Back in elementary school, teachers taught us how to be fair, share, and cooperate with other children. The article How to Get the Rich to Share the Marbles of the New York Times discusses how when two children cooperate together and are fair in doing so, the marbles that they would collect are more likely to be shared equally among the two children. This is a human response to earning the output from the amount of input work. In the American economy, President Obama wants to instill more taxes on the rich so the poor can save more money because all of the rich people do not need so much money as they will be able to live with a great amount of satisfaction while the poor need every penny that they can get their hands on. However, nobody wants to get taxed more because they worked harder to get to where they are and as a result get punished for being more successful.
My sister and I received an inheritance from my grandparents when they both passed away. Being the economics major and having knowledge of financing, instead of investing the money separately, my sister and I are planning to invest the money together, and put in all of the money in one pot. Having more money means that we will have leverage. Let's say that we wanted to invest in Tesla which closed Friday at 235.24. Assume that I saw that there was a potential growth of the 64.76 in two years down the road and close at the end of the year at $300. If I invested in Tesla by myself and my sister was not confident in making this investment by herself because she didn't know about the potential of Tesla, I would not have double the amount of money to invest into this stock. When I put in $12,500 into Tesla by myself because you never want to invest more than 5% of your money into one investment, then I would make a profit of approximately $3550. On the other hand, when I explained to my sister why the stock will be a good investment based on my analysis and she agrees to invest in Tesla, we would end up making $7100.
This profit would give us more leverage to invest in other stocks in the same manner. Both of us would only benefit from this strategy since there are two minds being put to use for investing a half-million dollars, as well as having leverage to put more money in a stock, especially the expensive ones. As long as we both were equally analyzing stocks and putting an equal amount of money into the stock, then there should be no discussion on why we would not split the profits or continue to do the same procedure for the rest of our lives. This example seems to correlate with the article How to Get the Rich to Share the Marbles of the New York Times.
I gather from the story you told that neither your sister nor you had any immediate cash needs so that irrespective of whether you split or pooled the inheritance, the money was going to be saved (invested) rather than be spent on something else. Let me give an example. Let's say after you graduate you go to work in the Chicago area and need a place to live. If you rent, then you can probably pay that out of your salary and the savings you are talking about makes sense. If, however, you decide to own your own place, say you want to take advantage of current low mortgage rates and buy a condo, then having money for a down payment is probably necessary. In this case, the opportunity cost of your investment may be more apparent. It is not my goal here to pry into your financial situation. I only want to note that whatever decisions you do make, there are opportunity costs to those and they should be considered as well.
ReplyDeleteOn the issue of pooling investments, economic theory says that might get you better diversification, rather than it enabling you to double down on beating the market. I wish you well with your choices here, but nothing is certain except death and taxes and do note that you increase the risk of what you are doing by the approach you are taking.
The above doesn't tie to the Haidt piece while you meant your example to do exactly that. It does if you are right on your call about Tesla. And if you are, you might continue to pool the next investment made after selling the Tesla stock. If, in contrast, you make a loss on this, then I gather you and your sister will share in that, but will you continue to pool your investments thereafter?
Because you're example is before the fact rather than after the fact, I'm not sure whether it is a perfect parallel with the Haidt piece (where the marbles have already appeared). In any event, since I too received an inheritance not that long ago which was shared with my siblings, blood is thicker than water and the family ties should not be wrecked by financial dealings. So if you are the active player in what you describe above, I encourage you to communicate quite regularly with your sister about what is happening. If there are some bumps, they are much easier to navigate if the communication is regular. They can derail things if the bumps come as a surprise.
I understand that diversification is typically the route to go down when investing, and we plan on diversifying our investments. With more money, when one stock, lets say hypothetically Tesla, is called correctly by us, we can continue to pool money into investments after selling Tesla. I agree with you completely on those two statements. We both plan on using our salaries post graduation to support or room and board needs, and use the inheritance money for savings for a rainy day and investments, whether they be for the middle term (mutual funds, stocks, bonds, whole life insurance) or the long term (retirement). We are very close and will work together and go through the peaks and valleys together. Thanks for the input professor, I sincerely appreciate it.
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