Rami Levi the night before the seder.

The stress is actually quite fitting because you stand to gain or lose more by how you decide to allocate your money than you will by deciding which specific stocks or bonds to buy. I’ve only made it worse by convincing you that you also need to consider whether your money is invested in dollars or shekel. (No need to thank me – that’s what I’m here for.)

This blog is on the “internet,” where there is already enough written about “how to allocate your portfolio” to make your head spin. I see no reason to be redundant on this topic. If you want to make your head spin, you could easily just pour yourself four large glasses of wine. That is why I recommend that you sip – not gulp – that wine as you think about how to allocate your investments.

The 60/40 Portfolio

The 60/40 portfolio allocation is the starting point for most allocation strategies that you read about on the “internet.” You can find plenty of articles on it from the basic to the advanced, but only at Investing by Accident can we say that anyone who wants to understand asset allocation must read these 3 principles:
  • Stocks historically have performed much better than bonds. This makes us want to put all of our money into stocks. However, the trouble is that they fluctuate considerably in value. This means that for any given time, we could see a huge drop in the value of our investments. We do not like losing money, even though we’re pretty sure over time that it will recover.
  • Bonds historically have not performed as well as stocks. This does not want to make us put all of our money into bonds. However, they fluctuate relatively less than stocks. This means that in any given year, we can usually count on having our money if we keep it in bonds. We like having money. 
  • Stocks and bonds tend to fluctuate in value differently, at different times. This means that on average they will not have good years and bad years at the same time.
At this point, the people who understand math came along and discovered that if you allocate 60% of investments to stocks and 40% to bonds, you can gain much of the benefit of the traditional gains from stocks while minimizing how bad you will feel during the times when the values of stocks decline. This was certainly enough for us to say “thank you,” but the experts still came along with more.

Making it Complicated

The experts began to ponder each part of the 60/40 and wonder which investments within “stocks” and “bonds” were really the best. They were motivated by the fact that any expert who expounds on the virtues of asset allocation is considered praiseworthy.

They analyzed whether it would be best to invest in large, medium or small companies. Then, they considered whether it was better to invest in “value” or “growth” stocks. Before long, the experts starting looking at where “real estate” and stocks with “high dividend yields” belong within the allocation. Soon thereafter, other experts began suggesting that thinking about stocks as “domestic” or “international” would be particularly interesting. More recently, experts have been looking at “alternative investments,” but we simply do not have enough wine for that.

In bonds, the choices are much simpler, but there is still enough room for experts. Should you invest in long, intermediate or short bonds? Should they be regular bonds or inflation protected?

So Now What!?
I have been struggling with how to allocate investments for as long as I can remember having money. I guess that wouldn’t be very long. But still.

There are many highly intelligent systems that you could follow that should make it very easy. I recently came across Paul Merriman’s investment approach which contains a lot of wisdom that I’ve read about in other places as well. He even translates his allocation recommendations to a practical guide by listing the ETF’s that you could buy to use it.

I want to allocate my portfolio just the way Paul did at the time that he allocated his, but I find myself struggling to come up with a plan. The first challenge is that I’m never quite sure whether I want to be “aggressive” or “conservative.” I like to think about myself as a “moderately aggressive Orthodox with a cynical conservatism” which just isn’t one of the options.

The other issue is that even when I think I know precisely what I want to invest in, I find it almost impossible to apply the allocation. I have 10 different accounts (5 retirement and 5 non-retirement) in two different countries.

I suppose that 10 should be manageable, but I have to balance it against investment options that are limited in different ways in each account. Worse still, there are 25 words in the last sentence and 10 times 25 is 250 which is a lot of plagues.

If so, you should refill your cup now, which could only mean that are you wondering…

How is Investing by Accident’s advice on allocation different than all other advice?

The obvious answer I could give you is that we were slaves to our money before you read this blog, but that would be too easy.

The less obvious answer is that my advice is to think about the different kinds of money that you have and allocate each one according to its own special nature.

In other words, this blog speaks to the 4 types of money: Wise, Wicked, Simple and I-Have-No-Idea. I’ll explain them in increasing complexity:

Simple Money. You have a certain amount of money (hopefully, less than or equal to your monthly income) that you are using for your expenses (food, shelter, clothing, bank fees, etc.). This money is very easy to invest because you shouldn’t be investing it at all. You should just keep it cash and use it to pay your bills. It’s also fairly straightforward to think about which currency to keep this in. Just keep it in whichever currency your expenses are in. For me, it is about 95% in shekel and 5% in dollars. 

Wicked Money. I was recently reading an article about successful investors and was inspired by one of the ideas that they shared. The idea came from a wealthy investor who always keeps $2 million sitting in a reserve account. This way, he never has to touch the money that he has invested. I suppose he is thinking that he may want to suddenly buy a house and does not want to have to worry about selling stocks.

In any case, I think this is a very good idea. You want the money that you invest to be off limits until you reach your financial goals. That is the only way you will be able to take a long term perspective on the investments.

To figure how much you should keep in backup, I recommend that you think about all the terrible things that could go wrong and consider how much cash you would like to have on hand to see your way through them. Personally, that makes me too sad to think about so I just use 6 months after-tax salary as my guide.

It makes sense that this money would just be sitting in your checking account; or, you could invest it in a short term deposit like a money market. If you are living in Israel, the emergency that we hope will never happen will most likely occur in shekel, although it may be so far away that having dollars is not really an issue. I wouldn’t know, I don’t think about bad things. I keep it allocated 75/25, with the larger part in shekel.

Wise Money. I skip now to retirement money because it is the next easiest to think about. This money is like the very opposite of the money that you are using to live right now. It is money that you are planning to use to live when you retire. If you are very far away from retirement (25+ years), you can allocate a great deal of this money to stocks. If you outlook is shorter, you will want to decrease the stock allocation accordingly. I personally try to allocate 80% to stocks in my retirement accounts.

In terms of shekel or dollars (or other), it also depends on how far away retirement is. The further away, the less fluctuations in currency should matter. I like to keep all of the money that is not in stocks in its local currency and for the money that is in stocks, anywhere from 20%-80% of it invested in a foreign currency. The actual amount varies each year depending on exactly which markets look like the best value at the moment. I apply the same approach to foreign currency both for retirement accounts in Israel and in the U.S.

I-Have-No-Idea Money. The final category of money is all money which is not in the other categories. This means money in non-retirement accounts which you not using for daily living expenses and is beyond the amount of money you feel you need as back-up money. This money is certainly the hardest because I have no idea what it’s for. Some possibilities: 
  • Paying for celebrations such as bar or bat mitzvahs; or maybe, weddings
  • To help finance advanced education for your children
  • To leave over as an inheritance
  • Buying an insurance policy on your only goat
  • Early retirement
  • For paying down your mortgage in a case where interest rates rise and you can no longer afford it
  • Buying a new car
  • Buying a second home
I have given these possibilities an acronym to make it easier for you to remember them: PT”T BE F”BB. Much easier now, isn’t it?

In these cases, it seems to me that the time horizon for this money is like a moving target. For some of it, I think I may want it earlier, perhaps in about 5 years. For other money, I think I may not need it for 10 years or longer.

I’m sufficiently confused with this money to not be entirely sure what to do with it. However, because I already have money in backup which I could use for some or part of these expenses, I feel comfortable taking a longer term outlook. That’s why I have opted for a classic 60/40 allocation between stocks and bonds for this money. I also balance it 50/50 between shekels and dollars. On the one hand, I will most likely want to buy things in shekel with this money; however, outlook is long enough that I’m not overly concerned with currency fluctuations. Obviously, if your family is traditional, your wife should address this money.

One last thought on the different types of money. How should you think about money that you are planning to use to buy a house in the next few years?

Honestly speaking, this is Simple money. No one wants to be left out as the stock market skyrockets, but you should take into consideration that stocks have wide swings in value. Any money that you invest in stocks may not be there when it’s time for your next house payment. The same is true for longer term bonds; and also, for those with intermediate term. Changes in interest rates could significantly raise or lower the value of these investments in the shorter term.

Summary & Conclusion

In a single table, here is what my allocation plan looks like:

Checking Account
95/5, between shekel/dollar
Short Term Deposits
75/25, between shekel/dollar
Bonds in “local” currency, stocks between 20-80% in “foreign” currency
50/50 between shekel/dollar

So now, loyal readers, I have now given you all that I can to help you come up with your own plan. At this point, if you have any wine left, I recommend that you drink it, especially if it is almost midnight.

Oh, and one last thing…

Who Knows 13?

I do. It is the number of ha-ggadot in this blog. If can’t find them all, try holding this blog upside down. The answers are always there when you hold things upside down. 

Sunday, March 23, 2014

Thank You for Investing on Purpose

Not a blog this time, just a thank you to everyone who supported Crossroads by sponsoring me, Ofir and Erez in the Jerusalem marathon last Friday by Investing on Purpose.

This is what we looked like afterwards:

Lest you think it was easy to get these medals, let me point out that you need to actually extend you arm and receive one after finishing the 10K race. If this sounds easy, you clearly have never seen what the streets of Jerusalem look like. I am not sure how they did it, but the hills actually got steeper as you were running on them.

In fact, I am fairly certain that there were cars abandoned at the beginning of kilometer 7 because they were not able to make it up the hill. Quite possibly, I observed several runners with snappling gear who made their way to the top.

The most disturbing part of this was that there were actually people sprinting on these hills, I mean at speeds like 12 km/hour and faster. I think these people need to undergo mandatory DNA testing to verify that they are in fact human.

In any case, as to be expected, Ofir pretty much won the race, with Erez just behind him. I, on the other hand, finished in 1:04, which places me 1,224 in my division of 1,865. I like to think of this as the 65th percentile, although not necessarily in a good way. Alternatively, you could say that I placed 3,381 of all 7,464 runners in the 10K. This would squarely put me in the top half, and we simply need to ignore the fact as many as 2,000 people who are not men between the ages of 20 and 39 ran right passed me.

But most importantly, we had a great time, and we raised just over $1,000 for Crossroads. Thank you!

Wednesday, March 19, 2014

Accidentally Asked Questions

Once in a while people ask me questions about money. I can’t figure out why they do this, so I assume they are doing it by accident. One of the most frequently asked goes something like this:

Is now a good time to buy dollars with my shekel? Or, is it a good time to hold shekels in the Israeli stock market? 

Will Obamacare weaken the U.S. economy? What impact will the situation in the Ukraine have on the Israeli stock market?

My answer is actually very simple: I have no idea.

I am not a prophet and I cannot tell the future. In fact, even if I were a prophet I wouldn’t be able to tell the future. Prophets were primarily messengers of God who sought to encourage people to change their ways. If I were a prophet, I would probably answer this Accidentally Asked Question very simply, as: “Reading blogs will not save you! Repent from your evil ways!”

Alternatively, I may decide to use my position as prophet to improve important social issues in Israel. My prophecies would most likely sound like this:
The spirit of the Lord descended upon me and said: “I have brought my people to a new city that has been planned. I have provided for them with roundabouts at every intersection.”

“But have my people embraced My kindness? No! They have not!"

"Go and stand in front of any gan on any morning (but especially on Friday) and say to My people, ‘Seriously!? What is wrong with you? You can’t drive an extra 50 meters and turn around at the roundabout?’”

I think you get my point. I do not know what’s going to happen in the future any more than I can understand why Israeli drivers won’t use roundabouts.

Actually, now that I think about it, maybe this is a bad analogy. We will never know why Israeli drivers won’t use roundabouts, but we can at least try to predict the future.

Why Predictions Don’t Work

Prediction is challenging because it is about things that haven’t happened yet. Although, to be fair, there are some things that we can be fairly good at predicting. Example:

Donny does not take out the garbage. He predicts that his wife will roll her eyes at him and say, “Seriously!? What is wrong with you? You can’t walk a few steps out of your way to take the garbage out on your way to the car?”

In this case, we can make a fairly good prediction because we have a long history to draw upon. However, even in a case like this, our successful rate of prediction will not be perfect. Will things turn out as predicted if Donny’s father-in-law comes by and takes out the garbage before anyone notices? No they will not. Even the easiest things to predict are only “mostly” predictable.

In the case of financial predictions, it is exceptionally difficult because many factors are involved. For example, take something “simple” like predicting the exchange rate between the dollar and the shekel. One of the most direct causes of changes in the exchange rate is changes in interest rates. The theory is that investors will move money between the dollar and shekel to achieve the highest interest rate after adjusting for credit risk.

However, even if interest rates were the only factor that impact the exchange rate (which they aren’t), to predict just them you will need to predict inflation rates and economic growth in both countries; and also, predict how each central bank will respond to these pressures.

Statistically speaking, if your prediction would require you to be right on even as few as just four different factors, and you are right on average even as high as 70% of the time, chances are only about 1 in 4 that you will be right.

Also, even if you are right, the market may already have taken your prediction into consideration. In order to profit on your prediction, you not only need to be right. You need to be right when almost everyone else is wrong.

Invest by Accident, but Allocate on Purpose

I began this blog in large part because I saw so many people making Aliyah and losing money from a declining dollar. I was lucky that when I needed shekels, the dollar had risen significantly. This experience is a classic example of a bad process leading to a good outcome. It isn’t that I was a great predictor of the future value of the dollar, it was that I was speculating on the dollar by accident and got lucky.

In managing your money, one of the biggest mistakes that you can make is relying too heavily on predictions. Instead, you should think about how to allocate your money for the long term in such a way that it will not matter if most of your predictions turn out poorly.

Your first step should be to figure out how you want to allocate your money in a “perfect world” where everything is stable and valued fairly. Once you have this set, then it would be perfectly sensible to consider small incremental adjustments based on some careful predictions.

One example of this today would be the U.S. bond market. About a month ago, I predicted that the bond market is in a bubble using careful non-expert logic. I made a small adjustment to my bond allocation by keeping it in cash instead of bonds. This is a small adjustment because the downside of being wrong in this case is a small lost opportunity. Making a large adjustment based on this prediction (for example, taking a “short position” on U.S. bonds) would be very irresponsible. My prediction is most likely either wrong or already priced into the bond market.

Accidental Answer

Should you invest more in the dollar right now? Should you take your money out of the Israel stock market?

On the one hand, at the moment, the dollar is historically cheap and the Israeli stock market is relatively high. It is always advisable to buy low and sell high. You could make a small adjustment to your investments to accommodate this.

On the other hand, if you already have allocated your investments, this will happen for you anyway. The greatest feature of an allocation plan is that every time you re-balance, it tends to lead you to sell high and buy low by accident. For example, let’s say you normally invest 60% of your money in stocks. You will find that when the stock market is high (like it was last year), you will be selling stocks in order to reset your allocation to 60%.
For currency, the same thing would happen if it was part of your allocation plan. Most allocation strategies tend to focus just on “stocks” and “bonds,” but for someone living in Israel, I think it is equally important (if not more so) to think about whether these “stocks” and “bonds” are in dollar or in shekel.

What’s the best way to do this?

I don’t know because I’m not an expert, but I will share my formula with you.

Wednesday, March 12, 2014

Getting Eaten by a PFIC

As a U.S. tax payer, it will not be feasible for you to invest in an Israeli mutual funds in your taxable accounts. Previously, I have asked you to trust me about this, promising that I would write fully about this in a future blog. As a thank you for trusting me, here it is:

If you buy a mutual fund outside of the U.S., you will first be sorry. And then, you will be very sorry.

I can explain why the easy way, or I could explain it the hard way. I’ll assume that because you made aliyah, you prefer to do everything the hard way. On the off chance that this was a one-time lapse of judgment, I am proud to introduce Investing by Accident’s patent-conceivable “Skipping” tags to show you exactly which parts you can skip and not miss anything too important.

אזרחי ארה"ב לדוברי עברית

It was recently brought to my attention that an increasingly large number of non-American Israelis are interested in my blog. By “increasingly large,” I mean specifically, Yael, who is my fearless pension agent. I say, “fearless,” because basically that is what it takes to be my agent for anything, especially for anything relating to investing.

In our last meeting, Yael mentioned to me that the question came to her recently on whether American citizens can invest in Israeli mutual funds. This blog is for everyone and I want to make sure that the word gets out on this. Also, I think it would be really cool if Investing by Accident was the #1 search result for “השקעה קרן נאמנות אזרח ארה"ב”. Therefore, I include the following statement for the vernacularly inclined local readership:

שימו לב, אזרחי ארה"ב! אל תשקיעו בקרנות נאמנות, בקרנות סל או בקרנות המשקיעות בהן. מבחינת החוק, זה מותר לגמרי, אבל מבחינת המיסוי בארה"ב זה ממש לא כדאי.

כל אזרח ארה"ב חייב לדווח ולשלם מיסים לארה"ב בלי קשר למקום מגוריו בעולם. המוצרים האלה נחשבים בארה"ב כחברות שמרוויחות רק על ידי השקעות, וארה"ב מחייבת מיסים עליהם ברמה הכי גבוהה שאפשר.

או שתאמינו לי, או שתקראו את הבלוג הזה ובו אסביר.

במקום להשקיע במוצרים אלו, אתם יכולים להשקיע ישירות במניות של חברות רגילות או ישירות באג"חים. אל תדאגו. זה לא יהיה לכם קשה מדי. אני אתן לכם רשימה מלאה של חברות שאתם יכולים להשקיע בהן באופן ישיר. רק תצטרכו לקרוא את הבלוג שלי באנגלית. 

כל מה שאמרתי הוא נכון לכספים רגילים שמחויבים במס רווחי הון. השקעות מסוג גמל (פנסיה, ביטוח מנהלים, קרן השתלמות) נחשבות בצורה אחרת מבחינת מיסוי. הן בדרך כלל בסדר, אבל כדאי לכם לקרוא את בלוגים שלי על הנושא זה (תתחיל פה).

Ok, then. Here’s what you never wanted to know.

[Begin Skipping]

Why will you be sorry?

A mutual fund outside of the U.S. is one of the forms that is taken by a PFIC. Most people have been fortunate enough to never have encountered one of these which is why they have never heard of it.

A PFIC is a semi-mythological creature that roams the earth outside of the United States of America. It seeks out American taxpayers wherever they may be living, watches carefully to see if they invest their money outside of the United States, and then eats them. It does this by levying the highest possible tax calculation on the earnings from these investments.

It tends to eat them slowly, so that at first they may not feel all that much pain. After time, they experience extreme agony.

How can you avoid the PFIC?
It’s simple! Just don’t buy shares in any investment which would be classified as a “Passive Foreign Income Corporation.” I think that is fairly self-explanatory already, but just to make sure you really understand, I’ll copy and paste how the IRS defines it:

1. At least 75% of the corporation's income is considered “passive,” which is based on investments rather than standard operating business; or,

2. At least 50% of the company's assets are investments that produce interest, dividends and/or capital gains

The PFIC was created by an act of Congress to attack wealthy people (probably not you) who were attempting to avoid U.S. taxes by hiding investments in foreign corporations (probably not you again) which were not actually doing any real business (like “making widgets”) but were instead just holding investments. Sadly, the PFIC is not a discriminate eater and doesn’t check your net worth before pouncing. Even poor little you can get eaten.

What does this mean for you?

The PFIC makes investing in Israel for an American much like keeping kosher in the U.S. You can still do it, but it will be harder for you than it is for everyone else around you.

That’s because an ordinary Israeli mutual fund traded on the Tel Aviv Stock Exchange falls squarely in the jaws of the PFIC. There is some real basis for this. Although you were not intending to hide from U.S. tax obligations by investing in one of these funds, inadvertently that would start happening because Israel does not collect any taxes on money you invest in one of these fund until you take your money out. This allows all of the gains that you have in the fund from interest and dividends to grow tax free for years and years. This is great for the Israeli side of you, but it you carry that U.S. passport, you have to pay taxes on these earnings every year that you earn them.

Can the PFIC be defeated?

No, not really.

The PFIC attacks investments into foreign mutual funds in such a way that you are either forced to somehow figure out exactly how much interest and dividends you personally earned (mostly impossible with an Israeli mutual fund), or make a “simple” calculation designed to tax the highest possible amount that the investment may have increased in value.

If you have money in a PFIC, at the end of each year, you will have one of several simple options to choose from when filing your tax return:

1. Fake your own death. This can be a bit tricky, but I see it in movies all the time. I would suggest starting a car chase that ends with you driving your car into a frozen river. You would then survive by breathing in the air from the tires. Even better would be if you somehow get out of the car earlier and leave a fake stuffed version of yourself in the car instead.

2. Chose “Qualified Electing Fund” and report the dividends and capital gains for your shares in the mutual fund. To do this, you simply need the mutual fund to tell you all of this information. It’s funny that you would even think such a thing is possible. However, because we have a good imagination, let’s just imagine what this would be like:

“Hi. This is an American. I’m about to get eaten by a PFIC. By any chance, could you just tell me the dividends and capital gains that were earned during the year for my portion of the fund? Also, if you could just tell me which of the dividends are ‘ordinary’ and which are ‘qualified’ that would be great because I simply don’t know whether I can eat this avocado yet.”

“I will call you back.”

3. Do nothing. In this case, you would use the IRS’s default method which will apply a sensible tax assessment whenever it is that you decide to sell. By “sensible,” I mean that you simply calculate the total gains that you need to pay tax on. Because it isn’t clear when the gain was made, we will just assume by default that they were made during the entire time you held the fund. Since you didn’t pay taxes on it back then, you can make it up now by paying an interest penalty. Also, because we don’t know what the gains were from, we’ll just assume the worst and you will pay tax at the rate of ordinary income.

4. Choose “Mark to Market” and pay taxes on the gains during the current year. This is the only real viable option that you would have. The way it works is that you calculate the fair market value of your mutual fund holdings on January 1 and December 31. Then you pay tax on any gain at the rate of ordinary income.

If you are still reading this, you may be thinking: Why didn’t I skip when I had the chance? And also, what’s wrong with option #4? It sounds fine.

That it “sounds fine” is to be expected, as the PFIC is very hungry and tries to lure you in with seemingly viable ways in which you could invest in foreign mutual funds. If you choose option #4, you will pay tax on the entire gain as ordinary income even if some of the gains came from long term capital gains and dividends that would have been taxed at a lower rate.

If your income places you in one of the lower tax brackets in the U.S., this may turn out to be ok. However, as soon as you are in the 25% bracket or higher, you will find that achieving the Tax Equilibrium will become very difficult. What this means is that you will start paying much more tax than you otherwise would have, had you invested in individual stocks and bonds.

Also, with Option #4, while you can offset losses from a PFIC with gains from another PFIC, you cannot take any loses as a deduction of any sort anywhere else on your U.S. tax return. This may not sound bad at first, but keep in mind that this means that if you had any gains from investments in the U.S., you would not be able to offset them with loses from investments that you had in Israeli mutual funds.

What about other insanely clever workarounds?

I have tried many different approaches to defeat the PFIC. My most clever attempt was a strategy I devised in which I would buy an Israeli mutual fund on January 1 and sell it on December 31 of every year. When I would do this, I would pay 25% tax on the gain to Israel which I could then credit against whatever taxes I owe on my U.S. return for investment income. Although, the U.S. tax would be calculated as “ordinary income,” I figured that the difference may not be all that significant.

This clever strategy is not so clever when you consider that U.S. taxes on gains are assessed in dollars, by comparing the buy and sell prices as they appear on January 1 and December 31 in dollars. This means that the mutual fund could actually lose money in shekel, but you would still owe taxes on gains to the U.S. due to a fluctuation in the exchange rate.

To calculate how much of an impact the fluctuation in currency could have, all you would need to do is model the price of the dollar and shekel from year-start to year-end against the estimated returns on your investments. I am quite ashamed to say that I did just this using the historical exchange rates from 1995-2012.

While there are years in which fluctuation between the dollar and shekel could cause you to owe no taxes at all to the U.S., in my model, there was not a single 4-year period in which the effective tax rate on the gains for someone in the 25% tax bracket would be at least 40%. In other words, you will get eaten by a PFIC.

Why you will be very sorry

Of course, there was no need to think about it this much anyway. One of the reasons you want to invest in Israel in the first place is to avoid fluctuations in currency. Using Option #4 (which is the only viable option) essentially re-assumes a good part of the risk that we were trying to avoid in the first place!

[Stop Skipping]

So, loyal readers, in conclusion: do not buy an Israeli mutual fund if you have to pay taxes in America. To be clear on this, by “mutual fund,” I mean anything that is a mutual fund or acts like one. For example, any companies in Israel whose business looks mostly like a mutual fund would also be included. The most common case would be companies who make money by investing in other companies instead of selling actual goods and services.

The PFIC is also a problem for Israeli “ETFs” (קרנות סל) because these are just mutual funds that are traded on the stock exchange. Regarding “ETNs” (תעודות סל), the story is more complicated. You should read about them in Running Away from a PFIC.

The PFIC could possibly also attack non-taxable retirement accounts, like your pension or Keren Hishtalmut. However, it does this in a way that generally doesn't matter. If you enjoy skipping tags, you will definitely enjoy reading all about this in Investing by Accident's series of logs on the Keren Hishtalmut as a PFIC, starting with Running Away from a Keren Hishtalmut.

But, have no fear! You can invest in Investing by Accident’s Israel Price Asset Yield index, or I-PRAY. It has been pre-screened to eliminate any companies that looks or feels like a mutual fund. At least I hope so. I don’t want to get eaten.

Wednesday, March 5, 2014

Investing on Purpose

As my loyal readers know, I generally do not believe in doing things on purpose. The reason for this is that so many great accomplishments happen by accident. No, I don't mean the kind of accident like when your 3 year draws on the wall and tells you that he did it “b’taut.” (I’m not buying it, Nadav.) I mean accidents that have a terrific outcome.

In my own life, one of these was our decision to live in Modiin, which happened entirely by accident. Basically, we needed a place to live and we-knew-someone-who-knew-someone who had an apartment to rent in Modiin.

As it turns out, Modiin is actually the best place on earth to live. If you don’t believe me, just ask any of my neighbors. We unanimously agree on this point every Purim morning at breakfast when we play a drinking game in which we attempt to be so drunk that we cannot tell the difference between Sara Imenu Street and Rachel Imenu Street.

Or, at least that is what I think I remember. It all gets a bit foggy after about the 3rd or 4th beer. But in any case, I also have empirical evidence to this fact. Modiin is the only city in the world with the courage to name itself, “intelligence,” yet show a conspicuous lack of such when it comes to planning the “planned city.” (Really? You didn’t think that a shopping center would need room for parking?)

But, I digress. My point is that while I am a firm believer in doing everything by accident, there are a few things which I believe in doing on purpose. One of those is charitable giving which I like to think of as social investing.

In a couple of weeks, I will be running the 10K in the Jerusalem Marathon to raise money for Crossroads Jerusalem. Crossroads helps at-risk Anglo youth in the Jerusalem area and vicinity, who have not been successful in getting the help they need from the mainstream programs. You can sponsor me directly on the Crossroads website.

Why bother?

I want you to sponsor me to run the marathon, but you are probably wondering why you should bother with social investing at all.

This is a great question. Why does anyone give anything at all? People earned their money… why should they just give it away?

The answer that I hear most often is that the reason to give is because of altruism. For religious people, we may say that it’s “just the right thing to do.” Altruism as the motivation for giving has been highly suspect by the academics who make a living by understanding selfishness; or, as you may know them: economists. For them, true altruism cannot really exist because people are motivated to seek their own interests.

A good answer for economists would be that people give because it allows them to signal to one another. Basically, by giving you are signaling that you are a generous and altruistic person. This would be a selfish motivation because you are giving so that other people will think more highly of you.

The motivation to give that comes from signaling is probably the reason why researchers have found that pretty women are able to raise more money from men than average-looking women. Most likely this is because men are more inclined to signal their generosity when asked for a donation from someone they are attracted to. I find it particularly fascinating that researchers needed to research this. It seems fairly obvious to me that this is what would happen.

One great way to signal would be to run in the Jerusalem Marathon for charity and then write about it on your blog. In doing so, you would be signaling to people that you a very caring and giving person who believes in making society better. Your readers may want to sponsor you to signal their appreciation for your blog. However, if you do this, be careful not to write about the signaling effect in your blog because then it will immediately lose some of its effect.

However, signaling by itself doesn’t seem to explain all of the giving that we see taking place in the world. There are many less expensive options that would allow people to signal. For example, the readers of your blog who want to signal appreciation could just register as loyal readers. This would be a much cheaper option, even though it would mean that they need to de-lurk.

What may also be motivating people to give is that they get something in return. This may be why charity raffles and auctions are such an effective way to raise money.

What you get from a donation could be direct, but it could also be indirect. In the case of making a donation to Crossroads, you are supporting a resource for the community. You may never need this resource at all; but, like all resources, you probably want it to be there just in case someone you know may need it one day.

But this also isn’t enough to explain all of the giving that we see taking place in the world. Many people give much more than they could ever expect to get in return. Why do they do it?

The answer could simply be that it just feels good. Researchers found this by attaching people to brain scanners as they were making donations. The best theory behind why this is happening comes from evolution. Basically, God made us this way because millions of years before He created the world, the brains in early humans adapted to their environment by giving a feeling of pleasure in response to giving. The adaptation would have helped survival because early humans would be less likely to get eaten by wild animals when they helped each other.

I guess what I am saying is that you should sponsor me in the marathon so that you don’t get eaten by a bear.

Wait, that can’t be right. You are just as likely to get eaten by bear whether or not you sponsor me in the marathon. The reason you should give is because it will make you feel good.

The Thrill of Helping

I like to give because it feels good to make a positive impact in someone else’s life. In particular with Crossroads, what I find so incredible is that I get to help people help other people. I have been on the board of directors for several years, and it has been nothing short of inspiring to see the dedication and compassion that the staff puts into helping the youth in our community.

You can also be a part of this. The marathon is Crossroad’s major fundraiser for the year, and I can tell you from the inside that even if you give just a small donation, it will go a long way to supporting the organization.

Who to Sponsor?

But enough of me. There are plenty of other great options on who to sponsor in the marathon.
A particularly good choice would be my co-workers, Ofir and Erez, who are running with me. They signed up to run because they wanted to help and they love to run. They have already helped raise more money in our office than I ever would have imagined. I think the reason for this is that people credibly think that they could win a marathon. For me, on the other hand, people generally want to make sure we are talking about a running marathon as opposed to some kind of typing marathon. (I would totally win, by the way. I typed this entire blog in less than 26 seconds.)

Alternatively, you could sponsor my Facebook-challenged friend Michael. This would be a particularly good way to allocate your money because Michael recently injured his foot and may not be able to run the entire 10K. However, he is very Jewish and as soon as you sponsor him, he will feel very guilty and will make the run. Don’t worry – he won’t hurt himself. There is a 5K shortcut and we will all look the other way when he takes it.

If you want to go in a different direction with your sponsorship, you could sponsor my brother, Jonathan. He is trying to downplay his altruism by stating that his reason for running is to “help keep the riff-raff off my lawn.” However, he doesn’t really have a lawn (at least not one that attracts any type of riff-raff). And, in any case, he is actually quite fond of riff-raff and would be delighted if they came to his lawn. Actually, this is just part of an elaborate scheme to create a persona in which he is an old man with a goat who yells at young children that come onto his lawn to retrieve lost toys. (Important life note: if my brother wants to buy a goat from you, please sell it to him. I want to see how far he will go with this.)

Invest on Purpose!

I hope you decide to support Crossroads, either directly or by sponsoring me or anyone else in the marathon. If you do: thank you!

But, either way, I encourage you to think about the ways that you can invest on purpose. The world could use your impact.