Jonathan Clements's Blog, page 146

Soul Brothers

IT WAS PROBABLY THE last time I would see my brother. I’m 78 and ravaged by a chronic but controlled cancer, a stroke warning and a stent. Rich is 74, with a health profile only a little less foreboding. Both of our parents died at 81.

Always cordial but not always close, we’ve worked through his resentment about how I abdicated my role as an older brother and my jealousy about his close relationship with our explosive father. We talk maybe once every few weeks, but—living on opposite coasts—we hadn’t seen each other for seven years.

I sped down Route 80 toward San Francisco, exiting on Route 12 North to Napa Valley, California’s answer to French wineries and countryside. I turned into the driveway of the resort and instantly spotted that long, angular frame waving in front of one of the stand-alone cabins. He was in jeans and wearing a Miami Hurricanes hat. We instinctively rushed toward each other and embraced tightly for a long time before walking arm in arm to the hotel restaurant.

Like most families, ours had to learn some of life’s darkest lessons. We survived my sister’s murder by a serial killer and my own debilitating depression. A tumultuous but tight-knit group, we hunkered down and looked to fly under the radar, determined to make good after centuries of religious discrimination.

Rich and I were raised by the same parents in the same house, but our internal interpretations of our childhood are very different. My brother uses the word “idyllic.” I felt unappreciated and rejected for my soft interests like writing and stamp collecting. The elephant in the room was my father, a Romanian immigrant resolved to avenge his personal experiences with bigotry by building a small real estate empire.

My brother was the loyalist who idealized my father for his exploits and worldly wisdom. I was the renegade who challenged his hegemony by excelling in academic pursuits outside of his realm. Identifying with my father, Rich became a tough-minded medical malpractice attorney and risk-tolerant stock and real estate investor. Shielded by my mother and grandmother, and spurred on by encouraging high school teachers, I became a clinical psychologist so I could figure out myself as much as my patients.

Different scenarios of childhood leave their mark. Emerging from his childhood years feeling safe and confident, Rich has always been into individual stocks, especially technology and small-cap companies. Tentative and insecure, I lumbered in diversified portfolios tilted toward defensive sectors like health care and consumer staples. He thrives on leveraging real estate to maximize capital gains potential. I prefer to own my properties free and clear, so I’m less vulnerable to recessionary downdrafts.

Despite our differences in career and temperament, my brother and I have braved some turbulent waters. He rails against government handouts, whereas I may be married to the only Sacramento landlord who voted for rent control. After a few animated telephone skirmishes, Rich and I agreed to ban political oratory from our conversations.

My mother’s death in 1999 put my financial future in my brother’s hands. He had moved from New York to Florida many years before, in part to help my mother care for my father, who was paralyzed on one side by a stroke. Rich also oversaw their personal finances, managed their remaining income properties in Florida and transported them to their mounting number of medical appointments.

Alienated by their provincialism and seeming minimization of my scholastic success, I abandoned my parents and built a life in California. My mother had always been the moral authority in the family and protected me. But Rich helped her write the will and was executor of her estate. I anticipated disinheritance or, at best, my own personal rendition of the 60-40 allocation.

A few weeks after my mother’s funeral, my brother asked if I wanted to see the will. I was startled and caught off guard. He read my apprehension. “Come on, Stevie, you already know what’s in there. It’s 50-50 all the way.”

Prepared to be devastated and enraged, I instead felt horribly guilty. “Richie, didn’t she give you anything extra for all you did?”

“No, we both thought of it as family. She was proud of you and felt strongly that what she left should be divided equally.”

Proud of me? Who knew? I was flush with gratitude that they stood by me but chagrined by the unfairness to my brother. The reward for his devotion was to be intangible and nonmaterial. My wife suggested I give him my share of our parents’ house, and I didn’t hesitate. When I presented the idea, he was about to respond with the perfunctory “no, that’s not necessary,” but paused and then nodded okay. Life can be so ironic. He was the one who was overlooked, not me.

Several years before their deaths, my parents bought residential-income properties located in both Florida and California. Sharing ownership of each property would have been a logistical and accounting nightmare. I proposed a solution. “Richie, let’s make it simple. You take Florida and I’ll take California.”

He laughed. “Yeah, no appraisals, we’ll just transfer the deeds.”

“Great.”

“I’ll have my office send the paperwork out to you. You’ll just have to sign and date.”

It was our first scheme as a twosome. Two weeks later, a thick manila envelope arrived containing the requisite documents with little red arrows pointing where to sign. I signed them all without looking at the contents.

Last month, before I drove away from the resort, we regaled each other with stories about our father’s most outrageous escapades. That was, I suspect, as much intimacy as we could tolerate—and as much as our limited time would allow.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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I Buy, I Sell

SERIES I SAVINGS bonds have garnered a lot of press over the past year. Thanks to higher inflation, these bonds have become a lot more attractive. Although savings bonds have historically been a go-to gift for birthdays, baptisms and bar mitzvahs, they’re more complicated than you might think. I bonds have a number of features that can confuse the average investor, me included.

Series I savings bonds, or I bonds, are designed to protect an investor from losing money to inflation. Each bond’s return has two components: a fixed rate of interest and an inflation rate. The latter is based on the Consumer Price Index CPI-U, it changes every six months and the change affects both newly purchased bonds and those that were bought earlier. Meanwhile, the fixed rate is set when you purchase the bond and it stays the same for the 30-year life of the bond you own. The fixed rate had been at 0% until Nov. 1, 2022, when it was raised to 0.4%. On May 1, the fixed rate increased again, to 0.9%.

The inflation rate that drives I bond returns is revised every six months, on May 1 and Nov. 1. When your bond is credited with that inflation rate depends on when you bought it. For example, if you purchased a bond in January, the inflation rate would be the rate announced the previous Nov. 1. Your January-issued bond’s inflation rate then changes every six months, in July and January, based on the inflation adjustment announced the prior May 1 and Nov. 1. Got that?

The combined rate for bonds bought between May 1 and Oct. 31 is 4.3%. This is the sum of the 0.9% annual fixed rate plus two times the semiannual inflation rate of 1.69%, or 3.38% annually. The actual formula is a bit more complicated, but this is close enough. For comparison, today’s 4.3% is less than half of May 2022’s meaty 9.62%

This is an area of confusion for many people. Each I bond has a six-month interest-rate period that starts on the first day of the month that the bond was bought. That bond’s rate will be the composite rate in effect on the date of purchase, and it will last for six months. When the Treasury resets the inflation adjustment on May 1 and Nov. 1, those changes won’t necessarily apply immediately to your existing bonds.

For example, I purchased several I bonds in mid-April as birthday gifts. My TreasuryDirect account shows that those bonds have an April 1 issue date. They have a composite interest rate of 6.89%—a 0.4% fixed rate plus an annualized 6.49% inflation adjustment, which was announced on Nov. 1. The bonds will continue to earn that 0.4% fixed rate for the next 30 years. The inflation adjustment, however, will change every six months, on Oct. 1 and April 1.

Another confusing aspect of I bonds: how and when interest is earned. New I bonds begin earning interest on the first day of the month you purchase the bond. That means that, even if you purchase a bond at the end of the month, you’ll receive interest for that entire month.

The way that interest is added to your I bond, however, is a bit complicated. The interest earned in any month is credited to your account on the first day of the following month. The implication: It makes sense to wait until the beginning of a month to sell a savings bond to make sure you’ve received the previous month’s interest.

Interest on an I bond compounds, but not like a traditional savings account. With a traditional savings account that compounds daily, each day’s interest is added to the principal, and the following day’s interest is calculated on the principal plus the accumulated interest.

With an I bond, the accumulated interest is compounded semiannually. This means that every six months after the month of issue, the accumulated interest is added to the principal to establish a new principal value. This is also the date when the new composite interest rate is set for your bond. The new, larger principal then earns interest at the new composite rate for the next six months.

To find the current value of your bonds, check your TreasuryDirect account or use the website’s Savings Bond Calculator. To make this even more confusing, the value of any bonds that are less than five years old doesn’t include the latest three months of interest, reflecting the three-month interest penalty for early withdrawal that applies during those first five years. This suggests that, for new bonds, you won’t see any interest show up in your account until the beginning of month No. 5.

A recent article by Harry Sit of The Finance Buff describes a clever strategy for replacing existing I bonds that have a 0% or low fixed rate with newer bonds with the 0.9% fixed rate. This assumes you plan to hold bonds for the long term. Any bonds purchased between May 2020 and October 2022 have a 0% fixed rate.

You can’t sell savings bonds in the first 12 months after you’ve bought them. But once you reach the 12-month mark, you could sell your 0% bonds and use the proceeds to purchase new bonds with today’s 0.9% fixed rate. Sit’s strategy involves waiting until at least three months after May 1, so that the three-month interest penalty you pay would be the three months when your bond is earning today’s lower 3.38% “variable” rate—the annualized inflation adjustment for the current six month period. Three months of interest at that rate is about 0.85%. With the sales proceeds reinvested at today’s new fixed rate of 0.9%, you would break even after a year.

Keep in mind that, depending on which month you bought your savings bond, you might not enter the new, low inflation-adjustment period until much later this year—and thus you shouldn’t necessarily rush to sell your low-rate I bonds this summer. Harry Sit’s article has more details. Also keep in mind that buying a new bond starts a new 12-month “no sell” period, plus the purchase would count toward the $10,000 annual purchase limit. You would also be liable for taxes owed on the interest received from the redeemed bond.

There’s a final bit of timing involving I bonds. Earnings from I bonds are subject to federal income taxes, but not state or local taxes. You have a choice of recognizing the bond’s income for federal tax purposes in the year you earn it or, alternatively, you could wait until you sell the bond to report the income. Most folks opt for the latter, so they benefit from the tax-deferral.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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Kicking the Habit

REDUCTION IN FORCE. Layoff. Redundancy. For months now, the media have been running articles about technology companies shedding workers.

In October, the headlines became personal: My manager eliminated my position. It was the first layoff in my 37-year career and an early 60th birthday surprise. My last day would be in mid-December. After another year of positive performance reviews and accompanying financial rewards, the news was a shocker.

After that fateful call with my boss, my thoughts immediately turned to our retirement plan. Landing an interesting role is harder at this age, so losing your job can mean starting retirement. I’d planned to work a few more years, but now I wasn’t certain I could or indeed wanted to work again. I’m grateful to have that choice, something my wife and I have worked hard to achieve over many years, with help from lady luck.

In that moment, I also felt grateful to HumbleDollar’s editor. Jonathan’s lifelong work has transformed the way we save, handle debt, and invest through the stock market’s ups and especially downs. I felt we had a solid retirement plan, though my RIF—reduction in force—meant we fell short of attaining a few lesser savings goals. It took about a week to rework my planning spreadsheet for our new reality. In the end, if I retired right away, the odds of dining on dog food seemed low.

While I wasn’t happy about leaving on my employer’s terms, at least those terms meant I’d go with a good severance package. To be sure, the severance pay took a big haircut from taxes, because its December arrival was on top of a full year of normal income. Still, the money pushed us past our retirement savings target and did so ahead of schedule.

What can you learn from what happened to me? Here are six tips:

1. Save for an early retirement. According to a study of expected vs. actual retirement ages, most retirees leave the workforce sooner than planned. Only 24% of workers expect to retire at age 61 or younger, and yet 42% of retirees had stopped fulltime work by then. Having saved as though I was going to retire early helped me avoid panic when I was hit with my RIF.

2. Manage your career for the long term. When young, there’s a strong temptation to switch jobs for better pay. Indeed, in that career phase, job hopping can sometimes quickly boost your salary. My advice: Don’t let switching become a habit. While it may help in your 20s, it could cause you to miss valuable benefits when you reach your 40s and 50s. For instance, my former employer lets employees age 55 or older with 15 years of service keep nearly all their stock grants when they leave. That sort of valuable benefit may elude those who job hop.



3. Think about how you’ll replace your paycheck. From your first fulltime job until your late 40s, it’s fine to focus on saving for retirement and on maximizing your retirement portfolio’s return. But when you hit age 50, pause to consider exactly how you’ll turn your growing retirement account balances into dependable income. I realized we hadn’t amassed enough in our 401(k) and IRA to yield the level of paycheck-like income we wanted. We started a taxable investment account—one earmarked for retirement—and shoveled still more money into that.

4. Shed debt to shrink retirement needs. We paid off our mortgage—our only remaining debt—early on. That freed up more cash for savings, lowered our retirement income needs and simplified our finances. Perhaps it wasn’t the most financially rational thing to do, but I was happy we'd done it when my job went away late last year.

5. Choose "enough" to unlock happiness and help you achieve your retirement goals. In The Psychology of Money , Morgan Housel notes, “Enough is not too little. ‘Enough’ is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.” During my peak earning years, we avoided many choices that would have raised our lifestyle bar to a level that would have been unsustainable in retirement and which would have damaged our savings rate. We’ve never been super-frugal, like some friends I admire, but we found a sense of enough that left us with lifestyle expectations that are more like the Smiths than the Vanderbilts.

6. Invest in the heart, too. A life change like retirement is fraught with emotion, especially when—like mine—it occurs “off time,” a term Nancy Schlossberg uses in her book Too Young to Be Old . Schlossberg’s discussion of transitions helped me think through my late-in-life RIF. While my entire career has involved embracing and supporting faster change, and I understood my employer’s reasons for shedding employees, I needed to reframe this sudden life change in a way which made sense for me. I also noticed my wife of 35 years was experiencing different emotions around retirement. Planning a happy retirement for two also involves understanding and accommodating your partner’s different perspective and needs.

Now that a few months have passed, is kicking the paycheck habit what I want? I love building software, and I miss the people and problem-solving. I might return to fulltime work for the right role—one that involves meaningful work, and which uses my time and talents effectively. Still, for now, it’s a wonderful feeling to know that my time is solely my own.

David Powell loves thinking about personal finance, spending time with family and friends, traveling, hiking, cycling, music, exploring new restaurants and sampling wines. His software engineering interests are focused on new technologies that improve security and trust in computing systems and software supply chains.  Check out David's earlier articles.

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Searching for Answers

MY DAYS WRITING for HumbleDollar may be numbered. I recently started playing with Google’s Bard, OpenAI’s ChatGPT and Microsoft’s version of the ChatGPT artificial intelligence (AI) platform, and was curious to see how they might perform in providing basic financial guidance. Their answers were generally sensible and aligned with HumbleDollar’s approach—though also occasionally flawed.

You might think that AI can’t possibly replace articles penned by contributors, since the charm of HumbleDollar is the contributors’ personal stories. Yet, if asked for a 500- or 700-word story, AI platforms can readily deliver original pieces of writing on any topic. While these stories are fiction, they can seem surprisingly realistic.

So far, I’ve found the most useful feature of these AI platforms is their editing ability. I’ve asked the platforms to edit a few of my finance and sports articles and, in every case, the platforms have improved my prose. They tend to make the writing more concise, choose more descriptive words and, in some cases, even suggest relevant content or context.

These platforms are built using large language models, so editing to deliver fluid prose is one of their strengths. You can use them to help you with almost any writing task. They can edit resumes, craft a job query, prepare interview questions, create training materials, complete homework (unfortunately), write poems and compose a love letter.

I’ve also tried other topics. The platforms were especially helpful with planning vacations and hiking trips. They do a good job of finding routes and offering travel alternatives. As with a regular search engine, the more specific the query, the more useful the output. Here are some AI responses to a handful of basic financial queries:

When asked to provide the optimal Social Security claiming age, the pros and cons of different ages were well summarized. An example: “If you are in good health and don't need the money right away, you may want to consider delaying claiming benefits until age 70.”
What portfolio allocation should I use? Bard suggested 60% stocks and 40% bonds for a conservative approach, and 80% stocks and 20% bonds for an aggressive approach. Risk and volatility were discussed, despite not being part of my query, but adjusting the allocations as a function of age was not included. Meanwhile, ChatGPT required several more specific queries to provide percentages. It suggested 30% stocks-70% bonds for a conservative approach and 80% stocks-20% bonds for an aggressive approach.
When I asked how large an emergency fund I should hold, both programs recommended “to have enough money saved to cover 3 to 6 months of living expenses.”
When does a Roth conversion make economic sense? The two main responses were “you are in a low tax bracket now” and “your income is expected to be higher in retirement than it is now.” The output also discussed the need for sufficient time for the Roth to grow and the ability to pay the conversion’s tax bill, but these nuances weren’t of the level of clarity found on HumbleDollar.
When asked about the safe withdrawal rate (SWR) for a retirement portfolio, both programs responded with the standard 4% rule, but cautioned that it “will depend on a number of factors, including your age, health, risk tolerance, and investment mix.” I followed up with a query on alternative SWRs and was provided with options covering “variable withdrawal rate,” “dynamic withdrawal rate” and “guaranteed (annuity) income stream.”
What’s the marginal percentage cost of Medicare’s income-driven premium surcharges? That’s a topic I wrote about in a recent HumbleDollar article. Both programs got the answer completely wrong. By contrast, the regular Bing and Google search engines each identified the article I’d written, and Google also offered a Bogleheads piece on the topic.

When answering these financial queries, both platforms almost always included a caveat to consult with a financial advisor. Likewise, when signing up, the platforms highlight that these AI systems are in the early development stages and that the responses may contain incorrect information. So far, I prefer Bard’s content delivery and ChatGPT’s editing capabilities.

Despite the occasional flaws, I would still recommend Bard or ChatGPT as useful tools, including for questions about personal finance and retirement basics. While they certainly won’t replace our humble editor any time soon, they can help with writing, editing and planning.

Interested in trying Google’s Bard, OpenAI’s ChatGPT or Microsoft’s ChatGPT? Using them isn’t as simple as typing in an internet address. Instead, you’ll have to request access. From my computer, I used the Google Chrome browser for Bard and the Microsoft Edge browser for the two versions of ChatGPT. Bard is also available using Apple’s IOS software.

Author note: This article has used AI editing assistance, and no egos were hurt in its implementation.

John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book "Win the Youth Sports Game" was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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Second Act

IN THE SHORT TIME I’ve been writing for HumbleDollar, I’ve noticed that most readers and writers are either on the cusp of retirement or not too far along in retirement. Some have expressed a desire to find new careers, perhaps part-time and preferably more challenging than being a Walmart greeter or Home Depot helper. As they say, 60 is the new 40—still time for new ventures.

Life coaching is a profession that’s become more mainstream and, indeed, increases in popularity every year, partly because no authority regulates it. A recent article in Barron’s noted that some financial advisors are partnering with life coaches to help clients navigate life issues, such as transitioning to retirement or starting a new business. Some advisors even have a life coach on staff.

If you’re enthusiastic about life, and enjoy helping people and guiding them through life’s difficulties, this unregulated profession—which doesn’t require any qualifications—might be an ideal choice for a second career. Anyone can become a coach. You can just hang out your shingle and start coaching.

A more ethical approach, however, is to get some training and become certified. This will give you more credibility with clients and improve your self-confidence.

There are many training courses available through career schools and community colleges. The benchmark for professional training, according to my research, are courses from programs accredited by the International Coaching Federation. These courses can be completed in six months to a year, depending on the level of expertise you wish to attain, and can cost $1,000 and up. Training can be even more expensive if you choose specialized coursework. You can find a list of accredited courses here.

Many life coaches focus on a single area, such as business, careers, relationships, diet and fitness, family life, finances, life skills, health and spirituality. Some coaches specialize in divorce, but that seems no fun.

One of the best reasons to consider a life coaching career is the flexible work schedule. I know a young woman who does part-time coaching in addition to her teaching job. I’ve read about a world traveler who does his coaching from a sailboat. You choose your work hours, leaving time open for family, recreation, travel and other activities. It’s your business.

What’s the difference between a therapist and a life coach? A therapist will focus on your past life, dealing with traumatic problems and how you’re handling a particular issue. A life coach is more focused on the present. They don’t give advice, but guide you to think and act with more clarity, and encourage clients to be more deliberate about their lives.

Life coaching is profitable as well. Here are some key financial data, according to the International Coaching Federation:

Average annual salary: $62,509
Average rate billed per hour: $244
Average number of clients: 12
Average hours worked per week: 12. This doesn’t include administrative work—bookkeeping, taking notes and so on.

Business life coaches command the highest salaries. Those with experience can charge $300 or more per hour—because the cost of this coaching is often subsidized by the client’s employer.

The best life coaches are those who like to help people with their problems and who have a propensity to be empathetic. With some training and experience, you just might give Tony Robbins a little competition. You may even want to consider being your own life coach. Intrigued? Check out Life Coaching for Dummies.

Marjorie Kondrack loves music, dancing and the arts, and is a former amateur ice dancer accredited by the United States Figure Skating Association. In retirement, she worked for eight years as a tax preparer for the IRS’s VITA and TCE programs. Check out Marjorie's earlier articles.

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Protecting Seniors

RECENT HUMBLEDOLLAR articles have addressed issues of aging, including defrauding the elderly, end-of-life considerations and preparing our homes to age in place. It must be the season for worrying about the elderly because I’ve also had their welfare on my mind, thanks to several recent events.

First, a friend’s 93-year-old mother fell down a flight of steps in her home. A faulty handle came loose from a door at the top of a staircase, and her momentum propelled her backward. My friend’s mom is still spry, mentally sharp, pays all her bills on time and lives independently. Luckily, she suffered no serious injuries, but she was badly bruised.

In discussing the event with my friend, I asked about the status of his mother’s estate documents, such as her will, and financial and medical powers of attorney. He said that his mom came from a generation that didn’t discuss money with their children, and that she was reluctant to involve him.

Later that same day, at my local volunteer tax preparation site, I came across two returns that raised concerns. Both were for clients in their 80s who had modest incomes comprised of Social Security, small pensions and required minimum distributions from their IRAs. Both had statements from major financial institutions that showed complex portfolios and dozens of transactions.

The first client, a widow, had more than three dozen short-term capital gain sales, about 40 long-term capital gain transactions and 10 pages of dividend details. Her portfolio had dozens of mutual funds, individual stocks, and environmental, social and governance (ESG) funds.

There also were several single-country emerging market funds and seemingly duplicate municipal bond funds. Many of them had high annual fees and front-end loads. The statement showed she paid approximately $2,000 in fees. This seemed to me and my tax prep colleagues to be an expensive and complex portfolio, not at all consistent with the widow’s modest income.

The other older client, a widower, had a consolidated statement detailing the proceeds of a Section 1256 contract. None of us knew what a 1256 contract was or what to do with it. The IRS defines it as covering such esoteric investments as a regulated futures contract, foreign currency contract, non-equity option, dealer equity option or dealer securities futures contract.

An unusual attribute of 1256 contracts is that they’re “mark to market.” Any contract held at the end of the year is treated as if it was sold for its fair market value, with any loss or gain treated as a short- or long-term capital gain in that year. The client was unaware that he owned such an arcane investment.

As a volunteer tax preparer, I see all kinds of financial situations. The majority of our clients are elderly, and many are widows or widowers. When I see this kind of inappropriate wealth management “help,” it makes me wonder who is looking after these seniors.

For the elderly in our lives, what warning signs should we stay alert to? A fall is a big red flag. It may be an accident, but it can result in physical or mental health issues. If you have an elderly person for whom you feel responsible, here are some other warning signs that indicate that you should perhaps get more involved:

Increased forgetfulness or unexplained confusion.
Decline in hygiene habits.
Change in eating habits.
Increased home clutter and declining cleanliness.
Neglected bills.
Decreased mobility.
Unexplained bruises.
Changed mood and behavior.
Loss of interest in hobbies or activities.

What tangible steps can we take to help our parents and loved ones? Here are six suggestions based on my and my wife’s experience:

Talk with your parents about their situation. They may be reluctant to engage at first, so it may take multiple attempts, but you should succeed eventually. With both my parents and my in-laws, there came a time when they were ready and grateful for our help.
Recommend they create or review their wills and powers of attorney. These are vital because emergencies will pop up. We had to have an attorney meet with my mother in the hospital over a weekend so we could update her will before she had major brain surgery.
Recommend that loved ones review their beneficiaries. We had several surprises when settling my wife’s aunt’s estate. There were a few IRAs whose named beneficiary was different from the heirs defined in her will.
Offer to review their finances and tax returns. That can help you see if an advisor might be taking advantage of them.
If your loved one is in a retirement home, visit at random times to get a sense of the care provided. The staff knows when most visits take place and may behave differently during off hours.
Demonstrate goodwill by having your own estate plan in place, and then discuss it with your parents and other loved ones.

Caring for aging relatives can be challenging. Your concern and desire to help may not be welcomed at first, or at all. You may have to show patience and persistence—and take solace in knowing that you’re doing the right thing.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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Needles in Haystacks

LOOK AT THE STOCK market, and you’ll see that certain stocks often do better than others. Technology shares have been standout performers over the past 10 years, and health care stocks have done very well.

But research has also found that certain types of stocks have done better than others. Smaller-company stocks, for example, have outpaced those of larger firms. In the academic literature, characteristics like this, which are correlated with outperformance, are known as investment “factors.” More than 100 such factors have been identified. Below is a brief history of factor investing and thoughts on how you might—or might not—incorporate factors into your portfolio.

In 1992, Eugene Fama and Kenneth French, colleagues at the University of Chicago, documented two factors that had a clear correlation with stock-market outperformance: small-cap and value. This research was broadly accepted, in large part because it was supported by intuition. It’s easier for smaller companies to grow more quickly, percentage-wise, than larger companies. And it makes sense that value stocks, which are cheaper, have more room to appreciate than those that are already expensive.

Factor investing is far from perfect, though. The Fama-French factors have sometimes lagged for long stretches. Value stocks, in fact, have lagged their growth peers by a cumulative 75 percentage points over the past 10 years. Similarly, small-cap stocks have an uneven track record. Last year, when the S&P 500 index of large-cap stocks dropped 18%, smaller stocks lost 26%. Factor investing, it turns out, requires patience—lots of it.

Even if you have the patience to stick with an investment factor over the long term, research has shown that good ideas often sow the seeds of their own demise. In a well-known paper from 2012, researchers David McLean and Jeffrey Pontiff looked at this question. Their study was titled, “Does Academic Research Destroy Stock Return Predictability?”

McLean and Pontiff examined dozens of stock market factors. What they found is that factors tend to have a limited shelf life, with performance advantages dissipating over time. Why? When a new factor is identified—and publicized—other investors tend to pile into that investment. That can drive up its price. If enough people do that, the opportunity to outperform with that investment will fade because the price has already risen. Investors talk about an advantage being “arbitraged away.”

The lesson for investors: Factors aren’t permanent. If you do decide to tilt your portfolio in favor of one factor or another, I wouldn’t go too far—because what worked yesterday might not work tomorrow.

Another obstacle to implementing factor strategies: They tend to be tax-inefficient. Because factor investing involves picking and choosing stocks, it can require frequent trading, and that trading can mean big tax bills. Thus, if you choose to incorporate some factors into your portfolio, try to do it in a tax-deferred account.

Another oddity of factor investing: Certain factors stand in direct contradiction to others. Momentum stocks, for example, are stocks that have recently been trending higher. They’ve been shown to exhibit outperformance. But so have value stocks, which are stocks with lagging share prices. In other words, they’re the opposite of momentum stocks, and yet they’ve also exhibited outperformance. This inherent contradiction doesn't make a lot of sense, and it’s a reason many investors are skeptical of the entire idea.

Even professional investors who work to exploit factors don’t find it easy. In The Man Who Solved the Market, Gregory Zuckerman looked at Renaissance Technologies, the hedge fund with arguably the best track record in the industry, returning an average 39% a year over 30 years. But that success was hard won. Even with all its expertise and resources, a Renaissance employee once commented that only 50.75% of the firm’s trades were successful—an awfully thin margin.

In the end, after Renaissance fully cracked the code on factor investing, the firm returned all outside shareholders’ money. Today, even if you wanted to invest in Renaissance, you couldn’t. The bottom line: These strategies are extremely difficult to implement, and the firms that do it best aren’t easy to access.

In fairness, you don’t need to build a Renaissance-like computer model to identify winning corners of the stock market. As I noted earlier, certain industries have demonstrated strong performance. It would be easy to buy index funds that covered those specific industries, so it might seem like an easy solution would be to build a portfolio that simply overweighted these winning corners of the market.

While that might seem logical, there are flies in the ointment with even this simple idea. Perhaps most significant is that sectors move in cycles—sometimes outperforming and sometimes underperforming—and these cycles are erratic. Consider the energy sector. Over the past 20 years, the oil market has swung between two extremes. In the late-2000s, many believed in “peak oil,” the idea that the world was running out of oil. Oil prices peaked in 2008 at $145 per barrel. In the years after the financial crisis, though, electric cars became more of a reality, and oil prices sank.

Still, it hasn’t been a straight line. Last year, largely because of Russia’s invasion of Ukraine, oil prices rose, and the energy sector was the top performer in the S&P 500, gaining 67%. This year, however, despite the ongoing war, prices have moderated, and year-to-date energy is the worst sector, down 7%, while the overall market is up 8%. In other words, you might have a long-term thesis on an industry—and you might be right—but in the short term, things could easily go in the other direction.

It’s not just energy. Every sector has its own dynamics. Banks, for example, are steady moneymakers in good times. But as we’ve seen this year, shifting interest rates—combined with mismanagement—can drive them into insolvency. Health care stocks have been the second-best performers in the S&P 500 over the past 10 years. But the government and insurers hold so much sway that it’s hard to know whether these stocks will be as profitable over the next 10 years. No sector is flawless.

For these reasons, it’s difficult to know which corners of the market will be leading the way at any given time. That’s why, in building a portfolio, I recommend trying to stick closely to a total-market approach. You could include some small factor overweights—personally, I include small-cap and value—but I would do that only in the most modest way. Vanguard Group founder Jack Bogle said it best: “Don’t look for the needle in the haystack. Just buy the haystack.”

Should investors tilt toward growth or value? Offer your thoughts in HumbleDollar’s Voices section.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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Breaking My Rules

I'M ABOUT TO MOVE OUT of my home for four or five months. Yeah, this takes some explaining.

In February 2020, when I was planning my move to Philadelphia, I wrote down 10 criteria I’d use to pick my new home. I recently re-read the article—and realized I broke the final two rules I’d laid down for myself.

To be sure, the home search didn’t go quite the way I planned. For starters, there was this little hiccup called the pandemic. Then the buyer for my New York apartment dropped out. Then another buyer dropped out. Meanwhile, the real estate market went bonkers.

I looked for a place in Philadelphia for almost a year and was outbid on the first four properties that I made offers on. By the time it came to the fifth property, I knew I needed to be more aggressive. I offered the asking price and was told two others had bid the same, so I reluctantly upped my offer by 2%. I won that bidding war—by a whisker.

On the year-long journey to that home purchase, my parsimonious nature and my persnickety criteria slowly relaxed, as it met the reality of Philadelphia’s frothy property market. Result? I not only paid slightly more than the asking price, but I didn’t get quite the home I wanted.

I knew that was a risk. Indeed, in my February 2020 article, I mentioned that, “Even if homebuyers draw up [a] detailed wish list, there’s still a danger that—in the heat of the moment—they’ll make some snap judgment that overrides the rules laid down earlier by their calmer self.”

So, what were my final two rules? No. 9 stated that, “While I’d remodel the place if I had to, I’d rather not. I’ve overseen enough remodeling projects in my lifetime. I don’t want the disruption and it isn’t how I want to spend my time.”

Meanwhile, rule No. 10 specified that, “I’d rather not have a basement or, failing that, a finished basement. I realize my aversion is somewhat irrational. But to me, basements mean vermin and possible flooding. What if the basement has French drains? Puh-leeze. That’s just an admission of defeat.”

The house I bought doesn’t have a finished basement, but it does have French drains. Still, since buying the place, I haven’t had a problem with water in the basement and I’ve never heard the sump pump kick into action, so I’m not quite sure why the French drains were installed. The upshot: While I broke rule No. 10, I’m inclined to cut myself some slack.

Rule No. 9 is a different story. Amid the craziness of 2020’s housing market, I had just 30 minutes to look over the house before making a bid. Everything seemed to my liking. But once I moved in, I found the kitchen to be somewhat dated and dark, and I started mulling some cosmetic changes that would make the place more to my liking. Long story short, those cosmetic changes ballooned into a full-blown remodeling, including a reconfigured kitchen and new, expanded windows upstairs and down.

Over the years, I’ve heard all too many homeowners justify their remodeling projects as an “investment.” I’m under no such illusions. I figure that, if I sold my house the day after the remodeling is done, I might recoup 60% of the money I’m about to spend, and perhaps far less. Make no mistake: What I’m doing here is spending money, which is not my favorite thing to do.

Still, with these improvements, I’m hoping to make the house a place where I’ll happily spend the next 15 years and perhaps longer, depending on my health. Thanks to the reconfigured kitchen, I’ll be able to sit at the breakfast table, look out on the postage-stamp backyard, and merrily write and edit HumbleDollar articles.

But to turn that vision into reality, I need to decamp from the house. I toyed with trying to live here through the renovation, but it would be simply too hard to work with all the noise, plus—without a kitchen at my disposal—I’d likely end up eating all the wrong things. The upshot: I’ve booked an Airbnb for the next five months. That might sound like a costly proposition. But going that route turned out to be 40% less expensive than the cheapest sublet I could find.

When is it worth remodeling a home? Offer your thoughts in HumbleDollar's Voices section.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Beyond the Obvious

I JUST FINISHED rereading a book every serious investor needs to reread: Moneyball: The Art of Winning an Unfair Game. It was written by Michael Lewis in 2003, but it’s still quite relevant to baseball—and to investing.

It’s the story of the Oakland A’s general manager, Billy Beane, and his struggle to create a competitive baseball team on a limited budget. How does this relate to personal finance? Well, first let me explain my connection to Moneyball.

It was a time long ago, meaning the 1970s. Due to then-limited technology, a baseball player’s batting average was displayed on television only during his first at-bat. I have a distinct memory of watching a New York Mets game and asking my father, “What’s a batting average?”

He patiently explained that it was basically the number of hits divided by the number of at-bats, and that it didn't include walks. I remember thinking that math may be more useful than I thought and... why weren't walks included?

When I watched subsequent games, read the newspaper and talked with fellow fans, a player’s batting average is what everyone wanted to talk about. After all, having the highest batting average enabled a player to claim the prestigious title of batting champion.

I quickly realized that walks were incorporated into another number, the on-base percentage. This number is basically the number of times a batter safely reached first base divided by the number of plate appearances.

As there were many players skilled at obtaining walks, a player’s on-base percentage could be significantly higher than his batting average. And because a walk was as good as a single, I realized that a player’s on-base percentage was a much better indicator of a player’s worth than his batting average.

For instance, in the 1970s, there was a coach on the Mets named Eddie Yost. As a player during the 1940s and ‘50s, he walked so much that his nickname was “The Walking Man.” His on-base percentage was a fantastic .3940, meaning he reached first in nearly four out of every 10 plate appearances. That’s the 87th highest of all time, well ahead of Hall of Famers Willie Mays (.3836), Ken Griffey Jr. (.3695), Johnny Bench (.3416) and Cal Ripken Jr. (.3402). Since Yost’s lifetime batting average was a modest .254, few know of him today.

On-base percentage plays a significant role in the book Moneyball. There’s a key scene where Billy Beane’s scouts encourage him to draft prospects based on phrases such as “good body, big arm,” “the guy has a cannon” and “he’s noticeable.” It’s said of the best prospects that “he’s a tools guy,” meaning he has all five tools—he could run, throw, field, hit, and hit with power.

Later in the book, when current major league ballplayers are analyzed, everyone but Beane wants to talk about their batting average. It was common knowledge among managers, scouts, writers and fans that the number of runs a team scored was directly related to a team’s batting average.

An exasperated Beane states that all these metrics are dated and well-known by every other team in baseball. If Oakland wants to win on its tight budget, it’ll need to think differently and start using other metrics, especially on-base percentage, in evaluating which players to sign. He also knew—through nascent baseball analytics—that both his scouts’ recommendations and batting average did not equal runs, but that on-base percentage did.

His scouts were not impressed. Beane pushed ahead anyway and built a winning team on a limited budget based in large part on focusing on a player’s on-base percentage. When I read the book, I thought, “Hey, that should be me.”

What does all of this have to do with personal finance?

If you think you can improve on the market’s risk and reward by investing in individual securities and, in effect, beat the market, that’s fine. I think it may be possible. Hard work can overcome many obstacles.

You’re doomed to failure, though, if you apply all that hard work to using dated and well-known metrics such as dividend yield, price-to-earnings, price-to-sales, beta and so on. When investing, they’re the equivalent of the “tools guy” and the batting average—terms still quoted on television, online and by fellow investing fans, but essentially useless because such information is already reflected in today’s stock prices. Old habits die hard. Wikipedia still displays batting average under a player’s “MLB Statistics,” but makes no mention of on-base percentage.

Oh, by the way, now that everyone in baseball knows about on-base percentage, Beane has found it has become much less useful in finding undervalued players.

Can the market be beaten? Offer your thoughts in HumbleDollar’s Voices section.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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Car Trouble

I WAS HAPPY TO receive this year’s boost to my Social Security benefit—but I’m regularly reminded that it doesn’t match the endless inflation.

A case in point: The same oil change at the same gas station for my 2020 Honda Fit cost me 28% more last week than it did nine months earlier. With detailed invoices, I could compare the reasons for the jump. Surprisingly, it wasn’t the cost of four quarts of full synthetic oil, which was just 7% more, or the $8.63 filter, which was the same price.

To be sure, synthetic oil is pricier than conventional oil, but it’s becoming standard on most new vehicles and it’s believed to be the better choice, according to a 2019 Consumer Reports article. I drove almost 9,000 miles before the maintenance reminder suggested changing the oil.

So, what drove the 28% increase? As you might expect, labor costs were the main reason. The labor for the oil change went from $15 to $20, and the tire rotation from $20 to $30. I live steps away from this gas station and for months had seen the “mechanic wanted” sign on the curb. Maybe it’s no surprise to see a shortage of mechanics in this university town that's overflowing with folks with graduate degrees, including me. According to Indeed.com, there were 164 auto mechanic or auto technician jobs available in the city. Most of the jobs pay $22 to $30 an hour.

A lack of mechanics is one reason car repair costs are now 23% higher than last year. That increase is four times higher than overall inflation, according to an ABC News story. Other reasons include shortages and higher costs for parts, and more high-tech vehicles requiring expensive equipment.

At the same time, 15 million more vehicles were added to our roads between 2016 and 2021, while the pandemic closed 19,000 service bays in 2020 and more in 2021. This trend is expected to continue to the point where there'll be a record high number of cars and light trucks per service bay by 2025. On top of that, the growth in the number of electric vehicles is predicted to further stress the car repair business.

Of course, I know it would be far cheaper to replace my own oil and filter, but the condo rules don’t allow it. The good news: It doesn’t have to be done that often—because I don’t drive that frequently.

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