Jonathan Clements's Blog, page 214

Fries With That?

MY MCDONALD���S INDEX is the way I keep track of long-term inflation. I worked at McDonald���s in 1971 and 1972, while in high school. The menu was much simpler back then: hamburger, cheeseburger, Big Mac, fish sandwich, small and large fries, coffee, small and large soda, and shakes���one size only.

We didn't have Quarter Pounders, chicken sandwiches, salads, lattes, mochas, frappes, smoothies, sundaes, McFlurries, super-sized drinks, meal combinations or Happy Meals. The food was not made fresh. Sandwiches were available in warming bins. Customers gave us their orders. Our job was to grab their food and drinks as quickly as possible.

Back then, our cash registers didn���t determine how much customers owed. We totaled it in our head, mentally added tax, and told the customer the amount due. We entered the total in the cash register, took their money and, without the help of a machine, calculated their change. I still remember the prices of almost every item on the entire menu.

I���ve developed two McDonald's indexes. The first is my Big Mac index. Back then, a Big Mac was 57 cents. Today, I paid $4.73 for a Big Mac at my local McDonald���s. Over 50 years, the cost of a Big Mac has increased just over eightfold.

My second McDonald���s index is a bit more complicated. Back then, McDonald���s had an advertising slogan��� ���two hamburgers, fries, and a Coke . . . and change back from your dollar.��� It was true.

Hamburgers then were 20 cents, small fries were 20 cents, and a small soda was 15 cents. Two hamburgers, fries and a soda came to 75 cents. Add three cents in tax for a total of 78 cents. If you paid with a dollar bill, we gave you 22 cents in change.

Today, at my local McDonald���s, two hamburgers, a small fries and a small soda come to $5.56. For this meal, prices have increased a bit more than sevenfold in 50 years.

Twice recently, I���ve had the opportunity to speak with 12th grade students. I get their attention by telling them that I���m going to give each of them $100. But there are two catches.

Before I explain the catches, I ask them to imagine that their grandparents are going to celebrate their impending graduation by taking them to McDonald���s. I ask them how much it will cost for the three of them to eat there. Most say it will cost $15 or $20.

I then give them the details of my offer. I will give them $100 in about 50 years���when their first grandchild is about to graduate from high school. The first catch: I will need to be alive in 50 years to give them the money. The second catch: Even if I am alive, $100 probably won���t be enough to buy a meal at McDonald���s for three people.

Using my McDonald���s index, I explain that if prices have increased sevenfold or eightfold over the past 50 years, we shouldn���t be surprised if prices increase another sevenfold or eightfold over the next 50 years. If it costs $15 or $20 for three people to eat at McDonald���s today, it���ll probably cost $100 to $150 for their modest celebration 50 years from now.

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Lords of Easy Money

THE FEDERAL RESERVE has a daunting responsibility. Among its jobs is ���to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.��� This is commonly referred to as its dual mandate of maximum employment and price stability.

Yet those two aims are often at odds. That���s because of the inverse relationship between unemployment and inflation, embodied by the Phillips Curve. Attempts to maximize employment���or minimize unemployment���often stoke the flames of inflation.

The primary tool the Fed has to achieve its aims is the ability to set interest rates, specifically short-term rates. It���s a powerful tool because interest rates determine the cost of money. When interest rates are low, people and companies borrow more, leading to credit creation���and credit is the lifeblood of the economy.

In recent years, the Fed has expanded its monetary toolkit. Since the Global Financial Crisis of 2008, it has directly intervened in the bond market by buying longer-maturity Treasurys and mortgage-backed bonds. These interventions, known as quantitative easing or QE, drive the yields of longer-maturity bonds lower.

In addition to controlling a broad swath of interest rates, the Federal Reserve has greatly expanded the money supply through these bond purchases. Since 2007, real gross domestic product has increased by 27%, while the aggregate money supply���as measured by M2, which includes cash, checking accounts and other highly liquid assets���has jumped 300%.

The monetary might wielded by today���s Federal Reserve is truly unprecedented. Astonishingly, this power rests in the hands of just 12 individuals���the seven members of the Fed���s board of governors plus five Federal Reserve Bank presidents���who comprise the voting membership of Federal Open Market Committee (FOMC).

Despite its devilishly difficult task, FOMC members have a striking tendency to vote as a bloc. Dissension among committee members is usually rare. Indeed, since 1996, only two dissenting votes have been cast by Fed governors���the last one in 2005. Federal Reserve Bank presidents are a more rambunctious lot, having cast dissenting votes in a little over a third of FOMC meetings since 1996. Still, 63% of FOMC decisions have been unanimous since 1996.

Are the weighty matters before the Fed and its staff of 400 PhD economists just open-and-shut cases to these intellectual giants? Or is there more to the story?

Christopher Leonard���s new book, The Lords of Easy Money: How the Federal Reserve Broke the American Economy, sheds some light on this question. One of the central characters of the book, Thomas Hoenig, was the president of the Federal Reserve Bank of Kansas City from 1991 to 2011. While serving on the FOMC, he cast dissenting votes at all eight meetings in 2010, the only committee member to dissent that year.

Hoenig was under tremendous pressure to conform with the rest of the FOMC, then headed by Fed Chair Ben Bernanke. In 2010, quantitative easing had only recently been unleashed. The great worry was that any dissenting vote would weaken the case for QE by undermining the Fed���s authority. Bernanke and others felt it was imperative to present a united front.

What was on Hoenig���s mind when he cast the lone dissenting vote against a second round of QE in late 2010? Hoenig worried that the Fed was embarking down a road from which there was no turning back. QE, he believed, was a Pandora���s box that would be impossible to close. Furthermore, he feared that the easy money unleashed by QE would lead to risky lending and asset bubbles.

Hoenig wasn���t alone in his concerns. Regional Fed Bank presidents Jeffrey Lacker, Charles Plosser and Richard Fisher had doubts, too. As Lacker put it, ���Please count me in the nervous camp.��� Plosser���s assessment was more blunt: ���I do not support another round of asset purchases [QE] at this time���. Again, given these very small anticipated benefits, we should be even more focused on the downside risks of this program.���

Unfortunately, Lacker, Plosser and Fisher were nonvoting members of the FOMC in 2010. I���m not arguing that the Fed was right or wrong to pursue quantitative easing. Rather, the apparent lack of psychological safety at the world���s most important financial institution is my concern.

What exactly is psychological safety? Amy Edmondson, a professor at Harvard Business School and an expert on psychological safety, defines it as a climate where people are comfortable expressing themselves without fear of reprisal or humiliation. In short, people feel safe speaking their mind.

In her wonderful book, The Fearless Organization: Creating Psychological Safety in the Workplace for Learning, Innovation, and Growth, Edmondson draws on decades of research to show that psychological safety is imperative for learning and managing risk. She points to the Wells Fargo account fraud scandal and Volkswagen���s ���dieselgate��� as prime examples. In both cases, an absence of psychological safety had disastrous consequences. These two corporate crises were enabled by an environment of fear���fear of not meeting impossible targets and fear of speaking the truth to leadership.

Hubris is antithetical to psychological safety, and it seemed the Fed suffered from a major case of hubris. An exchange between Fisher and Bernanke in 2012 is telling.

Fisher described how Texas Instruments was taking advantage of easy money by reconfiguring its balance sheet, issuing more debt instead of investing or hiring���one of the many unintended consequences of QE. Bernanke replied, ���President Fisher��� I do want to urge you not to overweight the macroeconomic opinions of private-sector people who are not trained in economics.���

I don���t know the state of psychological safety inside today���s Fed. But I do know that the Fed faces an economy that is as complex and uncertain as ever. Every voice inside the marble-white Eccles Building deserves to be heard and considered. Debate should not be stymied but rather encouraged. This includes garnering the views of ���private-sector people who are not trained in economics.���

John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.

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Still No Alternative

FOR AS LONG AS I'VE been writing about investing���37 years now���grumpy old men have been declaring that the stock market���s party will soon end with a world-class hangover.

Is it time to stock up on Tylenol?

I, of course, don���t have the slightest clue. But when the S&P 500 rises 3% on Wednesday and then plunges 3.6% on Thursday, you sure get the sense that investors are a tad uncertain about the future. That brings me to two questions I've been pondering.

Question No. 1: Will we get a wave of panic selling that causes stocks to become unhinged from their intrinsic value? We saw that in early 2020, and also in late 2008 and early 2009. That���s when great buying opportunities occur.

This year���s stock market slump has been dragging on for more than four months, but the decline from the S&P 500���s Jan. 3 all-time high has been relatively modest, just 13.5%. Despite yesterday���s whiff of panic, it would be hard to argue there���s widespread fear, with investors losing all sense of what stocks are worth.

I���ve been adding a little to my stock-index funds at current prices, and I suspect that five years from now I���ll be glad that I did. But I don���t think stocks are a great bargain. Still, with any luck, we'll get there, at which point you'll find me buying with far greater enthusiasm.

Question No. 2: Are we headed back to normal historical valuations? Because the U.S. stock market has become so dominated by growth companies, especially tech stocks, valuations will tend to be higher than the historical averages, a topic I���ve written about before.

But the rise in valuations over the past four decades has also been driven by another factor: falling interest rates. If we are indeed seeing at least a partial reversal of the four-decade trend toward lower interest rates, it���s reasonable to think stock valuations will be lower, as bonds offer more competition for investors��� dollars.

The good news: Stock valuations are already looking much improved, with the S&P 500 stocks closing yesterday at just under��21 times trailing 12-month reported earnings. If S&P Global���s analysts are correct in their earnings forecasts, stocks are now at 19.1 times 2022���s reported earnings and 17.1 times 2023 corporate profits. No, U.S. stocks aren���t dirt cheap, but valuations don���t seem absurdly high.

Back in May 2020, when yields on bonds and cash investments were so small they couldn���t be seen with a microscope, I argued that���for long-term investors���there was no alternative to owning stocks. Now that yields have perked up, bonds are looking more appealing.

But I���d argue there���s still no alternative to stocks for long-term investors. The reason: inflation. For most bonds, inflation represents a permanent loss of value. By contrast, over long periods, corporations have been able to increase their profits along with inflation, and share prices have followed suit. The weeks and months ahead may be rough for stock market investors. But the long term should be just fine.

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Can���t Help Ourselves

I BECAME INVOLVED with employer health benefits in 1962. Back then, my job was to screen medical claims before sending them to the claims��� administrator for processing.

In the decades that followed, I designed, negotiated and managed health plans for a company with 15,000 employees and 4,000 retirees. My job was twofold: to make sure the health benefits were working correctly and to manage costs. The first goal was relatively easy. The second was nearly impossible. It appears that, as of 2022, not much has changed.

Over the past 60 years, I���ve seen many strategies that promised cost savings. In the end, none has actually worked.

Providing full coverage, along with paid time-off for second opinions and preadmission testing, were early cost-saving efforts. The idea behind these efforts: Much health care and surgery are unnecessary. But the policies were ineffective, even though unnecessary care is still a real issue.

Self-funding was supposedly going to save money for large employers���but very little, as it turns out. Nearly 60% of large employers are now self-insured. The often-repeated assertion that insurance company profits are a big driver of health care costs is simply not accurate. When you consider all the Americans covered by any number of government plans, plus all of the employees in self-insured plans, you find only a minority of Americans are actually covered by health insurance.

Requiring employees to pay more toward the cost of their coverage was thought to give them skin in the game, so to speak. To ease the resulting burden, the employees��� share of the premiums is typically tax-free���which most employees don���t even realize.

Starting in the early 1980s, health maintenance organizations promised cost savings by keeping people healthy. I was on the board of directors of four different plans. The problem was that the physicians thought they could continue with business as usual. It couldn���t work that way if you wanted savings. Attempting to manage a patient���s care is met with significant resistance from both patient and physician. Any effort to do that is still a major source of discontent.

Giving employees a choice among different types of coverage was supposed to help. It didn���t. It did, however, cause adverse selection because the highest users of health care services typically selected the most generous plans.

Many employers spend a small fortune on health and wellness programs under the assumption they���ll generate savings. They don���t. Companies sometimes charge more for those who don���t participate or make it appear they���re providing extra premium credits if workers take a health quiz or submit to simple screenings. It���s all smoke and mirrors.

Those supposed extra credits from wellness programs are already built into the premiums so employers can���t lose. More important, employees typically don���t stay with an employer long enough for there to be any cost savings realized. Also, the programs often leave out the employee���s family, which accounts for a majority of plan costs.

Somewhere along the line, we accepted the idea that competition was the key���that the more companies selling health insurance in an area, the better. That���s exactly the wrong strategy. Health plans rely on networks of providers. To win provider contracts, the insurance company promises to deliver many patients. The more insurers in an area, the less leverage a plan has, and so its ability to negotiate lower fees is weakened.

In recent years, the idea of the patient as a health-care consumer caught hold. Many people accept that patients will shop to save money on health care, and thus seek out the lowest cost option. Sure, shopping for a generic over a brand-name drug works. But for any serious and expensive health care, patients aren���t looking for the Walmart alternative.

To support the consumer concept, employers have started offering high-deductible health plans. This is nothing more than cost-shifting. Of course, these do save the plan sponsor money���any increase in a deductible or copay saves them money. But it shifts costs and creates financial hardships for the insured, especially lower-income families.

To help with all this cost-shifting, we leverage tax laws that also naively embrace health care consumerism���things like health savings accounts and flexible spending accounts. But they help only those individuals who can afford to fund these accounts.

Why can���t we deal with health care in America? Okay, I know this may be a generalization, but it���s based on a great deal of experience. My contention: Americans don���t see spending on health care as their individual responsibility. We want the best, the most, the latest technology, and we want it all immediately���without anybody interfering with the relationship between us and our doctor. In other words, we want a blank check���drawn on somebody else���s bank account.

I recently saw a meme on Twitter promoting Medicare for All, claiming it would cover medical, dental, vision, hearing and long-term care with no deductibles or copays and would do so with ���affordable��� premiums. Have you ever seen affordable defined? A close look at the chart indicated some ���government funding,��� but no indication of where precisely that funding would come from.

Americans simply have no concept of the link between their demands for health care and the high cost of paying for it. Instead, we blame insurance companies and their CEOs��� pay packages. I saw a study showing the impact on the premiums charged by a major insurer if compensation for all its executives was eliminated. It lowered individual premiums by 83 cents a month.

Clearly, we need something different in America. But first, we need a new mindset, realistic expectations and an understanding that all systems must use various methods to manage costs. Finally, we need honesty in explaining the cost of what we want and how it will be paid for. We have a long way to go.

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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Funny Money

DO YOU SEE THINGS clearly when it comes to money? Here���s a test to find out. Which of the following scenarios would you prefer?

A 5% raise, but the inflation rate is 10%.
A 3% salary cut, but the inflation rate is 0%.

If you chose the 5% pay raise, you���ve fallen victim to a ���money illusion.��� This term describes our tendency to view money in nominal terms instead of inflation-adjusted ���real��� terms.

In the first scenario, you would have 5% more money to spend but you���d be able to buy 5% less in goods and services, thanks to the 10% inflation rate. In the second scenario, your nominal income would be down 3%���and that would also be your loss in purchasing power, because inflation was 0%.

Consider another hypothetical. Say you paid $200,000 in cash for a house 30 years ago. You sell the home for $500,000. Let���s ignore sales commissions, taxes and other expenses. Would you be happy with this investment?

On one hand, you would have made $300,000 on a nominal basis. But if you assume an annual inflation rate of 3%, your $200,000 home should be worth $485,452 after 30 years. On a real basis, you���d only come out $14,548 ahead on the sale. Had you invested the same $200,000 in the stock market, assuming a 7% annualized return, your investment would be worth $1.5 million after 30 years.

The money illusion stems from our view of the dollar as a fixed unit of measurement, like the inch or the mile. In reality, the dollar is a store of value that fluctuates. The value of a dollar in 1982 has shrunken to just 35 cents today. Put differently, a dollar today could only buy a third of the goods and services that it could have bought in 1982.

The money illusion is tricky because we see nominal prices with our eyes. Inflation, by contrast, is sometimes a stealth phenomenon. We might pay the same price for our favorite box of cookies without realizing that there are fewer cookies in the package. We may notice a recent surge in gas prices, but would we notice if the price of chicken rises a few cents per pound next month?

A more recent example of the money illusion comes from the yield on Series I savings bonds. Investors appear gleeful knowing that they can earn an annualized��9.6% yield on I bonds over the next six months. But that���s just the nominal return. The real return���the return after subtracting out inflation���is designed to be zero. Still excited? I am, but only because other fixed income options are lagging inflation.

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Striking Out

ROUGHLY 20 YEARS AGO, I left the world of corporate finance. I saw some of the ugly, high-fee undiversified products many of my friends owned���and how those differed from the ultra-low cost, disciplined investing at the companies where I had been a financial officer. I wanted to change things.

But after two decades, I���d say I���ve struck out. Still, there are lessons to be learned from my failures, as well as some encouraging changes occurring within the financial industry.

I started strong out of the gate. I met with Vanguard Group���s founder, the late John Bogle, and he encouraged and inspired me to become a financial advisor. I eschewed collecting commissions or levying a percent of clients��� assets, and instead charged by the hour. Soon, I was corresponding with some financial writers I admired, including William Bernstein, Jason Zweig and Jonathan Clements.

Months later, I was writing for what was then the big-time Money magazine. In an anonymous column called ���The Mole,��� I warned readers of the tricks of my trade and how to avoid being victims. I was committed to doing my part to ensure consumers got a fair shake. Here���s where I struck out���and the lessons for all of us.

Strike 1: Hold independent fund directors to their fiduciary duty.

I bought my first index funds in the late 1980s. Unfortunately, I hadn���t yet heard of Vanguard or John Bogle. Instead, I began with two giants, Dreyfus and Fidelity Investments. Over time, Fidelity did the right thing and lowered its index-fund fees. Dreyfus did the opposite and raised fees, trapping me and thousands of others between two bad choices���keep paying the higher fees or pay a large capital-gains tax bill to get out.

The Investment Company Act��of 1940 dictates that the fiduciary duty of independent directors is to the fund shareholders, not the fund management company. The fund directors have the ability to negotiate fees or to change fund managers. Bogle introduced me to a senior officer at Vanguard who gave me permission to communicate Vanguard���s willingness to explore a tax-free merger of Dreyfus���s S&P 500 fund with Vanguard���s far lower-cost fund.

I sent a certified letter to Joseph DiMartino, the fund���s independent chair (and also the former Dreyfus CEO), in which I stated that a high-cost index fund had no chance of beating a low-cost index fund investing in the same S&P 500 index. I wrote that he would be violating his fiduciary duty if he didn���t explore this or use it as leverage to get Dreyfus to lower its fee. The Dreyfus legal department suggested we discuss a settlement that would require me to sign a confidentiality agreement. I declined.

I was sure the law was on the fundholders��� side. I was wrong. I later managed to get discussions going at high levels at the Securities and Exchange Commission, including a senior attorney reporting to the SEC chairwoman. In the end, nothing happened. I wrote about the SEC being��too cozy��with Wall Street. I sold all but a token amount of my Dreyfus shares. I wanted to hang on to a small amount, so it would remind me of one of my biggest financial��blunders.

Lesson: Laws aren���t what they seem. Financial regulators may want to catch the Bernie Madoffs of the world, but that���s about it when it comes to consumer protection. Be your own regulator.

Strike 2: Stop advisors and brokerage firms from blatantly falsifying muni bond income.

In my practice, I saw client statements that showed the income on their individual municipal bonds was twice that of the interest rate of muni bond funds with roughly the same maturity and credit quality. The big muni bond funds got to buy in bulk���and yet the industry claimed that brokers could purchase smaller amounts earning much more. Baloney.

I discovered the muni industry���s simple but brilliant trick: Buy a muni bond at a premium that will mature or be called at par a few years later, and count that amortization of premium as income. Muni bond funds aren���t allowed to do this. On many occasions, I had to tell clients that the 3.5% tax-free income on their statement was really 0.5%, with the rest simply a return of their own principal. A typical response: ���How is this legal?���

The muni bond industry is regulated by the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization that���s subject to oversight by the SEC. I sent a certified letter to the chair of the board, asking why this practice was legal and noting it���s the economic equivalent of an advisor saying they���re charging 1% when actually they���re withdrawing 3%.

The letter resulted in an invitation to come to Washington, D.C., to speak to Lynnette Kelly, the executive director of the MSRB at the time. She and her senior staff laid out a lovely breakfast just to meet with me���the nicest people you���d ever want to meet. Though no one argued with the point I was making, they noted that other parts of the bond market did this, though to a lesser extent.

In the end, all they did was invite me to write an educational paper that they would then put on their website. I did so. But when the edited version came back, it did more to continue to trick the public than to help, so I asked them to remove my name from the paper.

Lesson: The MSRB is a self-regulatory organization and, when a part of the financial industry regulates itself, bad things happen to the consumer. Really nice people are driven by financial incentives and, most of the time, that���s also bad news for consumers.

Strike 3: Help the CFP Board enforce the higher standard it touted.

I became a Certified Financial Planner because I wanted to be held to the higher standard the CFP Board claimed to enforce. Early on in my practice, I came upon a client who had a troubling portfolio designed by his previous CFP. The portfolio included a variable annuity where the CFP apparently couldn���t decide between charging a commission or an ongoing asset management fee, so he did both. This double dipping resulted in the client paying an estimated 5.29% annually.

When I confirmed the facts with the insurance company that managed the annuity, even it must have thought this crossed the line. The insurer offered the client a generous settlement, which the client took under the condition that he got to file complaints against the CFP in question. The client filed the complaints in 2008. Though I wasn���t surprised regulators took no action, I was confident the CFP Board would act. Wrong again.

The CFP Board said this was old news and, after that incident, that it takes enforcement of standards very seriously. But I pointed out that, for years, virtually every certificant that the CFB Board publicly sanctioned came after a regulator or a court took action. It was just a matter of time before the CFP Board would be exposed for falsely advertising that it enforced a higher standard.

That time came in 2019 when The Wall Street Journal revealed that more than 6,300 certificants���out of approximately 72,000���were shown as having clean records on the CFP Board���s search website but, in fact, had regulatory disclosures. Those disclosures included more than 5,000 who had received customer complaints, and 499 who had past or current criminal charges.

The CFP Board has its own board of directors, who are charged with holding senior management accountable. What did they do that year? According to the required filing, which I had to wait two years to see, they gave the two top officers hefty pay raises. Last year, the board���s chairman wrote me saying much has changed and claiming that the CFP Board now takes the establishment and enforcement of high ethical standards very seriously. D��j�� vu all over again. The obvious conclusion: The CFP Board has given up on its mission to help the public.

Lessons learned: Talk is cheap. Those touting fiduciary duty and higher standards are perhaps more likely to be abusing clients than those who don���t. It���s easy to get fooled, as I was when I became licensed.

But where I may have failed in trying to get industry watch dogs to give consumers a fair shake, countless others succeeded in alerting consumers to some of these practices. Fund fees are��plunging as much of the traditional media, as well as sites like HumbleDollar��and Bogleheads.org, educate people on what they need to do to put their own financial independence ahead of Wall Street���s profits. These days, the mighty Dreyfus lion has become almost extinct and even the CFP Board is at least using advertising that���s less misleading. While I struck out with those that were supposedly protecting people, team consumer is scoring more and more hits���and may still win the game.

Allan Roth is a financial planner and writer. His investment columns can be found in publications such as AARP, Barron���s, ETF.com and Advisor Perspectives. He���s the founder of Wealth Logic, LLC, an hourly based financial planning and investment advisory firm with the goal of providing a one-time plan. Allan is proud to have the lowest client retention rate in the business. He���s a licensed CPA and CFP, and has an MBA from Northwestern University's Kellogg School of Management, but still claims he can keep investing simple���at least as simple as possible given the very complex tax issues in developing a plan.��

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Not Digging It

BEFORE I BECAME a devotee of index funds, I began my investing journey in commodities, with a focus on commodity miners and producers. These firms extract a variety of goods from the earth, including precious metals like gold and silver, as well as energy-related commodities like oil, natural gas and uranium.

As a college student first studying the markets, I was drawn to the outsized returns that can occur in a commodity bull market. The cyclical nature of commodity super-cycles means their profits are epic���and so are the bankruptcies. In the end, I abandoned investing in commodities after a decade of unspectacular results.

Here are the five reasons I avoid the sector entirely:

Commodity miners often engage in price-fixing that hurts consumers and destroys smaller competitors. When a few large producers dominate a market, they may act as a cartel to affect both supply and prices.
Mining certain commodities, like uranium, can cause health problems to miners, most of whom are poor and desperately need the work to support their families. I discovered this when I recently read Max Chafkin���s��biography of tech billionaire Peter Thiel. Thiel���s father worked as a uranium mining engineer in apartheid South Africa when Thiel was a boy. Black laborers reportedly were never told they were mining uranium. One advocacy group reported that workers were ���dying like flies��� from radiation. There are many such examples of indifference to miners��� health and safety, including a depressingly large number of coal mine��disasters in West Virginia.
Outside of Australia, the U.S. and Canada, nearly every commodity-rich nation is a human rights abuser. Look no further than the deplorable Russian actions in Ukraine, which are enabled, in part, by blood money paid for Russian oil and gas. Companies���and, by proxy, their investors���are, at best, forced to hold their noses at such gross misconduct and, at worst, seem complicit in criminal behavior.
Many countries in the Middle East and Latin America have enacted laws that rob shareholders of their equity in commodity companies. In Russia, commodity-producing assets have been stolen twice. The first time was during the Communist Revolution in 1917. Then, almost from the moment the Soviet Union fell in 1991, Vladimir Putin, his oligarchs and the Russian government stole private investments in oil and natural gas companies again.
Even when the best-run companies in Western-style democracies succeed in extracting commodities, the supply left in the ground drops. Unless new proven discoveries come on line to replace the diminishing reserves, their business success is finite. Investors with long-term horizons are betting that these firms will find quality replacements by discovery or acquisition, but this is anything but guaranteed.

Do my broadly diversified index funds own small percentages of commodity producers? Sure. But I���m comforted that these percentages have shrunk in recent years, and I hope they will continue to do so. I���m optimistic this trend will continue because I believe in the words of Dr. Martin Luther King Jr., who said, ���The arc of the moral universe is long but it bends toward justice.���

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Quick Work

I'VE USED QUICKEN since the DOS version, with my first entry made in August 1992. I���m trying to decide if I qualify as a power user. The fact is, there are so many Quicken features that I simply don���t use.

The product was first released in 1984 as a basic digital checkbook. It later moved to Windows and it���s now a subscription service. I love the ability to manage my checkbook, but over the years Quicken has added features aimed at managing my entire financial life. I did experiment with tracking some basic investment accounts, only to revert to my own homemade spreadsheets.

In the beginning, all entries had to be typed by hand. This required diligence but, for me, the payoff was the ability to manipulate the data once it was entered. For a while, I used the one-click update feature, where Quicken would initiate an automatic download of transactions from all my bank accounts at once. Various glitches led me to give up on that. Now, I enter my checkbook entries manually and download my credit card transactions from the card websites, rather than initiating the transfer within Quicken.

When the subscription service was added in an effort to increase Quicken���s revenues, I thought I might use the web feature to access my checkbook, rather than relying solely on the installed software on my desktop. It worked for a while. But when I had problems with the web version, I didn���t see enough value to call the help desk to try to fix it. They have a mobile app, but I haven���t tried it.

I���ve never tried the budgeting feature, either. I don���t budget, so it had no value to me. Likewise with bill pay. During the years I���ve used Quicken, I���ve migrated from snail-mailing checks to bill pay through my bank. Today, I have a combination of automatic deductions and payments made online through vendor websites. With the online glitches I���ve experienced with other Quicken services, I never wanted to invest the time to test its bill pay system.

Quicken offers a version that helps with managing rental properties and a home-based business. I don���t have either of those. They offer several service levels: starter, deluxe, premier, and home and office. I use the starter version. That���s all I need.

If I don���t use most of their product features, how could I consider myself a power user? The answer lies in how I use the core checkbook feature. I manage four bank accounts and five credit card accounts in Quicken. When our parents were alive and we paid their bills, Quicken allowed us to track their spending and account for where all the money went.

Through the report feature, I can readily track income and expenses, pull data for our tax return, compare different time periods, and run special reports on specific spending categories. The beauty is that it draws data from all accounts into a single report. Medical expenses paid with a credit card are merged with those paid from our checkbook.

Once built, reports can be saved so that they can be rerun or updated. They can be viewed on the computer screen, with the ability to double click a line item and get the details behind it. Alternatively, reports can be printed or downloaded into a spreadsheet for further manipulation.

Over the years, data entry has become easier, thanks to these product improvements:

Autocomplete suggests entries after typing the first few letters of a word.
Recurring transactions can be memorized for quick entry.
Money transferred from one account to another is only entered once.
Cryptic descriptions downloaded from credit card accounts can be automatically renamed to something recognizable.

I still believe in balancing my checkbook. This is accomplished quickly in Quicken, compared to doing it by hand, plus this exercise catches entry errors and missed transactions.

The key to Quicken���s usefulness lies in setting up the account right. Some forethought must be given to what you want to track. Set these up as categories. Quicken comes pre-loaded with numerous categories, but for the most part I���ve created my own.

Once categories are set up, each entry must be assigned to a category to make future reporting useful. Subcategories are available, too. In the insurance category, for instance, you can have subcategories for home, auto and life policies.

New categories are easy to add when new expenses arise. I���ve used them to track the costs of home remodeling projects and our daughter���s wedding. When these events were over, I could easily summarize the totals. When we moved, I ran a report on home improvements to update the cost basis of the house we sold.

At tax time, I rerun saved reports for medical expenses, taxes paid, 529 contributions, charitable contributions and miscellaneous income for the latest tax year. Yes, it took time to enter all that data, but the payoff comes in how quickly I���m ready to prepare my taxes. I���m also less likely to overlook something.

Anticipating early retirement, when I would have no regular source of income, I ran reports on my annual expenses. I downloaded these reports into Excel and made assumptions about which expenses would increase or decrease. Now that I���m retired, I run an annual report to monitor my spending.

I don���t have to guess or dig to find past expenses. What did we spend on lawn service last year? What was the cost of that appliance we bought? The answer is all in one place���and at my fingertips. I think all that makes me a Quicken power user.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.��� Check out his previous��articles.

The post Quick Work appeared first on HumbleDollar.

Not in the Plan

HAVE YOU EVER MADE a plan and then had it go awry? Like the car breaking down on the highway when you���re driving to Christmas dinner, as happened to me several years ago.

Stuff happens. That���s why I can���t understand why many people preparing for retirement seem to have unwavering confidence in their planned budget���one that���s often generated using software or a spreadsheet.

Hiring a financial advisor may help. But for that advice to bolster your chances of success, you must be 100% honest when discussing your goals, your fears, and how you define risk and financial security. Is your goal really to spend every penny and leave nothing to your children? Are you really an aggressive investor and truly willing to live on a tight budget?

I���ve heard people say their planning covers every contingency. Over the next 30 years? I doubt it. I���ve been retired since 2010. In the last three years, I���ve spent $5,000 on an unplanned tree removal and $8,000 on dental work in a single month. In 2021, my former employer dropped our medical and prescription drug coverage, replacing both with a payment to a health reimbursement account that, over time, won���t keep up with premium inflation.

Those are just some examples of what can happen. I���m thinking they aren���t in row 10, column B, of most retirees��� planning spreadsheet.

Some people have supreme confidence in their budget and how much money they need. Unfortunately for many, it may be necessary to live on a strict budget that only covers basic necessities. But is that a desirable plan? Having just enough to get by, based on some cooked-up budget, seems a bit risky.

Surveys consistently show a great disconnect between saving rates, expected retirement income and spending in retirement. I cringe when I read that living in retirement is possible on 40% or even 60% of preretirement income. Will that income really cover all financial risks for 30 years���and perhaps far longer if folks are retiring in their 50s?

My perspective is different from that of most retirees. I have steady income from a pension and Social Security that���s equal to 100% of my preretirement base pay. Perhaps I���m too conservative���and too skeptical of retirees who think they can get by safely on their investments and Social Security.

I try to think ahead, to cover all the bases, to account for life���s ���what ifs.��� So far in 2022, those ���what ifs��� include high inflation, a rocky stock market and rising interest rates. I maintain retirees need more than whatever their budget indicates. Their retirement finances should include an emergency fund���and ample financial breathing room.

The post Not in the Plan appeared first on HumbleDollar.

Betting the Ranch

IT WAS 2010, I was age 52, I���d just divorced���and I found myself with neither a home nor a fulltime job.

As part of the divorce, we���d sold the house. Between the cash from that sale and some savings I���d amassed when I was single, I had a modest nest egg. I also had��a teenage daughter who needed to stay in our current school district.

The rent on my lovely two-bedroom townhouse was devouring my savings. I had a part-time job teaching technology to elementary and middle school students, but the pay didn���t even cover my rent, let alone other expenses.

Meanwhile, on the other side of San Francisco Bay, houses were selling at depressed prices after the real-estate market meltdown. I was confident prices would recover, but I couldn't qualify for a mortgage. I could see myself slowly going��broke in a part of the country with a sky-high cost of living.

In the back of my mind, I had a thought: Assets should help you buy assets. I had my money invested in income-generating stocks and partnerships. What else could my money be doing for me? How could I leverage my investments to generate money? Could I buy a house?

I learned that I could get a line of credit���similar to a margin loan���that was backed by my investments and then use the credit line to buy a house. Make no mistake: This was��a risky move. The line of credit was at a 4.1% variable rate and would increase if rates moved higher. What if the stock market crashed? My loan would be called in, meaning that my investments would be liquidated to cover the loan. On top of all that, it was a negative amortization loan, so every month interest would be tacked on to the balance.

In taking on the loan, I was making some key assumptions. The biggest assumption: I could create equity in the new house from day one and, if I had to sell, I could repay the loan and turn a small profit. I also assumed that the stock market was stable enough that a crash of great magnitude wasn���t coming soon. I limited the sum I borrowed so there was room for error���and thus something drastic would have to happen for the loan to be called in.

Driving around my target neighborhood, I saw plenty of houses for sale. But many of them were already ���sale pending��� by the time I got to see them. On the front door of one house, however, I saw a notice from Bank of America. It included a number to call to contact realtors who were selling bank-owned properties. I phoned and left a message.

A few days later, a sales agent called me. We set out to explore the rapidly vanishing inventory. I saw��three houses in a��day. One was in my target neighborhood. It had a kitchen that needed work but also had a basement that could be finished. The second house was small and cute, but in an area that I wasn���t as familiar with and near busy roads. The third house was a sweet Cape with two bedrooms upstairs and a shared bathroom. Downstairs had a living room with a fireplace, a dining room and a kitchen that overlooked a big unkept yard. A few steps down from the kitchen was a big bonus room with��French doors leading to a deck.

I thought that the bonus room could be turned into a master suite. Most of the homes in the area had just one bathroom. I could see remodeling the house so it had three bedrooms and two baths, renting it out to supplement my meager income, and then moving into it when my daughter went to college in two years.

I put in a bid. It turned out there were many others. I increased my offer by $10,000 and found myself a homeowner.

That was the easy part. An inspection revealed that this cute bank-owned house was hiding all sorts of problems. It needed a new electrical system because the last renter was growing marijuana in the basement and had jerry-rigged all sorts of electrical lines on top of the old knob-and-tube system for his ���grow lights.''

It also had termites, plus some structural issues with the front porch and deck. The budget for repairs was as much as I was planning for the upgrades. Now that the inspection was done, the report��would have to be included in future sales disclosures. I negotiated a better deal and closed on the house.

The biggest problem was where to put the second bathroom. When I bought the house, it seemed like there was an easy solution. There was an old dumbwaiter space that I thought I could use. But it wasn���t level with the bedroom floor. My second choice was to convert a small closet in the living room. But once again, with the split-level layout, that wouldn���t work. I could convert the garage. But garages were at a premium in the city, so I didn���t want to lose it.



I was running out of ideas when a neighbor invited me into his house. Our houses had the exact same floor plan. As he showed me his house, the solution came to me. He had taken three feet from the garage and three feet from the bonus room to carve out a bathroom. I would do the same.

Luckily, my contractor was connected to the planning department, permits were issued, and the budget and plans were set. We went to work.

I had a target rent for the house. My realtor thought it was too high, so I went to rental open houses to check out comparable properties. Those seemed to justify the higher rent. I had nothing to lose except the cost of an ad, so I posted and waited. Finally,��a young couple with a blended family wanted the house. A realtor friend gave me a lease form, we signed the deal and they moved in.

The first year as a landlord was stressful. The family had a break in and insisted I pay for a security system, which I did. The old furnace had to be replaced. I had some minor cosmetic damage that needed to be fixed. But the rent came in regularly.

They gave notice after 18 months. They left the house in good shape and, after a little painting and sprucing��up,��I put the house up for rent again. After a week or so, I had a new tenant, a retired couple who have lived there ever since. They pay regularly and are happy to be there.

A few years later,��I got a better paying��job and was able to get a mortgage on the property, allowing me to pay off the line of credit. I owed an additional $20,000 by the time I settled the loan���the result of the accumulated interest���but the house had appreciated at least four times that amount.

The whole thing was an exciting and scary process. At times, I��would wake up in a cold sweat, imagining all the things that could go wrong. Still, every time I had a problem, I was able to find someone who could help me solve it. I���m grateful for my good luck.

Theresa��Sarappo recently retired after a career in digital marketing. She���s now exploring freelance writing, photoshop and photography, while also traveling the country in her 31-foot travel trailer. Terri can be contacted through LinkedIn.

The post Betting the Ranch appeared first on HumbleDollar.