Jonathan Clements's Blog, page 208

Pain at the Pump

GAS PRICES TOOK another step higher last week���troubling news for the millions of families planning their summer vacations.

It���s already shaping up as a big travel year. An estimated 39.2 million folks hit the road or took a flight over the Memorial Day weekend, according to AAA, up 8.3% from last year. GasBuddy data show the average price for a gallon of regular unleaded was $4.60 over the holiday weekend. Steep? By July 4, that could look cheap.

As inflation continues to run hot, gasoline futures are worth watching. ���RBOB gasoline��� futures are offered by the CME Group and trade on the New York Mercantile Exchange. Retail investors, like you and me, can play it through an exchange-traded fund: United States Gasoline Fund LP (symbol: UGA).

Gasoline futures have more than doubled over the past six months. When pump prices go up, folks are displeased���consumer sentiment, as measured by the University of Michigan���s survey, is at its��lowest level in more than a decade. The handwringing will likely grow. Gasoline futures hit a new all-time high as of Friday���s closing price.

The futures settled near $4.25 last week. One rule of thumb: Add 90 cents to arrive at the expected average retail price. While the current national average is $4.82, drivers in California are shelling out $6.30 and prices might approach $7 later this summer.

What to do? The usual litany of tips is out there: Tackle multiple errands whenever you take the car out, keep your tires at the right air pressure, drive less aggressively, use a gas rewards credit card and the like. But in reality, these tips will likely generate small monthly savings. Instead, if you want to save money, focus on bigger expenses���like investment fees, taxes and health insurance.

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Time for a Change

THE INVESTMENT consulting firm Callan publishes its periodic table of investment returns each year. It shows the results of key asset classes on a year-by-year basis. Each asset class is color-coded and ranked from best to worst. This makes it easy to see not just annual performance, but also��relative��results.




The periodic table is valuable because it illustrates that there���s rarely a consistent pattern to relative returns from one year to the next. On more than one occasion, in fact, the best investment one year has turned out to be the worst the following year. That is��precisely��Callan���s�����point. All investments���stocks, bonds, international markets���are unpredictable, but each is unpredictable��in its own way.




The lesson for investors: Because of that unpredictability���and because��investment cycles can be long���a key ingredient for success is to settle on a sensible asset allocation and then stick with it for the long haul. Following that approach, I make changes to the lineup of investments I recommend only infrequently. But now is one of those times.




I have never felt entirely comfortable with emerging markets���countries like China, Russia, India and Brazil���because their political, economic and legal systems are less well developed than that of the U.S. That makes them inherently more risky. But their economies typically grow faster than the U.S.,��and that makes��them attractive. To balance these considerations, I���ve always included emerging markets stocks in the portfolios I manage, but only at a modest level���usually 5% of the stock allocation.




For a long time, that seemed reasonable. Yes, China and Russia were run by autocrats. But those were just two of the countries in the main emerging markets indexes. Many other countries���such as India���are democracies. Thus, for a lot of years, I was comfortable with diversified emerging markets index funds that included Russia and China because they also included many other��countries. Unfortunately, though, things have changed. Five factors are of most concern:




1. Index change.��Back in 2019, I��talked about��a change to the most prominent emerging markets index���the one managed by MSCI. According to�� The Wall Street Journal , MSCI had come under ���heavy pressure��� from Chinese authorities to increase the number of Chinese stocks in its emerging markets index.��MSCI��ended up making that change.




For China, this was a boon. But for investors holding funds that tracked this index, the result was a sizable increase in exposure to Chinese stocks.��Today, those stocks dominate the MSCI index, with a roughly 30% allocation.��This figure had been��even��higher���around 40%���a few years ago. It���s dropped only because the value of China���s market has fallen, for reasons explained below.




I should note that MSCI wasn���t alone. FTSE, another major index provider and the one that Vanguard Group uses for its��emerging markets��fund, made a similar move. These changes were problematic for investors because the increased allocations to China meant a decrease in portfolio diversification.




2. Common prosperity initiative.��Beginning in late 2020, China���s leadership���in a set of��inexplicable��moves���began punishing many of its own companies. First, it��blocked��a planned public offering by Ant Group. This was widely viewed as a punitive measure against Jack Ma, Ant���s largest shareholder, because he had made comments critical of the government. Shortly thereafter, Ma��disappeared��from public view for several months.




From there, China���s leadership took aim at a variety of other companies and industries. It��forced��a set of tutoring firms to become nonprofits. The government levied a set of seemingly arbitrary��fines��against companies like Alibaba and Tencent, two of the largest companies not only in China, but also in the entire emerging markets index. This was under the umbrella of a renewed ���common prosperity��� initiative. Ironically, the result was to erase about $1 trillion of value from China���s stock market.




3. Cyberattacks.��Justice Oliver Wendell Holmes once said, ���The right to swing my fist ends where the other man���s nose begins.��� From our perspective here in the U.S., I suppose it���s the Chinese government���s prerogative to make policies as it sees fit, even if they seem unjust, inexplicable and financially damaging. Unfortunately, though, President Xi Jinping seems to be extending his campaign of bullying beyond China���s borders.




According to��the U.S. government's Cybersecurity and Infrastructure Security Agency (CISA), China's government regularly perpetrates cyberattacks against the U.S. Targets include both our government and private companies. In addition, according to CISA, ���China is conducting operations worldwide to steal intellectual property and sensitive data from critical infrastructure organizations, including organizations involved in healthcare, pharmaceutical, and research sectors....���




4. Russia���s war in Ukraine.��Most recently, the Chinese government���s response to Russia���s actions in Ukraine has been unsettling. At best, it���s been��mealy mouthed. Unlike every decent regime in the world, China has failed to condemn Russia and indeed has reaffirmed its relationship. This is a problem for a few reasons. First, it���s simply abhorrent to remain silent about the human rights abuses Russia has perpetrated. It calls into question China���s judgment and decency. That may not sound like a financial argument, but I believe it is. If you're investing��in��any��entity that��doesn���t��subscribe to shared principles, it raises the risk level of that investment.






A further financial consideration: Since China regularly��rattles its saber in Taiwan���s direction, there���s the risk that it could experience economic isolation���similar to Russia today���if it were to become aggressive. When the value of Russian stocks was zeroed out of the emerging markets indexes this spring, the financial impact for investors was minimal because it only accounted for��3% of the index, much less than China���s 30%. If China were to be excluded in the same way, the impact on major emerging markets funds would be significant.




5. Overall posture.��I���ve focused so far on a��set of��specific�����concerns about China. Unfortunately, though, the problem is larger than that. Each year, the CIA publishes its��Annual Threat Assessment. It���s telling that just four countries have dedicated sections in this report. One is China. The others are Iran, North Korea and Russia. That���s the company China keeps.




This is how the Annual Threat Assessment summarizes the Chinese government���s posture today: ���The Chinese Communist Party (CCP) will continue its whole-of-government efforts to spread China���s influence, undercut that of the United States, drive wedges between Washington and its allies and partners, and foster new international norms that favor the authoritarian Chinese system.���




To be sure, we can���t expect all governments around the world to adopt our democratic ways. But it���s important to make a distinction between countries that happen to be different and those that are actively trying to undermine the U.S. On this score, according to the evidence, China is simply up to no good. Since it accounts for a hefty 30% of major emerging markets indexes, it���s time for a change.




I still believe emerging markets are an important element for investors��� portfolios, providing exposure to faster-growing economies. But I no longer recommend the standard capitalization-weighted index approach employed by MSCI and FTSE, on which Vanguard,��iShares and others��base��their emerging markets funds. Instead, I will begin shifting portfolios out of these China-heavy funds and into alternatives.




First among these alternatives is a fund called the Freedom 100 Emerging Markets ETF (symbol:��FRDM). Created by a��native of China��who knows firsthand the issues there, the Freedom 100 ETF has a unique makeup: It���s ���freedom-weighted.��� That is, countries are weighted in proportion to��their adherence to democratic values and other important principles. For that reason, not surprisingly, China has a zero weight in this index. Russia, before it became uninvestable, also had a zero weight. This fund isn���t perfect. Its expense ratio is higher than a traditional index fund, and its holdings are a little top-heavy. Still, I view it as a fundamentally better investment because it doesn���t include China.




Because many investors share these same concerns about China, I expect to see more new funds introduced that offer emerging markets exposure without the China risk. The Freedom 100 ETF is first on my list, though, because I agree with the premise that demonstrably undemocratic regimes carry higher risk. Russia has proven this. Also, Freedom 100 now has a three-year track record���a common criteria for investing in a new fund.

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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Financial Slimming

I THINK SERIES I savings bonds are a great place to stash money you���ll need to spend in five or six years, and yet I���ve resisted buying. I���ve seen credit cards that offer more cash back than the cards I currently carry, but I haven���t taken the bait.��The reason: My goal is to have fewer financial accounts, not more, even if it means fewer dollars in my pocket.

As I discussed in an article earlier this year, I���ve unloaded the jumble of investments in my three Roth accounts���which I plan to bequeath to my kids���and consolidated everything in a single fund, Vanguard Total World Stock Index Fund. That���s had an immediate payoff: Amid this year���s market turmoil, I haven���t bothered checking the performance or even looking at the account values.

Since then, I���ve closed a checking account and a credit card, leaving me with three credit cards and two checking accounts���one personal, one business. I���ll likely ditch one of the three credit cards, leaving me with two. I���ll use one for everyday spending and keep the other as a backup, in case I lose my primary card or it gets hacked.

Next on my to-do list: cutting back the rewards programs that I use. Thanks to decades of business travel, I���m signed up for four frequent-flier programs and three hotel programs, plus I collect Amtrak rewards points. My goal is to use the points I���ve accumulated in most of these accounts and thereafter focus my spending on one hotel and one airline, in part so I don���t have to worry about keeping the other accounts alive by occasionally earning points.

The fact is, the more accounts we have and the more investments we own, the more precious time we have to lavish on them, and I can think of so many better ways to spend my time. Similar to donating or throwing away old possessions, I find it liberating to relinquish these various accounts, and I suspect my executor will also be grateful���though I���m hoping to delay that moment of gratitude for as long as possible.

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Course Correction

FOR MUCH OF MY LIFE, I only had to deal with financial issues in the abstract, the result of being born into an economically comfortable family that worried little about spending choices. But like all good privilege stories, I had my comeuppance and resurrection.

I grew up with just about every privilege a person could want. My family was as stereotypical a nuclear, suburban, well-to-do group as any seen on a TV sitcom. I never wanted for food, shelter, top-flight schooling or the latest comforts. I was born wealthy, male and white in America. The road to success was flat and freshly paved.

Budgets, paying bills and other pragmatic aspects of finance were discussed in our family. But I kept all this knowledge at arm's length. Money was, for me, a valued but undefined resource that didn���t necessarily need management, like living in a forest and never worrying about running out of timber.

My father was self-made. He had taken a money-losing curtain, drapery and bedspread company and turned it into the country���s leading producer of such goods. He was hands-on with everything, overseeing all the manufacturing plants and making personal sales trips to JC Penney in New York and Walmart in Arkansas.

He was also pragmatic. I remember excitedly showing him one of my comic books that was, according to a collector���s guide, worth $50. My father smiled and asked, ���Do you know anyone right now who will pay you $50 for that comic?��� When I sheepishly said no, he put his arm on my shoulder and said, ���Then it���s not worth $50.���

If Pop had a fault, it was that he was too generous with his kids. He wanted us to be free of money worries so we could pursue our dreams. But there was a cost. While I learned to stay mostly within my allowance and spend reasonably, there was no harsh penalty for blowing the budget once in a while. I learned about stocks and watched interest rates���I grew up during the inflationary 1970s���but I also knew I had a safety net if I made a bad choice. My privilege told me that money took care of itself. I needn���t worry about paying for college and law school, so I didn���t.

One good lesson I learned from watching my father���though it didn���t immediately stick���was that just because we could afford the best didn���t mean we should spend that much. If a salesman tried to talk my father into buying the high-end deluxe model, my father would point-blank ask, ���Tell me what exactly makes this version worth so much more than the other one, and then I���ll judge.��� We learned that the basic version of things, like a car, was almost always enough.

I came out of law school ready to take on the world and, with a good job in hand, I again didn���t need to worry about money. I had plenty to live on and even invest. I bought stocks and municipal bonds. I won���t say I bought wisely. It was pretty much hunches supported by a little research. Despite being mid-20s and having spent almost all my life in school, I thought of myself as an advanced investor because I was using the latest high tech, in the form of a 640 KB RAM personal computer, as well as programs like Quicken, to monitor it all. In truth, I was like a novice driver in a Ferrari.

When spending, I resisted buying big-ticket items, except, of course, those that I ���needed,��� like expensive designer suits to play power litigator in court. Where I was most undisciplined was day-to-day expenses. I usually ate at good restaurants. If I needed something, I opted for convenience, rather than spending time shopping for a better deal. Also, at this point, in my haughty 20-something-knows-everything mind, I opted to counter my father���s example and buy more expensive versions of everything from tires to furniture to wine. That way, in my na��ve thinking, I knew I was getting quality.

I married another lawyer and we moved to Dallas, each working for a different law firm. We bought a starter home and began a family with the birth of our son. We each saved and invested, but we kept our investments mostly separate, except for shared things like the mortgage.

My rude awakening. For the U.S., the 1990s was a time of strong growth. For me, it was my crash. I came to realize what I had felt intuitively for a long time: I hated being a lawyer. It was what society said was ���success,��� but it wasn���t for me. I was raised with a sense of noblesse oblige, that my privilege not only allowed��me to give back to society, but that I had a duty to do so. As a business litigation attorney, I was giving little back, instead simply moving piles of money from one rich party to another, while also keeping a chunk for the law firm. I hated the monotonous day-to-day grind. It showed in my work and attitude. I was paid well, but I put on weight and had chest pains.

I quit law. Lawyers don���t have a lot of transferable skills���that���s why they���re usually the first chosen to be eaten in surveys of people told to imagine they were marooned. I looked around for what I could do to both serve humanity and still serve my son food. I found it in teaching. I put together a resume and sent off letters to schools, saying I was a lawyer who wanted to teach and please give me a shot. I substitute-taught to see if I liked it and could handle being in a classroom. I loved it.

During this time, I had a long lunch with my father, discussing my career transition. He just wanted me to be happy. For my part, I told him I owed him an apology. Growing up among elite kids, I was somewhat embarrassed that my father was so bourgeois as to make money by manufacturing curtains and bedspreads. I now realized that he made a tangible product that improved people���s lives and, in the process, he and Mom created a wonderful environment for their kids to grow up in. I���m glad I got to say this before his passing.

At around the same time, my marriage fell apart. My now ex-wife and I were friends who had the law in common, but we weren���t good as a couple. For one, I had already lived with privilege, and didn���t really desire club memberships and the latest doo-dads. Been there, done that. My ex had grown up modestly in a rural town where young girls were told the best they could do was marry the local seed salesman. Law and the lawyer lifestyle were her vehicles to self-reliance and to prove her worth.

Neither of us was right or wrong, but we had different aspirations. Now that I wasn���t a lawyer and could no longer afford to spend without thought, the marriage crumbled. She retained primary custody of our son, so she got the lion���s share of our assets. I put most of the assets I had to give her into a college fund for our son.

Luckily, I proved good at teaching and managed to get a great job and remain employed for the rest of my career. The problem: I was pretty much starting over. My savings were gone in the divorce. I had the spending habits of a lawyer, but a teacher���s salary. I was forced to limit how often I ate out and care whether something was on sale. I had one fancy leftover bit of bling, a shiny red convertible with a $450 monthly lease payment. I broke the lease, paid a large penalty and bought a plain PT Cruiser. My toddler son was disappointed that we could no longer jump in and out of the convertible, but he loved the Chrysler emblem on the Cruiser because it looked like Harry Potter���s golden snitch. It was a reminder that it isn���t things that bring meaning to our lives. Rather, it���s the meaning and appreciation we invest in them.

I tried to live within a budget, but having never done so, it took a long time to corral my spending. Still, I maxed out my contributions to my 403(b) plan. Our school���s retirement services manager, TIAA-CREF, made it easy to do basic research and pick funds. I was finally able to join the rest of the country���s rising 1990s portfolios by buying global funds, tech shares and some adventurous gambles on small-cap funds.

Even as I invested, though, the credit card was my best friend and worst enemy. I had, of course, endless offers for new cards, with assurances I only had to pay the minimum each month. I never bought big, but the ���what the heck��� instances were like body blows to my credit score.

I had two weaknesses. First, I tried to keep up with my ex. If she took my son on a great vacation or bought him tons of gifts, I feared he would prefer her, so I acted like a third-world economy trying to keep pace with a first-world one. Eventually, I had to look for shortcuts and freebies. Instead of vacations, we did ���buddy hikes��� and made secret buddy caves in the woods. We saved cardboard, and built forts and other things.

My other big money leak was dating. I was fixed up with lawyers, businesswomen and other professionals. The expectation was to ���do the town.��� Flowing cash would supposedly make the evening flow better. I was even told by a dating consultant to lie and say I was still a lawyer because ���no woman wants to date a teacher.���

Ironically, while I was watching my debt rise, I began teaching economics and started seeing a disconnect between theoretical economics���which presumed buyers and sellers made rational decisions���and real life. I had irrational spending habits and often made bad purchases that I figured I could worry about ���later.���



My classroom textbook explained that a credit card was like a temporary loan from the bank. But I came to realize I was actually borrowing from my future self, with the expectation that the debt would be easily repaid because inflation would make the debt worth less and because I would supposedly have more money. Being a teacher paying off a lawyer���s debt, I saw the folly of it all. Meanwhile, my high school students were reading about how to spend rationally ���when they become consumers in the future,��� only to immediately run to the mall after school.

I began studying behavioral economics, especially the psychology of consumerism, which would become popular 10 years later with the publication of Steven Levitt and Stephen Dubner���s Freakonomics. I became fascinated that consumers, starting as children, get ���nudged��� into irrational spending choices and habits by the media and those around them. I fancied myself a Holden Caulfield of economics, becoming a pioneer in this new field of media literacy. I wrote articles and eventually three textbooks on the subject.

This academic foray helped me to reassess and cut back my own spending. I shopped at discount stores for clothes. I���d make a vat of chili and then eat it for the next week, rather than going to restaurants every night. I was still a tech-loving geek. But I began looking at the features offered by computers and other devices���the ones advertisers said I had to have���and asking if I actually needed the upgrade. Dating became more fun, as I no longer posed as a high roller but could relax and say, ���This is me and where I am. If it works, great. If not, nice to have met you.���

Along with hikes, my son Ben and I had a regular outing for burgers and shakes, during which we rolled out a chessboard and I taught him how to play. One time, I even heard a sigh and looked up to see several single moms smiling and even giving me the once-over.

Meeting Jiab. Redirecting a ship from its nearly 40-year course is tough, and better done with help. I found the right co-captain in January 2002. I���d been using what was then seen as the new ���weird��� system of online dating. I actually liked it because I could look over profiles and decide if a woman might be a good fit. If we had different core values, such as she only wanted men of a particular faith, or didn���t want to be a parent, or wanted a high-end lifestyle, I knew it wouldn���t work.

I won���t get into all the things in Jiab���s profile that attracted me, but there is one facet that sums up our different financial attitudes. I had bought a year���s online dating subscription but would ignore it for a month at a time. I just liked having it there when I needed it. Jiab, by contrast, signed up for the 30-day free trial and wasn���t going to subscribe���read ���pay������after that. I happened to catch her during the trial period. Lucky that I did, because it was magic.

We met for coffee after she had done yoga. So enamored was I that I immediately and impulsively offered to buy her dinner, going back to my old spending habits. Unable to resist a freebie, Jiab accepted. I went home and immediately wrote her an email. I apologized for not playing it cool by waiting a few days to then casually ask if she wanted to get together. I said I didn���t want to risk losing an opportunity with a great woman by playing games. It worked.

I was also lucky that we met after I had started to right my financial ship. If it had been earlier, I don���t think Jiab and I would have jibed. But as things stood, we agreed on our general outlook on money management. We both believed in saving as much as possible and maxing out our retirement accounts. We also���and this is essential���believed in the greater value of experiences, especially varied ones, over the power of owning things.

For example, we did the obligatory family Disney World vacation. Even then, Jiab and I sat through a time-share presentation to get free tickets. If you ask our two children���Jiab also has a son from an earlier marriage���more fun was had on the family trip done on the cheap, where we backpacked through New York, Philadelphia and Washington, D.C., staying in hostels, taking trains, walking and, yes, carrying all our stuff in backpacks.

Jiab and I differ in two ways. First, she���s detail-oriented. She knows every dollar we have, where it is and what it���s doing for us. She has her head down micromanaging to make sure we have the quantity of money necessary for a good life. Jiab has earned a reputation on three continents for her reluctance to spend. Meanwhile, I focus more on the quality of life and advocate for judiciously releasing our grip on funds to get all we can from an experience. For example, having a pet really makes no sense financially, but my joy at having cats got Jiab hooked and we have had a houseful ever since.

I don���t need her to tell me I was right on those occasions. Her smile at enjoying a rare carefree-about-money moment is enough. Some of my old habits are still hard to shake. Sometimes, I don���t bother to look at prices or shop around much when I feel something is a ���necessity,��� like food or a home repair. To this day, when I start to say, ���Just get it,��� Jiab will give me a not-so-subtle hint by asking, ���But how much does it cost? Is there another place we can get it cheaper?��� For us, tipping remains a negotiation.

The other area we differ on is the tradeoff between time and money. Jiab will spend hours looking to save just a few more dollars, but���and I���m sorry, honey���is terrible about wasting time. She���s always surprised at how late the hour is and how behind she gets. I, on the other hand, am stingy about time. I want to ���get ���er done��� and move on to the next thing. It���s a product of managing a classroom for so long, or perhaps my ADHD. Jiab spends time to get money, and I���ll spend money to get time.

The key to us is that we don���t counter, we complement. At the heart of our marriage, and even when we disagree financially, there���s a mutual respect and willingness to reexamine our beliefs and maybe trust the other���s view. We aren���t either-or. Rather, we���re like the yin-yang that���s completed by the other���s viewpoint.

When we take family vacations, Jiab will plot the travel and find the best places to stay, all maximizing savings. Once we get there, I���m in charge of finding that cool attraction, like a weird museum, a great hiking trail or a haunted spot. Our reciprocal respect often comes out in good-natured teasing. Jiab refers to ���Wassernomics��� when I say we ���made��� money because something was cheaper than we anticipated, or when I contend that a videogame the boys and I want to purchase will be made cheaper every time we play it.

Our differing styles influenced how we raised our two sons. Jiab rightly thought that the boys were getting too many gifts for Christmas, so I found Heifer International, through which ���Santa��� delivered two goats, named after the boys, to a remote village in Africa. The only problem: The day after Christmas, the boys excitedly demanded we visit the goats.

When they were older, we had a Salvation Army Christmas, where everyone agreed to only buy gifts at thrift stores and not spend more than $10 per gift. The hit was the mug with a battery-operated fan that kept chocolate milk mixed. If there was a key to instilling an appreciation for saving money with our sons, I would cite two factors. First, we never presented spending less as a sacrifice, but more as a lifestyle choice to avoid consuming so many resources. Second, we were all in it together and enjoyed it as a fun event.

Going places. When the boys went to university, Jiab and I began downsizing. There was no sense in paying a mortgage on empty rooms that were rarely used. We sold our larger suburban home and moved to a nearby townhome. Without fully realizing it, we were also taking small steps toward the retirement door.

The idea of exploring the world, something we���d always loved doing, crept into more of our conversations. We both liked our work, but had become increasingly bothered by the administrative roadblocks and workplace politics. For years, I could just sit and smile through every staff in-service meeting that proclaimed that a rebranded version of something from a dozen years ago would purportedly revolutionize pedagogy. More and more, however, the irritation lingered after the meetings. I more openly proclaimed my skepticism, probably as an unconscious first step toward announcing that I was done.

The moment of clarity is different for everyone. For me, it was a meeting with a TIAA financial advisor. Retirement was one of those ���someday��� states of mind���until the advisor said he ran our savings through a Monte Carlo analysis and determined that the odds our money would be enough for the rest of our lives was over 99%.

Done.

The entire drive home, I kept thinking, ���We did it.��� By the time I got home, however, my thought was, ���We now do��� what?���

We began planning our life���s next phase. True to our roles, I dreamt and read, Jiab crunched. We wanted to travel, but we���d always favored rubbing elbows with locals and living like them. Rather than taking glamorous cruises and vacationing behind resort walls while devouring Americanized versions of local fare, we preferred staying in modest hotels and eating street food. To us, it's a more authentic experience. To our wallets, it���s more cost-effective. We wanted the same experience now, just more extended.

We settled on relocating ourselves to a place from which we could explore the world. Once our boys graduated university, we knew we had a window of time between then, when they wanted to be on their own, and when we might get the call that we were to be grandparents and once again needed.

We first considered Costa Rica. It had great expat reviews, a relatively low cost of living and was only a two-hour flight from the U.S. Soon, however, we were looking farther afield. We discovered that for about the same cost as Costa Rica���$30,000 per year���we could live in southern Spain. That would give us easy access to the rest of Europe.

We looked into Spanish visas and, the next thing we knew, we were in Houston getting them. We chose Granada, in Andalusia, as our initial landing spot, but ended up asking the flat owner if he was willing to make it a year-long lease. Of course, Jiab handled the paperwork. I added color commentary, encouragement, made coffee and looked for Spanish language courses.

Once we reached Spain, there were further hurdles, such as having to set up financial accounts and learning that many aspects of official business seemed stuck in the 1500s, when Spain was the world���s dominant empire. Most everything, from government interactions to banking, was still best done in person and on paper.

For all the annoyances, we only had to take a walk in the mountains, or on the beach, or have tapas and wine followed by a siesta, to remind us that annoyance was the price of choice and privilege. We remained grateful for having both. When not wandering and wondering, we strove for the Hemingway-like writer���s life abroad. The house full of entitled cats was a good start.

Three years later, we returned to the States. We had family matters to attend to. We also missed the boys. COVID isolation brought that point���and us���home. We���re still secure in our savings and enjoying what is the essential power of money, which is the power to choose.

America was founded to give people the right to pursue happiness, but the pursuit is not free. There are charges all along the way. As a young man, my pursuit was prepaid. I didn���t really learn how to play the game until my 1990s wipeout.

Much of my good fortune has stemmed from the luck of the birth lottery and the help of others. But I also helped myself with some good choices and some key adjustments made by my younger self. To that, I keep hearing the words of an old tae kwon do teacher who would���on the rare occasions I adjusted my sparring strategy to take advantage of an opening���drop his scowl, nod and offer his highest praise, ���Not bad, Wasserman.���

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.

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Still Not Buying It

THIS IS ABOUT my crypto journey. Spoiler alert: I still don���t own any.

My journey began in 2013, when I was serving as an assistant principal in Philadelphia. Since I was always giving advice on our 403(b) plan based on my voracious reading of personal finance blogs, a colleague asked what I thought about bitcoin and whether she should invest. Back then, the price was well under $100���close to $30, I think. I dismissively told her to avoid it. Too speculative. Stocks, I assured her, were a far better place to put her money.

Three jobs later, with bitcoin now more in the national consciousness, I decided to take a closer look. It was 2018, and the price had recently dropped from $15,000 to below $4,000. While that was far above the price at which I deemed it too speculative, I again reassured myself that it was too risky and pointed to the sharp decline as evidence that my initial instinct was correct. No, I told myself, bitcoin wasn���t a wise investment.

Over the past few years, I���ve continued to go back and forth as cryptocurrencies in general, and bitcoin in particular, have hit amazing new highs, including bitcoin���s peak of almost $69,000 late last year. During these buying frenzies, I���d kick myself and calculate what my return would have been had I just embraced the risk, even with a small amount of money.

But I still haven���t invested because I���m also acutely aware of the precipitous falls, with bitcoin under $30,000 as I write this. I still can���t see why this thing should go up, even with the past decade of returns to look at. I���m sure this is some behavioral finance bias. But my gut tells me to stay away.

As I root for my Celtics in the NBA finals, I was hit with a new crypto-revelation. Steph Curry is the face of a crypto trading platform. Multiple sports arenas now have crypto names. Some athletes even get paid in crypto. High school students talk about crypto as though it���s the investment option. There���s a belief that crypto is a sure thing���and that belief is being evangelized aggressively.

The upshot: If someone asked me today whether to buy, I���d be even more cautious. All of this smells like a bubble, one that���ll ultimately damage those who arrive late to the party. Almost a decade after I first thumbed my nose at crypto, I��realize I might be wrong. But stocks still strike me as a better bet.

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A+ for Effort

WE HAVE A PROBLEM: We may have saved too much for our daughter’s college education.

My wife and I started contributing aggressively to our daughter’s 529 college savings account as soon as she was born. For the first two years, we invested the full amount of the annual gift-tax exclusion, which was then $14,000. Now, the exclusion is at $16,000, but lately we haven’t been saving as much as we used to. The reason: Our early aggressive saving, coupled with gifts from relatives, mean the account can already cover a couple of years of in-state college tuition—and our daughter is only five.

You may be asking yourself, “How is that a bad thing?” The simple answer is, we could have done any number of other useful things with the money. For example, we could have used it to save more for retirement. There’s plenty of financial aid available to help students pay for college—loans, grants, scholarships, work-study—but no such thing as financial aid for retirement. Unless retirees opt for, say, a reverse mortgage, they can’t take out a loan because they didn’t save enough in their 401(k). That’s why experts say you should always make retirement savings your top financial priority, even at the expense of your kid’s college account or your homeownership dreams.

For our daughter’s college savings, we could have used another financial vehicle, such as a Roth IRA or a custodial account set up under the Uniform Transfers to Minors Act. That way, we would have had more flexiblility in how we use the money. With a 529, if we don’t use the account for qualified education expenses, we’ll face income taxes on the withdrawals, plus a hefty 10% tax penalty.

So why did we do it? Why were we so worried about paying for college? Because of my personal experience.

To pay for college expenses, I had stocks left to me by my grandparents. That helped my parents and me cover college costs without taking on student loans. It was a wonderful gift that I’ll always appreciate—and it’s one I’d like to give to our children as well.

Our children’s education is one of our family’s most important financial goals. We wanted to make sure we were on track early. We’ve now met that goal. Even if the market only returns 4% per year between now and when our daughter graduates high school, we should be able to pay the full cost of college with her 529 savings. On top of that, if we continue to save more than we need or our investments perform better than expected, the 529 can always be used for the education of future grandchildren.

Still, looking back, maybe investing so heavily in a 529 wasn’t the optimal decision. But not having to worry about one of our most important financial goals has lifted a weight off our shoulders.

If you find yourself in the same boat as us, and you saved too much for a financial goal, my advice is to stop worrying about the choices you made. Instead, be happy that you’ll achieve your goal. Let’s face it: It’s better than the alternative.

Charlie Schafer is an aerospace engineer with an interest in personal finance and investing. His other hobbies include reading widely and homebrewing beer. Charlie lives with his wife and two children in South Philadelphia.

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Think Again

"WHO DOESN’T KNOW that already?" That’s the question we should ask when making an investment decision.

Take Tesla. It builds wonderful cars. It’s an innovative company led by a visionary CEO. Its sales are growing by leaps and bounds. Question: Who doesn’t know that already?

If the attributes of a company are widely known, more than likely its stock price reflects that. The question for investors isn’t whether Tesla is a great company. Rather, the question is whether Tesla is a great investment. Two very different things.

Famed distressed-debt investor Howard Marks discusses this notion in his book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. First-level thinking is commonplace, second-level thinking far less so. In Marks’s words, first-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”

Second-level thinking requires an appreciation of intrinsic value. In the words of Warren Buffett, “Price is what you pay; value is what you get.” Conflating the two is a common mistake of first-level thinking.

Second-level thinking is probabilistic thinking. So much of investing is about the future and hence uncertain. It isn't easy to simultaneously hold a variety of scenarios in our mind and assign probabilities to each. But that’s what second-level thinkers must do. Second-level thinkers are also like world-class poker players, adept at appraising their opponents. They understand the importance of investor psychology and the way it shapes the investing climate. Consider some examples of first- and second-level thinking.

First-level thinking: The economic data suggest the economy is slowing, maybe even headed into a recession. The Federal Reserve is intent on raising interest rates, which will be a further headwind. Time to sell stocks.

Second-level thinking: The possibility of a recession looms, but stocks have already fallen quite a bit. While there may be further downside, investors are forward-looking and stocks have already priced in a mild recession. Moreover, while a recession is possible, it’s not a foregone conclusion. Time to start buying.

First-level thinking: China is a mess. A renewed lockdown has wreaked havoc on its economy. GDP growth is at multidecade lows. Recent crackdowns by Beijing remind us that the rule of law is tenuous. Avoid investing in China at all costs.

Second-level thinking: Yes, China is a mess. Yes, economic growth has slowed sharply. But all this is widely known and has been priced into Chinese shares. Historically, there’s been a low correlation between a country’s GDP growth and its stock market returns. Investors have scant enthusiasm for Chinese and other emerging market stocks. As a result, emerging markets are dirt cheap relative to U.S. stocks. It’s time to raise our allocation to emerging markets.

First-level thinking: The war between Ukraine and Russia has led to soaring energy costs across Europe. Inflation and geopolitical uncertainty are major threats. It’s time to sell. Once the dust settles, I’ll buy back into European stocks.

Second-level thinking: There’s great uncertainty in Europe. But this has been reflected in falling stock prices and a weakened euro. There’s a danger the conflict widens, which would likely mean further losses for stocks. But this uncertainty presents a long-term buying opportunity. By the time the dust settles, share prices will be much higher. Start buying European stocks today.

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No Guarantees

TARGET-DATE FUNDS are riding a wave of popularity. Morningstar reports that investors placed $170 billion into these funds in 2021, more than double their 2020 inflow. Morningstar also reports that, as of 2019, 58% of all 401(k) participants were invested in a target-date fund. That percentage is likely higher today.

It���s clear why the funds have become so popular. They can be an excellent solution for retirement savers who prefer a hands-off approach. To this end, many employer retirement plans use target-date funds as their default investment choice. But there is, I fear, a lack of education around what to expect from these products.

A recent AllianceBernstein��study found that many target-date shareholders don���t understand how their funds work. This confusion could lead to significant overconfidence about retirement readiness. Among those surveyed:

68% thought their funds were FDIC-insured.
57% thought their funds would be invested in cash at retirement.
50% thought their funds were guaranteed to meet their income needs in retirement.
42% thought their funds were guaranteed to never lose value.

If you���re a regular HumbleDollar reader, you most likely are well aware that target-date funds don���t have any of these features. It���s possible, however, that some folks you know hold these misconceptions���and they may be shocked by the drubbing that many target funds have suffered in 2022.

Here are the two crucial concepts that every target-fund shareholder should understand:

Modular construction. There���s a Berkshire Hathaway-owned company headquartered in my town called Clayton Homes. Rather than build homes on site, the firm builds them in sections, or modules, in one of its facilities. Construction can happen in less than a week. Once built, the modules are transported to the home site, where they���re attached to each other atop the home���s foundation.

If you visited one of these homes, you���d never know that the entire structure was assembled this way. Clayton uses the same quality of materials, and meets the same state and local building codes, as site-built homes.

You can think of target-date construction the same way: Many target-date funds are built from a handful of different components that are then joined together. For example, Vanguard Target Retirement 2065 (symbol: VLXVX) holds Vanguard���s Total Stock Market Index Fund (53.3%), Total International Stock Index Fund (36.8%), Total Bond Market Index Fund (6.8%) and Total International Bond Index Fund (3.1%).



Every provider builds its target-date funds a bit differently. Some use passive index funds, some use active funds and some use a blend. Stocks and bonds are the primary asset classes involved, but some target-date funds also dedicate a minor allocation to alternatives like real estate investment trusts and commodities. While each target-date fund is built with its own flavor, you won���t find any that are built with products that guarantee income or preservation of principal.

Glide path. A target-date fund���s investment mix changes automatically over time, often every five years. This is called the glide path. The purpose is to decrease fund volatility as the fundholder nears retirement. Some funds stop the glide path and keep the investment mix static at retirement, while others will change once or twice more.

Target-date funds are offered in series based on the estimated retirement year. Depending on when you want to retire, you could choose from a fund roster that includes a 2065 fund, 2060 fund, 2055 fund and so on. These are sometimes referred to as ���vintages.���

Typically, the stock allocation decreases and the bond allocation increases as the fundholder moves down the glide path. For example, Vanguard Target Retirement 2025 (VTTVX) holds the same four funds as the 2065 fund, but with lower stock and higher bond allocations. It also has a 3% allocation to Vanguard���s Short-Term Inflation Protected Securities Index Fund.

The best part about the glide path is that it takes the investment decisions out of the hands of the fundholder. The years right before and right after retirement can be the most important in a person���s investing career. They can be fraught with worry about ���not having enough.��� By removing the allocation decisions, the glide path feature prevents fundholders from making emotional, ill-timed changes to their portfolio.

The bottom line: Target-date funds have numerous features that make them useful tools. It���s important, however, to be clear about what they are and aren���t designed to do. They provide portfolio growth during our accumulation years and risk management later on, but they don���t provide guaranteed income or guaranteed returns. Investors who want those features will need to look elsewhere.

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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Worth a Listen

MIKE ZACCARDI recently wrote about his favorite podcasts. His list was excellent, but it didn���t include my own favorite, which is Focus on Facts by Eric Sussman. One of the most popular professors at the University of California at Los Angeles���s Anderson School of Management, Sussman delivered a series of riveting podcasts in the first half of 2021.

Given its short run, it���s no surprise that Mike missed the series. But I recommend that Mike���along with other HumbleDollar readers���go to Sussman���s podcast archives to hear his witty insights on the financial markets. Podcasts I enjoyed include those focusing on the market action behind GameStop���s ascent; financial fraud at Wirecard, the insolvent payments processor that some call Germany���s Enron; and the state of housing in America.

But my favorite Focus on Facts episode���and the one I���ve used in teaching a college course about emerging technologies���covers cryptocurrencies. For anyone who wants to learn how cryptocurrencies work, or is considering investing, it���s ���must listen��� material. Sussman provides practical examples of how cryptocurrencies work, and contrasts them with government-issued currencies. He then gets to the oft-debated question of whether to invest.

Sussman is outspoken that cryptocurrencies aren���t a necessary holding in an investment portfolio. As I relistened to this year-old podcast for the fourth or fifth time, I was struck by how pertinent his message is today, given the recent freefall in cryptocurrencies. Here are three reasons that Sussman sees them as purely speculative:

Cryptocurrencies are too volatile to become broadly accepted mediums of exchange.
Cryptocurrencies aren���t needed because we already have reliable and effective ways to transmit funds globally.
There is a massive���and unsustainable���environmental cost to mining cryptocurrencies.

If this sounds intriguing, listen to his entire podcast. And be sure to check out some of the other Focus on Facts episodes. If enough of us listen, perhaps Sussman will record a few more.

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My $233 Surgery

IT TOOK MONEY to resolve my recent health issue���on the surface, a lot of money. But figuring out what it really cost is difficult. Actually, I found it impossible.

Still, being a health benefits nerd, I couldn���t resist looking at the claims processed by Medicare and my Medigap insurance. Trying to understand billed charges, allowable charges and the resulting payments is daunting. I���m guessing most patients wouldn���t even try. Why should they?

My surgery was in the outpatient department but required an overnight stay. I walked into the hospital at 11:30 a.m. on day one and was out at 11 a.m. on the second day. The hospital billed Medicare $43,294, which covered scores of services, each billed separately. Medicare approved the entire amount.

Pharmacy costs totaled $936.71, which is a lot of drugs. The only non-intravenous drugs I had were Tylenol and one Oxycodone. I can attest to how good the latter makes you feel.

My favorite individual service charge was $109 for ���insertion of needle into vein for collection of blood sample������twice. Each collection resulted in seven separate billings for different blood tests, at a total cost of $1,567.10. Interestingly, the same tests were done two days in a row. Could my blood cell count change in 12 hours? Not being a doctor, who knows?

Pathology was $900. The operating room charge was a whopping $20,000. I���m thinking the robot used in the surgery got a piece of that $20,000. Anesthesia was another $5,000. I���m certainly thankful for anesthesia, but the $5,000 wasn���t for the administration of the anesthesia. Instead, the anesthesiologist���s charge was a separate bill. Six assorted injections added another $358.81 to the total.

Is all this itemization necessary? Or does it create an incentive to provide more services? Why is it important to know, for example, that an injection of an antibiotic cost $5.08? The Medicare explanation of benefits says it was a drug ���requiring detailed coding.��� Administrative requirements, it seems, are not limited to private insurance.

Now for the really interesting stuff: the doctor���s charges. Back in January, I had several rather unpleasant tests and procedures in the doctor���s office. The first test was billed at $1,737. Medicare���s allowed benefit���in other words, what it paid���was $447.04. Another procedure was $1,275 and Medicare allowed $240.82.

The insertion of a catheter was described as ���complicated��� and billed at $400. Medicare paid $88.76. I���m not sure ���complicated��� is the right word to describe that procedure. All the services were billed as rendered on a single date, which they weren���t.

Here���s another favorite charge in my journey: The anesthesiologist billed $4,482 and Medicare allowed $393.64.

How can health care providers survive on such low fees? They don���t. Those reduced payments from Medicare are partly recouped through the fees charged to private-insurance patients and, in the worst case, the uninsured. It���s called cost-shifting.

What is a fair and appropriate charge for all this stuff? Who knows? But here���s the thing: I don���t care what it all costs. My out-of-pocket expense for all this health care was just $233, which is my Medicare Part B deductible. Why so little? I pay an additional $240 a month for Medigap supplemental insurance, which covers expenses that Medicare doesn���t.

My attitude to health care costs is similar to that of most patients, who are focused solely on getting better. In any case, given that I didn���t see any of these charges until nearly two months after the services were provided, what could I possibly do?

It makes you wonder who pays for all this care. The lion���s share of Medicare is covered by a 1.45% payroll tax on all wages, which is levied on both workers and employers, for a 2.9% total. On average, seniors pay premiums of around $400 a month, including premiums for Medicare Part B, Medigap insurance and Part D drug coverage. Those who sign up for Medicare Part D prescription drug coverage may also have additional out-of-pocket expenses, which can be quite substantial, depending on the drug.

This is how Medicare works for some 64 million Americans. But what about the larger population? Given the high cost of health insurance and the lack of universal coverage, it���s no wonder many people are seeking a better way. One of the most common recommendations is that we expand Medicare to cover everyone.

But as my recent medical procedure suggests, paying for health care raises all kinds of thorny issues:

If private-insurance patients effectively subsidize Medicare by paying more, what happens if we move to a system where everybody���s on Medicare? How will hospitals cover costs and what will happen to doctors��� incomes?
The hope is that patients will become more attuned to costs and smarter consumers of health care. But how does that happen if patients don���t know what costs they���ve incurred until weeks or months later? How does that happen if everything is covered beyond a small deductible and modest copays���or, in the case of some versions of Medicare for All, there���s no cost to the patient?
Compared with what many workers and individuals pay, Medicare is a bargain. Still, seniors pay an average $400 a month in premiums���and, remember, there are also deductibles and copays. Will workers be happy with universal coverage once they understand the full costs they���ll incur, most of which will be in the form of new taxes?
Universal coverage will increase demand for health care services, while lowering payment rates to providers. How will health care providers respond? What will happen to the supply of care and the types of care provided?

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

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