Jonathan Clements's Blog, page 190

Book Smart?

JAMES J. CHOI is a finance professor at Yale University. But in a recent paper titled “Popular Personal Financial Advice versus the Professors,” Choi played the role of (somewhat) neutral arbiter. The question he sought to answer: Do popular—that is, non-academic—personal finance books offer advice consistent with the academic literature? And if not, is that a problem?




To conduct his study, Choi looked at 50 personal finance titles including The Millionaire Next Door, Rich Dad Poor Dad, A Random Walk Down Wall Street and I Will Teach You to Be Rich. As you might guess, Choi found a sizable disconnect between the academic literature and the advice offered by popular titles.




For example, academic studies advocate an approach to budgeting called “consumption smoothing.” The idea is that, when people are early in their careers and their incomes are low, they should save very little, leaving them with more cash for living expenses. In fact, the theory goes, young people should even take on debt so they can enjoy a reasonable standard of living while their incomes are low. As Choi puts it, “You don’t want to be starving in one period and overindulged in the next.” According to this theory, workers shouldn’t start saving until later in their careers, when their incomes are higher.




That’s what the academic literature says. Most personal finance books, though, recommend the opposite: The standard advice for young people is to avoid debt—other than a mortgage. Recognizing the power of compound interest, young people should also start saving as soon as possible rather than delaying.




Another disconnect with the academic literature: Popular books recommend that investors diversify internationally but still maintain the bulk of their investments in U.S. stocks. Academics, however, look down on this approach. They call it “home bias” and believe it’s illogical to favor any one country’s stock market over another. Choi, in fact, accuses personal finance authors of “jingoism” and maybe laziness. "People just like the stocks that they are familiar with," he says.




Another key point of disagreement between academics and popular books: To facilitate saving, books often recommend that consumers segregate money using different accounts. You might have an emergency fund, for example, that’s separate from your day-to-day checking account.




This setup can help people get organized, and it can help them measure progress toward specific goals. That makes intuitive sense, but economists see it as foolish. They call it “mental accounting” and believe that it, too, is illogical. In the academic view, money is fungible, so there’s no reason to segregate funds in different accounts.




Those are just some of the disagreements. On several other points, as well, Choi found that popular books don’t adhere to many of the key findings in the finance literature.




As an investor, what should you make of this? Is it a problem that personal finance books, in Choi’s view, seem to have so little basis in research? To answer this question, I would consider four points:




1. Investing isn’t easy. Investors are human beings. It’s no surprise, then, that much of the popular literature is focused on practical solutions. Choi himself acknowledges this. Ordinary people need solutions that are “easily computable” and not complex, he says. He goes on to say that individuals may be susceptible to “emotional reactions to circumstances” and might need to fight against “limited motivation.”




These observations have a condescending tone, but they may also be correct. Intuitively, many of us know the right thing to do. We shouldn’t overspend, carry high-interest debt and so forth. What’s needed, then, isn’t so much formulas as practical solutions. That’s what most personal finance books offer. Most of their recommendations aren’t really counter to the academic literature. Instead, they just select the most important findings and translate them into recommendations that are usable.




2. Risk isn’t so simple. Very few popular books look at risk the way economists do. Formal economics uses volatility—the variability of returns from year to year—as the primary measure of risk. This is the basis for Modern Portfolio Theory. But it also has a flaw: Volatility is a backward-looking statistic. No one can say what the volatility of an investment will be in the future—and that, of course, is all that matters.




There’s the joke that Bernie Madoff only had one bad year. If you had looked at the volatility of his firm’s returns before his scheme unraveled, it would have looked great. But that would have overlooked other, non-quantitative risk factors. Critics noted that Madoff didn’t use a traditional custodian, that his math didn’t add up and that he carefully avoided people who questioned him too closely. None of those risks would have shown up in a traditional economic analysis.






To be sure, Madoff is an extreme example. The reality, though, is that all investments carry risks that are multi-dimensional. Using only the academic lens would be foolish. In that way, then, it’s a good thing that popular authors deviate from the academic understanding of risk.




3. Historical data is—necessarily—about the past. It’s important to remember that research studies are backward-looking. That’s a problem because the past is only a guide to the future. It offers no guarantees. For that reason, it’s not surprising if popular advice looks beyond historical data.




A good example: Historically, value stocks have outperformed growth stocks. But very few authors would tell readers to put all their money into value stocks. Why? This historical outperformance was only on average and over time. It hasn’t been true in every time period, and there are no guarantees that it’ll be true in the future.




Further, when it comes to historical data, there’s always an additional risk: that the pattern observed historically might have been just a fluke, without any fundamental basis.

Finally, we each get to make just one financial journey. Like most investors, I reference charts that go back to the 1920s. But I also recognize that no one will be in retirement for 100 years—so those long-term averages can’t be applied directly to any one individual.




4. Finance is not a physical science. Each year, the Nobel Committee issues a prize in “economic sciences.” The reality, though, is that economics isn’t a science in the same way that physics or chemistry is. Economics can only approximate how the world works. Because the economy is so complex, it’s impossible to ever know for sure how things will turn out.




Consider our experience with inflation over the past few years. A portion of it was perhaps the predictable result of stimulus spending. But no one could have predicted Russia’s invasion of Ukraine, which made matters worse. These sorts of things happen all the time. An economic model might predict one thing, but then something else happens.




In his survey, Choi found quite a bit of disagreement between academic research and popular books. He also found quite a bit of dispersion among the personal finance books themselves. On the one hand, this might sound discouraging. My sense, though, is that this confirms what we already knew: Personal finance has some quantitative underpinnings, and academic research does provide many useful insights. But ultimately, it’s a balance. No formula can perfectly explain the real world. Thus, there's a danger in relying solely on the numbers. At the same time, academic research does provide an important leg of the stool.




A final thought: Choi did identify one—and only one—area in which there was broad agreement between academics and popular authors. On the topic of mutual funds, nearly all agreed that index funds were a better bet than actively managed funds.

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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All Together Now

ONE OUT OF FOUR Americans lives in a household with three or more generations under one roof, according to Generations United���s 2021 report. The number of folks living in these multigenerational households has increased sharply over the past decade, from 7% in 2011 to 26% in 2021. Although ���multigen��� households come in many shapes and sizes, the rarest type is a four- or five-generation family living together.

For most of my pre-teen years, I lived in a four-generation household. It all began in 1947, during a blustery blizzard when my great-grandpa drove my very pregnant mother and my father to the hospital. He didn���t trust Dad to navigate his DeSoto on the icy roads. When my parents brought me home, my great-grandparents and grandparents welcomed me.

All seven of us lived together as a multigenerational family in a large rambling house built in the late 1800s. When Dad returned from Europe after World War II, he was a G.I. Bill university student with no income. Mom promptly got pregnant and remained a homemaker for several years as the babies came quickly. Living with family was about economics and affordability.

I thought our housing arrangement was normal, though I later realized most of our neighbors lived in two-generation family homes. Except for a short stint when my parents and I stayed with my great-aunt and uncle on their farm, we lived with my double set of grandparents until I was almost 13 years old.

I believe my parents��� failed finances were the main reason they lived with the grands. My great-grandma provided childcare, allowing Mom to earn income working outside the home. When my great-grandmother and grandmother were each widowed, living with the extended family helped them emotionally as well as financially.

Growing up with all these relatives taught me several money messages. ���You can���t take big shortcuts and expect to get paid,��� my exasperated grandmother told me one day. As an eight-year-old, I had to pick a row of green beans from the backyard garden before receiving my compensation���the chance to play with friends. Rushing to get done, I offered up only a half-filled bowl. Admonishing me for missing many string beans still on the vine, Grandma sent me back for another round. Only when I returned with a brimming bowl was I rewarded with playtime.

In addition to that lesson on doing a job the right way, there were six other lessons I learned from my multigenerational family:

1. Live frugally, resourcefully and spend money intentionally. Both sets of grandparents lived through the Great Depression and knew how to stretch a dollar. They saved and reused everything until further repair was impossible. Times were tight for us all, so money was spent meaningfully. Today, I still find bargains at vintage thrift shops, use coupons and prefer spending money on experiences rather than stuff.

��S&H Green Stamps bought many kitchen accessories. Vacations were rare and usually involved visiting family. Seven of us drove from Wisconsin to California and back jammed into our Rambler station wagon with overload springs. We probably looked like The Beverly Hillbillies. Going to the state fair at summer���s end every year was a special family treat.

2. Start a small business. That's what��my grandmother did with her commercial bakery, and where I helped after school. A related lesson I learned from Grandma is that it takes dedicated, demanding work to make your business successful and, even then, things might not work out. My first venture as a 10-year-old entrepreneur was a lemonade stand, followed by selling greeting cards door-to-door. My babysitting work boomed when I was 11. At 49, I began my own financial planning business, which I continued for 18 years before switching to a six-year encore consulting business.

3. You���ll never go hungry if you grow your own food. I helped my family raise plentiful crops, which filled our freezer and the basement���s shelves of canned goods. All that bounty fed us through the winter. Today, I continue harvesting a wide variety of healthy veggies and luscious blueberries from our garden, although I no longer pack a full-sized freezer.

4. Don���t eat your money. Dining at McDonald���s was a rare treat for us in the 1950s. Today, I���m not comfortable paying $50 for lunch when I can easily eat a healthy meal at home, brown bag it or choose an inexpensive alternative if I���m out.

5. Do well in school.��Scholarships and a college degree can be your ticket to a better life. Having seen my parents, grandparents and great-grandparents struggle financially, I hoped to break the cycle by continuing my education. Both my great-grandmother and grandmother were briefly one-room schoolteachers, before their marriages. I���m glad they encouraged me to earn a university degree and start my professional career as a public-school teacher.

6. We care for each other as we age, and save money that way, too. After my great-grandpa died and later my grandpa passed, their widows continued living in our multigenerational household for decades. Before his death, my father-in-law moved in with my husband, my children and me for several years. It was much less costly than a retirement home, and it was meaningful for his grandkids to know this gentle soul better. I believe living with us gave Grandpa a better quality of life in his remaining years.

I don���t want to appear pollyannaish. Yes, I do also remember negative money messages from my childhood. My parents often argued about their finances. There never seemed to be enough money, especially one Christmas when Mom bought many presents from the General Merchandise catalog on credit.

My grandparents dealt with their money disagreements away from us kids, but sometimes I heard their fights as well. I recall adults yelling, banging doors and sulking. These memories turned me 180 degrees in the opposite direction. My husband and I openly discuss money matters and don���t keep financial secrets.

Will the trend toward increased multigenerational housing continue? I believe it will.

During the pandemic, a friend of mine and her husband combined households with their adult daughter, son-in-law and two toddlers. With no childcare available, their remote-working daughter and husband were desperate for help. Now that the critical phase of the pandemic has passed, this three-generation family has decided to remain together for financial and other benefits. Indeed, they pooled their money and bought a bigger house to provide more space for all, including a semi-private in-law suite.

For many years, I���ve enjoyed living just with my husband, inviting extended relatives to visit often. Two summers ago, my son and his family stayed with us in our roomy house for almost two months. Years ago, when my mother was widowed, she was with me before choosing to live in a nearby retirement home.

I plan to maintain my independent lifestyle for many more years. But who knows? Perhaps someday I���ll return to a multigenerational family���but this time I���ll be the elderly grandparent.

Kathleen M. Rehl is retired following a career in financial planning and an ���encore career��� of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. You can learn more at www.KathleenRehl.com. Check out Kathleen's earlier articles.

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What’s Cooking?

COUNTLESS ARTICLES on HumbleDollar speak of the need to save, especially for those early in their careers, so they can eventually retire in comfort. The powerful effect of compounding means that the sooner those dollars are saved and invested, the greater the sum down the road.

But where can folks find those extra savings? Let me offer a suggestion: learn to cook.

The amount Americans of all income levels spend on eating out, whether it’s sit-down restaurants, fast food places or takeout, is staggering, according to studies cited by Richard Quinn in an article last year. Americans spend an average of $787.28 a month on meals outside the home, found one survey.

The timing of this screed may seem insensitive. After all, the restaurant industry was decimated by the pandemic and its underpaid workers were hit hard. I have nothing against the restaurant industry. I worked as a waiter during college. Two of our kids have also worked in restaurants, and my niece is part owner of two successful restaurants and bars.

But I have an old-fashioned view of restaurant meals. Eating out is a treat, an occasional indulgence, not a several-times-a-week habit.

I’m not saying to give it up entirely. For those retirees and others who enjoy it and can afford it, by all means indulge. Among those who have a future to save for, however, I’d suggest calculating what dining out is costing you and then look to reduce that sum.

The total tab can be quite surprising. Years ago, my wife checked the bank account of one of our kids, then in college. In one month, the cost for restaurants was around $600. That was a shocking amount even to our dining-out college student, who promised to reform.

You don’t have to be a gourmet chef to take on cooking at home. I’m lucky to be married to a woman who’s a great chef. But even I, in my clumsy way, can manage a dozen or so decent dishes. The truth is, much restaurant food is mediocre, plus their shortcuts to taste are often exorbitant amounts of salt, sugar and fat. Cooking at home means you know exactly what’s going into your meal, and can control every ingredient.

To work up enthusiasm for home cooking, it helps to have an angle. If you’re a natural host or hostess, inviting friends over to sample your latest dish might spur you on. Maybe you enjoy exotic and spicy dishes, so trips to different ethnic markets would be part of the fun.

Meal prep is a lot more enjoyable with a well-tuned chef’s knife, so my hobby of knife collecting and sharpening comes into play. One of our daughters began trying recipes from The New York Times cooking app—she’s now tasted well over 200.

I’m not blind to how things have changed in America when it comes to cooking at home versus eating out. At the gym my wife used to attend, the women in her exercise group were astounded to hear that she cooked “almost every day.” When our kids were in high school, and we had more contact with their friends’ parents, we were amazed at the number of families whose homes included magnificent kitchens—which were rarely used to cook a meal. I realize I’m asking people to buck a widespread cultural trend.

Our kids are all grown now and we’re proud of them. Some of them likely overindulge on restaurants, food trucks and takeout. Still, they’re all capable in the kitchen, so—even if they never eat out again—I’m confident they won’t starve.

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What���s Cooking?

COUNTLESS ARTICLES on HumbleDollar speak of the need to save, especially for those early in their careers, so they can eventually retire in comfort. The powerful effect of compounding means that the sooner those dollars are saved and invested, the greater the sum down the road.

But where can folks find those extra savings? Let me offer a suggestion: learn to cook.

The amount Americans of all income levels spend on eating out, whether it���s sit-down restaurants, fast food places or takeout, is staggering, according to studies cited by Richard Quinn in an article last year. Americans spend an average of $787.28 a month on meals outside the home, found one survey.

The timing of this screed may seem insensitive. After all, the restaurant industry was decimated by the pandemic and its underpaid workers were hit hard. I have nothing against the restaurant industry. I worked as a waiter during college. Two of our kids have also worked in restaurants, and my niece is part owner of two successful restaurants and bars.

But I have an old-fashioned view of restaurant meals. Eating out is a treat, an occasional indulgence, not a several-times-a-week habit.

I���m not saying to give it up entirely. For those retirees and others who enjoy it and can afford it, by all means indulge. Among those who have a future to save for, however, I���d suggest calculating what dining out is costing you and then look to reduce that sum.

The total tab can be quite surprising. Years ago, my wife checked the bank account of one of our kids, then in college. In one month, the cost for restaurants was around $600. That was a shocking amount even to our dining-out college student, who promised to reform.

You don���t have to be a gourmet chef to take on cooking at home. I���m lucky to be married to a woman who���s a great chef. But even I, in my clumsy way, can manage a dozen or so decent dishes. The truth is, much restaurant food is mediocre, plus their shortcuts to taste are often exorbitant amounts of salt, sugar and fat. Cooking at home means you know exactly what���s going into your meal, and can control every ingredient.

To work up enthusiasm for home cooking, it helps to have an angle. If you���re a natural host or hostess, inviting friends over to sample your latest dish might spur you on. Maybe you enjoy exotic and spicy dishes, so trips to different ethnic markets would be part of the fun.

Meal prep is a lot more enjoyable with a well-tuned chef���s knife, so my hobby of knife collecting and sharpening comes into play. One of our daughters began trying recipes from The New York Times cooking app���she���s now tasted well over 200.

I���m not blind to how things have changed in America when it comes to cooking at home versus eating out. At the gym my wife used to attend, the women in her exercise group were astounded to hear that she cooked ���almost every day.��� When our kids were in high school, and we had more contact with their friends��� parents, we were amazed at the number of families whose homes included magnificent kitchens���which were rarely used to cook a meal. I realize I���m asking people to buck a widespread cultural trend.

Our kids are all grown now and we���re proud of them. Some of them likely overindulge on restaurants, food trucks and takeout. Still, they���re all capable in the kitchen, so���even if they never eat out again���I���m confident they won���t starve.

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A Hardship Indeed

BORROWING FROM MY 401(k) helped my wife and me buy our home in 1997. I���m grateful I was able to reach inside my retirement plan for the money we needed for the house down payment.

Experts often warn against 401(k) loans because, even if the loan is repaid, the money borrowed can miss out on investment gains. That���s certainly a risk. Still, there���s a second way of taking money out of a 401(k)���and it���s far more harmful to retirement savings. It���s called a hardship withdrawal, and it���s grown more popular in recent years.

A hardship withdrawal differs from a 401(k) loan in that the money isn���t repaid. Instead, the worker owes income taxes on the money taken from the account, plus a 10% early withdrawal penalty in most cases. The tax cost would be 32% for a single person earning $60,000���not to mention the big hole made in his or her retirement savings.

Even 401(k) loans should be used sparingly. Forget the opportunity cost of missed investment gains. The big risk is that you lose your job with a loan outstanding. If that happens, the loan typically has to be repaid in full in 30 to 60 days, depending on plan rules. If the money isn���t promptly repaid, the outstanding balance is subtracted from savings, and subject to income taxes and usually an early withdrawal penalty.

This is the worst-case scenario with a 401(k) loan���but it is, alas, business-as-usual for a hardship withdrawal. Yet, despite the hefty cost, hardship withdrawals have only become more popular and easier to get in recent years. People who badly need money should take it from their plan savings using a loan. But instead, they compound their problems by taking a hardship withdrawal.

Why would someone opt for a hardship withdrawal rather than a loan? Sometimes, a hardship withdrawal is the only option. According to data from Vanguard Group, a big administrator of 401(k) plans, 94% of plans offer hardship withdrawals, but only 81% offer plan loans. Another reason for hardship withdrawals: A worker may already have a loan outstanding, and many plans only allow one or two loans.

A third reason could be naivete���and semantics. For workers in a financial jam, a hardship withdrawal may sound like the right answer to their exact circumstance. Hardship withdrawals are permitted for only��six reasons:

To pay large medical expenses for a worker or family member.
To prevent eviction from a rental or avoid foreclosure on a primary residence.
To pay funeral or burial expenses for a family member.
To make needed home repairs after a storm, fire, flood or other damaging event.
To pay college tuition or related fees and expenses.
To buy a first home.

Many of these situations are stressful and pressured, and not the time folks are inclined to carefully weigh their options. Employers used to slow down the process by requiring proof of need���an eviction notice or medical bill���before issuing hardship money. The financial need had to be immediate and heavy, and the withdrawal was limited to the amount required to meet the emergency.

In 2019, Congress eased the requirements after several destructive hurricanes struck U.S. shores. Workers complained they couldn���t produce the necessary paperwork if their homes had been washed away or if they���d been evacuated from, say, New Orleans to Texas.

Today, by contrast, workers can often simply name their hardship and the amount of money needed using an online application. With less paperwork, payments are faster and more convenient. Predictably, the number of workers taking hardship withdrawals jumped 48% in 2019, to 2.3% of participants in Vanguard-administered plans. If that same percentage applied nationwide, it suggests there were 1.3 million hardship withdrawals in 2019. Roughly 60 million people participate in a 401(k) plan, according to the Investment Company Institute.

In 2020, Congress opened a new door for hardship withdrawals aimed at those affected by COVID-19. People could take out as much as $100,000 penalty-free from their retirement plan account, twice the maximum available through a plan loan. Vanguard said 5.7% of its plan savers took advantage of the one-time program. If that percentage applied to the nationwide 401(k) population, it would work out to more than 3.4 million COVID distributions.

Workers can treat their COVID distribution as a loan, and pay the money back. That way, they���d avoid income taxes and replenish their retirement savings. But they can also treat the money received as a hardship withdrawal and pay taxes in installments���33% each year for three years.

Fewer than 1% of COVID borrowers repaid the money to their plan in 2021, according to Vanguard. The overwhelming majority are treating it as a hardship withdrawal. They���ll pay higher taxes now���and have less money later for retirement. A hardship indeed.

Greg Spears is HumbleDollar's��deputy editor.��Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Artfully Dodged

I HAD THE OPPORTUNITY to view Gustav Klimt���s most famous work of art, The Kiss, while visiting Vienna a few years back. It depicts a couple locked in an intimate embrace. It���s an oil painting with a significant amount of gold leaf���quite distinctive.

A few weeks later, I had an opportunity to buy a Klimt. I was in a gallery in Salzburg and came across a drawing of his which was titled Stehender��R��ckenakt - 1913. I can���t remember the exact price. But since I didn���t buy it, it most likely cost a little more than I thought it was worth���or more than I currently had in my wallet. Still, I���ve always wondered what it would look like in both my living room and my portfolio.

This pleasant memory all came back to me recently when a friend emailed me a link offering me a second chance to add artwork to my portfolio. I must admit I was a little leery when I first clicked on it and the newly opened web page allowed me ���to skip the waitlist!��� It announced that I was now ���invited to join an exclusive community investing in blue-chip art.���

The link also informed me that Masterworks is a company that buys multi-million dollar works of art, creates a Delaware limited liability company to own each one and sells shares in that company to the public. It resells the art a few years later, presumably at a higher price, and then disburses the proceeds to shareholders. Masterworks enables the fractional ownership of art���basically art for the little people.

I accepted the offer and opened an account. Before I could start investing, I needed to make an appointment with Masterworks��� registered financial advisor so he could learn more about me and answer any questions I might have. I also now had the ability to review the four works of art that Masterworks is currently securitizing.

I immediately started to imagine telling people at cocktail parties���or grocery store lines���that I owned a Picasso. Specifically, Homme a la Pipe, which is, of course, one of a series of Pablo Picasso���s important later works that feature the subject of the Musketeer. These are easily identifiable by the Musketeer���s colorful regalia and various accouterments, such as pipes, knives and swords.

Well, Evan the advisor called a few days later and explained, among other things, that the fee structure was 1.5% per year and 20% of the future profit. The management structure: Masterworks, via its B shares, determines when to sell the artwork and for how much. Where my Picasso would be stored: in the Delaware Freeport in Newark, Delaware, though it might sometimes be on display in Masterworks��� New York City office for my personal appreciation.

For those of you not in the know, the Delaware Freeport is a��newly opened 36,000-square-foot, state-of-the-art temperature- and humidity-controlled warehouse. It offers various storage services to art investors, with the most important being avoiding New York City���s 8.875% sales tax.

Evan failed to mention that Masterworks takes an 11% ���true-up��� fee off the front end to facilitate a ���reasonable compensation for Masterworks��� services, capital commitment and outlay in sourcing and acquiring��� my Picasso. It was mentioned in the prospectus. But to read it required a measure of squinting that would make Clint Eastwood proud.

I also learned Masterworks wouldn���t be a part owner of my Picasso. If it had some skin in the game, that would keep our interests better aligned. But as things stand, Masterworks might view my Picasso a little less as an investment and a little more as a wallet adorned with colorful regalia and various accouterments, in this specific case a pipe.

Evan also recommended that I diversify and buy some shares in a painting called Ripe by Ed Ruscha. That artwork is far more decipherable than the Masterworks��� fee schedule as it has the word ���Ripe��� written in pomegranate juice on a 59-inch by 55-inch yellow canvas. I thought, much as you might, ���I���ll stick with my Picasso, thank you very much��� as who in the hell is Ed Ruscha?��� By the way, you philistines, it���s pronounced roo-SHAY.

My Picasso would be insured against damage or theft, but not against competing ownership claims. Evan said that Masterworks only purchases paintings with impeccable provenance, so this shouldn���t be an issue. Still, I was a little concerned. If, in this day and age, my mortgage company requires me to obtain title insurance for my $500,000 house, you���d think the same coverage might be nice for my $17 million painting.

I also take issue with the risk of this type of investment. When I invest in stocks or bonds, I know that their prices may drop, but���in the end���there���s some underlying value. This is not necessarily true of works of art like Ripe. Tastes change. On top of that, there���s the added risk that my investment might be stolen, damaged or counterfeited, and therefore tied up in insurance claims and litigation.

Despite what I���ve written, I think there may be something to investing in art. I just returned from a visit to Crystal Bridges Museum of American Art in Bentonville, Arkansas, where Sam Walton���s daughter spent hundreds of millions of dollars to create a museum from scratch. It appears that the filthy rich���s appetite for money is only exceeded by their appetite for ridiculously expensive works of art.

By investing in paintings, it just may be possible to separate rich art dilettantes from a small portion of their money. I just don���t like the structure and fee schedule of this particular investment���not to mention I know almost nothing about art. On the other hand, if there was a way to invest in ridiculously expensive casks of bourbon���.

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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Barely Holding On

AS THE SAYING GOES, you get what you pay for. Does that mean a higher price equals better service and quality? When I purchase something, I assume customer service is built into the cost. But maybe I���m wrong.

One of my current life goals is to be one of those ���other customers��� who are currently being assisted while I���m on hold. When I call a helpline, I���m thinking my call is not that important to them. Otherwise, why would I be on hold?

I���m also not amused with the hold music. My hopes rise when there���s a slight pause, only to have those hopes dashed. I���m told I���m 65th in line���but my ���call is important, please stay on the line.��� I wonder if the 66th person is as important?

Sometimes, you can request a call back and get out of the queue. It���s a relief not to have a phone glued to your ear listening to music���or, worse, to ads trying to sell you more of the company���s quality product.

What is it that���s causing all the ���extraordinary call volume���? I���m thinking it may be poor customer service, bad products or the business trying to cut corners. Could it be there just aren���t enough customer service reps���in Romania or India or maybe Utah?

There���s another possibility, too. Those reps working from home have put down their headsets to change a diaper or walk the dog. Yeah, I���ve heard the barking dog and the crying baby on occasion.

You can avoid all this waiting by using the company���s website���at least that���s what we���re told. But the website���s section devoted to frequently asked questions has limited value if your question isn't one that���s frequently asked.

Then there���s the chat function. I like using chat���unless you start and discover it���s only a programmed set of responses, none of which applies to your inquiry. Frankly, I���d rather wait for the dog to be walked.

Within this world of questionable service, there are exceptions. I recently had a three-year-old beach umbrella suddenly malfunction and stop closing. I sent a note to the company through its website. The next day, I received a call from someone who sounded like he was in charge.��In more detail than I could understand, he explained the problem and said he would send me a new umbrella. And he did, in four days.

About that same time, my family was working on a 1,500-piece jigsaw puzzle. We found upon completion that two pieces were missing.��An extensive search never turned them up, so I emailed the company and again received a call. The company didn���t offer to replace the two pieces. But we could select any puzzle the company made and it would be mailed to us. We did���and the puzzle arrived three days later.

The lesson: If you���re in the market for a beach umbrella or a jigsaw puzzle, it appears possible to be that important customer who gets help. What if you���re calling about your refund from a canceled cruise? Not so much.

The post Barely Holding On appeared first on HumbleDollar.

Moving the Goalposts

EARLY IN MY CAREER, I pursued a rigorous financial industry certification. Among the hoops I had to jump through: passing a seven-hour exam.

For 18 months, I woke up every day before work and studied for an hour. I found that consistency far more helpful than eight-hour weekend study sessions. Thanks to my daily commitment through the workweek, I only had to study for one to three hours each Saturday and Sunday.

Still, I didn���t want to get up most mornings. I���d lament to my wife, ���When this is over, I���ll start working out so much more. I���ll start cooking breakfast every day. I���ll do yoga on the porch. I���ll be so much happier.���

Then came the exam. I was nervous. I couldn���t wait for it to be over so I could move on with my life without any more formal education tests.

I completed the exam in half the time allotted. I passed. I was so prepared it even felt easy. My wife had champagne waiting for me in the parking lot, and we popped it right there.

Then, on the three-hour car ride home, it hit me: It���s over. No more studying. No more early morning grind. I was pumped. But then something I didn���t expect occurred. The next day, my mind began to race. What now? I had jumped out of bed every morning to study, to compete, to win. But now, what���s my next aim? What���s my next purpose?

Anyone who has achieved something of great rigor understands this feeling. Lost. Aimless. Bored. A lot of the time, achieving our goals is the wrong goal.

We often hear, ���It���s not about the destination, it���s about the journey.��� We���re told, ���Always striving, never arriving.��� We hear platitudes about smelling the flowers along the way. Sometimes, clich��s exist for a reason. They���re true in the highest form of the word.

We humans are insatiable. We aren���t content for long with completion. We need a new aim, a new target, a new goal, no matter what our realm of pursuit. Ran a 5k in 20 minutes? Now, we want 19:30. Got a promotion? Great. Now, we want another. Have a $500,000 net worth? Next up is $1 million. On and on it goes. We hit the next pinnacle and find ourselves wanting more.

What can we do about it? Here are three options I believe to be effective, depending on your personality.

1. Don���t have goals. This is a new-age philosophy circulating on the internet right now. I think it has some merit. By having a direction, but not necessarily a destination, we leave the door open to a never-ending moving forward, not necessarily ���arriving.��� If we don���t have an end goal, then the journey gets to last forever.

This also frees us up to accomplish more than our measly goals. Often, we set goals that we know we can achieve���because we���re afraid of coming up short. This sets a cap on our achievements. Once we accomplish the goal, we step back and ease up.

I can���t tell you how many times I���ve set goals in my professional, financial and fitness journeys, only to adjust them higher because gains happened faster than anticipated. It���s human nature to set easy goals. We don���t want to fail.

The next pursuit you have, don���t put the destination in your motivational GPS. Simply choose your direction and go forward. Act. Do. Move. When you come to a crossroads in your journey, choose the path that excites you the most, rather than the path that stops at a dead end.

2. If we must set goals, make them audacious. Some people can���t help themselves. Without a well-defined target, they���re completely lost. Direction is not enough for these folks. They want to know, ���Where am I going and how do I get there as fast as possible?��� I have a solution for this one as well: B-I-G goals.

I���m talking as big as we can imagine���goals that feel impossible. If we want to get the next promotion, set the goal to become CEO. If we want to complete a 5k, set a goal to run a marathon.

This again gives us the air cover to focus on the journey, the adventure, the pursuit. Small goals will always leave us wondering what���s next. It���s in our nature. That���s why we might set goals so big we think we might not be able to achieve them. That way, we stretch out the pursuit so far into the distance that the joy and excitement get stretched out as well.

3. Only pursue those things in life that excite us and can���t be finished.��If we feel that having no goals is too ephemeral and having big audacious goals is a recipe for disappointment, consider this third alternative.

Take golf. I don���t care how much you practice, or how good you get, you can���t win. One day, you���ll shoot your best round ever, and the next day you can���t remember how to hit the ball. One day, you hit every chip to one foot of the hole, and the next day you can���t stay on the putting green. Even professional players go through slumps and have bad days. The best players in the world often place well below 100th in tournaments.

For each of us, our life���s pursuits will be different. They might be art, work, relationships, gardening, fitness, writing, anything. But whatever we���re looking to accomplish, we must pursue those things without end.

Don���t just set the goal of running a 5k. Instead, set the goal of running a 5k on your path to ���becoming a runner.��� Don���t just set the goal of having date night once a week. Instead, set a goal of ���being a better spouse.��� Don���t just set a goal of amassing $1 million. Instead, set a goal of ���being financially free.���

Good luck with your pursuits. I hope you won���t achieve them too fast.

Luke Smith is a CFP����professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine his two favorite passions: finance and people.��He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at�� Luke.Smith@Wealthspire.com.

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Anchors Aweigh

THE DALLAS HOUSING market has recently shown signs of slowing. In our townhome community, I���ve noticed that houses are sitting unsold for longer. Until recently, any place on the market for more than seven days was considered unusually long.

Two weeks ago, we became interested in buying a two bedroom, two bath townhome on our street as a rental property. It was listed at $375,000. Upon a closer look, however, we found the following:

The property hasn���t been upgraded since 1988. We also found several structural problems, including a major foundation crack that seemed to cut across the front room. The roof, heating and cooling system, and hot water heater all needed replacing.
The county tax appraised value is $305,000, which is based on the assumption the house is in average condition and hence doesn���t factor in the structural problems and the lack of upkeep and updating. That $305,000 works out to $188 per square foot, significantly below the list price of $230 per square foot.

Based on the condition and the expected repairs, we made an offer of $280,000, or $95,000 lower than the list price. Yes, that was a big difference. But considering all the repairs needed and the cooling housing market, we thought it fair. The seller countered with $359,000. We walked away.

It struck me that this was a classic example of anchoring bias���the inordinate influence of the first piece of information encountered. With a home sale, the initial price is typically seen as an anchoring point, whether that price is reasonable or not.

I suspect the owner set the selling price based on market conditions in early spring, and then failed to adjust the price despite sharply higher mortgage rates and a recent high cancellation rate for home-sale contracts. Even our own realtor thought our bid was too low. But I suspect she, too, was measuring our bid relative to the list price, not the house's actual condition and value.

Anchoring bias typically occurs in situations where folks are dealing with numbers. But it can also occur with qualitative expectations. If children have good grades in elementary school, that anchors the parents��� expectations. Parents declare their child an ���A student��� and expect subsequent teachers to confirm.

Similarly, athletes who perform well at the junior level are designated forever stars. Donald Young, a U.S. tennis player, was phenomenal in junior tournaments but ranked only as high as 38th as a professional. That���s an incredible achievement���but it���s seen as disappointing compared to our expectations of Young, which are anchored on his early success.

Want to be happier with your achievements? Weigh the anchor of your expectations���and perhaps change it for another if that���s what the facts demand.

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Best Option

BACK IN 2005, my employer was in merger talks. If the deal had gone through, I would have lost my job. I���d already received an offer of promotion to vice president. That made me eligible for an officer���s severance package that included, among other things, two years��� pay plus my full pension.

I was almost hoping the deal would go through, but it didn���t. Still, I was made a VP and worked another five years. In the middle of the merger talks, some stock options I���d previously received became exercisable. The prudent thing to do was to set aside the cash in case I lost my job.

Nah. Instead, my wife and I decided to exercise the options and put an addition on our vacation home on Cape Cod. We added a dining room, family room, a bedroom and a full bath. The budget was $150,000, but the reality was somewhat more.

When I exercised those options, the stock was $31.21 a share. Now, it���s $66.69, and a few months ago it hit $75. With accumulated and reinvested dividends, I estimate those exercised options would be worth more than $400,000 today. Instead, I���m sitting in the family room we added, writing for HumbleDollar.

Did we make a wise move? It all depends on your point of view. With all the improvements we���ve made to the house���which we bought new in 1987 for $159,000���we���ve recently been told it would sell for nearly $1 million. No, it���s not large and, no, it���s not on the water.

Lest you think that buying a house for $159,000 and selling it 35 years later for nearly $1 million would be a good investment, that���s not necessarily so. Over the 35 years we���ve:

Spent more than $400,000 on additions and on remodeling the kitchen and two bathrooms.
Paid $80,000 in property taxes.
Replaced a roof at a cost of $9,000.
Painted the house inside and out���twice���for $25,000.
Replaced gutters at a cost of $2,000.
Installed new windows, setting us back $7,000.
Replaced the deck���and we���re about to do that again���for $10,000 each time.
Installed central air and converted to gas heat from electric. We then had to replace both systems when the addition was built, for a total cost of $35,000.
Paid a service to check on the house when we aren���t here. That���s $35 a week.
Paid insurance and utility bills of about $300 a month.
Paid the landscaping service about $3,000 a year.

Still want a vacation home?

Back in 2005, we had one grandchild. Today, we have 13. We purchased the house for our family���first for our four children, and now for their children as well. The house is big enough to sleep 13 individuals��� worth of mass confusion.

One of the grandchildren has already expressed her hope that we���ll never sell the house. Only over my dead body, as the saying goes. The memories are truly priceless. There���s still a basket of toys in the family room from when the grandkids were toddlers. We can���t bring ourselves to remove it. We���ve gone from pushing the grandchildren on the swing set to playing a round of golf with them.

Meanwhile, I���ve gone from age 62 when I exercised those stock options to age 79, but it all feels like yesterday. There���s no chance we���d be happier with that $400,000 in the bank. Our accumulated memories have more value than any amount of additional assets I could imagine.

I did, however, exercise subsequent stock options, taking the shares instead of cash, and I���ve reinvested the dividends ever since. That will help fulfill my granddaughter���s wish that we keep the house in the family.

What���s on my mind these days? I���m hoping I can continue to drive the 300 miles to get here from our principal residence for many more years���or, at least, reasonably more.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.

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