Jonathan Clements's Blog, page 202

Going Strong, Alas

THE FINANCIAL NEWS these days is all about inflation���what caused it, what it means for American families and how we should address it. Little wonder: The annual U.S. inflation rate hit a 40-year high of 8.6% in May.

How can we track a slow-moving force like inflation to figure out when it���s starting to cool? I���d watch four areas: energy costs, housing demand, employment rates and retail spending. When I examine the latest trends from these four bellwethers, I don���t think inflation is near a turning point. Here���s why:

Energy. For inflation to peak, energy costs must peak first. We aren't close to that happening. Oil prices are up 70% over the past year, and the first-order effects are clear from the price increases on related products. Gasoline is up 80%, heating oil is up 100% and natural gas is up 80%.

Examples of second-order effects���as higher energy prices are incorporated into the costs of non-energy goods and services���are growing, too. In addition, China's reopening will increase demand for already-tight global energy supplies. All these trends need to slow and then reverse before inflation can turn down.

Housing. Both home prices and rents have skyrocketed over the past two years. For inflation to ease, housing cost increases need to slow as a result of reduced demand and declining housing sales. The Federal Reserve is taking an aggressive stance by raising short-term interest rates. Though the Fed has only increased rates by 1�� percentage points to date, financial markets have done heavier lifting by pushing up longer rates even more.

Mortgage rates have moved up with other interest rates. The average 30-year mortgage rate moved above 5% in April for the first time since 2010. Insufficient housing supply is a problem in nearly every geographic market. Still, higher mortgage rates should eventually put a damper on housing demand.

Thanks to the one-two punch of higher mortgage rates and robust housing price hikes, home sales are now mixed. After falling for the first four months of the year, new home sales in May 2022 were 11% above April 2022 but 6% below May 2021. Existing home sales in May were down 3% from April 2022 and down 9% from May 2021. Housing prices, however, aren���t yet falling.

Jobs. Inflation won���t peak while unemployment, currently 3.6%, is near its lowest level in 50 years. With workers so scarce, employers are forced to raise wages to find qualified candidates in a job market where there are two unfilled positions for every job seeker. The gap between unfilled jobs and job seekers needs to shrink to help drive wage growth back to sustainable levels.

In March, the Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics (BLS) reported 11.8 million open and unfilled positions. The employment report for March, also from the BLS, said that only 5.7 million workers were seeking employment.

The April JOLTS reported 11.4 million open and unfilled positions, while the employment report said that 5.9 million workers were seeking employment. This reduced gap between open positions and available workers is a small sign that the job market may be slowly moving toward a better balance.

Spending. Inflation won���t cool until consumers and businesses slow their spending. Financially speaking, the pandemic was good for consumers. Stimulus payments contributed an estimated $2.7 trillion in excess savings across all income levels. Because of this cushion, many economists believe consumers will be less affected by inflation at first, though how long they can look past higher prices is uncertain.

Recent earnings reports from big retailers reflect some consumer pushback. Profits were less than expected as retailers showed an unwillingness to pass along increased costs to consumers, despite the manifold problems at retail chains, including higher markdown rates on slower selling goods, inventory impairments on goods that won���t sell and lower-than-expected sales among ���discretionary��� goods like casual clothing and flat screen TVs.

The upshot: Current data suggest that inflation will be with us for a while. I continue to watch these four components closely. A growing body of evidence will, at some point, reflect changing behavior and a downturn in inflationary pressures across the economy. But we aren���t there yet.

Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital , a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn . Check out his earlier articles.

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Didn’t Last Long

JUST A HANDFUL of weeks ago, I posted about achieving a $1 million net worth. Now my status as a millionaire is already in jeopardy. While the value of some of my financial assets have held steady���and some have seen gains���the portion of my retirement account invested in the stock market has suffered significant losses.

My retirement account balance peaked on Jan. 4 at $478,000. Today, it hovers around $430,000. Since I retired in late May, I���m no longer adding money to the account. Without those regular contributions, I know it could take months���and perhaps years���for the balance to rebound.

Am I worried? Not yet.

For now, I feel financially secure. I pay off my credit card in full every month. I haven���t had to dip into my emergency savings. Between my husband���s retirement income and the money we made from the sale of our Portland home, we can easily cover all our bills.

My hope: It���ll be at least a decade before I need to begin taking withdrawals from my retirement accounts. In seven years, at age 62, I���ll likely start drawing Social Security. That income, combined with my husband���s, should provide us with enough money to cover all our expenses.

In the meantime, the portion of my retirement savings that���s invested in a guaranteed return fund will continue to grow. I���m earning close to 5% on that money. My state pension fund also continues to grow at a rate of 7.5% a year. I plan on leaving that money in place until I turn 72. At that point, I���ll be required to take withdrawals.

It feels good to know I have other options besides tapping my retirement accounts. I���m confident I could land a part-time job if the need arose. I���m also in the early stages of starting my own dog training business. I don���t know how successful the business will or won���t be. Since the overhead costs are low, the financial risk is minimal.

For now, my status as a millionaire depends on the whims of the stock market. But by having a substantial portion of my retirement portfolio invested in guaranteed return accounts, I know I can afford to ride out the current market volatility.

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No Help

OUR LAST SUMMER road trip didn’t exactly go as planned. That ordeal changed my mind about an annual expense I’d been paying without much thought. I gained a new perspective—even if I did learn my lesson the hard way.

On a Saturday morning last summer, Sarah and I woke our kids at 4 a.m. for a predawn drive through the mountains of East Tennessee and across the Carolinas. We were on our way to enjoy the beaches of Hilton Head Island, South Carolina.

For the first eight hours of our planned nine-hour trek, we all watched the trees go by in peace—a significant feat, as any parent will tell you. Then suddenly, every light on the dash began flashing incessantly. The alternator had gone bad and the car battery was failing quickly. When I stepped on the gas, the car would barely accelerate.

Luckily, I saw a pizza place coming up on the right. I coasted into the parking lot. Once everyone was inside—where they could enjoy lunch and wait safely for help—I stepped out and dialed AAA. I was calling for a tow using my roadside assistance coverage.

To my chagrin, four calls and four hours of waiting produced nothing more than one extended wait-time quote after another. I was told repeatedly that all AAA-affiliated tow truck drivers were busy working on other calls, and the service was doing all it could. As the afternoon wore on, I finally realized that if we ever wanted to get out of that parking lot, I’d have to arrange for help myself.

First, I took an Uber to a nearby service shop to secure a loaner car before it closed for the weekend. I’d arrived just in time. I had to give a “desperate dad” speech to convince the shop to release a car to me since ours hadn’t been towed in yet. Thankfully, the employees took pity on me.

Once I made it back to Sarah and the girls, I found that there was still no response from AAA. I called the first local tow service I saw in my phone’s search results. An employee answered and told me someone would be there to help us in 15 minutes.

I was relieved and flabbergasted at the same time. I explained our situation and learned that, sure enough, I was talking to one of AAA’s contractors. No one from AAA had called them to request a dispatch to us, however.

How was Sarah handling all of this stress while caring for our two girls, who by this time were screaming and crying? Well, if it gives you any indication, while I was working with the tow truck driver, she singlehandedly managed to stuff the entire contents of our jam-packed Honda Pilot into the loaner vehicle—a Honda Civic. She’d found a productive way to burn off some steam.

I didn’t have good feelings toward AAA, but after a week at the beach, I felt better. “Everyone has a bad day,” I thought. I figured once I explained what happened, AAA would be appalled and would make it right. I called to tell the company what happened. To my surprise, the service representative didn’t seem surprised.

All the rep could do was reimburse me for the tow at AAA’s contracted rate—about half of what I’d paid. I pressed the issue, asking for more. Eventually, a manager came on the line and relented by offering a meager $10 off the price of next year’s membership. “No thanks,” I said.

Roadside assistance is the reason I signed up for AAA membership. Yes, I know a few other perks are included, like discounts on hotels and attractions, but I rarely use them. If AAA can’t reliably provide roadside assistance when I need it, it doesn’t offer me much value.

After 19 years of membership, Sarah and I fired AAA. I’m not sure why the company performed so poorly on that day last summer. I assume AAA does better much of the time. That one horrendous experience, though, isn’t the real reason we’re dropping our membership. It took that mishap to open my eyes. Now I could see that I’d been paying AAA to manage something I would rather manage myself.

When we started our membership, smartphones didn’t exist. I viewed AAA as necessary to avoid getting stranded. Now, all it takes is a quick search on my phone, and I can find a local tow service that I can call myself. I’m confident I can do a better job coordinating this service than AAA did.

AAA membership costs Sarah and me $151 every year. If we go a year with no need for emergency service, we save $151. That would be great.

If we do need roadside assistance, however, I don’t mind paying up. Saving money is not my priority in an emergency. I want someone to get my family and me safely on our way as quickly as possible. I’m happy to pay the going market rate for that.

We all have expenses that we “set and forget.” If we take a moment to think, we might find that we’ve been paying for services we no longer want. I’d rather have avoided all that stress on our road trip last summer. But I’m glad the experience prompted me to rethink a “set and forget” expense.

Matt Christopher White is a CPA and CFP® who writes about money and apprenticeship to Jesus. He's the author of “How to Love Money: Four Paradoxes that Breathe Life into Your Finances,” available at MattChristopherWhite.com . Matt is equally comfortable talking about Luke 6:43, Section 643 of the Internal Revenue Code and the 6-4-3 double play. There’s no place he’d rather be than with Sarah and their two girls, Lydia and Eliza, at their home in the foothills of the Smoky Mountains. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles .

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Growing Pains

THE LATEST ESTIMATE for first-quarter GDP growth was issued by the Bureau of Economic Analysis (BEA) on Wednesday morning. While not market-moving news, it revealed that the economy shrank at an annualized rate of 1.6%, a tad worse than market expectations. The most surprising part of the revised estimate was the downward adjustment in personal consumption. Along with recent credit- and debit-card spending data, as well as comments from a few consumer goods companies, there are clear signs that the economy might already be in a recession.

The Friday before a long holiday weekend is usually quiet for the markets. But instead, we got another GDP data point, this time from the Federal Reserve Bank of Atlanta. Its GDPNow model provides a “nowcast” estimate of GDP before the BEA’s release. The model currently shows -2.1% for the second quarter. To be sure, GDPNow isn’t always accurate. Still, if the BEA’s official number comes even close to that -2.1%, that would imply that the economy has been in a recession since the start of 2022.

A recession, as defined by the National Bureau of Economic Research, “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The pandemic-induced recession of 2020 is such an example. It lasted just two months. Meanwhile, many economists expect sluggish economic output through 2024. So much for the “roaring '20s.”

Is your heart beating a little faster having digested those grim thoughts? Here’s the good news: The stock market is not the economy. A rule of thumb is that stocks lead the economy by about six months. Funnily enough, the S&P 500 peaked almost exactly six months ago. The S&P 500’s Jan. 3 all-time closing high of 4,796.56 took place when few traders were anticipating an economic contraction. But by the middle of June, signs of a slowdown were piling up—and stocks had plunged 24%.

Major changes in the stock market’s direction often happen before inflections in GDP and other backward-looking economic data. Expect more troubling financial news not just about the macro picture, but also from the coming corporate earnings season, with executives seeking to lower the bar for the rest of the year. What might fool many investors: We could see a stock market rally in the face of all this negative news.

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Say What?

A FEW WEEKS BACK, I��mentioned��Robert Shiller���s book��Narrative Economics. His contention: Stories���to a surprising degree���often drive markets.

Similarly, the investment world is driven by a good number of sayings and aphorisms. Many of these are��entertaining. Some are even useful. But they can also be tricky. Any time advice is��delivered��in a pithy��phrase, it seems to carry extra credibility���as if it were a truth handed down from above. But that, of course, isn���t the case. Below are four of the most common investment sayings.

1. Never try to catch a falling knife.��Whenever a stock drops, two camps usually emerge. The first argues that the stock is now a bargain and thus more attractive. The other camp argues that��the stock probably has further to fall,��so it should be��avoided. While this ���falling knife��� expression is usually invoked by stock-pickers, it also applies to the overall market. In an environment like today���s, those in the falling knife camp are able to make plausible arguments to back up their cautious view. The list of economic woes, including inflation, is well known.

Does that mean you should stand clear of the stock market? Or do stocks��now represent an attractive��bargain? I have often referred to the stock market as a Rorschach test. The market is always��tricky because it depends on your perspective. But in this case, I think you can sidestep the question entirely. The market might indeed have further to fall. But here���s the way I���d look at it: Suppose you���re trying to drive from New York to California. Along the way, you���ll inevitably run into traffic jams and other setbacks. But that wouldn���t stop you. You���d simply keep heading west, focusing on your ultimate goal.

I suggest stock market investors look at it the same way. If your timeframe is five years, 10 years or more, I think you can have a good amount of confidence that the market��will be higher��at that point than it is today.��What if your timeframe is shorter? The way to avoid worry is to avoid investing those dollars in the market.

2. Trees don���t grow to the sky.��This is another saying often invoked by stock-pickers to convey caution. The idea is that everything has a limit. Intuitively, this makes sense. None of the��original stocks��in the Dow Jones Industrial Average, for example, is still included in the index. Some are out of business, while others, like General Electric, are shadows of their former selves and have greatly disappointed investors. That history seems to support this aphorism.

On the other hand, many companies have grown far beyond what anyone would have ever thought possible. In recent years, some technology companies attained valuations north of $1 trillion. Even after declining 23% this year, Apple is still worth more than $2 trillion. That skyscraping value is arguably well deserved. Apple���s revenue last year exceeded $365 billion and its profit was nearly $100 billion���both unthinkable numbers. Will Apple be even bigger and more valuable in the future? As history has shown, anything is possible.

You may notice, though, that I���m using Apple as the only example here. That���s for a reason: It may be the exception rather than the rule. That, in fact, is another investment pothole to look out for. There will always be exceptions, and those exceptions will, by definition, be the ones that come to mind most readily��because they���re so notable. But don���t let them distract you from the big picture. According to��work��by finance professor Hendrik Bessembinder, the vast majority of stocks, on average, haven���t done any better than humble Treasury bills. Apple has been great, but it really is the exception. Most trees don't grow to the sky.

3. The wisdom of crowds.��When I was in school,��a finance professor conducted��a powerful demonstration. He sat��each of us��down at a computer in a simulated trading environment. Soon after trading started, something remarkable happened: The prices of the fictitious investments each converged with their fair value. The professor��had successfully��demonstrated the wisdom of crowds. The message: Any one individual might be right or wrong in his estimate of an investment���s value. But in aggregate, investors do tend to arrive at the right answer.

That was what we saw in the controlled environment of the computer lab. But what about in the real world? As we all know, collective self-delusion often takes over during bull markets. In that way, crowds can actually go farther off track than any one individual might. This dynamic may be even more of a hazard today than in the past. That���s because ideas can spread much more quickly online, especially on social media, where there���s little fact-checking and where echo chambers often develop.

What���s the answer? My view is that markets are generally efficient. They often lead to rational price levels. But prices��can, and often do, become detached from reality. Fortunately, there's a solution: To protect yourself,��I���d rely on traditional valuation metrics. Something as simple as a price-earnings (P/E) ratio would have told you that pandemic darlings like Peloton, Shopify and Zoom were absurdly overpriced.

To be sure, no metric is perfect. But they can help you identify extremes. A stock trading at��a 20 P/E may or may not be overpriced.��But if it���s trading at a 400 P/E���as those stocks were���it���s much easier to guess what���s going to happen next. At times like that, it���s best to rely on facts and data rather than popular opinion, no matter how great a company might seem or how popular it is.

4. Fortune favors the bold.��This is an ancient Latin proverb. In TV��commercials��for crypto.com, Matt Damon has employed a variation: ���Fortune favors the brave,��� he says. The message: Be contrarian. Be adventurous. That���s where the profits lie.

Investor Peter Thiel has taken this a step further. At a cryptocurrency conference earlier this year, Thiel��took aim��at Warren Buffett for his opposition to bitcoin. Among other things, Buffett has��called��cryptocurrencies ���rat poison.��� Thiel���s view: Buffett is old fashioned and just doesn���t get it. At the crypto conference, Thiel reportedly dismissed Buffett as ���a sociopathic grandpa from Omaha.���

Since Thiel made that statement in the spring, bitcoin is down 55%. That would seem to validate Buffett���s opposition. But we shouldn't be too quick to dismiss Thiel. As you may know, he was the first investor in the company formerly known as Facebook. He took a chance on Mark Zuckerberg when he��was just a 19-year-old college student���and after at least one established venture capitalist passed on the��opportunity. Thiel made a fortune with that bold bet.

How, then, should investors think about this? Is being bold a virtue or not? This is a little bit of a trick question. When Thiel bought his stake in Facebook, it cost him just $500,000���a sum he could easily afford after co-founding PayPal. It was a bold move but, for Thiel, not terribly risky. I assume Thiel can also easily afford whatever risk he���s taken with cryptocurrencies. But billionaires are in a different category from you and me. What works for them��may not make sense for the general public.

There���s another,��more important lesson here: A few weeks back, I��talked about��investment analyst Elaine Garzarelli and hedge fund manager John Paulson. Each is famous for making a notable��investment prediction. But each later stumbled. And those are just two examples.��There's no denying their success, or that of Peter Thiel. But as individual investors, we still need to take their advice with a grain of salt. Indeed, if there's one investment saying that you can truly take to the bank, it's this one: Past performance does��not guarantee future results.

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 Shook Up

FINANCIAL EXPERTS with ���certified��� in their title have plenty of good advice for retirees as they cope with today���s rough financial times. My qualifications are a little different. They���re limited to my eight decades of experience, plus my CC designation, short for Certified Curmudgeon.

What���s my advice? Say you���ve accumulated that magic $1 million nest egg and you���re following the 4% withdrawal-rate strategy. In year one, you���d pull out $40,000. In normal times, your remaining balance might grow, say, 6%, so you start the second year with $1,017,600, equal to $960,000 multiplied by 1.06. Assuming 3% inflation, your year two withdrawal would be $41,200.

But thanks to this year���s stock and bond market decline and escalating inflation, that $960,000 might instead have shrunk to $800,000 and your inflation-adjusted withdrawal in year two might have jumped to $43,000. Over time, things should get better. But right now, it���s a scary picture.

What to do? Here are three things I���ve realized over the past two turbulent years:

A dependable income stream offers security and peace of mind. My retirement income comes largely from a pension and Social Security. Other possible income streams include immediate annuities, stock dividends and bond interest payments.
A cash reserve is essential. The 2022 stock market plunge has made it clear that the ability to temporarily avoid selling longer-term investments is very desirable.
We should overestimate our retirement spending needs. It���s risky to assume all we require is ���enough to cover expenses��� or simply to declare ���we���ve always lived modestly.���

In recent months, I���ve been asking retirees and near retirees how confident they are about their retirement savings and income. Initially, most were very confident. The stock market turmoil hadn���t shaken them. But lately, attitudes have changed. I have been told by a few people that they may delay retirement or return to work. Several folks mentioned cutting expenses, and some said they were going to reduce their planned annual portfolio withdrawals.

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Learning by Erring

IMAGINE AN AGE long ago, before the internet. Not only that, it was so long ago that it was before most Americans cared about the stock market. Unimaginable? Well, it isn���t to me.

When I came of age in 1987, the stock market was a fantasyland. It was a place inhabited by your dentist, a friend���s father who was a lawyer, or that banker your dad knew from the Knights of Columbus. People like my parents, a janitor and a secretary, lived in a different world of passbook savings accounts, certificates of deposit and���if they were lucky���pensions. It was so long ago that if, for some bizarre reason, you wanted to know the price of an individual stock, you had to look it up in the newspaper���s business section���one that was printed on paper.

Most people���s knowledge of the stock market was limited to hearing that ���the Dow closed up 12 points in light trading��� on the 11 o���clock news. The market was such a non-story that when, on Oct. 19, 1987, the S&P 500 dropped 20.5% in the largest one-day percentage decline in its history, it passed me by nearly unnoticed. The only vague recollection I have is a fellow student asking if I���d ���heard what was happening with the stock market.��� I hadn���t and went back to studying or, more likely, watching General Hospital.

All that changed in the spring semester of my senior year, when I took engineering economics, an elective taught by Dr. Joe McNeill, P.E. I give his name this way because I remember him walking into the classroom and writing his name on the chalkboard in exactly that way. I think the good doctor was proud of his P.E.���professional engineer���license. When my fellow students subsequently spoke about him, we always called him ���Dr. Joe McNeill, P.E.���

Dr. Joe McNeill, P.E., taught a course that consisted of three parts:

Economic fundamentals, which included terms like net present value, internal rate of return and weighted average cost of capital. He taught us how to calculate the value of today���s dollar at some future date. Like most people, I realized that time was money, but the theory was eye-opening.
Saving and budgeting, because setting aside a significant portion of your income could lead to wealth, career options and early retirement.
Stock market basics, because this was where you needed to invest your savings. By doing so, you could become rich. It all seems so commonplace now���invest and grow rich���but back then, to the son of blue-collar parents, it was a revelation.

Using a special student rate, he made us subscribe to The Wall Street Journal. In a way, the Journal��was better than the internet because, while it contained a wealth of information, it left out much of the nonsense that the internet now reports as news.

You also have to realize that the Journal had a very different look and feel than it does today. First, the news stories did not contain any photos. If you were born in this millennium, this may blow your mind. No photos? Instead, the Journal used stylized black and white drawings that it called hedcuts. Second, it was only published on days when the stock market was open, not holidays or weekends. The idea was that whatever happened didn���t really matter���until the stock market opened.

The front page had a very regimented look, with six vertical columns. Each one covered a specific topic like global news, story summaries, human interest and weekly reports. I can still recall Dr. Joe McNeill, P.E., teaching us how to read the Journal, highlighting what to read first and where to focus our time. He also mentioned that the fourth column was about human interest, adding, ���You don���t need to waste your time on this.���

I have two distinct memories of my time with Dr. Joe McNeill, P.E. One was that, as a reward for having the highest grade in the course, I received a six-month subscription to The Journal and a plaque. This was given to me with my proud parents in attendance. The second was the realization that I needed to start saving as much as possible and invest it in the stock market.

Buying past performance.��The course required that I research a specific mutual fund. The one I picked was the hottest mutual fund then in existence, Fidelity Magellan Fund, managed by the hottest mutual fund manager then in existence, Peter Lynch. At that time, Lynch was possibly the most famous investor in the world due to the outsized returns he produced at Magellan, averaging 29.2% annually over the 13 years he managed the fund.

His secret, as he explained in his bestselling investment books, was working long hours, rigorous fundamental analysis and following his wife to the store. For example, he bought shares of HanesBrands based on the recommendation of his wife, who���while food shopping���came across the company���s egg-shaped plastic containers, called L���eggs, which held women���s stockings.

She purchased a pair and raved about them to her husband, who promptly bought shares in Hanes for Magellan. It was among those investments that increased 1,000% in share price, or ���10-baggers��� as Lynch called them. He had plenty of 10-baggers���over 100���and he made successful investing seem like the easiest thing in the world.

As soon as I graduated, I started investing in Magellan and quickly learned a valuable lesson about active mutual funds, namely that ���past performance does not guarantee future results.��� In this case, Lynch retired soon after I���d invested, as the stress of trying to beat the market was becoming an issue���another drawback of active investing.

His replacements didn���t have the magic touch of their predecessor. I soon realized that, while I didn���t mind paying Lynch an outsized expense ratio for his outsized returns, I didn���t see the benefit of paying his successors the same expense ratio for their underperformance. I started to look around for other places to invest my savings.

Fool���s gold. In the mid-1990s, while living in Hawaii, I attended an investment seminar in a hotel conference room given by a man named Harry Bellefontaine. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation Mr. B had given. He mentioned that he thought both the stock market and Hawaiian real estate were overvalued. Indeed, he���d sold most of his stocks and his house. Because inflation was coming, he said that gold and silver were the way forward. Not just any gold and silver, though, but collectible coins���which he sold.

It was most likely the historic allure of gold coins, along with greed, but I bit and bit hard. Among other coins, I bought 20 half-ounce uncirculated 1991 American Gold Eagles. I can still remember leaving Mr. B's offices slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took the coins to my bank, where now I had the added benefit of paying $100 a year to rent a safe deposit box.

Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady Madoff-like rise in the value of my collection. Then, one day, I was watching TV and heard a teaser for the local nightly news that went something like, ���Local financial advisor scams gold investors, news at 11.��� Well, that had my attention.

When I tuned in at 11, I almost cried. There was the station���s investigative reporter saying numerous locals may have been scammed by investing in rare coins. In the background, they ran grainy undercover footage of guess who? Mr. B. It appears they couldn���t interview him, as he had fled Hawaii on a boat to parts unknown. I almost crapped my pants.

A few weeks later, I was contacted by a different coin dealer, who offered a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter. He informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy. But my mood wasn���t helped when, at the conclusion of the consultation, he asked if I���d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.

Built to last���maybe. Soon after my Gold Eagle gambit ended, I read a fascinating book titled Built to Last by Jim Collins��and Jerry I. Porras. It was the must-read business book of the 1990s and detailed an exhaustive study proving that some companies were just plain better than others.

The idea was that these select companies were ���built to last��� because they all followed similar paradigms, such as setting ���big hairy audacious goals������called BHAGs���like Boeing betting the company on the 747. Or by creating ���cult-like cultures������like Nordstrom providing dazzling customer service. Or by promoting ���homegrown management������like Procter & Gamble, which developed such a deep bench of talent that it never went outside to hire its CEO.

I thought it obviously followed that, since these were great companies, they would be great investments, too, and make a perfect recipe for a stock portfolio. That worked fine for a few years. But it turned out my recipe also included a few unappetizing ingredients���once-great companies that soon fell on hard times. Like Citibank, a penny stock amid the Great Recession of 2008-09. And Fannie Mae, mentioned in the follow-up book titled Good to Great, which was placed in conservatorship in 2008. And GE, whose long slide ended in near-bankruptcy in 2008. And Motorola, which was deemed irrelevant by the market in the late 2000s after the introduction of smartphones.

Master investor���briefly. In 1999, I read an article written by Paul Sturm in the��much-missed��SmartMoney��magazine. It was a comprehensive review of a security I���d never heard of before called a master limited partnership (MLP).

An MLP is a publicly traded company that has the tax benefits of a private partnership. Its income is taxed but not its distributions. That meant investors like me could defer taxes owed, sometimes almost indefinitely. Due to the vagaries of the tax code, MLPs are mostly limited to oil and gas pipeline companies.

To me, they seemed like the perfect security: tax-deferred distributions, rich cash flow, inflation-protected and high-yielding. We���re talking companies like Suburban Propane, NuStar Energy, Kinder Morgan and TEPPCO Partners. I felt like Yankees��� manager Miller Huggins reviewing his lineup card for the 1927 World Series: every player a heavy-hitter and reliable. Would you say no to investing in Babe Ruth and Lou Gehrig���on a tax-deferred basis to boot?

I bought my fill of MLPs and was rewarded richly, even though the K-1 partnership forms were a pain when it came time to file my taxes. But who am I to complain? For 10 golden years, I felt like a youthful Warren Buffett, consistently outperforming the S&P 500 with less volatility.

But alas poor Yorick, no security is perfect. I came to realize in time��that every��publicly traded company will borrow to the limit of its cash flows. I won���t bore you with the details of the painful deleveraging and subsequent MLP selloff by retail investors, but it was death by a thousand cuts. Since the Great Recession of 2008-09, my MLP lineup has reliably underperformed the S&P 500. Worse, one of my beloved ���Babe Ruth��� investments was restructured, sticking me with a Ruthian-sized tax bill, plus its distributions were reduced and the share price cut in half. As Job said, ���The Lord giveth, and the Lord taketh away������and then some.

Wait, there���s more. In 2000, I bought stock in a company that used the latest technologies to revolutionize the way multiple business lines did their business. A company that only hired the smartest people to work on cutting-edge projects that would change the world. Led by an even smarter CEO who claimed that many existing businesses were dinosaurs and would soon be extinct.

Unfortunately for me, this company wasn���t named Amazon. It was called Enron. Soon after I made my investment, then-CEO Jeff Skilling resigned to ���spend more time with family.��� Within months, Enron declared bankruptcy���the largest in U.S. history until then. I hung on for a little while because, as my mother used to say, ���hope springs eternal.��� But I eventually sold to harvest some very large tax losses.



The subsequent fraud convictions of Enron���s CEO, CFO and the chairman of the board���along with the collapse of its complacent auditor, Arthur Andersen LLP���were of little consolation. Enron not only shook my faith in the decency of man, but also in the wisdom of picking individual stocks.

This mood only grew on me with the subsequent significant devaluation of other ���can���t miss��� investments that I owned. Like Thornburg Mortgage, which went bankrupt in 2009. Or Medallion Financial Corp., which was such a stinker that it changed its ticker symbol from TAXI to MFC to hide. And International Business Machine���but at least I wasn���t alone in that gradual meltdown.

All the lemons that I���d chosen made me start to doubt my stock-picking ability and realize that maybe it was impossible to beat the market. The outperformance of my MLPs early on had made me believe that I possessed superior analytical skills. The subsequent underperformance by the same MLPs���plus all the other lemons I���d picked���disabused me of this notion.

While losing money on my clunkers was bad enough, it also filled me with an amount of anxiety and shame that wasn���t offset by my few-and-far-between winners. Because there were some in my portfolio, even if I eventually realized they might be due more to good luck than financial acumen. These included:

I purchased shares based on my wife���s orthopedic analysis, which was in turn based on the injection of a Genzyme-produced drug called Synvisc into her bad knee. Synvisc is a natural joint lubricant and cushion, synthesized from the cockscomb of a��rooster���the feathers on the top of his head. Chicken feathers, I thought. I knew that Peter Lynch would approve, so some shares were purchased. A few months later Sanofi bought out Genzyme and I received a 37% annualized return.
Monarch Cement. I purchased 100 shares at $28.50 based on a reverse stock split arbitrage opportunity offered to owners of record. The stratagem had the company buying back stock at $30 a share for a quick $1.50 gain. But it turned out that, due to a grammatical issue, I was not an ���owner of record,��� so the company didn���t buy back my shares. It all worked out in my favor, though, as my unsold shares subsequently tripled in value, leading to an annualized return of more than 20%.
In 2009, my mother gave me some money for Christmas. I used it to buy stock. I decided to invest it in a company she would be able to understand, so I picked the food distributor Sysco. I thought it could be a way we could share my interest in the stock market. I wrote her a ���thank you��� note, including specifics about the company, and mentioned I would update her now and then on its performance.

She may not have completely understood what I said, as she subsequently informed me that she ���didn���t need any stock tips.��� Since purchasing it in early 2010, Sysco has easily outperformed the S&P 500. Unfortunately, my mother had only given me $25.

The road to indexing. Over time, I started to lose interest in doing the deep research that was required to invest in individual stocks. I found I would rather spend my time working out, reading about World War II and traveling. Since it was obvious that I previously hadn���t spent enough time researching, common sense told me that reduced research would not lead to better results.

All this led me, slowly but surely, to shift my investments from hand-picked stocks to low-cost index funds like the Schwab Total Stock Market Index Fund, iShares Select Dividend ETF and Fidelity 500 Index Fund. These were added to a portfolio that already contained a fair amount of low-cost index funds as, thankfully, my 401(k) didn���t give me any other options. While low-cost index funds weren���t as sexy as Amazon or Apple, they were easier on my blood pressure and, more important, my ego.

When I retired a few years ago, I looked back at how I did. What kind of grade, I wondered, would Dr. Joe McNeill, P.E., give me? I think he���d be proud of my ability to save. As I tell fellow investors, the size of my portfolio is proportional to the size of my frugality.

He���d probably be disappointed, though, in many of the clunkers I���d invested in. How could I explain away Enron? He might, however, be proud that I���d learned from my mistakes and subsequently invested enough in low-cost index funds to allow for my early retirement.

Dr. Joe McNeill, P.E., was a tough grader. Still, I think he���d give me a ���B.��� But maybe not a plaque.

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.

The post Learning by Erring appeared first on HumbleDollar.

Change Is Coming

WHETHER FOR GOOD luck or because I���m thrifty, I still stoop down to pick up pennies. But there might not be any in the future.

Thanks to their copper content, pennies now cost twice as much to produce as they���re worth���and skyrocketing inflation is only exacerbating the problem. There are even rumors that the government will stop producing pennies, but so far the U.S. Mint has made no such announcement.

Instead of using my debit card for groceries, gas and so on, I���ll occasionally do an all-cash budget for a week. Spending seems less abstract when you���re pulling dollars from your wallet and coins from your pocket. For example, if I'm paying cash, I���ll pause before buying that extra snack from Trader Joe���s.

My millennial children can identify a penny, but I don't think they pay for much of anything with cash. My son, who favors his American Express card, touts the credit card rewards he gets for his purchases. Debit cards are my usual method. They���re a vast improvement on checks. I write just one check a month, to my condo���s homeowners��� association.

According to a 2021 analysis, debit cards are used for 67% of card payments. Four out of five consumers prefer to use debit or credit cards for purchases. Only 10% use cash for all their spending, but 88% of consumers use cash at least sometimes. That���s not surprising: Some places won���t allow card use for very small purchases.

At some point, coins and paper currency are likely to become unneeded and irrelevant, and pennies might be the first to go. But without pennies, future generations will never understand expressions such as ���penny wise and pound foolish��� or ���a penny for your thoughts.��� Will they forget one of our greatest presidents if they don���t see his profile on a shiny coin? He���ll still be on the $5 bill, of course. But how long will paper currency be around?

Seeing Lincoln, Washington or Hamilton on our currency is a subtle reminder of how much we revere these leaders and how important they were in making our country great. The symbolism reaches much further into our society than a monument some will never see. It���s sad to think that eventually we���ll have just sterile transactions with plastic cards or with our cellphones.

I can���t say I think about Lincoln every time I pick up a penny or get change, but I am reminded of the respect we have for him and others when I use actual money. Shifting to a cashless society may be inevitable, but I won���t stop picking up those lost and neglected copper coins. Who knows, maybe they do bring good luck?

The post Change Is Coming appeared first on HumbleDollar.

Home Rich Cash Poor

ACCORDING TO MY local newspaper, the average home price in my town rose 450% over the past 25 years. That made me ponder how I could use my home equity to fund my desired retirement lifestyle. I���m certainly not alone in thinking this way.

There are three ways you can access home equity. You can sell your home and downsize, you can take out a home equity line of credit or you can take out a reverse mortgage.

The first option isn���t attractive to many retirees. These folks want to maintain their current lifestyle, and remaining in their home can be a big part of that. The stories of COVID-19 outbreaks in nursing and retirement homes only reinforce the desire to stay put. Meanwhile, with a home equity line of credit, you���ll be compelled to make repayments during your lifetime.

What about the third option? I find reverse mortgages quite attractive. They allow you to unlock the equity you���ve accumulated in your home while still living there. That sounds great. Why be house rich and cash poor when you don���t have to be? Yes, reverse mortgages come with steep upfront and ongoing costs. Still, they can play an important role in a retirement income strategy, offering the following features:

They give you the choice to receive your home equity as a lump sum, as annuity payments or as a line of credit.
There are usually no repayments required until the home is sold���typically after your death.
They���re nonrecourse loans. That means that neither you nor your estate will ever owe more than the property���s market value, even if the sum borrowed plus accrued interest is greater.

There are other reasons I like reverse mortgages. For example, they can significantly increase your liquidity in retirement. You can use the extra cash they provide to fund your adventures, make large purchases, give money to family or make home improvements. All the while, you retain possession of a valuable, appreciating asset.

A reverse mortgage can also help you manage sequence-of-return risk by serving as a source of funds during market corrections. When the market drops, you can live off your reverse mortgage instead of selling investments.

In addition, a reverse mortgage can provide income that allows you to defer Social Security retirement benefits. Those benefits increase by roughly 8% for each year you delay claiming. This increased payout continues for life and rises every year with inflation.

With so many benefits, I���m surprised more folks don���t take advantage of reverse mortgages. I believe it���s because there���s an unfortunate stigma attached to them. Many people view a reverse mortgage as the option of last resort for impoverished retirees.

I would argue otherwise. There���s nothing wrong with spending your home���s equity to support your retirement lifestyle. Why choose to live on a tight budget when you have untapped wealth at your disposal?

Consider two couples. The first buys a home and then gradually pays off their mortgage, while the second couple rents an apartment and invests in a stock portfolio. After 30 years, the first couple owns a $1 million home outright, but has little in the way of retirement savings. Instead, the couple���s wealth is tied up in their home, and they lack the cash flow to support their desired lifestyle.

Meanwhile, the second couple has amassed a $1 million investment portfolio.��In all likelihood, the second couple would feel more comfortable drawing down their portfolio than the first couple would be taking out a reverse mortgage. I worry that the stigma of a reverse mortgage would force the first couple to struggle financially for no good reason. The first couple made a smart decision by buying a home. They should feel free to make another smart move���tapping their home���s equity to support their lifestyle.

I believe another reason people don���t use reverse mortgages is they worry about robbing their children of an inheritance. Some parents feel shame at not bequeathing a substantial sum. I���m not one of them. My wife and I worked hard to give our kids a good start in life. Now that they���re well-established, I don���t believe they need a further financial boost from us. Leaving them a sizable estate is the least of my concerns.

If the goal is to live your best life in retirement, you should be willing to use all the tools at your disposal. The reverse mortgage can be an effective tool, and more people should feel comfortable using it.

Of course, taking out a reverse mortgage is a major decision. Also, the money that you unlock still needs to be managed wisely. If you burn through it too quickly, you could find yourself in a tight budget situation all over again.

Want to learn more about reverse mortgages? I highly recommend the book Reverse Mortgages by Wade Pfau.

Mike Drak is a 38-year veteran of the financial services industry. He���s the author of Retirement Heaven or Hell , published in 2021, as well as an earlier book, Victory Lap Retirement . Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to�� BoomingEncore.com . Check out��his earlier articles.

The post Home Rich Cash Poor appeared first on HumbleDollar.

June’s Hits

NOT SURPRISINGLY, many of last month's most popular articles and blog posts were devoted to the financial markets. Here were June's six best-read articles:

Donnie Mattox has had a perfect credit score in eight of the past 12 months. He explains how he does it.
Why is managing money so maddening? Because what seems true often isn't. John Goodell lists his top 12 financial paradoxes.
"You might want to check your mailbox," writes��Jim Kerr.��"Mr. Market has been sending around a book of discount coupons on some great index funds and individual stocks."
"I still believe emerging markets are an important element for investors��� portfolios," says Adam Grossman. "But I no longer recommend the standard capitalization-weighted index approach."
Don't own cryptocurrencies? There are still six useful lessons to be learned from the collapse of the crypto market, says Adam Grossman.
"The price of admission to this stock game is emotional pain and suffering," writes Tanvir Alam. "We need to stay in the game. Always. If we cannot, we will lose our money quickly and often."

Meanwhile, among the site's blog posts, the most popular were my pieces on check washing, financial slimming, why I'm optimistic��about stocks and income allocation, along with Mike Zaccardi on profiting from the bear market, Dick Quinn on feeling his age, Dennis Friedman on his��medication and John Lim on second-level thinking.

What about our twice-weekly newsletters? The three most popular were my article titled Like Edith Sang, Jim Wasserman's Course Correction and Matt Trogdon's Learning to Get By.

The post June’s Hits appeared first on HumbleDollar.