Jonathan Clements's Blog, page 206

My Preference

I WAS PLEASANTLY surprised recently when a lump-sum dividend payment showed up in my brokerage account. It was from a preferred stock I bought a few years ago to boost my investment income. The windfall reminded me of the three criteria I���d used to screen preferred shares:

Taxation. Unlike bond payments, which are taxed as ordinary income, the income payments from most���but not all���preferred stocks enjoy the favorable tax treatment given to qualified dividends. Since my investments were in a taxable brokerage account, I avoided preferred stocks that didn���t offer this favorable tax treatment.
Callable. Preferred stocks typically don���t have a set maturity date, but many of them are callable at the issuer���s discretion. I decided not to pay more than face value for a preferred stock if the call date had already passed or was approaching soon. A few of my preferred stocks have been called away over the years. But since I bought them at a discount, the extra buffer���the difference between the face value and my purchase price���was a consolation.
Cumulative. If a bond misses a coupon payment, the creditors can go after the company. Not so with preferred shares. The board of directors can suspend all dividend payments indefinitely to preserve capital. When things look up, and the company can afford dividend payments again, it must resume the preferred stock dividend before that of the common stock.

But what about the missed payments in the intervening period? This is where the cumulative feature comes into play. All unpaid dividends of a cumulative preferred stock must be paid before resuming common stock dividends. I opted to exclude noncumulative preferred stocks from my holdings.

My surprise lump-sum payment was from the cumulative preferred shares of Pacific Gas and Electric, the San Francisco-based utility. The company got into legal and financial trouble, the result of rampant wildfire damage. Facing bankruptcy, it suspended all dividends back in 2017.

Now, for patient investors, the wait was finally over. PG&E resumed dividends last month, coughing up all the unpaid dividends from the past few years.

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Like Edith Sang

WHEN I WAS IN college, late in the evening and usually after a few drinks, someone would often play Edith Piaf���s Non, Je Ne Regrette Rien, her stirring and defiant 1960 song about regretting nothing.

It���s a sentiment worth recalling as we look back on our financial life. Here are four things we shouldn���t regret:

Saving too much. Is that really something to regret? It���s undoubtedly better than the alternative: saving too little. While lifestyle improvements often fail to deliver much happiness, a sharp decline in our standard of living���perhaps triggered by inadequate retirement savings or a job loss coupled with a skimpy emergency fund���would almost certainly hurt.

That said, if we spend our life saving voraciously, we might regret our sacrifice if we get scant pleasure from the money we amass. This doesn���t mean we ought, at some point, to start spending with wild abandon, though opening our wallets a little wider strikes me as a fine thing to do.

But there are also other ways to get pleasure from our savings. For instance, we might use our money to help others, perhaps making financial gifts to family members or supporting our favorite charities. We might also choose to hang on to our savings and enjoy the sense of security that money bestows. I���ve come to believe that the pleasure that comes with being generous and from feeling financially secure often exceeds the pleasure that comes from spending.

Diversifying. Ever since I got religion about sensible investing and started diversifying broadly, I���ve found myself owning parts of the global financial markets that have generated lackluster returns for a decade and sometimes longer. Think about the poor performance of U.S. stocks in the 2000s and that of foreign shares in the 2010s.

This is not something I regret. Obviously, if I knew with certainty that tech stocks would sparkle in the 1990s and 2010s, and stink bigtime in the 2000s and also in 2022, I would have invested accordingly. But without such clairvoyance, I take what strikes me as the only prudent course of action, which is to own a little bit of everything.

Funding retirement accounts. I���ve lately seen a spate of comments from retirees bemoaning the amount they stashed in traditional tax-deductible retirement accounts, and the big tax bills that are now coming due as they draw down these accounts. These retirees suggest that Roth accounts would have been a better choice���and that even a regular taxable account would have been preferable. But this smacks of financial amnesia. How so? It ignores the earlier tax deduction that likely compensated largely or entirely for the later tax bill.

If you���re in the same tax bracket when you fund a traditional retirement account as when you draw it down, you effectively get tax-free growth, just like you would with a Roth. To understand why, read this explanation.

But what if you end up in a higher tax bracket in retirement? In that scenario, a Roth would have been the better bet. But what about a regular taxable account? Suppose you���re age 25, and your combined federal and state income-tax bracket is 15%. You invest $10,000 in a tax-deductible retirement account that grows at 8% a year. Forty years later, at age 65, you empty the account, paying a combined 25% income-tax rate on the proceeds. Result: You���d net almost $163,000.

What if, at age 25, you skipped the tax-deductible retirement account and instead stashed the dollars in a regular taxable account? Right off the top, you���d lose 15% to taxes, leaving you with $8,500 to invest. The money again grows at 8% a year. Let���s be (absurdly) optimistic and assume you paid no taxes along the way���because you received no dividends and realized no capital gains.

At age 65, your taxable account would be worth close to $185,000, with a cost basis of $8,500. You then cash out the account, paying taxes at a 15% capital gains rate. Result: You���d be left with some $158,000, or $4,700 less than if you���d stuck with the tax-deductible retirement account. What if we used more realistic assumptions? The taxable account could easily have fallen short by $30,000 or more.

Owning insurance. I haven���t submitted an insurance claim���other than to my health insurer���in the past three decades. Does that mean carrying life, auto, homeowner���s and umbrella liability insurance has been a waste of money? Hardly. I paid my premiums to protect against a host of financial risks, I got the peace of mind that the insurance provided���and I���m happy none of these risks came to pass.

The case for carrying insurance is similar to the case for diversifying. We���re protecting against the unknown. More things can happen than will happen���and, when it comes to the sort of things that good insurance covers, the financial consequences of not having coverage can be devastating. In the absence of a crystal ball, we need to manage risk so we aren���t hurt financially if our home burns down, our neighbors sue us, we need major medical care or some other costly misfortune strikes. That���s what our premium dollars buy and, if we have the right coverage, it���s money well spent.

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

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Four Decades Later

LAST MONTH MARKED 40 years of wedded bliss for my wife and me. I���m amazed at how fast the time has gone. I still remember the day we met. It was at a party celebrating her high school graduation. I gave her a ride to pick up a pack of cigarettes, all the while lecturing her on the dangers of smoking. I believe I saved her from a lifetime of smoking. She saved me from everything else.

We���ve been blessed these past 40 years with a large and wonderful family, friends, great careers and now the chance for a happy retirement. We���ve had our challenges for sure, including early financial struggles, family troubles, illnesses, elder care and career hiccups. Through it all, we worked together and got through the tough times.

I���ve heard it said that love and a long-lasting marriage are a choice. I know there were many days my wife woke up, and decided to stay in love and married to me, even though she may not have liked me very much that day.

Both of our parents had long marriages. They were hardly perfect, but they showed what it meant to stay faithful and committed, despite lots of flaws and challenges.

This shaped my wife and me, and seems to have rubbed off on our two sons. They both married fantastic women���beautiful, strong, smart, loving, independent. Just like their mother. They have given us near-perfect grandsons���grandpas can say such things���and they���re excellent parents. We couldn���t be more proud.

Lest you fear that I���ll keep waxing poetic about marriage, let me be a bit more prosaic���and mention the economic benefits:

Cost of living. They say two can live more cheaply than one. Sharing a home, utilities and real estate taxes helps reduce a couple���s per-capita expenses. In my classes for the Certified Financial Planner designation, we were told a couple���s shared expenses were typically 1.67 times that of a single person.
Tax advantages. Parts of the tax code favor married couples. For instance, a spouse who doesn���t work can still contribute to a tax- deductible IRA if the couple meets the income qualifications. Also, if the spouses have very different incomes, the lower-paid spouse may help the higher-paid spouse stay in a lower tax bracket.
Estate planning. Couples get the benefit of provisions such as the portable estate-tax exemption, no dollar limit on gifts to each other and more flexibility with inherited IRAs.
Health care benefits. Many companies provide health insurance at favorable rates to not just the employee, but also his or her family.
Social Security. Spouses are eligible to receive up to 50% of the higher earning spouse���s benefit as of full Social Security retirement age, which is age 66 or 67, depending on the year you were born. This is extremely valuable for couples where one spouse doesn���t work outside the home. A widow or widower can also receive survivor benefits.

Succesful relationships are about a lot of things. To me, that includes love, attraction, friendship, respect and shared values. Financial hardship is a common reason for divorce, so it���s important to be on the same page when it comes to money.

If one partner is frugal and the other is a spendthrift, a couple needs to figure out a happy medium. We were lucky. Neither of us is a big spender, although we like nice things. We both believe in being generous when we can. But we never let money problems stop us from doing the things that are important to us.

When we were a young family, expensive vacations weren���t in the budget. But with a Coleman tent, some Sears sleeping bags, a borrowed camp stove and a cooler, we explored Pennsylvania���s state parks, Virginia���s Blue Ridge region, the Adirondacks, Niagara Falls and coastal Maine. Those trips are some of our best memories. We���ve worked hard to provide for our retirement. Now that it���s here, we plan on making a lot more memories.

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Gas Pains

LIKE MILLIONS of other Americans, I���m experiencing serious sticker shock when I gas up the car.

Last week, I was filling up my 2019 Ford F-150 and, for the first time ever, the bill topped $100. That was 21 gallons of regular unleaded at $4.85 a gallon.

Shelling out that kind of cash for a tankful of gas is hard enough for working folks. But for those of us who are retired and living on a set income, sky-high gas prices���along with the soaring cost of groceries, electricity and other necessities���are causing us to revisit our budget and make painful spending cuts.

The economic term for this is demand destruction. Just like it sounds, it means people buy less of something that���s become too expensive. I���m seeing it play out in my own budgeting.

Before I��retired from the corporate world last year at age 61 to pursue a second act career as an author and storyteller, I created a detailed, line-by-line spreadsheet of my expenses for the next few years until I start taking Social Security. The goal was���and still is���to live off a modest pot of taxable savings without dipping into my retirement funds. I intend to stretch out those savings for as long as possible.

But my best-laid plans have run into the hard realities of rampant inflation. The calculus on the transportation line of my budget is particularly ugly.

I own a cabin in the Endless Mountains of Pennsylvania, just south of the Elk Mountain ski area. I regularly make the drive there from my girlfriend���s house two hours to the south, near Harleysville, Pennsylvania. It���s a 120-mile drive one way, and I average between 18 and 20 miles per gallon in my 2.7L EcoBoost F-150���meaning I burn about six and a half gallons of fuel each way.

At $4.85 per gallon, that amounts to roughly $30 each way, or $60 roundtrip. I typically make the trip once a week, so we���re talking about $250 per month in fuel costs just to go back and forth to the cabin. Add in the other local driving I do, and I���m spending about $400 on gas in a typical month.

My retirement budget���put together at a time when gas prices were two-thirds of what they are now���called for spending about $250 a month on fuel. So right there, I���m over budget by about $150 a month.

The pain of higher gas prices also extends to the entertainment line of my retirement budget. Last year, I bought a 30-foot Keystone ultra-lite travel trailer for the traveling that Rachael and I plan to do in this new phase of our lives. When I have that trailer attached to the truck, my gas mileage plummets to a horrid 10 miles per gallon.

We typically drive about 200 miles roundtrip on a given camping trip, except for trips out west, when the calculus changes dramatically. At nearly $5 a gallon, an average 200-mile roundtrip drive with the trailer attached will cost me upwards of $100.

If we take two trips a month during the summer, as we���d planned, we���re talking $200 a month just to tow the trailer back and forth from camping spots. That���s compared to the $120 per month I���d budgeted for vacation-related gas purchases when I built the spreadsheet. At that time, gas cost about $3 per gallon.

Between everyday driving and fuel for the trailer, I���m at least $230 over my monthly budget because of higher gas prices. That may not sound like much, but when you���re on a fixed income and also paying dramatically higher food and utility costs���not to mention your medical insurance���it makes it that much harder to stick to the plan.

What���s an early retiree to do? It���s a zero-sum game, after all. There���s only so much to go around. The options, as I see them, are to dip more into my savings, or go back to work in some fashion, or further cut expenses in a budget that���s already trimmed to the bone.��I really don���t like the first two options, so I���m going the belt-tightening route. Practically speaking, this means:

Making fewer trips in the truck and staying longer each time I go somewhere. For instance, when I go up to the cabin, I���ll stay an entire week rather than just a few days. That way, I���ll end up making the 120-mile trip twice a month rather than three or four times.
Reducing the number of camping vacations, and going to campgrounds closer to the house.
Cutting back further on dining out, clothing and other frills.
Taking on more side jobs in my communications consulting business. Last month, for example, I wrote stump speeches for the president of a large technology company. It was fun doing it, and it enabled me to replenish my taxable savings after overspending in recent months.

Is this not demand destruction at work? If millions of others are doing the same, it must eventually cool the economy, and inflation along with it. The question is, will it cause the economy to tip into a recession? That���s the big issue the financial markets are grappling with these days. No one knows. But I suspect the answer lies with the collective spending decisions of consumers like you and me.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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Stocks on Sale

YOU MIGHT WANT��to check your mailbox. Mr. Market has been sending around a book of discount coupons on some great index funds and individual stocks.

Twenty-two percent off the S&P 500's��closing high set earlier this year. Seventeen percent off the Dow Jones Industrial Average. How about a whopping 33% off the Nasdaq Composite?

Still kicking yourself for not scooping up Amazon���s stock (symbol: AMZN) in early 2020 when it was���adjusted for the recent stock split���below $100? Well, it���s almost there now. How about some Apple stock (AAPL) at $132, nearly 28% off its 52-week high? Or PayPal (PYPL) below $74, a whopping 76% price cut from a year ago?

Yes, it���s sale time in stock-land. We���re officially in a bear market and good stocks and index funds everywhere are selling at a discount, some even at fire-sale prices. We all knew it was coming. After all, markets don���t go in a straight line to Nirvana. We were overdue for a correction.

These are the times that try the souls of market timers but make investors��� eyes light up. Who doesn���t love a good sale? When the sellers are running to the exits, long-term investors rush in, looking to put to work that cash they���ve been holding on the sidelines. As they like to say on Wall Street, bear markets are when stocks return to their rightful owners.

Maybe you���ve been putting off getting into the market because it felt overbought. Maybe you didn���t buy during past market swoons and didn���t benefit from the sharp recoveries that followed, and you���ve always regretted it. Now is your opportunity. What better time than when stocks are selling at a discount?

Oh, but this crash is different, you say. Today, we have out-of-control inflation. We have a war in Ukraine. We have major global supply chain issues. Biggest of all, we don���t have the Federal Reserve throwing near-free money into the markets to stoke demand and job growth.

Here���s the thing: Every time the market crashes, it feels different, it feels unique, it feels like the world is coming to an end. Remember how it felt back in 2008 and 2009, when the subprime mortgage market collapsed and people were talking about the prospect of a global financial meltdown? Remember how it felt back in early 2020 when people around the world were locked in their houses, and it seemed like there was no way anyone would ever fly on an airline or take a cruise again?

Guess what? The world didn���t melt down 14 years ago. Today, people are rushing to airports and taking cruises again.

It���s part of our ancient lizard brain to always look for the worst. Sometimes, the lizard is right and the worst-case happens. Most times, it doesn���t. In between lies opportunity.

In every market swoon over the past two decades���the popping of the dot-com bubble in 2000-02, the Great Recession of 2008-09, the pandemic-fueled crash of 2020���I put money to work. The reason I was able to leave the��workforce��last year and go off to pursue a second-act career is largely because I invested during those past downturns.

Sure, it doesn���t feel good to be grabbing the knife of a falling market, not knowing where the floor is. But no risk, no reward. In the words of the great Warren Buffett, be fearful when others are greedy, and be greedy when others are fearful.

Is a 22% discount on the S&P 500 not enough to entice you to buy? So what is the discount where you���re willing to jump in? Twenty-five percent? Thirty?

It���s important to know your price. It���s also important to realize that, like an auctioneer, the market might give you your price���or it might not. Will you be kicking yourself if it doesn���t hit your 30% off discount price and takes off again to fresh record highs?

Market timing is hard. In fact, it���s impossible. I don���t have a crystal ball and neither does anyone else. But there���s one thing I���d be willing to bet on: The market will see fresh highs again. When? I don���t know. But it will.

I know this because I have faith in the markets, in capitalism, in the awe-inspiring ability of companies around the world to innovate and grow.��If you don���t have that belief, you probably shouldn���t be in the stock market at all. But if you share my faith, check out those discount coupons in the mail. I���m going through my booklet right now and putting together a shopping list.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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Tax Shelter

MY WIFE AND I��recently took advantage of one of the most valuable tax breaks for the typical American family. The tax code provides a generous exemption on the profit from the sale of a primary home. Although this is widely known, it also���based on my conversations with a variety of people���seems to be widely misunderstood.

The Taxpayer Relief Act��of 1997 made a major change to the taxation of home sales. Prior to this, owners typically had to roll the full amount from a home sale into another home purchase within two years to avoid paying the capital gains tax. This is no longer the case, but many people seem to think the restriction is still in place.

The 1997 law was very beneficial to homeowners. It exempted from taxation a capital gain of up to $250,000 on the sale of a personal residence by a taxpayer who was single, and up to $500,000 on a sale by a married couple filing jointly. If you want to understand how this tax break works, IRS Tax Topic 701 provides an excellent starting point. From there, you���re directed to IRS Publication 523 for the details.

Want to take advantage of this tax break? First, the sale needs to qualify for preferred tax treatment. The seller must meet an ownership, use and look-back test. Specifically, you must have:

Owned the house as your main home for a total of at least two years in the five years before the sale.
Used the house as your main home for a total of at least two years in the five years before the sale.
Not used the exclusion in the previous two years.

Even if you meet the ownership and use tests, you aren���t eligible for the exclusion if you excluded the gain from another home sale during the two years prior to your latest home sale.��This being the tax code, there are exceptions to the ���only one tax break in two years��� rule. These include exceptions for divorced spouses, widowed spouses, and taxpayers on military and other government service. You also might be eligible for a partial exclusion of the gain if the main reason for your home sale was a change in workplace location, a health issue or an unforeseeable event. IRS Publication 523 provides more details.

Do you have to report the sale on your federal tax return? It depends. If you receive a Form 1099-S, which lists proceeds from a real estate transaction, you must report the sale, even if the profit is excludable. Sellers must also certify that they met the tests listed above.

In general, a 1099-S must be provided by the company responsible for closing the real estate sale. That���s not necessary if the seller was single and the sale price was less than $250,000, or the sellers were married and the sale price was less than $500,000.

Properly calculating the gain from your home sale is key to the process. The IRS defines the gain or loss as the selling price, minus selling expenses and the home���s adjusted cost basis. The latter would include the original purchase price plus certain home improvements. Publication 523 provides a useful worksheet to guide you through the calculation. Maintaining good records of your home���s purchase and any improvements is critical to an accurate calculation.

We sold our suburban Philadelphia home in March 2021 for slightly less than $500,000. At the time of settlement, we filled out a ���certification for no information reporting on the sale or exchange of a principal residence.��� This form determines whether the closing agent is required to report the sale or exchange to the IRS on a Form 1099-S. Because the sale was for less than $500,000, we met the appropriate tests, and we���re married and file a joint return, no 1099-S was created. Result: We didn���t have to report the sale on our federal tax return.

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

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Feeling Deflated

CONSUMERS��� MOOD HAS never been worse���at least according to the University of Michigan Consumer Sentiment Index. The monthly survey, released last Friday morning, paralleled the worse-than-expected Consumer Price Index report. May���s inflation reading notched a fresh four-decade high as Americans���and the rest of the world���grapple with soaring food and energy costs. The issue is front and center, and we all feel it every day.

The hits keep on coming. This weekend, AAA confirmed a grim milestone: The average price of a gallon of regular gas topped $5. Climbing costs at the pump and supermarket checkout line appear to finally be taking their toll on consumers. According to debit and credit card transaction data from Bank of America, spending growth���not including gas and groceries���dipped in recent weeks. Moreover, even though consumers collectively have more than $2 trillion in excess savings, spending is barely above early 2021 levels, once inflation is factored in.

Surging raw material prices and labor costs are weighing on corporations, too. According to FactSet, more S&P 500 companies than ever cited inflation on earnings conference calls during the second-quarter reporting season. Target and Walmart shares have plummeted as those mega-retailers struggle to predict consumer spending patterns and to cope with ongoing supply chain challenges. Those two stocks dropped hard in the week they issued profit reports last month.

Investors might feel like nothing is going right. Global stocks are down sharply in 2022 even as the bond market endures unprecedented losses. But don���t overlook the good news: Unemployment is near record lows and incomes are solid. That means many folks have the cash to buy shares at today���s lower prices.

And we are, as evidenced by the 2022 How America Saves��report from Vanguard Group. The Malvern, Pennsylvania, fund company notes that workers invested 7.3% of their 2021 wages into their employer-sponsored retirement plan, up from 6.9% in 2012.

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Telling Stories

ROBERT SHILLER, in his book�� Narrative Economics , argues that stories can be a powerful force in moving markets���more so even than facts or data. Recently, I gained a better understanding of why that���s the case.




I was speaking with a fellow and, it seemed, we disagreed on nearly every topic. But the way he presented his arguments made them sound surprisingly persuasive. What I realized is that, in the world of finance, storytellers have a diverse toolbox for convincing people of their point of view. As an individual investor, it���s important to be alert to these strategies. Here are the ones I���ve encountered most frequently:




1. Fame.��In the world of finance, there are some surefire routes to fame. One is to accurately foretell the future. Perhaps most notable in this category is investment analyst Elaine Garzarelli. On Oct. 12, 1987, Garzarelli��appeared��on CNN and delivered a bearish outlook for the stock market. Just one week��later, the��market dropped 22%, its worst ever one-day decline. A week after that,��The Wall Street Journal��crowned��her a ���star prognosticator.��� Her reputation was sealed.




More recently, hedge fund managers John Paulson and Michael Burry both foresaw the meltdown in subprime mortgages that precipitated the 2008 financial crisis. Both were able to bet against these mortgages and made fortunes. Paulson���s success was chronicled in a book titled�� The Greatest Trade Ever . Burry was featured in�� The Big Short , which was also turned into a movie.




Other fund managers have become famous by beating the market in dramatic fashion.��Bill Miller��outperformed the S&P 500 for 15 years in a row���still a record. Cathie Wood gained fame in 2020 when her ARK Innovation Fund��soared 153%.




Because of their singular achievements, these five, among others, continue to be revered. That���s despite subsequent stumbles. Elaine Garzarelli���s track record��since 1987��has been unremarkable. John Paulson, after his big win in 2008, started a new gold-focused fund that was��lackluster. Michael Burry has��warned��that index funds carry systemic risk, a prediction that hasn���t panned out. After his 15-year run, Bill Miller���s fund��gave back��much of its accumulated outperformance. Cathie Wood���s ARK Innovation Fund��lost��23% in 2021, when the overall market��gained 29%, and it���s down almost 58% so far this year.




I recommend avoiding market seers. Yes, it can be tempting to tune in to predictions when they come from someone with a notable track record. But the more impressive the track record, the more cautious I would be. It might be possible to catch lightning in a bottle once, but it���s a tall order to replicate that feat.




2. Credentials.��Last summer, I met a new neighbor. Within the first five minutes, he found a way to let me know he���d gone to Harvard. There���s no denying the prestige of an institution like that. But prestige doesn���t necessarily translate into financial wisdom.




A recent example occurred in the U.K., where a��well-known��fund melted down. It was particularly surprising because the fund���s manager was Neil Woodford CBE, an investor with a previously distinguished record. What does the CBE stand for? That���s a Commander of the Order of the British Empire���a high honor in Britain. The lesson for investors: There���s nothing wrong with credentials. But don���t let folks tell you stories���or, worse yet, sell you something���just because they have a fancy diploma or fancy initials after their name.




3. Facts.��Another strategy used by skilled storytellers is to employ very specific���often arcane���facts. The fellow I referenced at the start of this article, for example, knew certain stock prices to the penny. He spoke knowledgeably about Federal Reserve chairs from the��1960s. He knew the price of oil at various points in the 1970s. He knew how much Harry Houdini had��paid for his house. These very specific facts added a veneer of authority to his arguments. It gave the appearance that he had an unlimited reserve of information and thus, by implication, shouldn���t be questioned.




Trouble is, facts about the past don't necessarily translate into logical opinions about the present or accurate forecasts about the future. Always be wary of bluster, even when���and maybe especially when���it���s supported by very precise facts and figures.




4. Self-confidence.��I recall riding in an Uber with a driver who didn���t hesitate to share his unconventional views. He asserted that the Federal Reserve was not a U.S. government entity but instead owned by the Rothschild family. The Rothschilds also controlled the White House, he said. Instead of debating him, I suggested he might want to confirm this information. His reply: ���I have confirmed this many, many times, my friend.���






His information was obviously absurd. But it occurs to me that this is another strategy employed by storytellers���to assert opinion as fact and to further assert, with supreme confidence, that the information has been well researched. It seems like it shouldn���t work, but it���s remarkable how easy it is to fool people just by saying something with an outsized dose of self-confidence. Beware of those who never��display��� a shred of doubt.




5. First-hand knowledge.��Some years ago, I remember someone starting a sentence, ���When I met Bill Gates, he told me....��� Everyone leaned forward in their chairs. That���s another strategy storytellers use to add credibility. But while first-hand accounts may be interesting, they���re nonetheless still anecdotal, susceptible to one person���s recollection, subject to interpretation and potentially outdated. Listen to them for entertainment, but don���t put too much stock in these kinds of stories.




6. Market prices.��If you chart the frequency of��Google��searches for bitcoin and then chart the price of bitcoin, you���ll find that they look a lot alike. In other words, interest in bitcoin increases when its price increases. That probably seems intuitive, but it highlights a cognitive bias that storytellers can use against us: We become more interested in things when their prices go up. Logically, of course, we should become more interested in an investment when its price goes��down. But to do that is counterintuitive, and it���s just not how we���re wired. Instead, for better or worse, we look to market prices for validation.




That���s a problem because market prices are simply the aggregate of many individuals��� thinking. Just as any one person can be wrong, so too can many individuals. The lesson: Don���t let anyone tell you that an investment is good simply because its price has been going up.




7. New things.��Howard Marks, in his��latest memo, quotes John Kenneth Galbraith. ���There can be few fields of human endeavor,��� Galbraith wrote, ���in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.���




In the dot-com bubble of the 1990s, the internet was, of course, the ���wonder of the present,��� and a key buzzword was ���eyeballs.��� Corporate profits, we were told, didn���t matter. Instead, it only mattered that these new companies were gaining users��� attention. In the end, of course, profits did matter���as they always do. But for a time, skeptics were dismissed as old fogeys who didn���t understand this new era. Today, the equivalent may be cryptocurrencies or nonfungible tokens. To many, they look like the emperor���s new clothes. But just as with past manias, their supporters are working overtime to discredit critics by claiming that they just don���t get it.

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.

The post Telling Stories appeared first on HumbleDollar.

Indexing Triumphant

FOR THE FIRST TIME, retail investors have more money in index funds than actively managed funds. This is based on March 31 figures compiled by��Morningstar��and reported by columnist Allan Sloan.

Twenty-five years ago, Vanguard Group founder Jack Bogle published his remembrance of the 1970s launch of the first index fund geared to main street investors. As I page through the book again, I���m reminded of how close indexing came to failing.

Bogle recounts going on a 12-city roadshow, hoping to raise somewhere between $50 million and $150 million for the fund���s launch. He returned with $11 million.

Several firms already had tried an indexing approach with institutional clients, including Batterymarch Financial, Wells Fargo and Samsonite���s pension managers. They met with technical problems and little or no commercial interest, as Robin Wigglesworth details in his excellent book Trillions.

Bogle���as determined as they come���plowed ahead anyway. Vanguard opened First Index Investment Trust, as it was called then, on Aug. 31, 1976. It didn���t have enough money for all 500 stocks in the S&P index, so it began with 280 stocks���the 200 largest by market capitalization, and 80 stocks judged representative of the index���s remaining stocks.

The timing was terrible. The U.S. stock market soon entered the doldrums, battered by oil shortages and inflation shocks. In its first seven years, the index fund beat the average return for U.S. stock funds only two times.

���The Trust���s disappointing initial reception was followed by an equally disappointing ongoing acceptance in the marketplace,��� Bogle wrote. The fund was dubbed ���Bogle���s folly,��� and the name stuck.

Bogle always seemed to draw strength from difficulties. He remained a vocal proponent of indexing, sounding certain that its success was inevitable. It isn���t ���alchemy,��� he wrote in his remembrance. ���The secret to indexing is its ability to provide extraordinarily broad diversification at extraordinarily low cost.���

Today, it seems that everyone shares Bogle���s faith in indexing. Or one-half of everyone, to be more accurate. Retail investors had $8.53 trillion in index funds on March 31, compared to $8.34 trillion in actively managed funds, according to Morningstar.

It���s taken 45 years for index funds to become No. 1. And it���s thanks to one incredibly determined person who persevered with the index fund through its difficult birth. That indispensable man was Jack Bogle.

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Learning to Get By

IT WAS SUMMER 2021. I was working a job I didn���t like. The salary was solid, but I dreaded Monday mornings and lost sleep at least twice a week. This had been going on for months. Finally, I���d had enough.

I looked at my portfolio one last time. I didn���t need to, of course. I���ve been an almost obsessive tracker of my investments for 20 years and, indeed, acutely aware of money since I was a child. I knew I had more than enough saved up to take the leap.

���The only reason I���m in this job anymore is because I haven���t found another job,��� I told my fianc��e, Sarah. ���But I can afford to live off my savings for a bit. Are you okay if I quit?���

���You���re miserable, and we���ll be fine,��� she answered. ���You���ll get by.���

I left in August 2021 and haven���t looked back. By October, I was back to work, having joined a couple of friends who started a small investment and financial planning firm. While I���m technically an employee, I���m building my own practice and essentially working for myself. My goal now is to continue working for myself for the rest of my life. I���ve never been as professionally fulfilled as I am right now.

Lots of people would be thrilled to have a steady, well-paying salaried job. To be able to walk away from a job and not worry about making ends meet? That���s a privilege, no doubt.

But I also have lots of experience with learning how to ���get by.��� It���s been the core motivation in my life for more than 30 years. The idea of leaving a salaried job to jump into something riskier was never that scary for me.

Where did this mindset come from? My financial journey began with tragedy. My mother died three weeks before I turned age six. My father died the day before my eighth birthday. I went to live with my maternal grandmother���the only grandparent I had left.

I could write a whole book on how losing my parents at a young age affected me mentally, emotionally and psychologically. I���ve spent many years trying to peel back the layers. The devastating loss also affected how I think and feel about money. It might be somewhat predictable that it provoked a sense of scarcity that I still deal with today. Still, some time after losing my parents, I developed a keen sense of knowing what I needed to survive. I think I���m more dialed into that sense than most people.

Finding money. On a happier note, I grew up in a big Greek family, with plenty of uncles, aunts and cousins. I recall having to create a family tree in grade school. Mine only had one branch, but I put so many cousins in my tree that it made up for it. I got an A.

My family talked about money quite a bit. One of the first things my grandmother did when I went to live with her was open a savings account for me at the local bank. She deposited $50 and told me I was going to receive something called ���interest.��� She also told me to look out for the mail at the end of the month. The bank would send me something called ���a statement,��� and I���d find out how much interest I���d earned.

I don���t remember the exact amount, but I think I received about 45 cents that first quarter. When I reflect on that now, I realize that 45 cents annualized on $50 would be a 3.6% return. I���d be thrilled with that from a savings account today. But as an eight-year-old, I wasn���t impressed.

We had enough money. There was always food on the table. But my grandmother never let me think we were anything other than getting by. She sent me to a private school that was walking distance from our house. That���s when I first realized what ���rich��� looked like. I had classmates whose parents were doctors, lawyers and successful business people. I���d visit their homes and note how much bigger and more lavish they were than ours.

School is where I honed my ���getting by��� techniques. I got very good at asking for favors. My grandmother didn���t drive at night, so I always needed a ride home from baseball or basketball practice. I would rotate my requests so the same friend���s parents never took me home more than twice in a row.

My grandmother also taught me how to balance a checkbook. We had a separate account for all my expenses, and we wrote three checks each month: one for private school tuition, one for health insurance and one to my grandmother for my ���room and board.��� I received a Social Security survivor benefit each month, and that was the main source of income for the account.



I was age 11 or 12 when I realized that we had more money going out of my account each month than coming in. I marched up to my grandmother and pleaded that we needed to do something to fix our monthly shortfall. Deeply religious woman that she was, she just said, ���Don���t worry, God will provide.���

I could debate all day about whether God was actually involved or not. But on a practical level, our monthly shortfall wasn���t a problem because there was another account I didn���t know about until I became a teenager. This was an account that was managed by my aunt, who was the executrix of my father���s will and later the trustee of his estate. She would supplement the required funds when necessary. She would help us get by.

I soon learned that there was something called ���a trust,��� and that it would be mine when I turned 25. My aunt, unlike my grandmother, was a fountain of transparency. She opened the books and showed me exactly what was happening behind the scenes. Was God pulling the strings? Or was it my aunt? At the end of the day, I���m not sure there was much of a difference.

The trust wasn���t massive. It held some brokerage accounts and a couple of rental properties of questionable investment value. Once the books were opened, my aunt gave me the job of collecting all of the investment account statements as they arrived and putting them in a filing cabinet. I successfully executed my job about 40% of the time���I was a teenager, after all.

In the late 1990s, I couldn���t help but notice that the investment account balances were growing quickly each quarter. Again, I didn���t know what I didn���t know, but I figured there might be more to my position than I���d previously thought. I left for college in August 2000. On my fall break, I went with my aunt to meet with our accountant.

���Your father left you a nice nest egg, Matthew,��� he said. ���As long as you don���t spend it frivolously, you could be set for life. The way things are going, you could be a millionaire by 30.���

That was October 2000. Two years later, I was home from college for the summer and decided to check my investments to see how things were going. I was appalled. Like everyone else, we suffered significant losses in the tech crash. There was still a rump portfolio left, but becoming a millionaire by 30 was no longer in the cards.

That summer was when everything changed. I dove into my investments head first. Even as a beer-drinking, math-despising history major, I realized that I still held an ace in the hole. As long as I learned about what I had and protected it, I���d be able to get by financially no matter where my life led.

One cousin explained the rule of 72 to me���how you can divide 72 by your expected annual investment return and thereby learn how many years it���ll take to double your money. ���Just don���t spend that money,��� my cousin told me. ���Even If you never save another dime, you���ll be absolutely fine.���

Finding my way. In retrospect, that money was a bit of a double-edged sword. It allowed me to be less serious and less career-focused than I probably should have been. I had lots of friends who���d studied business or economics. Many of them got investment banking jobs and set off on successful career paths. I had other friends who studied history or government. Many of them went to law school.

Meanwhile, I flitted in the wind during the first few years out of school. I worked as a fulltime reading tutor for a year. I spent two years as a history graduate student. Eventually, I went to work at The Motley Fool��investment website, where I did a number of different jobs over a period of 12 years. I enjoyed my time there, but I never advanced much in any specific��role. Of course, I knew I could get by if I just protected what I had, so how much more did I actually need to achieve?

Fortunately, ���the Fool��� was a great place to work. Being around people who wrote about investing and personal finance helped deepen my interest and understanding of those topics. The company provided a generous 401(k) matching contribution and offered some great education on how to invest the money. I regularly contributed to the 401(k) throughout my time there, always heeding my cousin���s advice to keep my spending below my income. My financial position improved along with the market.

I finally got serious about my career in 2016 when I decided to try financial planning. I enrolled in Certified Financial Planner coursework and passed the exam in 2018. In 2019, I left the Fool and joined a local firm in Washington, D.C. I took a pay cut to do so, but I didn���t much worry about that. Adjusting my expenses to meet my new, lower income wasn���t a problem.

Today, three years later, my financial situation is one of constant calibration and measurement. My income is uneven as I work to build my planning practice. I know I have a couple of years ahead of me when things will be lean. But I also know how much I need to make each month to avoid dipping into savings. And I can estimate how things will look in the future, depending on different assumed investment rates of return.

Despite knowing the math, I���m not sure I���ll ever get over the sense of scarcity that lives deep within me. It���s laughable how frugal I am about some things, given how stable my financial situation is. The best example of this: How I keep my car running instead of getting a new one.

The car is 10 years old. It has so many things wrong with it that I have trouble remembering them all. The alignment is off. The driver���s side door has an unsightly dent. The air-conditioner doesn���t always work. I had to get a waiver just to pass the inspection last year. The pi��ce de r��sistance: I can���t take the key out of the ignition without using ���the flick trick.���

I drove my friend to a basketball game recently. When we arrived, I told him I can���t pull my key out of the ignition normally. He asked me what I do and I showed him. I pushed the key further forward into the ignition and then released my fingers. The ignition flicked backwards and spat the key out. My friend keeled over laughing.

���How���d you learn how to do that?��� he asked.

���I Googled ���can���t get key out of Volkswagen Jetta ignition.��� The comments said it would cost $6,000 for a new ignition column. Then I saw this ���flick trick��� video and tried it. It works like a charm.���

He kept laughing.

���Look, if you ever need someone to tell you how to do things the right way or how to pick out the nicest stuff, don���t waste your time calling me,��� I continued. ���But if you need someone to tell you the trick to making something last just a little longer, I���m your guy.���

My car will get by for another year or so. I have no doubt that I, too, will continue to get by.

Matt Trogdon is a financial planner with Craftwork Capital, LLC. He's based in Washington, D.C., and has a special interest in helping Gen X and Gen Y families. He also serves as a workshop instructor for the Babson College Financial Literacy Project.��Follow Matt on Twitter��@Matt_Trogdon��and check out his earlier articles.

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