Jonathan Clements's Blog, page 213
May 11, 2022
Memories All Round
MY WIFE AND I ARE traveling to the U.K. This will be my first time in England, Wales and Scotland. We���ll spend a week in London before taking a train to Cambridge, where we���ll rent a car for the balance of the vacation.
My wife planned the trip, doing an enormous amount of research. It took her a couple of months to put this adventure together. I thought we���d be staying mostly in major cities with well-known attractions. But my wife has us visiting a lot of small towns I���ve never heard of.
She insists each of these small towns will provide us with a memorable experience. For instance, my wife points out that the Porch House in Stow-on-the-Wold is the oldest inn in England, dating back more than a millennium, to the year 947.
But I also know there���s another reason she wants to visit these small, beautiful towns. It���s the bare wall behind our living room couch. My wife wants to take a gorgeous photo that she can hang on that wall. She thinks one of these small towns will give her that opportunity.
I���m really excited about our upcoming trip. But I���m not the only one. No, I���m not talking about my wife. It���s Michael, our 14-year-old neighbor. He���s excited because we hired him to water our plants and get our mail while we���re gone. It���ll be his first job.
Of course, I asked his mother first. She was on board with the idea. I think Michael���s father���who is quiet and reserved���is, too. The other day, he gave me a rare smile, as if he was telling me it was a good idea.
We���ll be gone for five weeks. My wife and I decided $50 a week would be a fair wage for Michael. I thought I would pay him $125 before we left. That way, he doesn���t have to wait until we return to get all his money.
I remember my first job. I delivered newspapers. It was a good money experience for me. I was confronted for the first time with the question: What should I do with the money I earned? Should I save it or spend it? I decided to spend it all.
I spent my earnings on a small television and record player for my bedroom. I bought comic books and junk food at the neighborhood market. I walked away broke from that job���just the way I started it.
Who knew years later I would become a saver who lived well below his means? Maybe my old paper route taught me an important lesson about money, after all. Hopefully, Michael will learn some lessons about money from his first job. At the very least, he���ll have to answer the same question I did: What should I do with the money I earn, spend it or save it?
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May 10, 2022
Rules for Retirement
1. Have a purpose and a plan, but be flexible. You might have devoted more than 70,000 hours to your career, so it wouldn���t be a big surprise if your work has become a huge part of your identity. Giving up what you do for a living can create a void in your psyche. My advice: Before you quit your career, think hard about what you want to do instead. It may take years to work through the details, but consider interests or skills that you didn���t tap into while working. Find a reason to get up in the morning, but without the daily grind.
My reason for getting up: It started with earning a master���s degree in personal finance at age 62, and also becoming certified in career coaching. Now, I work with young adults to help them align their purpose, their passions and their future paychecks, so they can achieve financial freedom while realizing greater personal and professional satisfaction. I do it not for the money, but because I enjoy it.
2. Learn to say ���no��� without guilt. Your time is your most precious resource. Use it wisely. Do what you want, when you want, how you want and with whom you want. During retirement, you���re in a position to ���lend a hand.��� You have a lifetime of experience and perhaps you���re anxious to share your hard-earned wisdom with others. That���s a great idea, but don���t get overwhelmed by the opportunities. Don���t feel as though you need to save the world all by yourself.
3. Stay away from crowds. That means never shopping on weekends. Instead, shop during off-hours. While you���re at it, take advantage of the senior discounts offered by vendors.
4. Avoid traffic. Don���t leave your house before 10 a.m. and be back by 3 p.m. My dad, who lived to age 96, made sure he was home by 3 p.m. to pour himself a glass of red wine. Rush-hour traffic or red wine? Not a difficult choice.
5. Don���t commit to activities that are taxing or unenjoyable. Instead, pick one or two activities you���re passionate about and do them well.
6. Spend your time and money on experiences with family and friends. Meanwhile, forget accumulating further possessions. News alert: Your family, especially your children, don���t want your stuff.
7. Organize and declutter. One of the greatest gifts you can give to your loved ones is cleaning up your life before you die. Rid yourself of things that don���t bring you joy and have no useful purpose or sentimental value. Be sure to organize your financial records. Update your will, any trust documents and powers of attorney. Money and death make bad bedfellows, and can create enemies among previously loving family members. Do your family a favor, make your intentions clear���and save your family from themselves.
8. Keep active, both physically and mentally. Research shows that even moderate exercise and mental stimulation help stave off physical and mental decline. Try to walk for 30 minutes each day. All you need is a comfortable pair of shoes. Invite a friend while you���re at it. Similarly, try reading and doing a crossword puzzle each day. That might require a trip to the library or a subscription to your local newspaper. Yes, some of us still read the printed newspaper.
My 97-year-old mother, who has never driven a car, has walked all her life, even now using her walker up and down the halls of her condo building. She never misses a day. She also completes a daily crossword puzzle. She���s one of the most engaged and happy people I know.
9. When you���ve finished the race, stop running. If you���re fortunate to have enough income and assets to sustain your desired standard of living, stop worrying about beating the stock market. Be an investor, not a speculator. If you feel compelled to trade, limit yourself to, say, 2% of your portfolio. With the rest of your money, adopt an asset allocation that allows you to sleep well at night.
10. Take time each day to give thanks. Reflect on who you are, what you���ve become and the gifts you have to share with others. Thank people who have supported you. Look for opportunities to share your kindness with others. You will be remembered for what you do, not for what you have.
After 30 years in corporate sales, Ray Giese, CFP, CCSP, MS, launched an encore career with his coaching practice,
Career & Financial Pathways LLC
. His goal is to help people align their purpose, passions and paycheck so they achieve financial freedom, while realizing greater personal and career satisfaction. Ray's previous articles were Work That Asset and��Inject Discipline.The post Rules for Retirement appeared first on HumbleDollar.
Details, Details
DO YOU SKIM OVER the fine print? Two recent incidents involving insurance coverage made me rethink my tendency to do just that. One incident alerted me to a major problem. The other saved me money.
Let���s start with the problem. It was time to renew our homeowner���s insurance. In looking over the policy, something didn���t look right. In the section for dwelling, which is defined in our policy as alterations and other improvements, we had $5,000 worth of coverage. That sum would potentially need to cover the replacement of appliances, flooring, fixtures and so on. Meanwhile, for personal property, we had $250,000 of coverage. This is defined in our policy as furniture and clothing.
I think you know where this is going.
When I called our insurance agency to ask if I understood the designated amounts correctly, an employee acknowledged there was a problem. I was told to call the insurance company directly.
What we discovered was that our coverage had been flipped. Even though we all have the impression that our personal items are valuable, it���s far more important to be able to replace the essentials in our homes, such as appliances and flooring. The $5,000 would barely cover the price of one or two appliances.
What about the happier incident? We have some trips planned, and there���s the issue of travel insurance. Since the pandemic, travel has gotten dicier, so finding the right policy is important.
In my research, I discovered something positive: We already have significant coverage through our credit cards. For example, according to the American Express literature, I���m covered for $3,000 of lost or stolen baggage. Not bad.
The amount for trip cancellation also looked good to me. I was skeptical, so I called American Express. The fine print said it provides secondary coverage. A rep confirmed that if I didn���t have primary coverage, its secondary policy would indeed cover me.
Still wanting to see this in writing, I went to the website to confirm what I had been told. That���s where I came across the ���noncontribution clause.��� That means the coverage won���t apply if any other insurance is in place. Since I plan to use only American Express���s coverage, that won���t be a problem. I discovered that other credit cards have similar features.
There are still restrictions, such as the coverage not being available in all states. The coverage could also change or be eliminated at any time. I���ll have to check if there are any changes when the card renews and pay attention to emails from American Express.
Will I read all the fine print from now on? Probably not. I let my husband do that.
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She Finally Said Yes
I'VE BEEN GIVING salient and sagacious financial advice to HumbleDollar readers for coming up on two years. Before that, I���d shared my wisdom for as long as I can remember with family, friends and���in a few cases���complete strangers. Sometimes, though, you need to listen.
Recently, I attended a presentation given by Carlson Financial, where various personal finance issues were discussed while I ate a complimentary eight-ounce filet mignon. One of the issues raised: When determining the total cost of a financial advisor, in addition to the advisor���s fee, an investor needs to include the expenses of the mutual funds that the advisor recommends.
I thought ���how ridiculous.��� Most savvy investors know that controlling mutual fund��expenses is crucial. Then I suddenly realized that it had been years since I had reviewed the fees charged by the mutual funds in my wife���s 401(k), which still sits with her old employer.
Almost 20 years ago, soon after we were married, I briefly reviewed the mutual funds in my wife���s 401(k), which is administered by Fidelity Investments. When I recommended that she think about moving her money to low-cost index funds, she refused.
She informed me then that she had invested her 401(k) based on her own analysis, and in consultation with partners at the then third-largest accounting firm in the world. She made it quite clear that she had no desire to make any changes.
I decided that the benefits of marital bliss exceeded any savings we might achieve in her 401(k)���and that maybe her mutual fund selections weren���t that bad after all. When I got home from the recent Carlson Financial presentation, however, I decided to take a second look. Here are the funds held in my wife���s 401(k):
An eclectic list, to say the least. With a weighted average expense ratio of 0.27%, I realized that my wife���s 401(k) ship required only a modest course correction. I also resolved, however, that a couple of her costliest funds should go.
I thought about reviewing my findings with my wife immediately, but then remembered her steadfastness when we discussed it some 20 years ago. It reminded me of a story I���d read in Stephen Covey's��The 7 Habits of Highly Effective People.
The author had been frustrated by his wife���s requirement that all their new appliances be made by Frigidaire, as it added cost and complexity to each purchase. Eventually, he talked with his wife to try to understand why. She informed him that Frigidaire had always supplied credit to her father when he owned an appliance store���credit that kept his store afloat during hard times. As a result, when buying Frigidaire, she felt she was being loyal to the company and, by extension, to her father.
I decided to take a similar approach with my wife. I gingerly brought up the subject of mutual funds, hoping to better understand her attachment to her 401(k) selections. She replied matter-of-factly that she hadn���t wanted to discuss the topic with me 20 years ago ���because back then I didn���t think you knew what you were talking about.���
We both laughed. She then informed me that she was now open to moving her investments in a lower-expense direction. It was nice to know that our future held lower costs���and that I had learned just enough during the last 20 years to gain her trust.
Using FundVisualizer.com, I compared each of her mutual funds with an alternative low-cost index fund. I decided to focus first on her small position in Vanguard Primecap Core (VPCCX), partly to better understand how Fidelity handled mutual-fund trades within her 401(k) plan.
I was concerned there could be a delay between the sell order and the corresponding purchase of the lower-cost fund. It turns out the sell and buy orders occurred simultaneously. With my wife���s blessing, I planned to sell Primecap and purchase the Fidelity ZERO Large Cap Index Fund (FNILX)���the zero referring to the fund���s 0% expense ratio.
There was just one problem with this master plan. The Fidelity fund wasn't an option in her 401(k). Even though Fidelity offers access to more than 10,000 mutual funds on the retail side, my wife���s 401(k) was limited to just 31 investment choices, a dozen of which are target-date funds. This made some of my wife���s fund selections much more understandable.
She had one good option, however, that appears available only to 401(k) investors���Spartan��500 Index Pool Class E with a 0.01% expense ratio. We sold Primecap and purchased this fund. A few days later, Dodge & Cox Stock (DODGX) was exchanged for Spartan��500 Index Pool Class E as well.
What to do with her remaining funds? I started with the most cryptic, listed among my wife's holdings as US Smid Eq Portfolio, which apparently stands for U.S. Small-Mid Cap Equity Portfolio. According to Fidelity, it ���is not a mutual fund��� but rather ���an active, multi-manager fund��� that has only been in existence for about a year. I wondered what this exactly meant, and what had my wife previously been invested in.
As the fund���s prospectus was not available online, I called Fidelity. When the representative said the firm could only mail me one, I asked the rep if I was dialing 1992. In a way, I���m thankful for this obstacle as it made the decision to sell that much easier. The entire position was promptly converted to���you guessed it���Spartan 500 Index Pool Class E.
American Funds Europacific Growth R6��(RERGX), T. Rowe Price New Horizons I��(PRJIX) and American Funds New Perspective R6��(RNPGX) have all outperformed their respective indexes over the past 10 years, but they have plummeted this year. I decided that, while timing the market might be heretical to some readers, I'm going to give it a try in this case and wait for a market rebound before exchanging these three funds for Vanguard Institutional��Total International��Stock Market Index Trust. This decision is made easier by the fact that just 10% of my wife���s 401(k) balance is invested in these three funds.
The next step: Roll over her 401(k) to an IRA to allow for future Roth conversions���and, more important, a future article.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post She Finally Said Yes appeared first on HumbleDollar.
May 9, 2022
Tax Bites
MY TAXES ROSE 50% in 2021. I've never paid so much before, not even during my peak earning years. I���m not upset about having to pay my fair share, but the extent of the increase puzzled me. After examining my tax return, I came away with a handful of insights.
To be sure, I wasn't expecting a large refund. The reason: I suspected that a onetime employment windfall would cause me to owe money, so I withheld more taxes during the year. I wanted to avoid an underpayment penalty at all costs.
While the workplace windfall and some employer stock vesting contributed to higher taxes, I made moves in my taxable brokerage account that increased the pain. I had rebalanced my portfolio in early 2020 to take advantage of the stock market swoon. The market recovered and soon my stock allocation exceeded my target portfolio percentage. I trimmed my stock holdings in 2021 to get them back to an acceptable size.
Many of the stocks I sold last year had risen in value, so rebalancing increased my capital gains for the year. I���m not much bothered by that. Regular rebalancing is part of my investment process, and this was the expected result.
Here���s where the unexpected happened: I invested the rebalancing proceeds in a short-term inflation-indexed Treasury ETF. I wasn���t planning on much income from this investment, thanks to the chronically low interest rate. But soaring inflation changed the dynamic, boosting the value of inflation-indexed Treasurys���and leading the fund to distribute a large sum that was taxed at the ordinary income rate.
The most unexpected surprise came from capital gains distributions in my ETF portfolio. Vanguard International Dividend Appreciation ETF (symbol: VIGI), for example, distributed more than 6% of its net asset value in capital gains. Half of those gains were short term, so they were taxed at the ordinary income rate. It was an unfriendly reminder that the vaunted tax-efficiency of ETFs isn���t guaranteed.
To prepare for the taxes we might face, we can keep a close eye on our portfolio. Our brokerage statements will list the dividends and interest we receive. Fund company websites will tell us what size distributions to expect. Sound like too much work? Alternatively, you might keep a little extra cash on hand���just in case you owe money when you file.
The post Tax Bites appeared first on HumbleDollar.
Taking a Punch
BOXER MIKE TYSON observed, shortly before he bit Evander Holyfield���s ear, that, ���Everyone has a plan until they get punched in the mouth.���
Well, the bond market has me black and blue and gnashing my teeth. Have Treasury bonds lost their diversifying power in these inflationary times? For decades, they���d mostly held their ground or gained during stock market routs. Not this year.
My longstanding plan has been to invest in conventional short- and intermediate-term Treasury funds to cushion volatility and as a source of money to add to my stock funds when the market tanks. But this year through May 6, with the S&P 500 index down 14% from its record high, the Fidelity Intermediate Treasury Bond Index Fund that I had in my IRA is off 10%.
That���s a worse return than some high-yield junk bond funds. What to do? I���m still working, so I don���t need income from my bond holdings. Some might say to hunker down in conventional high-quality, short-term bond funds and call it a day. Instead, I���ve researched some alternatives with even less interest-rate risk and decided to diversify widely, so I have a little bet on almost everything.
Maybe I���m nuts, but I now own a ton of fixed-income positions spread over various retirement accounts, a taxable investment account and a separate account for my emergency savings. The complexity doesn���t bother me too much. But the idea of having at least some investments that are bucking the bond bloodbath really appeals to me.
I recently started using a spreadsheet to look at all the fixed-income exposure in my portfolio and emergency savings. In the spreadsheet, I include both the bond funds I���ve purchased and the fixed-income portion of my large balanced fund holdings. For purposes of this analysis, I considered my balanced funds��� bond holdings to be similar to a total bond market index fund.
The exercise clearly showed that, despite my focus on shorter-maturity Treasurys when buying bond funds, I still had a lot of exposure to intermediate and longer-term bonds, including corporates. These higher-volatility bond holdings came compliments of the balanced funds I own. I also realized that I lacked certain niche bond funds and securities that can fare well in an inflationary environment, including some specifically designed to limit the risk of rising rates.
Result? I���ve embarked on a somewhat unconventional strategy. In my portfolio and my emergency fund I have���or will soon have���a finger in these different bond-market pots:
Series I savings bonds issued by the U.S. Treasury. I bonds have a periodic inflation adjustment built into their yields. I learned a lot about them from HumbleDollar contributor��John Lim. For those who buy during the six months starting May, the yield for the first six months will be an annualized 9.6%, plus the principal value is guaranteed by Uncle Sam.
A floating-rate Treasury fund from WisdomTree, whose yield will rise and fall with prevailing interest rates. It���ll be a good bet only if rates keep rising.
A bond ladder built with iShares defined-maturity ETFs. The iShares website has a handy ���estimated net acquisition yield" calculator to give you an idea, depending on your purchase price, of a fund's return if it's held to maturity. There���s little principal risk with the Treasury versions of these funds if they���re held to maturity���for instance, through December 2022, 2023 and so on. The corporate funds, however, carry some credit risk.
��
A conventional, actively managed Fidelity short-term bond fund in my 401(k), one of the few fixed-income fund choices that my 401(k) offers. This is a little redundant and probably the first fund I���d sell to take advantage of further weakness in stocks. But for now, I want a bond fund in my 401(k). Its share price fluctuates modestly with interest rate changes and the fund comes with some credit risk.
A conventional short-term Treasury ETF, perhaps from Vanguard, in my IRA. It���ll fluctuate a little with interest rates but there���s no credit risk.
My balanced funds��� fixed-income holdings, which are akin to a total bond market index fund. They���re quite exposed to interest rate and credit risk.
Fidelity Inflation-Protected Bond Index Fund in my IRA, where such funds belong for tax reasons. The fund should outperform a conventional intermediate-term Treasury fund if inflation continues to come in higher than expected. Its value will rise and fall significantly with interest rates.
Except for the inflation-indexed bond fund and the bond holdings in my balanced funds, I have scant principal risk. I���m diversified pretty much across the board, so different funds should perform well in different market environments. Finally, my new holdings, such as the Series I savings bonds, are much safer and should deliver higher returns than the funds I owned before.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart��and check out his earlier articles.
The post Taking a Punch appeared first on HumbleDollar.
May 8, 2022
Whipping Inflation
HAS THE ECONOMY reached peak inflation? That might be the biggest question in financial markets right now. Economists at several Wall Street firms, including Goldman Sachs and Bank of America, say the highest pace of consumer price increases may now be in the rearview mirror.
Inflation is typically measured as a percent change from a year ago. From here, prices for goods and services may still go up, but at a slower pace. That���s the hope.
As financial writer Morgan Housel likes to quip, ���Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you.��� Suggesting we may see a slowdown in inflation usually triggers a flurry of unfriendly responses on Twitter.
Still, there are some signs that inflation has indeed peaked. One of the biggest drivers of the inflationary spike over the past year has been the meteoric rise in used car prices. A lack of semiconductor chips and labor woes led to a freefall in U.S. auto production and inventories. As a result, there have been few new cars on dealership lots, leading many to buy used vehicles instead. But the Manheim Used Vehicle Value Index now shows prices of preowned cars are down for three straight months. New and used vehicles are significant contributors to headline inflation.
On the other hand, food and energy prices continue to show massive annual increases. One indicator: A popular commodity index fund is up a whopping 53% from a year ago, thanks to higher oil prices. But not all the raw materials news is bad. The price of an important industrial commodity, copper, is down from a year ago.
On the labor front, Friday���s jobs report revealed continued robust increases in average��hourly earnings. Also last week, the Bureau of Labor Statistics released its monthly jobs openings and labor turnover report for March. The report found that the number of job openings hit a new high of 11.5 million. The ratio of openings per unemployed worker has also climbed. The strong labor market is good for workers but bad for inflation.
Federal Reserve Chair Jerome Powell and the rest of the Federal Open Market Committee are, of course, seeking to cool inflation. Last week���s half-percentage-point interest rate increase by the Fed was the biggest hike since 2000. The May meeting also kicked off asset sales to shrink the Fed���s $9 trillion portfolio of bonds and mortgage-backed assets. It sounds strange, but the Fed might want to see stocks drop, mortgage rates rise and job gains slow. It���s all about whipping inflation.
So will inflation slow? We���ll get an update��on the Consumer Price Index on Wednesday morning. The consensus forecast calls for an inflation cool down.
The post Whipping Inflation appeared first on HumbleDollar.
Why Rates Matter
1. Interest rates and inflation.��Inflation has been the financial topic of the year. The Federal Reserve has hiked interest rates twice so far in 2022, including a larger-than-average increase last week, as it tries to rein in rising prices. It���s also communicated plans for further increases. What's the Fed trying to accomplish?
An easy way to think about interest rates is that they���re the price of money. Suppose you want to buy a home. To be sure, there are always some people who can pay cash and don���t need a mortgage. But most do. For those folks, the interest rate is a key factor. Consider a $500,000 mortgage. At a rate of 2.75%, which was attainable last year, the monthly payment on a standard 30-year mortgage would have been $2,041. But today, with rates closer to 5.25%, the same mortgage would cost $2,761 per month.
The impact, as you might guess, is that many homebuyers will reduce the amount they���re willing to spend so they stay within their monthly budget. In fact, to get to that same $2,041 monthly payment with a 5.25% rate, the purchase price would have to drop about 25%. Result? Over time, people will bid less for homes���and prices, on average, should increase less rapidly and perhaps even fall.
This same dynamic applies to other items that need to be financed. For consumers, this includes cars. For businesses, it includes equipment purchases. Anyone looking to buy anything on credit will either want to pay less or may forgo the purchase altogether. That, in turn, will cause sellers to be more accommodating, lowering prices as needed to close sales. That���s the Fed's goal in raising rates.
2. Interest rates and housing prices.��Does that mean home prices will be cheaper tomorrow than they were yesterday? Not necessarily. Higher rates will definitely put downward pressure on prices. But there���s a countervailing force that comes into play.
When rates are higher, existing homeowners become less interested in selling. That���s because most mortgages carry fixed rates. A homeowner with a 3% mortgage may now be reluctant to sell because a new mortgage will carry a higher rate. At the margin, some number of potential sellers won���t put their homes on the market. Fewer homes will thus be available. All things being equal, that would put��upward��pressure on prices. How does this net out? Right now, that���s the question many folks are asking.
3. Interest rates and stocks.��Interest rates also affect the stock market. This explains a large part of this year���s decline. Here���s why: According to finance theory, the value of any company should represent the sum of all its future profits, but those future profits need to be discounted. That���s because a dollar next year is worth less than a dollar today. A dollar received in two years is worth even less. And so forth. The longer a company takes to produce a dollar of profit, the less that dollar will be worth to an investor today.
That effect is compounded when interest rates rise. Here���s a mathematical example: When interest rates are 3%, the present value of a dollar of profit earned next year would be 97 cents. But if rates rise to 5%, that same dollar would be worth just 95 cents.
Now consider how this would affect two hypothetical companies. The first is a food manufacturer that���s very profitable but doesn���t grow too quickly from year to year. The second is a software company that���s growing quickly but hasn���t yet generated a profit. When interest rates increase, the first company will fare much better than the second. That���s because a smaller portion of its profits lie in the future, where they will need to be discounted. The second company, on the other hand, which isn���t currently producing any profit, will be severely impacted, because��all��of its profits lie in the future and are thus subject to greater discounting. That���s why many technology stocks are down more than 50% this year, but a stable company like Procter & Gamble has fallen less than 5%.
4. Interest rates, inflation and commodity prices.��This year, stocks have dropped. But gold has risen, from $1,830 at year-end 2021 to $1,882 Friday. Why? Gold is seen as a permanent store of value and thus immune to inflation. One rule of thumb, in fact, posits that an ounce of gold has always been worth the equivalent of a (fancy) men���s suit. Gold enthusiasts have shown this to be roughly accurate even going back to ancient times.
Paper currencies, on the other hand, lose value over time. We all know that, and many have felt it acutely over the past year. If we accept the idea that gold is a permanent store of value, always exchangeable into the same amount of goods, while the purchasing power of a dollar has dropped this year, then it makes sense that the price of gold has risen in dollar terms. If the Federal Reserve is successful in bringing down inflation, we should see gold prices moderate or even drop.
How do interest rates and inflation affect other commodities, such as crude oil and wheat? This has been an unusual year. Russia���s invasion of Ukraine has exacerbated existing supply chain issues, and that has driven up the price of both these commodities. But in an ordinary year, is there a connection between inflation and energy prices or food crops? There is. Just like gold, commodities tend to be permanent stores of value. It takes the same amount of wheat, for example, to make a loaf of bread today as it did 100 years ago. But dollars are worth less. The result: It takes more dollars to buy the same amount of wheat.
This is why many people view commodities as a good hedge against inflation. Trouble is, commodity prices are also subject to lots of other economic forces. Crude oil today, for example, is still 20% or so below the peak it hit back in 2008. Other commodity prices have seen similar swings. That���s why, appealing as it is in theory, I don���t see commodities as a reliable hedge against inflation.
It���s important to note that many of these relationships are interrelated. On top of that, because world events are difficult to predict, it���s still a challenge to know which way things will turn out. For example, will China back off its damaging zero-COVID policy? Will Russia back off its damaging war in Ukraine? If either or both occur, that would materially impact the economy over the coming year. And those are just two factors. For that reason, investors should always start with the assumption that anything can happen at any time���and prepare accordingly. That said, I do think it���s useful to understand the above relationships. The world is unpredictable���just not totally unpredictable.
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 Why Rates Matter appeared first on HumbleDollar.
May 7, 2022
Rant Ahead
WARNING: WHAT YOU read next may be interpreted as a rant���because it is.
I���m tired of hearing about how Americans are unprepared for retirement or even minor financial emergencies. A few years back, it was the inability of 40% to 50% of us to come up with $400 for an emergency. The $400 figure has been used to prove everything from the extent of inequality to how Americans struggle to manage money.
Other studies set the hurdle at $1,000. These studies are even more suspect. One recent survey claims 56% of us couldn���t come up with $1,000 in an emergency���but another, conducted in 2021, says 39%. Remember, we aren���t talking here solely about Americans living in or close to poverty. Instead, these studies include many who are middle class and above.
But at the same time, clearly many families are somehow managing to save. During the pandemic, the bottom 70% of Americans by income collectively saved about $1.1 trillion. The total saved by the entire population is estimated at $3.7 trillion.
I recently viewed a 2016 YouTube video on ���financial fragility��� from PBS NewsHour. It included an interview with writer Neal Gabler, who published an article in The Atlantic. Gabler said he was among the 47% of Americans who didn���t have $400 to his name. The interviewer asked how much of this was caused by his own decisions.
He listed a few personal circumstances, like being a writer, living in an expensive area, having two children and sending them to college. Then came the big ���forces beyond our control��� moment. Gabler noted that real household income has risen modestly since the 1970s, while costs have grown dramatically, especially college.
Yup, there are financial things beyond our control, but the ability to accumulate a modest emergency fund is not one of them. Let me go shopping with a middle-class family and I���ll find savings equal to $400 in a month or two.
Do you really need that new pair of shoes? Can you do your own nails for a couple of months? Why not make coffee before leaving for work, instead of paying $5 for a Venti whatever? I say skip eating out until you���ve accumulated an emergency fund. And forget buying those lawn blowups for every holiday. Am I being silly? I think not. It all adds up.
My daughter works part-time in a daycare center. One family, with two children enrolled, is $2,000 in arrears on daycare fees. Yet the family spent spring break at Disney World. An emergency fund? Financial priorities? You���ve got to wonder.
My contention: Building and maintaining an emergency fund should be part of a family���s budget, not an afterthought. The vast majority of Americans have no excuse for not having a modest emergency fund. Ditto for saving regularly for retirement.
I say, where there���s a will, there���s a way. What that means, simply, is that your standard of living should be based on your income after taxes���and after money is set aside for savings. Isn���t that the only responsible way to live?
The post Rant Ahead appeared first on HumbleDollar.
May 6, 2022
Learning by Helping
I was born in 1957, the second of three sons. My parents provided us with a loving home and an excellent education. At college, I studied to become an engineer and spent my career in aerospace engineering. No surprise, I���ve always been highly analytical, and that���s been the way I���ve approached money questions.
Forty years ago, I married the love of my life. We had two sons, and now two wonderful daughters-in-law and three grandsons. I���m surrounded by a large, caring family. I consider myself extremely lucky: The chance to have a successful life���financially and otherwise���was placed before me.As I���ve sought to make the most of that opportunity, four experiences have had a major impact on my financial thinking. Those experiences transformed my interest in matters of money from a modest hobby to a passion and, along the way, taught me the power of sound financial planning.
Joining the club. The first experience was helping to found an investment club. My older brother and some of his in-laws wanted to start one, and asked me if I was interested. I���d never considered joining an investment club before. But they were good guys and I thought I could learn something, so I agreed. It was one of the best decisions I���ve ever made.
We started the club in 1993, at the beginning of the bull market in technology stocks. Legendary fund manager Peter Lynch���s first two books were popular bestsellers. They filled the heads of novice investors like me with the idea that we could find undervalued stocks with strong growth potential if we just kept our eyes open.
Another contribution to our can-do investment philosophy was Wall Street Week with Louis Rukeyser. The long-running weekly show on PBS was entertaining and educational. It made us feel like we could invest using our own ideas and research.
We agreed that the club needed to be a legal entity���a general partnership. We created a partnership agreement, registered for a federal tax identification number, and set up a checking account, a brokerage account and an accounting structure. I volunteered to be treasurer. I was also the accountant, keeping the books on preprinted ledger sheets.
Initially, we all invested the same amount each month, so we each owned the same share of the club. It quickly became obvious that this would impede the club's growth. Any new member would have to invest the total amount of a founding member to keep things even.
What to do? Being the engineer that I am, I built a spreadsheet that became the backbone of the club���s accounting structure. To allow unequal ownership, we needed to run the club on a per-share basis. The value of each share was initially set at a nominal value. Each member invested their desired amount and received shares. At the end of each month, we would value all of our stock holdings and calculate the new net asset value per share.
In effect, our investment club ran like a small mutual fund. Members contributed money, which was pooled to purchase stocks. Each member owned a pro-rated amount of the fund based on his contributions plus earnings. The club was a pass-through entity: All profits and losses passed through to the members.
Members could buy or sell as many shares as they chose at the share price calculated for that month. At the end of the year, we totaled up the dividends and capital gains. These were passed through to members by way of a Schedule K-1, an IRS partnership form. It took some time, but I was able to automate the process. Club membership doubled, and I ran the books and the treasurer���s office for almost five years.
The club members decided to invest half our money in blue-chip companies. We used discounted cash flow analysis to find value stocks, those which seemed cheap relative to expected future earnings. We purchased household names like Merck, Exxon Mobil, GE, Motorola and Ford. We religiously bought more shares when their prices dipped and reinvested all dividends. I thought of these five stocks as our mini-Dow Jones index. All five were among the 30 giants in the Dow Jones Industrial Average.
The other half of our fund was devoted to speculative growth stocks. At this time in the 1990s, there were dozens of small, high-tech startups that held out the promise of becoming a big winner���the next Microsoft or America Online. Two companies, in particular, haunt me.
TRO Learning was a company that was early in electronic learning, the now-routine practice of teaching students at a distance. We bought in at around $5 a share, and the stock rose to about $20. All the company���s reports said it wasn���t making money, and didn���t expect to for several years. To me, that was a sign we should sell. I brought it up at a club meeting but was voted down. The other members liked the company���s sales momentum. We didn���t sell, and the stock dropped. We eventually sold our shares at a modest profit.
The other company I recall was a small manufacturer called Plasma-Tech. It made the equipment that created screens for flat panel displays. Industry experts said the company made the best equipment of its type in the world. The future of flat screens was limitless, and this company was essential to America���s plan to dominate that market. It was a great story and we bought it���along with a bunch of its stock.
Despite the great story, Plasma-Tech went nowhere. The company was having huge problems delivering its products. It had significant supply chain issues, as well as challenges in ramping up production. In 1999, the company was purchased by a Swiss conglomerate and is no longer listed on any exchange. I learned a valuable lesson from Plasma-Tech. A company can have great technology and a great story. But if it can���t manage its business or turn a profit, you won���t succeed by investing in its shares.
My five years in the investment club made me a much more knowledgeable���and humble���investor. We had our ups and downs, but overall our returns pretty much mirrored the broad market. Our blue-chip stocks, in aggregate, followed the Dow 30, and our growth portfolio averaged out to a similar result. The greatest return may have been the learning involved. By the end, the club had piqued my interest in all things financial.
Helping my parents. The second key experience occurred about the same time as the investment club, but it was far more serious. I realized in my mid-30s that my parents, then in their early 60s, were falling into financial difficulty. My father hadn���t worked in a while, and they were living off my mother���s salary, plus some money she had inherited. We confronted my parents, and they reluctantly acknowledged that they needed help.
My brothers, my wife Vicky and I agreed to provide enough support to stabilize their situation. After a few years of helping them meet their bills, however, it became obvious that the small steps we were taking weren���t enough to secure their long-term future. My wife suggested that we sell our home, purchase my parents��� house, move in and let them live with us. When we presented our plan to them, we could see the relief on their faces.
My parents lived with us for the rest of their lives. My father���s health was deteriorating. He soon needed a walker and oxygen. He died in 1999 at 71 years old. My mom lived with us for another six years. In summer 2004, she suffered a seizure. Over the next two months, she gradually lost control of the left side of her body. It took a few months to diagnose, but doctors discovered a tumor in her brain. It was a B-cell lymphoma, fairly advanced.
She had brain surgery and follow-up chemotherapy. Although she showed some improvement after chemotherapy, her symptoms returned within a few months. At that point, there were no good options left. She passed away a few weeks after Christmas, in early 2005, with her family and friends around her.
The experience of caring for my parents��� health and finances taught me so much. I think it marked my final transition into adulthood. I dealt with resolving debts, fighting with Medicare, retrofitting our house to accommodate my parents��� mounting disabilities and���finally���settling two estates.
All this made me determined that my wife and I wouldn���t be a financial burden to our children. Though it was a lot of work and challenging at times, I never considered it a hardship to care for my parents. It was a profound experience that I would do all over again if required. And soon I was.
Assisting my in-laws. The third experience began about five years later, when I took over the finances of my wife���s widowed aunt. Aunt Pat was childless. She started showing signs of cognitive decline in her late 70s. She gradually lost the ability to manage her affairs, and even lost track of some assets, as I was to discover.
Aunt Pat moved in with my in-laws in 2007. My wife was granted power of attorney over her medical and financial affairs. I assumed the responsibility for understanding, organizing and managing her finances.
She was fortunate to have ample fixed income from several pensions and Social Security. My biggest job was organizing and simplifying her finances. It took several years, but I consolidated everything in a Vanguard Group account and a checking account. I automated her income and expenses payments. I found evidence that Aunt Pat had lost track of assets. After an extensive search, I recovered more than $75,000.
My financial plan for Aunt Pat ensured she would have the money needed to pay for a decade or more of high-quality care, if required. That didn���t come to pass. Sadly, she died suddenly in May 2011 at age 81. From helping Aunt Pat, I learned the benefit of simplifying your finances as you age, and making sure that all your estate documents are in place.
Meanwhile, my in-laws provided a fine example of how a middle-class couple can build a successful retirement. They had spent their lives working hard, living well within their means and saving diligently. After their five children had grown, they began to invest in earnest in their retirement accounts. Between their traditional pensions, Social Security benefits and their savings, they were able to enjoy a comfortable retirement starting at 65.
My father-in-law passed away in 2009 at 82. Following her husband���s death, my mother-in-law seemed to lose interest in managing her finances. Again, I took over. As well as they planned and executed their retirement, there was one crucial mistake I discovered when my father-in-law died. When he���d taken his Teamsters��� pension, he���d chosen a single-life-only payout. That meant the checks stopped cold when he died. This greatly reduced my mother-in-law���s income.
My initial task was to organize her assets by simplifying the number of accounts and assets that she owned. Once again, I consolidated them at Vanguard. Her portfolio consisted of a 403(b), some Vanguard funds, a few individual stocks and some certificates of deposit. She kept a large amount of her assets in cash.
A year after her husband died, she decided that she was ready to sell her home and move together with her sister���Aunt Pat���into an independent living facility. She chose a two-bedroom apartment. This community didn���t require a big entry fee. But the monthly charge was about $6,000. Fortunately, the combined fixed incomes of my mother-in-law and her sister could cover it.
We sold my mother-in-law���s home and invested the proceeds in her Vanguard account. I felt comfortable that her finances were now in good shape. But then Aunt Pat suddenly passed away. Now, my mother-in-law had to pay $6,000 a month for the apartment on her own.
Not long after that, she developed some medical issues. During a routine procedure, there was a complication that led to emergency surgery. Further complications from that surgery caused a significant reduction in her cognitive abilities. At age 84, she was no longer capable of living alone without assistance.
We were forced to quickly investigate several senior living facilities. Each had its own financial structure. I had to evaluate each one to see if it fit her financial situation. We chose a quality facility near us with a small initial deposit but larger monthly charges. Her monthly cost went up to $7,000. I calculated that she had enough assets and income to cover her care until she was 95.
Because of her dementia diagnosis, the majority of her living expenses qualified as tax-deductible medical expenses. I used this tax deduction to her advantage from 2011 through 2014 to offset her IRA withdrawals, greatly reducing her income taxes. After we emptied her IRA, I used her medical deductions to offset long-term capital gains taxes. Her reported income was so low that she qualified for the 0% capital gains tax rate.
I set up a three-bucket approach for her short-, medium- and long-term expenses. We kept three years of cash in the first bucket to cover current needs. The second bucket was invested in short-term bonds, and the third in an S&P 500-index fund. Because she was already in her mid-80s, we planned on drawing down her assets over 10 years. But she only lived for another three-and-a-half years.
Taking care of ourselves. While looking after my in-laws, my wife and I were also preparing for our own retirement. In 2007, on my 50th birthday, we had a local financial planner do a detailed retirement assessment. He performed a portfolio analysis, retirement income projections and a so-called Monte Carlo analysis, which looked at how our investment mix might fare in a host of market scenarios. His detailed report showed that we were on a solid path to retire at age 62.
We all know what happened next. In 2008 and 2009, our assumption of 8% average annual stock returns suddenly looked foolish. But it didn���t change our retirement plans. Our two sons had just finished college, so we focused on maxing out our 401(k) contributions. As share prices plunged toward their March 2009 low, we kept buying stock index funds at ever lower prices.
In 2010, my employer���a division of aerospace company Lockheed Martin���was sold to a private equity firm. Employees were very concerned that this meant the end of our traditional pension. I was a senior manager at the time, and many of the employees looked to me for guidance on the complicated pension rules. I realized that, as a leader, I needed to become much more knowledgeable about the pension. This was my fourth key experience���taking my financial education to a new level.
I spent a week studying the plan and building some spreadsheets that helped explain our options. Over the next seven years, I became an expert on our pension plan, providing consultations and lunchtime briefings to many employees. In 2014, the new company froze our pension plan, meaning we could accrue no more benefits. At the same time, they added the option of a lump sum payout but provided few details. Luckily, one of my sons had a friend who was an actuary in the pension industry. He was able to educate me on the new option.
Many employees came to me to understand their choices and figure out what they should do at retirement. I enjoyed counseling them. I decided to continue my education, so I enrolled in the Certified Financial Planner program at the American College of Financial Services. I completed the program in about nine months, and then passed the comprehensive exam. A few years later, I completed the Retirement Income Certified Professional program as well.
I stopped working fulltime in April 2017���two years ahead of the schedule we���d drawn up before the Great Recession. I started taking my pension several months later. I briefly considered switching careers and becoming a financial planner. But the thought of starting a new career at age 60 was daunting. Several months after I stopped working, my former employer asked if I���d be interested in some consulting work. I agreed, and I���ve done a meaningful amount over the past four years.
I���d always intended to give back during retirement. I volunteered for AARP���s Tax-Aide program. We provide tax return preparation, free of charge, with a focus on older clients with low incomes. This proved to be a great choice. It melded my passion for finance with my desire to help the wider community, and it connected me with a great group of smart, caring people.
I also discovered the HumbleDollar website. I thought I might be able to write articles and become part of the web���s ongoing financial conversation. More than 90 articles and blog posts later, I���m happy I took the chance. It���s enriched my life and, I hope, entertained a few readers.
In 2021, Vicky and I sold our home in the Philadelphia suburbs and moved fulltime to our house on the Jersey Shore. Will this be our final stop? It might be. We love the area, and our children and grandchildren are within a few hours��� drive. But after helping my parents, Aunt Pat and my in-laws, I���ve learned to be prepared���but also stay flexible. I���m not so sure how the rest of our lives will go, but I���m optimistic that our years of saving will provide the wealth we need to live comfortably.
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.The post Learning by Helping appeared first on HumbleDollar.
