Very very rarely will you find yourself saying 100%. Act accordingly.

1. https://en.wikipedia.org/wiki/Endowment_effect

I know that in the fog of war, it's easy to get fixated on what could be vs. what you actually have NOW.

About 3 years ago I was holding a very large amount of stock in a startup. The primary investor and ceo offered to do some of the early employees a solid by allowing the primary investor to purchase some shares directly from the employees.

I decided to sell about 10% which gave me a nice payday, but I decided to hold onto the remainder because 'it could be worth so much more.'

Needless to say I'm sitting on some stock that is virtually worthless. While the company in question is still active and doing ok, the real value has dropped, there is no IPO in sight, no secondary market sales opportunity, and the long term prognosis isn't great.

If I'd only had asked myself that question then, I would have sold at least 60% or more.

Probably not; yet, they hang on.

What I'm suggesting is that that's the irrational part. They should be thinking about this decision as though it's an offer of a million dollars to move to Austin, TX (because it is).

If it's paid off, it's perhaps fine. But many people owe mortgages on those houses. They will be in for a world of hurt if house prices drop. I.e. The exact scenario we are discussing here.

Agree that holding mortgages that expose you to negative equity risk is a big gamble. Like stocks (real stocks, not options or non-listed equity) it's actually a good gamble if you will be able to cover a 5 year price dip. If you are likely to have to do a distressed sale at a stress point you are setting up a big loss - smart to take the risk if you are in your early 20's (the upside is great, you'll be ok if you bust) but dumb if you are >45.

[1] Yes some counties will allow you to "keep" your prop 13 tax rate one time.

Really, stepping up to an even higher level of abstraction I think the most important advice is to pay attention and think about your options. I think that far to many people fall prey to inaction and sticking with the status quo simply because it is easier.

It's far from obvious whether it's better to be 25% poorer with diversification.

Unless you think the tax rate is going to be lower in the future, once you've hit the long-term capital gains threshold, I don't see a reason to believe that paying taxes now and switching investments is worse than holding investments and paying all the taxes later.

[1] http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm#1

I don't think I'm cut out for the startup world.

Reminds me of a stock options seminar I went to, presented by an actual Fidelity options trader. The question came up along the lines of "so something something, what would the tax implications be?" His answer was something that I remember to this day, and remind myself when I'm worried about "something something capital gains": "I'm the worst person in the world to ask about investment taxes. If I'm getting taxed, then I'm making money, and that's as much thought as I give it."

I couldn't even tell you the capital gains rates at this moment. If I need to get out of a position, I get out. And to quote the above professional options trader, if I take a tax hit then I made money. If I try to avoid the tax hit by holding on for a few more months to avoid short term capital gains, I might very well lose money in the interim. So I just don't pay any attention anymore and settle up with the government come April.

It is, and I won't even try and argue against that. However, short term capital gains are taxed at the same rate as my ordinary income. In the worst case, when I make money my tax situation is no worse than if I made the money working. That's good enough for me to just not spend the CPU cycles. Yeah, yeah, in some situations I'm leaving money on the table. I don't care because I'd rather spend the limited cycles I have for investing in finding the next good pick, not tax avoidance. At the very best, I can save 28% on taxes. Spending my time finding good companies, however, can do much better than that (see: TSLA, AAPL in the 2000s, et. al.). I'm also lazy, and find tax stuff boring in comparison to evaluating whether now is a good time to get into Lending Club.

Another way to look at it is with an eye toward always preserving capital. IOW, if I'm getting taxed I'm making money (and therefore not losing it). However, I could screw around with some tax avoidance scheme and end up losing money. I'd rather break even or slightly below than lose money; live to trade another day. So most of the time I set an 8% trailing stop and call it a day, let the machines worry about it.

This isn't investment advice, and even if it were there are a lot of unspoken assumptions that I haven't outlined. It's probably not even the smartest way to maximize gains. But for me, personally, it's the right combination of not overthinking it, not spending time obsessing over my portfolio, and still making positive returns. And last time I looked it up, I've had two negative years in the last sixteen. So it works for me (though at my age I need to start looking less at the TSLA's and more at those sexy, sexy bonds).

This is true, but if you are making money and getting tax, but if you are also losing money and not reducing taxes (because you are trading a lot and getting gains taxed some years but not saving on taxes in down years), you will hurt yourself.

Yes, but I want to sell off to diversify the kinds of chips I'm holding. At the moment, the tech stocks I'm holding on to as a result of work are doing quite well, but I'd like to insulate myself from risk anyways.

(Most of them are naturally short-term, but even LEAPS I thought were taxed as STCG.)

Not that ridiculous! Give yourself some credit. One of the reasons taxes work this way is to incentivize people to keep their money invested.

At the same time, many of them will not agree that taking out a HELOC so you can play the stock market is a good idea.

The two situations aren't really equivalent given liquidity, etc. But at the margins they're pretty much the same thing.

I'm not sure this is how fractional reserve banking works. Banks only supply a fraction of depositors money against a mortgage with the majority supplied by the fed. They basically make their money by investing other peoples money (including fed "imaginary" money) and by keeping a relatively low default rate.

The reason that that act creates money is that the money in the deposits can still be requested by depositors at any moment -- it's still fully liquid, and thus the depositors still have their money. But so does whoever borrowed money.

The effect is compounded a lot by the fact that the borrowed money will also end up in some bank account almost certainly, and be almost entirely lent out again, and so on.

Banks create the money when they create the loan. Assume the simple case where the buyer of the house has an account at the same bank as the seller. The bank puts an credit on its books for the loan and a debit on its books for the sellers account.

The money in the sellers account is newly created money. They didn't have to ring up the Federal Reserve or get permission. They got the permission when they got their banking license.

Let's assume the buyer now wants to move that money to another bank. He transfers his deposit from bank A to bank B. Bank B now has excess funds on its books and deposits it at the central bank. Bank A now has a deficit and goes to the central bank for a loan. The central bank loans money on deposit from Bank B to Bank A and everything balances.

Now let's say he wants to convert it to cash. He goes to Bank B and withdraws his deposit in cash. Bank B then goes to the central bank and requests the funds. The central bank then gives a loan to the central government for the amount of cash that it needs. Then it takes that loan to the central government which issues cash in the value of the loan. Bank B then exchanges its deposit at the central bank for cash and gives it to the customer. The central bank now has a deposit from the central government in the amount of the loan from Bank A and so everything, again, balances.

The only restriction that banks have on creating money these days is the ratio of equity against the entire size of their balance sheet.

Reserve requirements essentially mean that each bank has to have some amount of deposits at the central bank that is proportional to the size of it's balance sheet. In theory that limits the total amount of money to a multiple of the amount of base money which is controlled by the central bank.

In practice central banks have been moving away from reserve requirements as a way to influence monetary policy and some countries have eliminated reserve requirements entirely. In the US cash and reserves doesn't pay interest and so acts as a tax on the banking system. When market rates are high like they were in the 70's and 80's this tax can be significant and at some points lead to banks leaving the Federal Reserve System all together and the creation of non-bank competitors for deposits such as money market funds.

Today most banks balance sheets are limited by regulatory capital ratios rather than reserve requirements.

A history of reserve requirements can be found here that lays it out in detail. I highly recommend it if you find yourself unable to sleep on a plane. Skip to the end if you are interest in current history:

https://www.federalreserve.gov/monetarypolicy/0693lead.pdf

Unfortunately there is a lot of bad information (and conspiracy theories) about fractional reserve banking on the internet which in many cases is outright wrong and in the best cases no longer relevant.

With property tax and home owners association fees even with your house paid off you still basically have a permanent rent. I guess in some sense you're playing the housing market, but seems like having more options and ability to move is a pretty good deal. Renting also seems a lot cheaper (even with bay area rents).

Being long on your employer just seems like a really stupid idea. I don't consider myself likely to be fired for incompetence and I'm not high enough on the ladder to be fired for political reasons. If my income stream ever goes away, chances are it'll be because my employer stock is doing the same.

Otherwise, I totally agree with your statement here. Especially considering that your employer is not likely to be up-front with you when business gets bad (at least, not right away), you can wind up with the "corporate blinders" on and not notice the signs around you that your stock is about to tank. I've only worked for three different companies at this point in my career, but the quarterly "business group communications meetings" always felt much more like pep rallies than real status updates, meant primarily to boost morale rather than to inform. In this day and age, to place trust or loyalty in your employer is to misplace it, as employers are highly unlikely to place either of those things in their employees.

What I'm trying to say is: your logic here is sound, and your strategy is a good one, but be careful about ignoring corporate politics.

Often times I have "sold to cover" which is to say exercised the option, and immediately sold enough of the stock to cover the cost of exercising the option and paying the tax. At that point you have shares in your company in your brokerage account where the "basis" is the fair market price when you exercised them. A year and a day later (to convert to long term gains) I've sold half the shares.

When my RSUs at Google vested they would automatically sell some to pay my tax obligation, but I would instruct them to sell half as well. Same philosophy. Get some of the money diversified, keep a bit of skin in the game in case it had a gain.

There is no difference (except for a few bucks in broker transaction costs) between doing this and selling ALL of your RSUs as they vest ie "auto-sale" and buying Google shares on the open market.

Although the latter emphasizes the decision you are making to concentrate on a single issue rather than diversify.

How is that possible? After 1 year, you are in Long-term capital gains territory, so selling now vs later is tax neutral (except for gains on gains, but that's rather minor unless you think you are in a growth stock)

The only reason to delay selling for tax reasons is if you also have a high income (over $300K?) that boosts your Long-term capital gains rate

It's possible that the second requirement is what affected ChuckMcM.

Anyway, the meta question of whether or not to pay off my house was real (my mother in law advised against, after all you get the mortgage deduction). The endowment question is also good and I find myself in the Vancouver situation in a house that I probably wouldn't spend as much as its "worth" to live in it. Future risk/reward never goes away.

What about if you live in a state with high income tax and no capital gains relief from said rate, and you think that maybe at some point in the future you might leave that state for one with a lower income tax? For example, moving from California to anywhere else.

During the dot-com bubble, long-term capital gains rates were essentially the same for most brackets (only the absolute lowest bracket had a lower rate)

Ended up paying a bunch of taxes i likely could have avoided and got something out of it (but it was painful) Now over 10 years on after the "corrections / bubble burst" I'm finally about back where I started ... oh well I guess. I have a house and a job and all my limbs ...