Think about the riskiness of your job or your business and what illiquid assets you might hold. We hope that the journey with our investment pioneers has inspired you to reflect and develop your own philosophy. If so, then index funds are the place to start.
Be prepared to update your investment philosophy based on new and convincing evidence. Keep in mind that mutual funds and ETFs come in many different shapes and sizes. As John Bogle pointed out, the traditional index funds TIFs that are broad-market, low-cost, no-load index funds are designed to be bought and then held for the long term. What about derivatives — are you comfortable with them, as Myron Scholes and Robert Merton are? You may not even be aware that many investment products are actually derivatives in disguise.
Your list will be the menu of assets from which the perfect portfolio will be built. Bogle and Charles Ellis remind us that these mistakes may include paying higher fees than needed, experiencing high and potentially costly turnover in your portfolio, needlessly incurring taxes, and investing with active managers based solely on trust and friendly connections. That guy Bernie may be charming on the golf course, but be careful giving him your money.
We may think of ourselves as Mr. Lo and Stephen R. But, among the differences between the two, the global deal has a higher rate and the requirement that it be calculated on a country-by-country basis. The Mutually Supportive Nature of the Proposals The changes being considered by US lawmakers to move to conform to the global deal are estimated to raise substantial tax revenue see Fact 5.
The tax rate that in theory matters most for determining corporate residence is the average tax rate that corporations would face on their worldwide income if they were resident in different countries. Under the Inclusive Framework on BEPS deal, differences in average rates should decrease by virtue of the floor on the rates moving from 0 percent to 15 percent.
Global adoption of similar corporate tax policy would reduce the potential tax benefit for US companies of leaving the United States or starting up elsewhere, since they will face at least a minimum 15 percent rate on their worldwide income regardless of their domicile. Locating real investment or paper profits in other countries to reduce US tax would similarly become less lucrative as the global floor on effective rates rises from 0 percent to about 15 percent.
Moreover, as an active participant in the global effort to reform international corporate tax policy, the United States would benefit from the reversal in the trend for countries to unilaterally impose taxes in a way that targets particular multinational corporations see Fact 6. If the United States remains outside the coordinated international tax system and US multinational corporations are deemed to pay less than the minimum tax, foreign countries would coordinate to collect additional taxes from US multinationals.
Alternatively, if the United States participates in the Inclusive Framework on BEPS deal and conforms its tax policy to international standards, the likelier outcome is a playing field that is more level for US multinational corporations and higher US tax revenue. In addition, the United States can likely go beyond international standards and still be an attractive location for investment and company headquarters. The relative strength in US markets, institutions, and labor policy among other non-tax dimensions likely means that the United States can sustain somewhat higher tax rates than the global floor and revenues raised, if used wisely, could strengthen those advantages.
Furthermore, US leadership on international tax reform may encourage other countries to implement the consensus standards. US multinationals paid an effective worldwide cash tax rate of 8. In , US multinationals paid a cash tax rate of 8. In addition, the average effective cash tax rate on worldwide income is much lower than the headline domestic statutory corporate tax rate of 21 percent, as is the average cash effective tax rate on income reported in the United States, which was only 7.
Low effective tax rates are in part the result of provisions targeted to certain activities or types of income that take the form of exemptions and deductions from the headline statutory rates, credits against tax, and provisions that allow for taxes to be delayed. Therefore, depending on the type of investment or activity and how it is financed, there can be a wide range of effective tax rates on corporate profits.
In fact, the effective tax rate on certain new investments especially if debt-financed can be negative—that is, rather than reducing profits on these investments, the tax system can add to profits from these investments. But as Fact 2 explains in more detail, another major way that multinationals are able to lower taxes on their worldwide profits is by shifting income to certain low-tax foreign countries for tax purposes.
US multinationals still shift profits into lower-tax countries To lower effective tax rates, multinational companies can use an array of techniques to profit shift; that is, they can report for tax purposes their profits as having been made in jurisdictions where they can achieve lower tax rates without changing the location of their real economic activities.
Furthermore, the way that the GILTI minimum tax is computed can in some circumstances reward reporting profits in tax havens. US multinationals can use the variation in tax rates across countries to lower their tax liability.
This blending or averaging feature of the GILTI minimum tax calculation means continued incentives to locate profits offshore. For example, if a multinational already generates substantial profits in high-tax foreign countries, it will have an incentive to book profits in tax havens because no US tax will apply, as long as the total taxes paid are high enough to avoid any GILTI tax.
And, the blending feature can create an incentive to move US profits or even real activities to foreign countries with a tax rate similar to that in the United States, or even somewhat higher. By paying higher taxes on reported foreign income instead of on domestic income, the higher taxes can be blended with lower taxes paid on reported income in tax havens—thus avoiding the GILTI tax.
This would help move the United States toward consistency with the Inclusive Framework on BEPS deal and would reduce incentives that result from blending under the current GILTI calculation to profit shift or to offshore real activities. Competition between countries has created a race to the bottom in corporate taxes. That minimum rate is intended to effectively eliminate the use of tax havens by reducing the potential tax benefits from shifting profits out of higher-tax jurisdictions and into tax havens that have effective tax rates approaching zero.
As a corollary, countries can implement tax policy that raises corporate tax revenue with less concern that such policies create incentive for companies to move their tangible and intangible assets to other countries to lower their tax liabilities.
To provide context for how small such effects are found to be, the large cut in corporate taxes under the TCJA had little discernible positive impact on investment see Edelberg ; Furman b; Gale and Haldeman b. In contrast to the average tax rate, largely the focus of the international tax reform proposals, the tax rates that in theory matter most for new investment within the United States are the effective marginal tax rates to new investments, which in the United States for certain investments would still be quite low and even negative, especially if it were debt-financed.
Corporate tax revenues in the United States are at very low levels, internationally and historically. Even as domestic corporate profits as a share of GDP have increased over the last three decades, US corporate tax revenue has remained relatively flat Figure 5A. In , the share was close to 1 percent, which is roughly tied with , , , and for the lowest in many decades. Of course, there are many drivers of the low level of US corporate tax revenue relative to profits, including policies that affect only domestic corporations and those that have created greater incentives over time for business owners to organize their businesses in such a way that income is taxed at the individual income tax rate with that pass-through income not facing the corporate tax rate Tax Policy Center Reforms to these areas could also raise revenue and complement reforms that affect only multinational corporations.
A failure for the United States to engage in the coordinate multilateral tax reform creates risks. International coordination on tax policy is necessary to prevent countries from using tax policy strategically to facilitate corporations shifting profits to chase ever-lower tax rates and from unilaterally imposing taxes that arguably target particular multinationals. For example, the introduction in some countries of digital services taxes DSTs , an excise tax that a country levies on the sale of digital services such as streaming services or advertising on global platforms to customers in that country, have had features that led US policymakers to claim that they unfairly targeted only large US companies such as Facebook, Apple, Amazon, Netflix, and Alphabet Google ; see Figure 6.
Countries considering or adopting DSTs argued they had a claim to tax some of this corporate economic activity because it relied on their domestic markets. Furthermore, profits flowing from this activity were often going entirely untaxed due to profit shifting to tax havens. Because these taxes have significant effects on US multinationals, they have raised the specter of retaliatory tariffs imposed by the United States, and an escalation of tit-for-tax tax and trade retaliatory measures Palmer DSTs are an example of how a lack of international coordination of tax policy could lead to a more incoherent patchwork of taxes that reduces a potential source of US tax revenue while also creating volatility for companies doing international business.
A lack of coordination could also lead to conditions that US policymakers might view as penalizing US corporations and potentially making them less competitive Office of the US Trade Representative If the United States participates in the Inclusive Framework on BEPS and conforms its tax policy to international standards, the likely outcome is a playing field that is more level for US multinational corporations and that will lead to higher US tax revenue.
Extensive other resources are available on these alternative approaches. Fundamentally different approaches to corporate international tax reform include a destination-based cash flow tax or other consumption tax variants, formulary apportionment, full corporate integration, and more.
Some of these approaches are covered in Nunn and Shambaugh See also TPC for a summary of alternative approaches that hew closer to the framework under current law, and see CRS a for challenges facing the Inclusive Framework. There is also extensive literature assessing the substance and process of the multilateral deal and alternatives, with particular consideration to the interests of low- and middle-income countries.
For example, see International Centre for Tax and Development Income from passive investments subject to the normal corporate rate generally includes dividends, interest, royalties, rents, and net gains from the sale or exchange of property that gives rise to the foregoing types of income. See Sullivan Note that proposed changes to the BEAT would address some of the issues that cause it to be considered punitive, and replacement of the BEAT with an undertaxed payments rule would rationalize the rules even further.
For more information, see Fact 5.
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ORIX CORPORATE CAPITAL PROPRIETARY INVESTING FOR RETIREMENT
Bernstein notes that past performance is no guarantee of future results. Everywhere in the investment industry, the performance of mutual funds is cited as a reason to purchase them. The author suggests this is crazy, and that regression toward the mean makes it likely that stocks and mutual funds with high returns in the past will have low returns in the future. The opposite is also true — poor performing investments are likely to improve in time. This is only a general tendency, and not a hard-and-fast rule.
If anything, the short-term returns from individual investments seem random. Bernstein writes that there is almost no evidence that professional money managers can regularly pick winning stocks. Warren Buffett is an exception. There is absolutely no evidence that anyone can time the market. Because of these facts, Bernstein argues that the most reliable way to obtain a satisfying investment return is to use index funds.
Pillar Two: The History of Investing How many investment books do you know with sections about financial history? Bernstein devotes 36 pages to the subject, and it's fascinating. By looking at centuries of information about financial markets, one can learn valuable lessons. For example, the Dot-Com Bubble of the lates had many precedents in investment history. Bernstein cites famous bubbles from the past, including the South Sea Bubble of But irrational exuberance isn't the only problem investors face.
Sometimes the markets are irrationally gloomy, depressing prices for prolonged periods. Bernstein writes: The most profitable thing we can learn from the history of booms and busts is that at times of great optimism, future returns are lowest; when things look bleakest, future returns are highest. Since risk and return are just different sides of the same coin, it cannot be any other way.
By understanding the history of investing, you can make more considered, rational choices. Familiarity with the history of investing might have prevented or at least mitigated the recent tech and housing bubbles. The number one impact on your investments is you. He explains that diversification and indexing are the most reliable methods to obtain long-term investment success.
Because it's boring. But that's not the case. Bernstein provides a list of techniques to deal with psychological pitfalls: Recognize that the conventional wisdom is usually wrong. Don't participate in herd behavior that exacerbates booms and busts. Don't become overconfident. Don't believe that you're smarter than the market. Ignore the past ten years. Recent performance has little bearing on the future of a particular stock or mutual fund.
You shouldn't invest for entertainment. This isn't gambling. You invest to protect and grow your principal. Don't let short-term losses affect your long-term strategy. Too many people panic at the first sign of trouble.
Know that the overall performance of your investment portfolio is more important than any single part. You will have investments that decline in value from year-to-year. Diversification helps to mitigate these losses. Pillar Four: The Business of Investing In the fourth section of the book, Bernstein demonstrates how the financial industry is designed to part you from your money. A smart investor does her best to reduce all three.
But there are other enemies lurking in the wings, too. Inflation is the silent destroyer of money. How long do I have access to the course? How does lifetime access download? After enrolling, you have unlimited download to this Andy Tanner — The 4 Pillars of Investing for as long as you like — across any and all devices you own.
Download only one file at a time. Sometimes doing all of the files at once will lead to them all freezing. Also, please do not attempt to download to a mobile device. These should be saved to a computer and then synced to devices such as phones and tablets. You can also learn online instead of downloading, but we encourage you to download for better results and viewing quality during your learn. Lastly, download times are much quicker in the mornings, before noon, Pacific time.
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