Need help managing excess taxable income

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Topic Author
XDark_FenixX
Posts: 59
Joined: Wed Mar 22, 2017 6:06 pm

Need help managing excess taxable income

Post by XDark_FenixX » Wed May 22, 2019 10:03 am

Hi all,

Graduated two years ago and posted a few times to learn. I’m 26 now and for the most part I’ve stuck to the plan. I have a basic 3 fund portfolio split across the various investment account types. I’ve maxed my 401k, HSA, and IRA every year. I’ve bought a small house and paid it off already (low cost of living area). I don’t have a car as public transportation is easier for my commute. And most importantly I have absolutely no debts or loans.

I have been hoarding money in savings accounts (2.15% return) and high interest checking accounts (3.03% and 3.35% return). I have close to $100k in them collectively. I’ve been diligent about making sure no money is sitting around not providing any return. More recently I’ve been spending some money (about $3000 so far, what will probably be around $8000 more tops) collecting vintage Pokemon cards. Probably a higher risk investment than the market but they’re reminiscent of my childhood so I don’t really care too much if they drop in value and/or might never sell them.

What I should be doing (I think?) but am not doing is investing excess income into the market through my brokerage account. I’ve never sold off the amounts I had placed initially, and have contributed a bit to my taxable account through the beginning of 2018. For the most part these contributions and existing investments have been stagnant (let’s call it bad luck since timing is generally viewed as impractical). For better or worse it definitely wears on the psyche.

So I have a few questions for the group:
1) what has your investing experience been these few years?
2) is it more prudent to branch out into other investment vehicles (collectibles, high interest checking) when the traditional stocks/bonds aren’t really working for you?
3) is the vanguard money market superior to a savings account (in terms of return)? Slightly loaded question as a yes would more easily justify keeping money in the vanguard brokerage account and probably make pushing money into the market easier.
4) Should investments only be viewed/realized in the long run? I definitely understand that perspective with retirement accounts but cash/assets in taxable accounts give a lot of flexibility and it’s odd to not capitalize on that.
5) What should I be doing differently?

Thanks in advance!

abc132
Posts: 317
Joined: Thu Oct 18, 2018 1:11 am

Re: Need help managing excess taxable income

Post by abc132 » Wed May 22, 2019 10:12 am

If you are maxing all 3 accounts, you can do whatever you want with the excess. 2-3% is a reasonable rate of return for cash right now. I would set a maximum amount to have in cash-like vehicles, and then choose between spending the excess and/or investing it into a three fund portfolio. Looking for more complexity is unlikely to improve anything.

I would probably view your Pokemon card collection as a hobby, rather than investment, and file it under entertainment expenses unless you are actively buying and selling for a profit. Many collectors never sell their collection.

MotoTrojan
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Re: Need help managing excess taxable income

Post by MotoTrojan » Wed May 22, 2019 10:13 am

What is your overall AA? You could keep a 6 month or so emergency fund isolated in this math if it makes you feel better, but the rest of your cash should be considered part of your fixed-income allocation. At 26 you should at-least be at 70-80% equity IMHO. 60/40 wouldn't be crazy but isn't my personal style.

A 3-3.4% yield on high interest checking accounts is pretty good, probably beats my other suggestion of considering rolling t-bills for your cash since they are state-tax exempt (although in LCOL you may not have much state tax).

I am close to your age and my largest account is my taxable brokerage, which is entirely in Total US & Ex-US equity index funds.

I personally would start by ignoring the various accounts and first decide on an asset allocation you are comfortable with, including an emergency fund if you desire a separate one (if you have a lot of fixed-income/cash maybe that can just be considered your EF too). From there you'll want to tax-efficiently invest all of the rest of your savings, which for most people is broad equity funds in taxable, bonds in pre-tax ideally (some equity is good here too if needed, plus helps for rebalancing), and then Roth in whatever is left (most like to try to stick with equities). Given your risk aversion you could also leave some cash in your savings/checking accounts, but again I would consider this as part of your fixed-income AA once you have decided what you are comfortable with.

To summarize, you could have a super risky 150/0 (leveraged) Roth, but if you have 10x as much in cash you are actually taking very little risk. Look at your whole portfolio as one entity and make it fit your goal.

Investments being stagnant since 2018 should not alarm you. Investments in both equities and bonds/cash (in real terms) can be stagnant for over a decade. In that case, at 26 you should just be glad that prices aren't going up so you can keep buying stock at a reasonable price before it skyrockets up :).

Topic Author
XDark_FenixX
Posts: 59
Joined: Wed Mar 22, 2017 6:06 pm

Re: Need help managing excess taxable income

Post by XDark_FenixX » Wed May 22, 2019 11:06 am

From a strictly stocks/bond perspective I’m 85/15 on AA in my investment accounts. If you factor in cash/banking accounts then it’s like 55/45. The high yield checking accounts will give a return on up to $35k together so I’ll probably have that much in cash to also serve as an EF (unless something better comes along). My taxable is currently my single biggest account too at $95k split between total US and total international.

I was thinking of doing some type of continual investment similar to the 401k contribution but it makes tax loss harvesting difficult. Maybe it’s just perspective? I’ve agreed more with the bear news than the bull news during this presidency. Those blips aside I always end up buying on the highs as well.

mhalley
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Re: Need help managing excess taxable income

Post by mhalley » Wed May 22, 2019 12:04 pm

If you don’t have a need for money within the next five years, money beyond 6 mos of expenses should be invested. Don’t worry that the market is high. Here is the story of bog, who only invests at market peaks.
https://awealthofcommonsense.com/2014/0 ... ket-timer/

carmonkie
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Re: Need help managing excess taxable income

Post by carmonkie » Wed May 22, 2019 12:15 pm

Never underestimate the value of continuous education. Invest in your self. Maybe some certificates related to your career or an advanced degree.

At 26 you are very young and probably think you are on top of the world. Through your life you might experience job loss so keeping skills sharp is very important in this world.

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: Need help managing excess taxable income

Post by ExitStageLeft » Wed May 22, 2019 3:49 pm

Congrats on being debt-free living below your means!

Were I savvy enough to be in your shoes at your age, I would set aside a year's worth of living expenses and treat that as the emergency fund. Put it in a high yield savings account and don't count it as part of your retirement portfolio.

I would put the rest of the cash into the three-fund portfolio. Invest the entire portfolio at 85/15. Consider writing up an investment policy statement that lays out your planned changes in allocation as your career and wealth grow.

Topic Author
XDark_FenixX
Posts: 59
Joined: Wed Mar 22, 2017 6:06 pm

Re: Need help managing excess taxable income

Post by XDark_FenixX » Wed May 22, 2019 10:32 pm

carmonkie wrote:
Wed May 22, 2019 12:15 pm
Never underestimate the value of continuous education. Invest in your self. Maybe some certificates related to your career or an advanced degree.

At 26 you are very young and probably think you are on top of the world. Through your life you might experience job loss so keeping skills sharp is very important in this world.
I certainly agree with your points primarily because I don’t feel on top of the world. Education/training plays nicely into my risk-averse style, especially if it can boost earning potential. That being said, with tuition assistance and online courses I don’t expect additional education to be a major cost. Some of my coworkers are persuing a MBA and the net cost to them will be around $10000 for the 2-year program.
mhalley wrote:
Wed May 22, 2019 12:04 pm
If you don’t have a need for money within the next five years, money beyond 6 mos of expenses should be invested. Don’t worry that the market is high. Here is the story of bog, who only invests at market peaks.
https://awealthofcommonsense.com/2014/0 ... ket-timer/
ExitStageLeft wrote:
Wed May 22, 2019 3:49 pm
Congrats on being debt-free living below your means!

Were I savvy enough to be in your shoes at your age, I would set aside a year's worth of living expenses and treat that as the emergency fund. Put it in a high yield savings account and don't count it as part of your retirement portfolio.

I would put the rest of the cash into the three-fund portfolio. Invest the entire portfolio at 85/15. Consider writing up an investment policy statement that lays out your planned changes in allocation as your career and wealth grow.
The story of bob is reassuring, and I also like the idea of an investment policy. So a couple questions:
1) would it be prudent to essentially eliminate the 2.15% savings account? (holding $55k+)
2) one of the major issues I have with investing is probably timing. I hear the bad news, see the s&p 500, and hesitate. How do other people deal with this? Are there specific times/points when people are making their purchases? I’m assuming no one is using a crystal ball to look for major drops, but I’m sure people have some level of strategy to this?

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Watty
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Re: Need help managing excess taxable income

Post by Watty » Wed May 22, 2019 11:18 pm

XDark_FenixX wrote:
Wed May 22, 2019 10:03 am
2) is it more prudent to branch out into other investment vehicles (collectibles, high interest checking) when the traditional stocks/bonds aren’t really working for you?
Two comments;

1) What you been investing in? The returns have been pretty decent over the last three+ years or so.

2) As odd as it sounds you really want the stock market to do badly when you are early in the accumulation phase. That way you will be buying stocks when they are low and basically getting them when they are on sale. For example I was in my early 50's when the financial crisis hit in 2008 so I increased my yearly retirement savings. The money I saved then did very well.
XDark_FenixX wrote:
Wed May 22, 2019 10:03 am
4) Should investments only be viewed/realized in the long run? I definitely understand that perspective with retirement accounts but cash/assets in taxable accounts give a lot of flexibility and it’s odd to not capitalize on that.
You can have multiple goal so the funds for goals that are in a shorter time frame would be invested differently.

For example if you would like to move to better house in five years then you would invest than money more conservatively than retirement money.
XDark_FenixX wrote:
Wed May 22, 2019 10:03 am
5) What should I be doing differently?
It may be time for a bit of controlled "lifestyle creep" so it might be time to spend a bit more money on enjoying your life now. If you have not done much travel you might try doing some of that since you are young, single, and presumebly in good health and don't have kids yet. There are a lot of things that will be more difficult or impossible to do in later phases of your life.

It is great that you don't need a car for your commute but you might also consider if buying one would improve your weekends and when you need to do things like shopping.

carmonkie
Posts: 149
Joined: Fri Jun 29, 2018 4:31 pm

Re: Need help managing excess taxable income

Post by carmonkie » Thu May 23, 2019 10:59 am

XDark_FenixX wrote:
Wed May 22, 2019 10:32 pm
carmonkie wrote:
Wed May 22, 2019 12:15 pm
Never underestimate the value of continuous education. Invest in your self. Maybe some certificates related to your career or an advanced degree.

At 26 you are very young and probably think you are on top of the world. Through your life you might experience job loss so keeping skills sharp is very important in this world.
I certainly agree with your points primarily because I don’t feel on top of the world. Education/training plays nicely into my risk-averse style, especially if it can boost earning potential. That being said, with tuition assistance and online courses I don’t expect additional education to be a major cost. Some of my coworkers are persuing a MBA and the net cost to them will be around $10000 for the 2-year program.
mhalley wrote:
Wed May 22, 2019 12:04 pm
If you don’t have a need for money within the next five years, money beyond 6 mos of expenses should be invested. Don’t worry that the market is high. Here is the story of bog, who only invests at market peaks.
https://awealthofcommonsense.com/2014/0 ... ket-timer/
ExitStageLeft wrote:
Wed May 22, 2019 3:49 pm
Congrats on being debt-free living below your means!

Were I savvy enough to be in your shoes at your age, I would set aside a year's worth of living expenses and treat that as the emergency fund. Put it in a high yield savings account and don't count it as part of your retirement portfolio.

I would put the rest of the cash into the three-fund portfolio. Invest the entire portfolio at 85/15. Consider writing up an investment policy statement that lays out your planned changes in allocation as your career and wealth grow.
The story of bob is reassuring, and I also like the idea of an investment policy. So a couple questions:
1) would it be prudent to essentially eliminate the 2.15% savings account? (holding $55k+)
2) one of the major issues I have with investing is probably timing. I hear the bad news, see the s&p 500, and hesitate. How do other people deal with this? Are there specific times/points when people are making their purchases? I’m assuming no one is using a crystal ball to look for major drops, but I’m sure people have some level of strategy to this?
1) I agree with EF suggestion. That is what I do. I have one year worth of expenses set aside in Vanguard Prime Money. You can figure out what your expenses are and put that much on a savings account or Money Market Account. Invert the rest.

2) Market timing is probably your worst enemy, but you have about at least a 35 year investment horizon. Market will go up and down and you will eventually learn to filter out the noise. You are very likely to go through one or more recessions in your lifetime.
What many around here do is to just invest on a predetermined schedule. If you get paid monthly do that after you have paid all your bills. I invest bi-weekly because that is how I get paid. I invest regardless of what the market is doing. Sometimes I invest more or less depending on what is going on at home. So that is a simple strategy no crystal ball needed.

Always remember this. It is time in the market what matters, not timing the market. Not sure if you remember, but this past December was brutal, what did you do then? Did you sell or did you stay? If you sold and never got back in, you lost this first half year market run, if you stayed and kept buying you came out ahead.

Topic Author
XDark_FenixX
Posts: 59
Joined: Wed Mar 22, 2017 6:06 pm

Re: Need help managing excess taxable income

Post by XDark_FenixX » Fri May 24, 2019 8:52 am

Watty wrote:
Wed May 22, 2019 11:18 pm

Two comments;

1) What you been investing in? The returns have been pretty decent over the last three+ years or so.

2) As odd as it sounds you really want the stock market to do badly when you are early in the accumulation phase. That way you will be buying stocks when they are low and basically getting them when they are on sale. For example I was in my early 50's when the financial crisis hit in 2008 so I increased my yearly retirement savings. The money I saved then did very well.

You can have multiple goal so the funds for goals that are in a shorter time frame would be invested differently.

For example if you would like to move to better house in five years then you would invest than money more conservatively than retirement money.

It may be time for a bit of controlled "lifestyle creep" so it might be time to spend a bit more money on enjoying your life now. If you have not done much travel you might try doing some of that since you are young, single, and presumebly in good health and don't have kids yet. There are a lot of things that will be more difficult or impossible to do in later phases of your life.

It is great that you don't need a car for your commute but you might also consider if buying one would improve your weekends and when you need to do things like shopping.
Great points. So my investments are VTSAX, VTWAX (were VTIAX but were TLHed into this during aforementioned crash so I did stay but didn’t buy more), and VBTLX. I’ve also been looking at interest banking as an “investment” since they’ve done better than VBTLX somehow. I initially justified buying Pokémon cards as an investment (which have technically appreciated nicely by about 50%) but the other user is probably right. Unless I have duplicates they’re unlikely to be sold.

I certainly understand the perspective of wanting to start on a drop as well and firmly believe I’ll live through several recessions. The issue is probably that I believe it will be sooner rather than later which has caused a lot of risk aversion.

I’ve actually handled lifestyle creep with new savings methods. IE maximizing credit card bonuses and points have drastically lowered my travel costs and I take at least two vacations a year.

There is a good probability of needing a car in the future, especially if I change jobs. However, I do intend to keep the high interest checking accounts at max over further bonds investments so that doubles as an EF of $35k. Should be able to buy a car outright should the need arise.

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Watty
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Re: Need help managing excess taxable income

Post by Watty » Fri May 24, 2019 9:26 am

XDark_FenixX wrote:
Fri May 24, 2019 8:52 am
So my investments are VTSAX, VTWAX (were VTIAX but were TLHed into this during aforementioned crash so I did stay but didn’t buy more), and VBTLX. I’ve also been looking at interest banking as an “investment” since they’ve done better than VBTLX somehow.
People don't have ticker symbols memorized so of you want people to comment on that use the fund names.
XDark_FenixX wrote:
Fri May 24, 2019 8:52 am
I initially justified buying Pokémon cards as an investment (which have technically appreciated nicely by about 50%) but the other user is probably right. Unless I have duplicates they’re unlikely to be sold.
Don't even begin to think of the Pokémon cards as an investment, they are a hobby.

There is nothing inherently wrong with that and other people might choose to spend similar amounts on things like photography, high end bikes, flying, scuba diving, etc so it is just a choice of what you want to do with your discretionary income with no one right or wrong choice.

Just don't try to rationalize them as an investment.

Topic Author
XDark_FenixX
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Re: Need help managing excess taxable income

Post by XDark_FenixX » Fri May 24, 2019 10:00 am

Watty wrote:
Fri May 24, 2019 9:26 am
XDark_FenixX wrote:
Fri May 24, 2019 8:52 am
So my investments are VTSAX, VTWAX (were VTIAX but were TLHed into this during aforementioned crash so I did stay but didn’t buy more), and VBTLX. I’ve also been looking at interest banking as an “investment” since they’ve done better than VBTLX somehow.
People don't have ticker symbols memorized so of you want people to comment on that use the fund names.
XDark_FenixX wrote:
Fri May 24, 2019 8:52 am
I initially justified buying Pokémon cards as an investment (which have technically appreciated nicely by about 50%) but the other user is probably right. Unless I have duplicates they’re unlikely to be sold.
Don't even begin to think of the Pokémon cards as an investment, they are a hobby.

There is nothing inherently wrong with that and other people might choose to spend similar amounts on things like photography, high end bikes, flying, scuba diving, etc so it is just a choice of what you want to do with your discretionary income with no one right or wrong choice.

Just don't try to rationalize them as an investment.
Ah, I figured since they’re the big 3 here I thought they might be memorized. Vanguard total world admiral fund, vanguard total us market admiral fund, vanguard total bond fund

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Psyayeayeduck
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Re: Need help managing excess taxable income

Post by Psyayeayeduck » Fri May 24, 2019 10:04 am

XDark_FenixX wrote:
Wed May 22, 2019 10:03 am
More recently I’ve been spending some money (about $3000 so far, what will probably be around $8000 more tops) collecting vintage Pokemon cards. Probably a higher risk investment than the market but they’re reminiscent of my childhood so I don’t really care too much if they drop in value and/or might never sell them.
Hello! :D

anil686
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Re: Need help managing excess taxable income

Post by anil686 » Fri May 24, 2019 10:12 am

Agree with many of the sentiments on the thread so far (including psyduck!)

a) would consider using Ibonds for emergency fund amount (i.e. like 6 months) - they are flexible, keep up with inflation and are not taxed until redemption. https://www.bogleheads.org/wiki/I_savings_bonds

b) Would put the rest into the market short of money you will need in five years - I also 3 fund but am working towards two fund with total world - but have cap gains in TSM and TISM preventing me from doing that at this time. Remember your dividend rate is your dividend rate. While dividends tend to be cut in recessions, they have been pretty stable. Interests rates (typically) also get cut in recessions so your return on cash will be reduced. At least you will have money reinvested in the market with your dividends at a cheaper price than it is now...

c) would enjoy your hobby. We all need hobbies and interests. Sometimes I don't spend enough money on things that make me happiest - watching sporting events live, off broadway plays and travel. One of the great things about LBYM and saving enough for retirement is the ability to pursue those hobbies and spend more on them to make them even more enjoyable. I'm not saying you need to always spend more to create happiness, but there is a difference being close to the field between the 40 yard lines and being in the upper deck. JMO though...

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BL
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Re: Need help managing excess taxable income

Post by BL » Fri May 24, 2019 12:14 pm

Hobbies and collecting are fine. As an investment, maybe, but there are tax, storage, insurance, and other cost considerations.

However, you need to research Capital Gains tax on collectibles anyway. The 28% LTCG tax on collectibles (vs. most LTCG at 15%) starts near the top of the 12% bracket (39,475 - 100). Short term CG tax is less at <=24% tax brackets, as you only pay your regular rate then, not 28%.

Here is a quick start investor's guide for new investors by Dr. William Bernstein, a recommended author (see Wiki):

https://www.etf.com/docs/IfYouCan.pdf

The 3-fund portfolio he suggests is also popular here on Bogleheads. There is a thread, Wiki topic, and even a book on the subject. See Taylor's thread or the Wiki. Many suggest looking at your portfolio as a whole, and putting bond requirements in tax-deferred accounts and total stock and/or total international in brokerage taxable account and filling in the rest as needed to get the preferred proportions.
The author also has a chapter on folks out to get your money, by selling you expensive investment or insurance products.

Just set up regular investment amount to your taxable account and keep going. If it were a 6% gain every year, which it is not, you would keep doubling your money every 12 years, until it starts to really count: $1, $2, $4, $8, $16, $32, etc. That is why they all say time in the market is important; also putting the most you can in early also helps so very much. Diluting it by spending on collecting could hurt your long-term totals more than you expect.

LFS1234
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Re: Need help managing excess taxable income

Post by LFS1234 » Sat May 25, 2019 4:52 am

XDark_FenixX wrote:
Wed May 22, 2019 10:03 am
Hi all,

Graduated two years ago and posted a few times to learn. I’m 26 now and for the most part I’ve stuck to the plan. I have a basic 3 fund portfolio split across the various investment account types. I’ve maxed my 401k, HSA, and IRA every year. I’ve bought a small house and paid it off already (low cost of living area). I don’t have a car as public transportation is easier for my commute. And most importantly I have absolutely no debts or loans.

I have been hoarding money in savings accounts (2.15% return) and high interest checking accounts (3.03% and 3.35% return). I have close to $100k in them collectively. I’ve been diligent about making sure no money is sitting around not providing any return. More recently I’ve been spending some money (about $3000 so far, what will probably be around $8000 more tops) collecting vintage Pokemon cards. Probably a higher risk investment than the market but they’re reminiscent of my childhood so I don’t really care too much if they drop in value and/or might never sell them.

What I should be doing (I think?) but am not doing is investing excess income into the market through my brokerage account. I’ve never sold off the amounts I had placed initially, and have contributed a bit to my taxable account through the beginning of 2018. For the most part these contributions and existing investments have been stagnant (let’s call it bad luck since timing is generally viewed as impractical). For better or worse it definitely wears on the psyche.

So I have a few questions for the group:
1) what has your investing experience been these few years?
2) is it more prudent to branch out into other investment vehicles (collectibles, high interest checking) when the traditional stocks/bonds aren’t really working for you?
3) is the vanguard money market superior to a savings account (in terms of return)? Slightly loaded question as a yes would more easily justify keeping money in the vanguard brokerage account and probably make pushing money into the market easier.
4) Should investments only be viewed/realized in the long run? I definitely understand that perspective with retirement accounts but cash/assets in taxable accounts give a lot of flexibility and it’s odd to not capitalize on that.
5) What should I be doing differently?

Thanks in advance!
Congratulations, you're on a great path. I started investing in the 1980's and am about 30 years ahead of you age-wise, so here's my feedback.

Regarding equities: start investing early, invest regularly, only buy equities (or equity funds) that you intend to hold for the long haul. A low cost S&P 500 fund would be ideally suited for such investments, especially through tax-deferred accounts. I hold a significant position in Berkshire Hathaway in my taxable accounts (it pays no dividends so it is very tax efficient), but this is something that Bogleheads typically would red-flag due to "single stock risk", so it isn't suitable for everyone.

Regarding collectibles: if you want to collect something, then the Pokemon cards seem like a great choice. They don't take up much space and they don't require maintenance, so it is completely realistic for you to hang onto these for your entire life. In that way, they're similar to the baseball cards which were so important to earlier generations (earlier than mine). Just assume that the cards will have no value going forward; that way there is no way you can be disappointed. These should not be part of your investment plan; they should be bought out of funds that normally would be used for the kind of discretionary purchases that immediately lose most or all of their value.

There is some chance that these cards will become valuable. However, if so, their appeal will be generational - they will appeal to the very narrow age group that experienced them the way you did. Their peak value will likely occur when your narrow age group reaches its 50s and 60s and a contingent thereof will have lots of extra cash and be reflecting on their youth with nostalgia. If you're rich 40 years from now, you won't want to sell the cards even if they're valuable. When you pass on at a ripe old age, your kids would probably love to cash out those cards, but by then there won't be many enthusiastic buyers and prices will almost certainly be much more modest.

Prolific financial author John Train wrote a book called "The Craft of Investing" in 1994. In that book, he also discusses collectibles with an emphasis on art. He makes the point that the winners of the prestigious French Prix de Rome between 1870 and 1900 consisted of names which are unknown today other than to some professionals. He further points out that no prize was rewarded in 1888 or 1897, presumably because there weren't any artists available who were considered worthy of the prize. Even though Degas, Cézanne, Matisse, Monet, Renoir and Toulouse-Lautrec were available! Even with art (which dealers like to call "investments"), only a very small fraction of the production will ever sell for more than the original sale price.

So if you collect, collect because you love what you're collecting - not because you think someone else in the future will pay you a lot more for it.

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