Section
Investing
The long-term side of the account: buying with room for error, keeping cash so you are never forced to sell, and the tax rules that decide what a gain or a loss is worth.
Benjamin Graham's phrase "margin of safety" describes buying at a price far enough below an estimate of value that the estimate can be wrong and the investment still work. The same idea applies to the rest of a portfolio: cash set aside for expenses, a tax plan for losses, and a clear line between the money being invested and the money being traded.
Taxes turn a gross return into a net one. Capital losses offset capital gains and, within an annual limit, ordinary income, while the marginal rate decides what the next dollar of gain costs. The loss recovery calculator shows how far an investment has to rise to make up a fall, which is the arithmetic behind keeping losses small.
Keep the investing money and the trading money apart. A long-term account works best with no margin loan, no short-dated decisions and a plan for adding money on a schedule, while a trading account runs on stops, position sizes and a drawdown limit. Mixing the two tends to mean a long-term holding gets sold in a panic, or a losing trade gets renamed an investment to avoid taking the loss.
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An Emergency Fund Is the Margin of Safety Under a PortfolioKeep several months of expenses in cash-like savings before investing, because the fund is what stops a lost job from forcing a sale at the low.
Answers
Concepts
- Margin of safety
Benjamin Graham's term for the difference between a security's estimated intrinsic value and its market price, expressed as a percentage of the estimated value.
- Marginal tax rate
The rate of tax that applies to the next dollar of taxable income, set by the highest bracket that income reaches; it is usually higher than the overall effective rate.