Jonathan Clements's Blog, page 219
April 8, 2022
Ditching Bonds
THE RECENT CARNAGE in bonds has been unusually fierce. The Bloomberg Aggregate Bond Index is down��more than 7% year-to-date. Unfortunately, this may be the tip of a very large iceberg. I believe we may be standing on the precipice of a multi-decade bear market for bonds.
The reason for my concern can be summed up in one word: inflation. It���s the great enemy of bond investors���and yet, despite an inflation rate that���s at four-decade highs, investors remain far too complacent.
Evidence for this can be seen in the 10-year breakeven rate���the difference in yields between the conventional 10-year Treasury note and 10-year Treasury Inflation-Protected Securities (TIPS)���which now stands at around 2.8%. That implies investors expect inflation to average just under 3% over the next decade. While that number is at multi-decade highs, it could still be too rosy.
Despite the painful bond market decline, the yield to maturity for the broad bond market stands isn't much above 2%, which is deeply negative after subtracting the rate of inflation. Since pronouncing the demise of the 60% stock-40% bond portfolio, I���ve pared back my bond holdings���with the exception of inflation-linked Series I savings bonds���from nearly 15% in early January to 5.5% today, using some of the proceeds to buy more international stocks.
The four most dangerous words in investing are, ���This time it���s different.��� Still, I believe my bearish view on bonds is rooted in fact, not fear. Here are five reasons investors may want to rethink their long-term bond allocation:
1. Real bond yields remain deeply negative.
The inflation rate has been between 7% and 8% over the past three months, based on the Consumer Price Index. The 30-year Treasury now yields 2.67% nominal or about -5% in real terms, assuming an inflation rate of 7.5%. Sure, inflation may eventually fall back to lower levels. But it would need to recede to 2% for real yields to rise above zero. I don���t think that���s in the cards, as I���ll explain in point No. 2.
As a bond investor, there���s isn���t much guesswork when figuring out the returns you���ll likely receive. You need only look at a bond fund���s yield to maturity. Vanguard Total Bond Market Index Fund (symbol: VBTLX) has a yield to maturity of 2.3%, far below the current inflation rate. I don���t know about you, but investing in an asset with a guaranteed negative real return isn���t too compelling.
2. Resurgent inflation is a game-changer.
Over most of the past three decades, we���ve enjoyed sub-3% inflation. Those days may be over. In their recent book, The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, economists Charles Goodhart and Manoj Pradhan argue that we will experience resurgent inflation over the coming decades.
If this is true, the Federal Reserve is in a box. It must choose between fighting inflation or preserving economic growth���it can���t do both. If the Fed goes down its current path of raising interest rates and reversing quantitative easing (QE), the economy will slow and most likely head into recession. Both rising interest rates and quantitative tightening mean lower bond prices.
On the other hand, if the Fed pivots to save the economy by lowering interest rates and resuming QE, that���ll add further fuel to the inflation fire. Higher inflation means lower���even negative���real returns for bond investors.
In short, there���s almost no way for bond investors to win. To be sure, it���s conceivable that nominal yields fall���or are driven down by the Fed���toward zero, which would push bond prices higher. But that���s like picking up pennies in front of a steamroller. The risks outweigh the rewards.
3. Bond bear markets can be brutal.
Everyone knows that bear markets in stocks can be punishing. But stock bear markets are mercifully short, averaging just under 10 months. While the bond market is far less volatile year to year, bond investors may instead suffer a death by a thousand cuts. Those cuts are inflicted by���you guessed it���inflation.
A picture is worth a thousand words. Look at the chart titled ���Inflation-Adjusted Government Bond Drawdowns: 1926-2017,��� courtesy of financial blogger Ben Carlson. Long-term government bonds experienced an after-inflation 60% decline over a period lasting almost 50 years. Five-year bonds didn���t fare much better, suffering a loss of 40% over the same time frame.
4. Bond investors remain complacent about inflation.
Perhaps I���ve convinced you that the outlook for bonds is poor. But could the bad news be priced in already? After all, some of the best investments are made when the news is bleak but what���s priced in is even worse.
Unfortunately, I fear the opposite is true. As I mentioned earlier, the 10-year inflation breakeven implies investors expect roughly 3% inflation over the next decade. That���s far too sanguine.
Let���s look at bonds from the viewpoint of stocks. A bond���s price-earnings (P/E) ratio is just the inverse of its yield to maturity. Vanguard���s total bond market fund has a yield to maturity of 2.3%. That corresponds to a P/E ratio of 43.5. By comparison, at the height of the dot-com bubble in 1999, the cyclically adjusted price-earnings (CAPE) ratio for U.S. stocks was 44.2. Today, the CAPE ratio for stocks stands at 36.5.
When looking at numbers like these, some will argue that the U.S. stock market is not overpriced. Maybe, maybe not. But one thing is clear: Bonds are expensive.
5. Could Treasurys be downgraded���again?
While bonds are typically thought of as the safe portion of a portfolio, it���s worth reviewing the risk of owning bonds. There���s interest rate risk, namely the risk that bond prices will fall should interest rates rise. That risk can be quantified by a bond���s duration���the longer the duration, the larger the interest rate risk.
There���s also inflation risk, which we���ve discussed already. Finally, there���s credit risk, sometimes called default risk. U.S. Treasury bonds are considered to have negligible credit risk, as they���re backed by the full faith and credit of the U.S. government.
In 2011, Standard & Poor downgraded the credit rating for the U.S. one notch to AA+, down from its top rating of AAA. Moody���s and Fitch have maintained their highest credit rating for the U.S.
I���m not predicting another downgrade anytime soon. But the numbers are not reassuring. Total public debt as a percent of gross domestic product peaked at around 136% in 2020 and stands at 123% today. The cost to service that debt could put the Treasury in a real bind, should interest rates rise from today���s historically low levels. No one is talking about this sort of credit risk, but that doesn���t mean it doesn���t exist.
I want to be clear. I���m not suggesting that you make radical changes to your portfolio���s asset allocation. Nor do I suggest you replace your bonds with stocks. Stocks are far risker than bonds, especially in the short term.
But I do think it���s important to give greater thought to the real risks���pun intended���bonds carry in a regime of higher inflation. As I mentioned earlier, I have pared my bond allocation significantly. My largest bond holding is in a TIPS bond fund, as such funds are protected against inflation risk���though they are still subject to interest rate risk. I also plan to continue buying Series I savings bonds, though the major drawback is the $10,000 purchase limit per year.
As readers of my previous articles will know, I also have significant holdings of gold and gold mining companies. Gold has served as a store of value for many millennia and, cryptocurrencies notwithstanding, I expect it to remain so. Gold is particularly attractive when real bond yields are negative, as they are today.
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.
The reason for my concern can be summed up in one word: inflation. It���s the great enemy of bond investors���and yet, despite an inflation rate that���s at four-decade highs, investors remain far too complacent.
Evidence for this can be seen in the 10-year breakeven rate���the difference in yields between the conventional 10-year Treasury note and 10-year Treasury Inflation-Protected Securities (TIPS)���which now stands at around 2.8%. That implies investors expect inflation to average just under 3% over the next decade. While that number is at multi-decade highs, it could still be too rosy.
Despite the painful bond market decline, the yield to maturity for the broad bond market stands isn't much above 2%, which is deeply negative after subtracting the rate of inflation. Since pronouncing the demise of the 60% stock-40% bond portfolio, I���ve pared back my bond holdings���with the exception of inflation-linked Series I savings bonds���from nearly 15% in early January to 5.5% today, using some of the proceeds to buy more international stocks.
The four most dangerous words in investing are, ���This time it���s different.��� Still, I believe my bearish view on bonds is rooted in fact, not fear. Here are five reasons investors may want to rethink their long-term bond allocation:
1. Real bond yields remain deeply negative.
The inflation rate has been between 7% and 8% over the past three months, based on the Consumer Price Index. The 30-year Treasury now yields 2.67% nominal or about -5% in real terms, assuming an inflation rate of 7.5%. Sure, inflation may eventually fall back to lower levels. But it would need to recede to 2% for real yields to rise above zero. I don���t think that���s in the cards, as I���ll explain in point No. 2.
As a bond investor, there���s isn���t much guesswork when figuring out the returns you���ll likely receive. You need only look at a bond fund���s yield to maturity. Vanguard Total Bond Market Index Fund (symbol: VBTLX) has a yield to maturity of 2.3%, far below the current inflation rate. I don���t know about you, but investing in an asset with a guaranteed negative real return isn���t too compelling.
2. Resurgent inflation is a game-changer.
Over most of the past three decades, we���ve enjoyed sub-3% inflation. Those days may be over. In their recent book, The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, economists Charles Goodhart and Manoj Pradhan argue that we will experience resurgent inflation over the coming decades.
If this is true, the Federal Reserve is in a box. It must choose between fighting inflation or preserving economic growth���it can���t do both. If the Fed goes down its current path of raising interest rates and reversing quantitative easing (QE), the economy will slow and most likely head into recession. Both rising interest rates and quantitative tightening mean lower bond prices.
On the other hand, if the Fed pivots to save the economy by lowering interest rates and resuming QE, that���ll add further fuel to the inflation fire. Higher inflation means lower���even negative���real returns for bond investors.
In short, there���s almost no way for bond investors to win. To be sure, it���s conceivable that nominal yields fall���or are driven down by the Fed���toward zero, which would push bond prices higher. But that���s like picking up pennies in front of a steamroller. The risks outweigh the rewards.
3. Bond bear markets can be brutal.
Everyone knows that bear markets in stocks can be punishing. But stock bear markets are mercifully short, averaging just under 10 months. While the bond market is far less volatile year to year, bond investors may instead suffer a death by a thousand cuts. Those cuts are inflicted by���you guessed it���inflation.
A picture is worth a thousand words. Look at the chart titled ���Inflation-Adjusted Government Bond Drawdowns: 1926-2017,��� courtesy of financial blogger Ben Carlson. Long-term government bonds experienced an after-inflation 60% decline over a period lasting almost 50 years. Five-year bonds didn���t fare much better, suffering a loss of 40% over the same time frame.
4. Bond investors remain complacent about inflation.
Perhaps I���ve convinced you that the outlook for bonds is poor. But could the bad news be priced in already? After all, some of the best investments are made when the news is bleak but what���s priced in is even worse.
Unfortunately, I fear the opposite is true. As I mentioned earlier, the 10-year inflation breakeven implies investors expect roughly 3% inflation over the next decade. That���s far too sanguine.
Let���s look at bonds from the viewpoint of stocks. A bond���s price-earnings (P/E) ratio is just the inverse of its yield to maturity. Vanguard���s total bond market fund has a yield to maturity of 2.3%. That corresponds to a P/E ratio of 43.5. By comparison, at the height of the dot-com bubble in 1999, the cyclically adjusted price-earnings (CAPE) ratio for U.S. stocks was 44.2. Today, the CAPE ratio for stocks stands at 36.5.
When looking at numbers like these, some will argue that the U.S. stock market is not overpriced. Maybe, maybe not. But one thing is clear: Bonds are expensive.
5. Could Treasurys be downgraded���again?
While bonds are typically thought of as the safe portion of a portfolio, it���s worth reviewing the risk of owning bonds. There���s interest rate risk, namely the risk that bond prices will fall should interest rates rise. That risk can be quantified by a bond���s duration���the longer the duration, the larger the interest rate risk.
There���s also inflation risk, which we���ve discussed already. Finally, there���s credit risk, sometimes called default risk. U.S. Treasury bonds are considered to have negligible credit risk, as they���re backed by the full faith and credit of the U.S. government.
In 2011, Standard & Poor downgraded the credit rating for the U.S. one notch to AA+, down from its top rating of AAA. Moody���s and Fitch have maintained their highest credit rating for the U.S.
I���m not predicting another downgrade anytime soon. But the numbers are not reassuring. Total public debt as a percent of gross domestic product peaked at around 136% in 2020 and stands at 123% today. The cost to service that debt could put the Treasury in a real bind, should interest rates rise from today���s historically low levels. No one is talking about this sort of credit risk, but that doesn���t mean it doesn���t exist.
I want to be clear. I���m not suggesting that you make radical changes to your portfolio���s asset allocation. Nor do I suggest you replace your bonds with stocks. Stocks are far risker than bonds, especially in the short term.
But I do think it���s important to give greater thought to the real risks���pun intended���bonds carry in a regime of higher inflation. As I mentioned earlier, I have pared my bond allocation significantly. My largest bond holding is in a TIPS bond fund, as such funds are protected against inflation risk���though they are still subject to interest rate risk. I also plan to continue buying Series I savings bonds, though the major drawback is the $10,000 purchase limit per year.
As readers of my previous articles will know, I also have significant holdings of gold and gold mining companies. Gold has served as a store of value for many millennia and, cryptocurrencies notwithstanding, I expect it to remain so. Gold is particularly attractive when real bond yields are negative, as they are today.
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.The post Ditching Bonds appeared first on HumbleDollar.
April 7, 2022
Seven Figure Sale
MY WIFE DECIDED to sell the house she bought before we were married. We���re both retired and I view it as another step in our ongoing efforts to simplify our financial lives as we age.
My wife and I interviewed a real estate agent who was recommended by a friend. Steven suggested we do some minor repairs before listing the house. Steven also gave us his opinion on the sale price. He told my wife she had a nice little starter home and we should list it in the middle of the estimated price range. That way, there���d be a better chance of getting multiple bids that would drive the price much higher.
Steven, who is Chinese-American, recommended a sale price of $968,000. I almost fell down when I heard that number. A starter home commanding almost $1 million doesn���t sound right. I know this is California, where real estate prices are through the roof, but this seems unrealistic.
My wife gave me some insight into how Steven came up with that price. She said, ���Six and eight are lucky numbers in Chinese culture.��� I guess it doesn���t hurt to have a little luck on our side. But that didn���t explain the most important number���the number nine.
The size of the house is 1,154 square feet. If you divide the $968,000 asking price by the square footage, a buyer would be paying $839 per square foot. That seemed awfully high for a home in a middle-class neighborhood.
The house does sit on a decent-size lot, so someone could easily add on to the house. But how could a first-time buyer afford to do that after spending that kind of money to buy the place?
One day, when I was over at the house watering and making sure everything was in order for a prospective buyer, a real estate agent and his client approached me. They wanted to know if the list price of $968,000 was the price we���d accept. I wasn���t sure how to answer. I told them they should talk to our agent.
After I thought about it, they must have thought we���d already received an offer above our asking price. Steven was right about listing the house at a price that wasn���t too high. The strategy did indeed ignite a bidding war for the house. We had multiple buyers bidding against each other. That drove the sale price of the house well over what we expected.
The main reason this bidding war occurred: Demand for housing far exceeds supply in Southern California. My wife���s house was one of only a few in the area that was for sale.
Although it wasn���t the highest bid, my wife accepted a bid from a couple because they had a mortgage preapproval letter and wrote a nice note about how much they wanted the house. It���s hard to believe my wife���s 1,154-square-foot starter home sold for more than $1 million.
I wanted my wife to sell the house two years ago, but a real estate agent we talked to thought we should wait. He was right. Real estate prices have increased quite a bit since then. Since the start of the pandemic, the number of U.S. homes worth $1 million or more has doubled, with a record 1 in 12 residences exceeding that figure.
If it was my house, I still would have sold it back in 2020. The agent knew it at the time. He made sure I wouldn���t undermine his advice by asking me, ���If you sold the house, what would you do with the money?��� He also said, ���The stock market is at an all-time high and interest rates are close to an all-time low.���
My wife looked at me, waiting for my answer. I had none. If I told her to invest in a broad-based stock index fund and the market nosedived, I'd have felt terrible.
We rented the house for a year. I never wanted to be a landlord, especially in retirement. My parents owned an apartment building when I was growing up. I saw the problems they experienced.
I remember my dad telling me about one tenant waking him up late one night to complain about her husband. He hadn���t come home, and she thought he was out with another woman. My dad didn���t know what she wanted him to do. I think she just needed someone to talk to.
I told my wife we needed to protect ourselves from lawsuits if we were going to rent her house. I called our insurance agent and said I wanted to increase our umbrella liability policy to $5 million. My wife thought I was crazy and so did our agent.
Now that the house is sold, I have an answer for my wife about what she could do with the proceeds from the house. I would tell her this: ���We probably won���t need the money. We skimped and saved most of our lives. We have a financially secure retirement. Why don���t you plan on leaving the money to your son? You can invest the money in the stock market over a six-month period. There���s no need to be concerned about market volatility. You're investing for his future, not ours. This money will compound over many decades, helping him reach financial freedom. It would be a great way to leave a legacy.���
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.
My wife and I interviewed a real estate agent who was recommended by a friend. Steven suggested we do some minor repairs before listing the house. Steven also gave us his opinion on the sale price. He told my wife she had a nice little starter home and we should list it in the middle of the estimated price range. That way, there���d be a better chance of getting multiple bids that would drive the price much higher.
Steven, who is Chinese-American, recommended a sale price of $968,000. I almost fell down when I heard that number. A starter home commanding almost $1 million doesn���t sound right. I know this is California, where real estate prices are through the roof, but this seems unrealistic.
My wife gave me some insight into how Steven came up with that price. She said, ���Six and eight are lucky numbers in Chinese culture.��� I guess it doesn���t hurt to have a little luck on our side. But that didn���t explain the most important number���the number nine.
The size of the house is 1,154 square feet. If you divide the $968,000 asking price by the square footage, a buyer would be paying $839 per square foot. That seemed awfully high for a home in a middle-class neighborhood.
The house does sit on a decent-size lot, so someone could easily add on to the house. But how could a first-time buyer afford to do that after spending that kind of money to buy the place?
One day, when I was over at the house watering and making sure everything was in order for a prospective buyer, a real estate agent and his client approached me. They wanted to know if the list price of $968,000 was the price we���d accept. I wasn���t sure how to answer. I told them they should talk to our agent.
After I thought about it, they must have thought we���d already received an offer above our asking price. Steven was right about listing the house at a price that wasn���t too high. The strategy did indeed ignite a bidding war for the house. We had multiple buyers bidding against each other. That drove the sale price of the house well over what we expected.
The main reason this bidding war occurred: Demand for housing far exceeds supply in Southern California. My wife���s house was one of only a few in the area that was for sale.
Although it wasn���t the highest bid, my wife accepted a bid from a couple because they had a mortgage preapproval letter and wrote a nice note about how much they wanted the house. It���s hard to believe my wife���s 1,154-square-foot starter home sold for more than $1 million.
I wanted my wife to sell the house two years ago, but a real estate agent we talked to thought we should wait. He was right. Real estate prices have increased quite a bit since then. Since the start of the pandemic, the number of U.S. homes worth $1 million or more has doubled, with a record 1 in 12 residences exceeding that figure.
If it was my house, I still would have sold it back in 2020. The agent knew it at the time. He made sure I wouldn���t undermine his advice by asking me, ���If you sold the house, what would you do with the money?��� He also said, ���The stock market is at an all-time high and interest rates are close to an all-time low.���
My wife looked at me, waiting for my answer. I had none. If I told her to invest in a broad-based stock index fund and the market nosedived, I'd have felt terrible.
We rented the house for a year. I never wanted to be a landlord, especially in retirement. My parents owned an apartment building when I was growing up. I saw the problems they experienced.
I remember my dad telling me about one tenant waking him up late one night to complain about her husband. He hadn���t come home, and she thought he was out with another woman. My dad didn���t know what she wanted him to do. I think she just needed someone to talk to.
I told my wife we needed to protect ourselves from lawsuits if we were going to rent her house. I called our insurance agent and said I wanted to increase our umbrella liability policy to $5 million. My wife thought I was crazy and so did our agent.
Now that the house is sold, I have an answer for my wife about what she could do with the proceeds from the house. I would tell her this: ���We probably won���t need the money. We skimped and saved most of our lives. We have a financially secure retirement. Why don���t you plan on leaving the money to your son? You can invest the money in the stock market over a six-month period. There���s no need to be concerned about market volatility. You're investing for his future, not ours. This money will compound over many decades, helping him reach financial freedom. It would be a great way to leave a legacy.���
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.The post Seven Figure Sale appeared first on HumbleDollar.
April 6, 2022
Still Resolute
AT THE BEGINNING of 2022, I wrote��about our resolution to go back to grad school. The short update: Jiab and I are indeed doing it. We���re enrolled in the Master of Arts in Interdisciplinary Studies program at the University of Texas at Dallas.
We scrambled to get the application paperwork done before classes started Jan. 18. Neither of us had applied to school for ourselves since the introduction of online registration, but we found it fairly easy. The only holdup was getting our prior transcripts submitted. My undergrad university and law school both said they didn���t have electronic transcripts ���that far back,��� so I had to have hard copies mailed.
A full load is three classes. We opted for two our first semester, so we could get acclimated to school again. Good thing we did. We have a regular weekly assignment load of about 100 pages to read and then writing reflection essays of at least 500 words each. We now complain to our kids that we want to do something but can���t ���because we have homework.���
The age of the students ranges from just out of college to 60���that would be me���with people from all over the world. The exchange of ideas from so many perspectives is magical, though I sometimes listen to the theoretical descriptions of life and think, ���Sorry, it doesn't work like that in the real world, but you���ll find out in your own time.���
One of the most intriguing assignments so far was writing an intellectual autobiography. Basically, it���s a review of the events of your life���both academic and personal���that have shaped how you think today. It was daunting at first, especially as I had almost three times as much life to cover as the fresh-out-of-college kids. But connecting the dots of events and influences was fascinating and extremely helpful for my understanding of my understanding (���metacognition��� in grad jargon). I recommend it as a great exercise. The professor kept saying that the intellectual autobiography would be helpful in future stages of our life, such as looking for a job. I agreed, though I said it���s best use for my future was probably as a first draft for my eulogy.
Jiab and I are determined to keep going. At first, we thought the main motivation to continue would be justifying the tuition we���d paid ($5,462 per person for two courses), plus $250 to $300 in application fees, a parking sticker and books (thank goodness for cheaper or even free online versions of texts). There���s a number of discounted���and even free���tuition programs for seniors, but we didn���t qualify.
We���ve come to love the possibilities that grad school is opening up. Jiab is delving deep into gender discrimination, a topic she can look at critically and with greater distance, now that she doesn���t have to worry about the repercussions from speaking out at her job. Similarly, I���m taking a broad view of media literacy, deciding if I want to focus on education reform or advocating for industry change.
It���s like when you first start exercising to lose weight but, at some point, realize the exercise itself���and the great feeling that you���re doing it���is the reward. We plan to sign up for summer classes and then take the fall off. As Jiab correctly observed, travel will be cheaper then and less crowded.
Now, if you���ll excuse me, I���m on spring break. I gotta show these youngins how to do it ���old school.���
We scrambled to get the application paperwork done before classes started Jan. 18. Neither of us had applied to school for ourselves since the introduction of online registration, but we found it fairly easy. The only holdup was getting our prior transcripts submitted. My undergrad university and law school both said they didn���t have electronic transcripts ���that far back,��� so I had to have hard copies mailed.
A full load is three classes. We opted for two our first semester, so we could get acclimated to school again. Good thing we did. We have a regular weekly assignment load of about 100 pages to read and then writing reflection essays of at least 500 words each. We now complain to our kids that we want to do something but can���t ���because we have homework.���
The age of the students ranges from just out of college to 60���that would be me���with people from all over the world. The exchange of ideas from so many perspectives is magical, though I sometimes listen to the theoretical descriptions of life and think, ���Sorry, it doesn't work like that in the real world, but you���ll find out in your own time.���
One of the most intriguing assignments so far was writing an intellectual autobiography. Basically, it���s a review of the events of your life���both academic and personal���that have shaped how you think today. It was daunting at first, especially as I had almost three times as much life to cover as the fresh-out-of-college kids. But connecting the dots of events and influences was fascinating and extremely helpful for my understanding of my understanding (���metacognition��� in grad jargon). I recommend it as a great exercise. The professor kept saying that the intellectual autobiography would be helpful in future stages of our life, such as looking for a job. I agreed, though I said it���s best use for my future was probably as a first draft for my eulogy.
Jiab and I are determined to keep going. At first, we thought the main motivation to continue would be justifying the tuition we���d paid ($5,462 per person for two courses), plus $250 to $300 in application fees, a parking sticker and books (thank goodness for cheaper or even free online versions of texts). There���s a number of discounted���and even free���tuition programs for seniors, but we didn���t qualify.
We���ve come to love the possibilities that grad school is opening up. Jiab is delving deep into gender discrimination, a topic she can look at critically and with greater distance, now that she doesn���t have to worry about the repercussions from speaking out at her job. Similarly, I���m taking a broad view of media literacy, deciding if I want to focus on education reform or advocating for industry change.
It���s like when you first start exercising to lose weight but, at some point, realize the exercise itself���and the great feeling that you���re doing it���is the reward. We plan to sign up for summer classes and then take the fall off. As Jiab correctly observed, travel will be cheaper then and less crowded.
Now, if you���ll excuse me, I���m on spring break. I gotta show these youngins how to do it ���old school.���
The post Still Resolute appeared first on HumbleDollar.
April 5, 2022
Affordable Care?
WHEN PLANNING OUR early retirement, I realized that getting and paying for health insurance for my wife and me would be our biggest financial challenge.
Before 2010���s Affordable Care Act (ACA) took effect in 2014, we talked to an insurance agent who gathered our medical histories and submitted them to insurers for consideration. Despite two major surgeries, I was deemed insurable. My wife, due to a congenital condition that had never caused a problem but might, was not.
When I actually retired, it was six months before key provisions of the ACA kicked in. We continued my employer���s coverage through COBRA to cover the gap and then switched to coverage under the ACA. That means I���ve been insured through the health care exchange created by the ACA for the entire time of its existence. My wife was also on an ACA plan until she enrolled in Medicare two years ago.
Under the ACA, we���ve watched premiums escalate far faster than inflation. Our doctor of 25 years dropped us. And our choices for in-network hospital care got tighter and tighter.
Being relatively healthy, each year we chose a bronze-level plan with a high deductible and a health savings account (HSA) option. We fully funded the HSA but stopped using it for current expenses after the first year. We realized it was better to allow the account to grow tax-free to pay for medical expenses later in retirement. We���ve accumulated a tidy sum that way.
From January 2014 until my wife entered Medicare in December 2020, we paid $113,000 in ACA premiums. The compound annual increase in our premiums averaged more than 9%. More disconcerting: Our rising premiums bought less coverage. Our deductible rose from $4,000 apiece in 2014 to $7,000 each in 2020. We also went from having a wide network of hospitals available to us to an extremely narrow choice.
When Anthem pulled out of the ACA Ohio market in 2018, the only plan left in our rural county was an HMO that didn���t include our longtime family doctor. Remember the old lie ���if you like your doctor, you can keep him���? He apologized for dumping us, but dump us he did. He said he felt uncomfortable that our restricted HMO network limited his ability to refer out to specialists, if necessary.
The next year, our local hospital dropped our HMO because the insurer was so difficult to deal with. Fortunately, a new plan entered the market that included our community hospital. Still, for more advanced care, the in-network hospital list was extremely limited. There were literally no hospitals included that I would consider true tertiary-level facilities. As a strict HMO, in the event we needed true tertiary or quaternary care, we���d have no coverage.
We then relocated to a metropolitan area where we had more plan choices, albeit at a higher cost. Once again, we were in a tight network, though one with good advanced-care hospital options.
Besides our premiums for those first seven years, we paid out-of-pocket costs of almost $30,000. In only one year did we exceed our deductibles. In that year, our insurance company paid about $5,800 toward an emergency appendectomy. Other than that, we have cost our insurance companies nothing.
We did not elect dental coverage, but our eyes and teeth aged along with us and we���ve incurred bills for glasses and crowns along the way. This added $27,000 in costs over the same seven-year period.
What did we get for our $113,000 in insurance premiums? Three important benefits:
First and foremost, we were protected against a catastrophic claim. Just as I would not like to collect on my life insurance, catastrophic coverage was there if we needed it���most of the time. For 18 months in the one HMO, I���m not sure an in-network hospital could have handled a truly serious case.
Even when I���m paying bills within my deductible, I am paying the rate that the insurance company negotiated. That���s a substantial discount from what the medical providers would otherwise bill.
Insurance coverage was available to us. Before the ACA, my wife was deemed uninsurable in the private market. Only because of ACA could we retire early and obtain insurance coverage.
Like so much federal legislation related to health care, including Medicare and Medicaid, ACA solved real problems, such as coverage for pre-existing conditions. In the beginning, insurance companies underpriced their product. The ACA was truly affordable then. But the years that followed eroded affordability as reality kicked in.
First, insurers began to retrench. Some plans left the market while others expanded. Efforts to keep the premiums affordable were accompanied by higher deductibles and tightened networks.
Today, ACA health care coverage is no longer ���affordable,��� and I���ve concluded that Congress cannot legislate affordability. My single-coverage premium in 2022 is higher than we paid to insure both of us in 2014. To be sure, I���m now nine years older���and premiums tend to climb sharply once you���re in your 60s.
The promise of covering the uninsured was equally pie-in-the-sky. Even with subsidies, 30 million Americans under age 65 remain uninsured, according to the federal government. Still, the percentage of Americans under 65 who are uninsured was 10.8% as of 2020���s second quarter, down from 18.2% in 2010.
If you���re considering early retirement without the continuation of employment-based health insurance, you need to budget carefully. Realize, however, that insurance coverage is about more than simply affording the premiums and deductibles. If you have a significant health issue, the network of doctors and hospitals available to you will be of prime importance. Coverage and choices vary by county. You may need to move if you live where coverage is limited. Start early and plan carefully.
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.
Before 2010���s Affordable Care Act (ACA) took effect in 2014, we talked to an insurance agent who gathered our medical histories and submitted them to insurers for consideration. Despite two major surgeries, I was deemed insurable. My wife, due to a congenital condition that had never caused a problem but might, was not.
When I actually retired, it was six months before key provisions of the ACA kicked in. We continued my employer���s coverage through COBRA to cover the gap and then switched to coverage under the ACA. That means I���ve been insured through the health care exchange created by the ACA for the entire time of its existence. My wife was also on an ACA plan until she enrolled in Medicare two years ago.
Under the ACA, we���ve watched premiums escalate far faster than inflation. Our doctor of 25 years dropped us. And our choices for in-network hospital care got tighter and tighter.
Being relatively healthy, each year we chose a bronze-level plan with a high deductible and a health savings account (HSA) option. We fully funded the HSA but stopped using it for current expenses after the first year. We realized it was better to allow the account to grow tax-free to pay for medical expenses later in retirement. We���ve accumulated a tidy sum that way.
From January 2014 until my wife entered Medicare in December 2020, we paid $113,000 in ACA premiums. The compound annual increase in our premiums averaged more than 9%. More disconcerting: Our rising premiums bought less coverage. Our deductible rose from $4,000 apiece in 2014 to $7,000 each in 2020. We also went from having a wide network of hospitals available to us to an extremely narrow choice.
When Anthem pulled out of the ACA Ohio market in 2018, the only plan left in our rural county was an HMO that didn���t include our longtime family doctor. Remember the old lie ���if you like your doctor, you can keep him���? He apologized for dumping us, but dump us he did. He said he felt uncomfortable that our restricted HMO network limited his ability to refer out to specialists, if necessary.
The next year, our local hospital dropped our HMO because the insurer was so difficult to deal with. Fortunately, a new plan entered the market that included our community hospital. Still, for more advanced care, the in-network hospital list was extremely limited. There were literally no hospitals included that I would consider true tertiary-level facilities. As a strict HMO, in the event we needed true tertiary or quaternary care, we���d have no coverage.
We then relocated to a metropolitan area where we had more plan choices, albeit at a higher cost. Once again, we were in a tight network, though one with good advanced-care hospital options.
Besides our premiums for those first seven years, we paid out-of-pocket costs of almost $30,000. In only one year did we exceed our deductibles. In that year, our insurance company paid about $5,800 toward an emergency appendectomy. Other than that, we have cost our insurance companies nothing.
We did not elect dental coverage, but our eyes and teeth aged along with us and we���ve incurred bills for glasses and crowns along the way. This added $27,000 in costs over the same seven-year period.
What did we get for our $113,000 in insurance premiums? Three important benefits:
First and foremost, we were protected against a catastrophic claim. Just as I would not like to collect on my life insurance, catastrophic coverage was there if we needed it���most of the time. For 18 months in the one HMO, I���m not sure an in-network hospital could have handled a truly serious case.
Even when I���m paying bills within my deductible, I am paying the rate that the insurance company negotiated. That���s a substantial discount from what the medical providers would otherwise bill.
Insurance coverage was available to us. Before the ACA, my wife was deemed uninsurable in the private market. Only because of ACA could we retire early and obtain insurance coverage.
Like so much federal legislation related to health care, including Medicare and Medicaid, ACA solved real problems, such as coverage for pre-existing conditions. In the beginning, insurance companies underpriced their product. The ACA was truly affordable then. But the years that followed eroded affordability as reality kicked in.
First, insurers began to retrench. Some plans left the market while others expanded. Efforts to keep the premiums affordable were accompanied by higher deductibles and tightened networks.
Today, ACA health care coverage is no longer ���affordable,��� and I���ve concluded that Congress cannot legislate affordability. My single-coverage premium in 2022 is higher than we paid to insure both of us in 2014. To be sure, I���m now nine years older���and premiums tend to climb sharply once you���re in your 60s.
The promise of covering the uninsured was equally pie-in-the-sky. Even with subsidies, 30 million Americans under age 65 remain uninsured, according to the federal government. Still, the percentage of Americans under 65 who are uninsured was 10.8% as of 2020���s second quarter, down from 18.2% in 2010.
If you���re considering early retirement without the continuation of employment-based health insurance, you need to budget carefully. Realize, however, that insurance coverage is about more than simply affording the premiums and deductibles. If you have a significant health issue, the network of doctors and hospitals available to you will be of prime importance. Coverage and choices vary by county. You may need to move if you live where coverage is limited. Start early and plan carefully.
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 Affordable Care? appeared first on HumbleDollar.
Side Hassle
THE SIREN SONG of a side hustle is alluring in theory���but not in reality. We���re beset by platitudes such as ���to become wealthy, you need multiple streams of income.��� Many folks, I suspect, take on a side hustle without fully understanding the costs. They imagine it���s an opportunity to monetize their hobbies or interests and achieve their financial goals faster.
Let���s face it: ���Second job��� just doesn���t sound sexy, so financial bloggers and the media favor ���side hustle,��� an apparently more glamorous term. But a side hustle is still a second job���and it takes work.
Some second jobs have obvious downsides. Driving for Uber means giving much of a ride���s fare to the company. There���s also the cost of higher insurance, as well as wear and tear on your vehicle. These prohibitive costs are rarely factored into the original dream of achieving financial freedom.
Of course, many side hustles aren���t driving for Uber but rather starting your own business. Owning a business offers the promise of financial independence, but most businesses require enormous effort and still ultimately fail.
Hustle culture gurus promise tremendous riches if you work hard enough on the right idea. To be sure, some people want to start their own business, no matter what the cost. That���s fine���but I hope they truly understand the tradeoffs and pitfalls.
An important, yet often ignored, part of hustle culture is the opportunity cost of time lost. Side hustles require hours of work outside of your primary job. Rarely does the dream of additional income fully value this lost time, especially if it would have been spent with family and friends.
I took a part-time job and failed��miserably because I wasn���t present for my family. I discovered what pastor John Mark Comer said: ���Both sin and busyness have the exact same effect���they cut off your connection to God, to other people, and even to your own soul.���
Author Stephen Covey instructs us to make decisions by beginning with the end in mind. How about using our ultimate end as our guidepost? Will the side hustle be at our bedside when we die? No, but our family might��be. Time spent nurturing those relationships seems like a much better investment.
Let���s face it: ���Second job��� just doesn���t sound sexy, so financial bloggers and the media favor ���side hustle,��� an apparently more glamorous term. But a side hustle is still a second job���and it takes work.
Some second jobs have obvious downsides. Driving for Uber means giving much of a ride���s fare to the company. There���s also the cost of higher insurance, as well as wear and tear on your vehicle. These prohibitive costs are rarely factored into the original dream of achieving financial freedom.
Of course, many side hustles aren���t driving for Uber but rather starting your own business. Owning a business offers the promise of financial independence, but most businesses require enormous effort and still ultimately fail.
Hustle culture gurus promise tremendous riches if you work hard enough on the right idea. To be sure, some people want to start their own business, no matter what the cost. That���s fine���but I hope they truly understand the tradeoffs and pitfalls.
An important, yet often ignored, part of hustle culture is the opportunity cost of time lost. Side hustles require hours of work outside of your primary job. Rarely does the dream of additional income fully value this lost time, especially if it would have been spent with family and friends.
I took a part-time job and failed��miserably because I wasn���t present for my family. I discovered what pastor John Mark Comer said: ���Both sin and busyness have the exact same effect���they cut off your connection to God, to other people, and even to your own soul.���
Author Stephen Covey instructs us to make decisions by beginning with the end in mind. How about using our ultimate end as our guidepost? Will the side hustle be at our bedside when we die? No, but our family might��be. Time spent nurturing those relationships seems like a much better investment.
The post Side Hassle appeared first on HumbleDollar.
Leaky Insurance
I JUST LEARNED a hard lesson about insurance companies: They have the upper hand.
Water leaked into my ground-floor condo���s bathroom and laundry room from a unit two floors above. The unit owner offered to report the damage to his insurance company, but I decided I should call mine for advice. A rep told me that I could file claims with my insurer and it would then seek compensation from the other unit���s insurance through subrogation, a term I had to look up.
According to Investopedia, ���Subrogation is a term describing a right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.���
I decided it was safer to file with my insurance company, Security First, where I had been a customer for many years. The result of this decision: It canceled my policy and I was forced to obtain a new policy from a different company that���ll cost me $120 more per year.
When I asked why I was being canceled, Security First said it couldn���t prove negligence by the other unit���s owner, so it had to pay my claims. On top of that, my claims counted as two instances���and two water damage claims made in a year result in cancellation. I just wish the company had stated this possibility more explicitly before I filed my claims.
If I���d known two claims would cancel my policy, I wouldn���t have filed the claim on my laundry room leak because the ceiling was just wet. By contrast, the bathroom leak damaged the drywall above and behind the shower spigot.
The adjuster said the damage in the laundry room was less than my policy���s $500 deductible, so I received nothing on that claim���and yet it cost me my insurance. Perhaps this is disclosed in the fine print of my policy, but has anyone ever actually read an entire insurance policy?
I called my state insurance commissioner���s office, and a worker there explained that insurance companies have this right. The worker also offered this depressing scenario: She said I could have several car accidents that weren���t my fault, and I could then have my auto policy canceled. I never thought about that possibility before. I guess I need to drive even more defensively���and maybe move to a top floor.
Water leaked into my ground-floor condo���s bathroom and laundry room from a unit two floors above. The unit owner offered to report the damage to his insurance company, but I decided I should call mine for advice. A rep told me that I could file claims with my insurer and it would then seek compensation from the other unit���s insurance through subrogation, a term I had to look up.
According to Investopedia, ���Subrogation is a term describing a right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.���
I decided it was safer to file with my insurance company, Security First, where I had been a customer for many years. The result of this decision: It canceled my policy and I was forced to obtain a new policy from a different company that���ll cost me $120 more per year.
When I asked why I was being canceled, Security First said it couldn���t prove negligence by the other unit���s owner, so it had to pay my claims. On top of that, my claims counted as two instances���and two water damage claims made in a year result in cancellation. I just wish the company had stated this possibility more explicitly before I filed my claims.
If I���d known two claims would cancel my policy, I wouldn���t have filed the claim on my laundry room leak because the ceiling was just wet. By contrast, the bathroom leak damaged the drywall above and behind the shower spigot.
The adjuster said the damage in the laundry room was less than my policy���s $500 deductible, so I received nothing on that claim���and yet it cost me my insurance. Perhaps this is disclosed in the fine print of my policy, but has anyone ever actually read an entire insurance policy?
I called my state insurance commissioner���s office, and a worker there explained that insurance companies have this right. The worker also offered this depressing scenario: She said I could have several car accidents that weren���t my fault, and I could then have my auto policy canceled. I never thought about that possibility before. I guess I need to drive even more defensively���and maybe move to a top floor.
The post Leaky Insurance appeared first on HumbleDollar.
Getting Out the Vote
JERRY SEINFELD tells a story about visiting the post office and noticing a wanted poster on the wall. He looks at the poster and checks the guy standing behind him. ���If it���s not him,��� he says, ���I feel I���ve done my part.���
I own some individual stocks, so it���s that time of the year when I vote my proxies. I do the best I can at trying to understand the issues. Sometimes, I wonder whether I���ve really accomplished anything. Just like Jerry, though, when it���s all over, I feel ���I���ve done my part.���
When I was younger and busier, I would stack the proxies and their associated annual reports on my desk and methodically go through them, trying to give each its due and then casting my vote accordingly. Now that I���m retired and have more free time, I can���t be bothered. I use the following shortcuts to allow me to vote as efficiently���meaning as quickly���as possible:
I vote for all proposals that would require an independent chairman. If I owned 100% of a company and employed a CEO, I would immediately fire him if he asked to be chair of the board. Why should a publicly owned company be any different?
Having an independent chair just makes common sense from a governance perspective. How can management manage themselves? Additionally, if a CEO has such little self-confidence as to demand to also be the chair, an investor needs to wonder about his or her leadership ability.
I vote against so-called classified boards, which have directors serving different term lengths. When I was employed, my performance was reviewed annually. Why should a company���s directors be any different?
I don���t vote for executive pay packages that include options. Since I own shares of a company���s stock, why would I want to incentivize executives with options?
After using these three heuristics, I then spend time only on proxies that pique my interest. This is what has piqued me so far this year:
1. H. Horton appointed Benjamin S. Carson to the board in April 2021 and he is now running for a permanent seat. Politics aside, what sense does it make to have a medical doctor, however talented, on the board of a company that builds houses?
Also, anyone who touts oleander extract as a cure for COVID based on the��word of the My Pillow Guy should not be on the board of any company. This was an easy vote against Dr. Carson, though I would love to know WTF is going on.
2. Myra K. Young of Elkgrove, California, proposed that Agilent give 10% of shareholders the power to call a special shareholder meeting. Despite Agilent pleading that 10% was too low a threshold, I voted for Ms. Young���s proposal, thinking, ���What the hell?���
3. An unknown shareholder of the Boeing Corp.��proposed that Boeing create a report listing all its charitable contributions greater than $999. The board���s two-page response against the proposal seemed like overkill. It never mentioned anything detrimental that would come of the proposal.
I felt that the time it took to generate the response could have been used to generate the requested list, so I voted for the proposal. I also voted against any director who was on the board in the runup to the whole 737 MAX debacle.
4. The Jay Stanley Weisfeld Trust of Rochester, Vermont, proposed that IBM prepare ���a public report assessing the potential risks to the company associated with its use of concealment clauses in the context of harassment, discrimination and other unlawful acts.��� In the time the IBM board took to recommend a vote against the proposal���saying that ���IBM does not prevent employees from discussing the terms and conditions of their employment������it could have published the report, unless, of course, it does unethically use concealment clauses.
Companies may legitimately use concealment clauses in employment agreements to protect corporate information, such as intellectual capital and trade secrets. But many companies use concealment clauses to limit their workers��� right to speak openly about harassment, discrimination and other unlawful acts.
I must admit, before reading this specific proposal, I didn���t know what a concealment clause was or why it was used. It appears this was all stirred up by Apple���s recent unsuccessful��attempt to exclude a similar proposal from its annual shareholder meeting, which in the end was voted down. After reading this IBM proposal, I felt the whole thing kind of stinks, so I voted for the proposal.
5. The DI Foundation proposed that, by the end of 2022, Enbridge���the oil and gas (O&G) pipeline company���"strengthen its net zero commitment such that the commitment is consistent with a science-based, net zero target.���
Now, as a former O&G man myself, I may not be the most impartial net-zero observer. But asking the largest pipeline in North America to work to ���develop, communicate, and implement a decarbonisation strategy��� seems a little much. What���s next, asking Philip Morris to work towards a net-zero cigarette target?
It���s only about halfway through the proxy season and it���s all starting to get a little old. I���m thinking I should either come up with a shorter heuristic���or sell some of my stocks.
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.
I own some individual stocks, so it���s that time of the year when I vote my proxies. I do the best I can at trying to understand the issues. Sometimes, I wonder whether I���ve really accomplished anything. Just like Jerry, though, when it���s all over, I feel ���I���ve done my part.���
When I was younger and busier, I would stack the proxies and their associated annual reports on my desk and methodically go through them, trying to give each its due and then casting my vote accordingly. Now that I���m retired and have more free time, I can���t be bothered. I use the following shortcuts to allow me to vote as efficiently���meaning as quickly���as possible:
I vote for all proposals that would require an independent chairman. If I owned 100% of a company and employed a CEO, I would immediately fire him if he asked to be chair of the board. Why should a publicly owned company be any different?
Having an independent chair just makes common sense from a governance perspective. How can management manage themselves? Additionally, if a CEO has such little self-confidence as to demand to also be the chair, an investor needs to wonder about his or her leadership ability.
I vote against so-called classified boards, which have directors serving different term lengths. When I was employed, my performance was reviewed annually. Why should a company���s directors be any different?
I don���t vote for executive pay packages that include options. Since I own shares of a company���s stock, why would I want to incentivize executives with options?
After using these three heuristics, I then spend time only on proxies that pique my interest. This is what has piqued me so far this year:
1. H. Horton appointed Benjamin S. Carson to the board in April 2021 and he is now running for a permanent seat. Politics aside, what sense does it make to have a medical doctor, however talented, on the board of a company that builds houses?
Also, anyone who touts oleander extract as a cure for COVID based on the��word of the My Pillow Guy should not be on the board of any company. This was an easy vote against Dr. Carson, though I would love to know WTF is going on.
2. Myra K. Young of Elkgrove, California, proposed that Agilent give 10% of shareholders the power to call a special shareholder meeting. Despite Agilent pleading that 10% was too low a threshold, I voted for Ms. Young���s proposal, thinking, ���What the hell?���
3. An unknown shareholder of the Boeing Corp.��proposed that Boeing create a report listing all its charitable contributions greater than $999. The board���s two-page response against the proposal seemed like overkill. It never mentioned anything detrimental that would come of the proposal.
I felt that the time it took to generate the response could have been used to generate the requested list, so I voted for the proposal. I also voted against any director who was on the board in the runup to the whole 737 MAX debacle.
4. The Jay Stanley Weisfeld Trust of Rochester, Vermont, proposed that IBM prepare ���a public report assessing the potential risks to the company associated with its use of concealment clauses in the context of harassment, discrimination and other unlawful acts.��� In the time the IBM board took to recommend a vote against the proposal���saying that ���IBM does not prevent employees from discussing the terms and conditions of their employment������it could have published the report, unless, of course, it does unethically use concealment clauses.
Companies may legitimately use concealment clauses in employment agreements to protect corporate information, such as intellectual capital and trade secrets. But many companies use concealment clauses to limit their workers��� right to speak openly about harassment, discrimination and other unlawful acts.
I must admit, before reading this specific proposal, I didn���t know what a concealment clause was or why it was used. It appears this was all stirred up by Apple���s recent unsuccessful��attempt to exclude a similar proposal from its annual shareholder meeting, which in the end was voted down. After reading this IBM proposal, I felt the whole thing kind of stinks, so I voted for the proposal.
5. The DI Foundation proposed that, by the end of 2022, Enbridge���the oil and gas (O&G) pipeline company���"strengthen its net zero commitment such that the commitment is consistent with a science-based, net zero target.���
Now, as a former O&G man myself, I may not be the most impartial net-zero observer. But asking the largest pipeline in North America to work to ���develop, communicate, and implement a decarbonisation strategy��� seems a little much. What���s next, asking Philip Morris to work towards a net-zero cigarette target?
It���s only about halfway through the proxy season and it���s all starting to get a little old. I���m thinking I should either come up with a shorter heuristic���or sell some of my stocks.
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 Getting Out the Vote appeared first on HumbleDollar.
April 4, 2022
Fleeing the Taxman
NEW HAMPSHIRE���S state motto is ���live free or die.��� But for my wife and me, the first part might be better expressed as ���live tax-free.���
We just moved to New Hampshire from Maryland. The move���s main purpose is to be near our kids, enjoy lake and mountain activities, and experience cooler summers. But New Hampshire���s zero tax rate on earned income, pensions and capital gains is a major bonus.
Eight states have no tax on personal income, capital gains or pensions: Texas, Florida, Wyoming, Alaska, Washington, Tennessee, South Dakota and Nevada. New Hampshire currently has a 5% tax on interest and dividend income above $2,400 for single individuals and $4,800 for joint filers. It���s scheduled to phase this out over the next four years, so it���ll be gone by 2027.
Contrast this with our old home state of Maryland, which has a 5.75%��state income��tax, plus additional local levies on income. Result: On past Roth conversions, in addition to the federal tax hit, my wife and I have incurred 8.1% in state and local taxes.
Most of our life���s savings were accumulated in tax-deferred accounts. Since retiring five years ago, we���ve been aggressively converting these to Roth IRAs to reduce our future tax burden. We hope to continue Roth conversions until our required minimum distributions start in five years, at age 72. That���s also around the time when federal income-tax rates are scheduled to rise, assuming 2017���s tax cuts are allowed to sunset.
New Hampshire is also one of five states without a sales tax. Since we don���t buy much stuff, and our new home came furnished, zero sales tax is not a big deal for us. To be sure, New Hampshire has high property taxes. Still, the savings from zero income taxes can outweigh the property tax bite for those with either high incomes or who make large Roth conversions. That���s why billionaires, retirees and tech employees who work remotely are fleeing to lower-tax states.
We���ve learned that high-tax states perform residency audits on those that change their residency status while still retaining a home in their old state, which is what we plan to do. Indeed, physical residency is tough to game. Cell phone data, electronic toll road collections, internet activity and video camera recordings can all provide a digital footprint for tax authorities to confirm where we live.
One tax-avoidance strategy is to move fulltime into a recreational vehicle and establish your permanent residence, or domicile, at an RV park in a zero income-tax state. Since the no-tax state doesn���t care about your whereabouts, RV residents may not even reside in that state for most of the year. Boat owners have utilized the same strategy to shift residency.
When changing residency from a high-tax state without selling your house, it���s important to cut many of your ties with your old state. Merely changing your driver���s license and spending less than half the year there may not satisfy tax authorities. They may claim you���re still enjoying the benefits of state residency even if you spend much of your time elsewhere.
That���s why there are apps that allow you to track your residency, including TaxBird, TaxDay and Monaeo. Even this may not be enough for RV residents who continue with many personal activities���such as doctor���s appointments, mail deliveries and property storage units���in their former high-tax state.
There���s more to our tax story: 12 states have estate taxes, while six impose inheritance taxes with a variety of thresholds and exemptions for spouses and other close relatives. Just one state, Maryland, has both an estate and inheritance tax. For even moderately sized estates, Maryland is among the most taxing states when the second spouse dies. The upshot: In moving to New Hampshire, our family will ���live free��� of many taxes���and, we hope, also die free.
John��Yeigh��is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book "Win the Youth Sports Game" was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.
We just moved to New Hampshire from Maryland. The move���s main purpose is to be near our kids, enjoy lake and mountain activities, and experience cooler summers. But New Hampshire���s zero tax rate on earned income, pensions and capital gains is a major bonus.
Eight states have no tax on personal income, capital gains or pensions: Texas, Florida, Wyoming, Alaska, Washington, Tennessee, South Dakota and Nevada. New Hampshire currently has a 5% tax on interest and dividend income above $2,400 for single individuals and $4,800 for joint filers. It���s scheduled to phase this out over the next four years, so it���ll be gone by 2027.
Contrast this with our old home state of Maryland, which has a 5.75%��state income��tax, plus additional local levies on income. Result: On past Roth conversions, in addition to the federal tax hit, my wife and I have incurred 8.1% in state and local taxes.
Most of our life���s savings were accumulated in tax-deferred accounts. Since retiring five years ago, we���ve been aggressively converting these to Roth IRAs to reduce our future tax burden. We hope to continue Roth conversions until our required minimum distributions start in five years, at age 72. That���s also around the time when federal income-tax rates are scheduled to rise, assuming 2017���s tax cuts are allowed to sunset.
New Hampshire is also one of five states without a sales tax. Since we don���t buy much stuff, and our new home came furnished, zero sales tax is not a big deal for us. To be sure, New Hampshire has high property taxes. Still, the savings from zero income taxes can outweigh the property tax bite for those with either high incomes or who make large Roth conversions. That���s why billionaires, retirees and tech employees who work remotely are fleeing to lower-tax states.
We���ve learned that high-tax states perform residency audits on those that change their residency status while still retaining a home in their old state, which is what we plan to do. Indeed, physical residency is tough to game. Cell phone data, electronic toll road collections, internet activity and video camera recordings can all provide a digital footprint for tax authorities to confirm where we live.
One tax-avoidance strategy is to move fulltime into a recreational vehicle and establish your permanent residence, or domicile, at an RV park in a zero income-tax state. Since the no-tax state doesn���t care about your whereabouts, RV residents may not even reside in that state for most of the year. Boat owners have utilized the same strategy to shift residency.
When changing residency from a high-tax state without selling your house, it���s important to cut many of your ties with your old state. Merely changing your driver���s license and spending less than half the year there may not satisfy tax authorities. They may claim you���re still enjoying the benefits of state residency even if you spend much of your time elsewhere.
That���s why there are apps that allow you to track your residency, including TaxBird, TaxDay and Monaeo. Even this may not be enough for RV residents who continue with many personal activities���such as doctor���s appointments, mail deliveries and property storage units���in their former high-tax state.
There���s more to our tax story: 12 states have estate taxes, while six impose inheritance taxes with a variety of thresholds and exemptions for spouses and other close relatives. Just one state, Maryland, has both an estate and inheritance tax. For even moderately sized estates, Maryland is among the most taxing states when the second spouse dies. The upshot: In moving to New Hampshire, our family will ���live free��� of many taxes���and, we hope, also die free.
John��Yeigh��is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book "Win the Youth Sports Game" was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.The post Fleeing the Taxman appeared first on HumbleDollar.
April 3, 2022
A World of Pain
INVESTORS ENDURED a lot in the first quarter, including rising interest rates, high inflation, fears about a recession and news of war. But it���s important not to get caught up in the scary headlines. Consider COVID-19. Not so long ago, it dominated the news, but now it���s hardly discussed because the situation is much improved.
No doubt today���s fears will also abate. Indeed, despite 2022���s dire news, stocks staged an impressive recovery toward the end of the first quarter. Bonds, however, suffered their worst first quarter in decades. Here���s a look at some of the numbers:
Stocks vs. bonds. At the quarter���s low point, the S&P 500 was off 13%, but was down just 4.6% as of March 31. Bonds, alas, didn���t offer any buffer for stock investors, with the broad bond market down 5.7%. The good news: Investors can now earn a half-decent yield on bonds. Short-term Treasurys, thanks to an inverted yield curve, feature yields close to 2.5%, while high-grade��corporates have a yield to maturity that���s actually above the expected inflation rate for the next 10 years.
Value vs. growth. Value investors finally had their quarter in the sun���at least on a relative basis. Value stocks beat growth shares by 7.7 percentage points in the first quarter. High-dividend��stocks fared especially well, outpacing the S&P 500 by almost six percentage points. Meanwhile, the continued drop in speculative growth stocks wasn���t surprising, given their meteoric rise off the March 2020 market low. It has a feeling of the 2000-02 dot-com bust, no? In the year through mid-March, Nasdaq stocks had seen an average��47%��decline from their 52-week peak, while the Russell 2000 small-cap index featured a remarkable 86% of stocks that had suffered declines of at least 20% from their one-year highs.
Large vs. small. Speaking of small-cap stocks, the Russell 2000 has done a whole lot of nothing recently, suffering even more than the S&P 500 in the first quarter. The iShares Russell 2000 ETF (symbol: IWM) peaked last November, before tumbling 21% through late February. The recent spell of lousy returns, however, means small-cap valuations are much cheaper.
U.S. vs. developed foreign vs. emerging markets. Like U.S. stocks, foreign��shares struggled in the first quarter. Developed foreign markets shed 5.6%, while emerging markets gave back 6.5%. It wasn���t all bad, though. Stock markets in resource-rich regions, such as Latin America, South Africa and Australia, were solidly higher, thanks to a 35% rise in commodity prices. One bonus for those with globally diversified holdings: Foreign markets now offer a dividend yield that���s 1.7 percentage points higher than the U.S.
Indeed, after a rough first quarter, the financial markets look more appealing. We have higher bond market yields and more attractive stock market valuations, though U.S. large-cap shares still look pricey. The Federal Reserve is expected to hike rates nine times in 2022. That may cause further turmoil in the stock and bond markets, but it should also push savings account yields above 2% by year-end.
No doubt today���s fears will also abate. Indeed, despite 2022���s dire news, stocks staged an impressive recovery toward the end of the first quarter. Bonds, however, suffered their worst first quarter in decades. Here���s a look at some of the numbers:
Stocks vs. bonds. At the quarter���s low point, the S&P 500 was off 13%, but was down just 4.6% as of March 31. Bonds, alas, didn���t offer any buffer for stock investors, with the broad bond market down 5.7%. The good news: Investors can now earn a half-decent yield on bonds. Short-term Treasurys, thanks to an inverted yield curve, feature yields close to 2.5%, while high-grade��corporates have a yield to maturity that���s actually above the expected inflation rate for the next 10 years.
Value vs. growth. Value investors finally had their quarter in the sun���at least on a relative basis. Value stocks beat growth shares by 7.7 percentage points in the first quarter. High-dividend��stocks fared especially well, outpacing the S&P 500 by almost six percentage points. Meanwhile, the continued drop in speculative growth stocks wasn���t surprising, given their meteoric rise off the March 2020 market low. It has a feeling of the 2000-02 dot-com bust, no? In the year through mid-March, Nasdaq stocks had seen an average��47%��decline from their 52-week peak, while the Russell 2000 small-cap index featured a remarkable 86% of stocks that had suffered declines of at least 20% from their one-year highs.
Large vs. small. Speaking of small-cap stocks, the Russell 2000 has done a whole lot of nothing recently, suffering even more than the S&P 500 in the first quarter. The iShares Russell 2000 ETF (symbol: IWM) peaked last November, before tumbling 21% through late February. The recent spell of lousy returns, however, means small-cap valuations are much cheaper.
U.S. vs. developed foreign vs. emerging markets. Like U.S. stocks, foreign��shares struggled in the first quarter. Developed foreign markets shed 5.6%, while emerging markets gave back 6.5%. It wasn���t all bad, though. Stock markets in resource-rich regions, such as Latin America, South Africa and Australia, were solidly higher, thanks to a 35% rise in commodity prices. One bonus for those with globally diversified holdings: Foreign markets now offer a dividend yield that���s 1.7 percentage points higher than the U.S.
Indeed, after a rough first quarter, the financial markets look more appealing. We have higher bond market yields and more attractive stock market valuations, though U.S. large-cap shares still look pricey. The Federal Reserve is expected to hike rates nine times in 2022. That may cause further turmoil in the stock and bond markets, but it should also push savings account yields above 2% by year-end.
The post A World of Pain appeared first on HumbleDollar.
Misleading Ourselves
INVESTING CAN BE maddening. Stocks that look like they're going up can end up falling, while investments that look like they���re headed for the dustbin can suddenly bounce back. This leaves investors in a difficult position���because the right thing to do often feels wrong.
Investing requires us, quite often, to act contrary to our own intuition. Here are four examples.
1. Don���t equate price with quality.��When consumers walk into a retail store, do they prefer the products that are on sale or do they head straight for the full-price items? All things being equal, most people prefer to pay less rather than more. But when it comes to the stock market, intuition often leads us in the opposite direction.
In our minds, price is associated with quality, so we end up being attracted to investments that are more expensive, not less. On top of that, because it���s natural to expect trends to continue, we assume that if the price of an item has been going up, it���ll continue rising. On the other hand, if a stock has been falling, we assume that there must be something wrong with it and we expect it to keep falling.
This logic is, of course, backwards. Like any other prospective purchase, we should be more interested in buying an investment when its price is lower. I���ll acknowledge that this is easier said than done. If an investment has been beaten up���and especially if you���ve incurred a loss on it���it���s understandable to want to distance yourself from it. Even though the price might be attractive, it���s difficult to buy more of an investment at a time like that. It just doesn���t feel right, and for good reason. One definition of insanity is doing the same thing over and over, expecting a different result. It can seem insane to put more money into an investment that���s declined in price, expecting it to suddenly behave differently.
As consumers, we���ve been trained to think this way���to see price as an indicator of quality���so it���s a deeply ingrained intuition. There���s a famous story, in fact, about the eyeglass company Warby Parker. The founders���a group of business school students���believed they could run a profitable business selling glasses online for $49. When they consulted their marketing��professor, however, he argued that this was a bad idea. Consumers, he said, wouldn���t trust the quality of a product that was too inexpensive. Instead, he suggested they set the price much higher. Warby Parker is now a very��successful��business selling glasses for $95.
How can you get over the psychological hurdle of buying something that looks unattractive only because of its low price? The simple solution, in my view, is regular rebalancing. Suppose you start with an asset allocation of 50% stocks and 50% bonds. If the stock market drops so your allocation to stocks falls to 45%, you would buy more stocks���enough to get back to 50%. It still may not be easy to buy stocks when they���re depressed, but I find this framework can make the decision easier.
2. Don���t look back.��When I think about the stock market, I often think of Charles Dickens���s line: ���It was the best of times, it was the worst of times.��� This describes the stock market perfectly. Virtually every year, some categories of stocks deliver strong performance while others lag. The challenge is that these categories change from year to year. There���s no such thing as permanent outperformance.
Between June 2001 and June 2007, for example, European stocks climbed 120%, while the U.S. stock market gained just 46%. Since then, things have reversed. Through the end of March, domestic stocks have gained 296%, while European stocks are up just 45%.
We���ve seen similar reversals in highflying tech stocks. In the depths of the pandemic, stocks like Shopify, Zoom and Peloton were all home runs. But this year, Peloton is down 26%, Zoom 36% and Shopify 50%.
Even in the quieter world of bonds, investment categories frequently trade places. Two years ago, municipal bonds���traditionally a very stable asset class���lost value quickly in response to worries about municipal finances when the economy shut down. High-yield bonds also lost value at that time. Both categories subsequently bounced back, more or less in unison. This year, though, they���ve again lost value in response to rising interest rates. Meanwhile, the big winner recently has been something else entirely: inflation-protected bonds, which for years were uninteresting because inflation was so low. Suddenly, they���re everyone���s favorite bond.
How should investors navigate this constantly shifting landscape of winners and losers? Again, it helps to have a framework. Continuing with the above example, if your portfolio has a 50% allocation to bonds, you might designate further targets within that 50% to specific categories of bonds, such as 20% to municipal bonds, 20% to standard Treasury bonds and 10% to inflation-protected Treasury bonds. Then try hard to stick to these allocations through good years and bad, recognizing that the three categories will inevitably trade off over time.
When I was a kid, I remember going to a horse race with a friend���s family. My friend won $2 on one of his bets and immediately said, ���I wish I���d bet more.��� It���s the same with investing. At any given time, every investor will wish they���d owned more of a particular category. But that���s the price investors pay for the benefits of diversification. When you own a diversified portfolio, you���re accepting that each year you���ll own some winners and some losers. But you can���t know in advance which will be which. That���s why I suggest choosing a sensible mix of investments���and then not looking back.
3. Don���t put the tax cart before the investment horse.��Many investors, I���ve noticed, prefer to sell only investments that have losses, or perhaps just small gains, so they minimize their tax bill. On the surface, this makes sense. But this is another area of investing that���s counterintuitive.
From an investment perspective, the right thing to do is to sell investments that have done well. That���s because they���re the ones that may now be overvalued. At the very least, they���re the ones that may be overweight relative to your asset allocation targets. Problem is, from a tax perspective, these are the investments you���d least like to sell.
How can you manage this inherent conflict? In my experience, it doesn���t need to be an either-or decision. If you want to sell some investments, I generally recommend selling a mix. Sell some with big gains, some with small gains and some with losses. That, in my view, is the way to balance both the investment and tax objectives.
4. Don���t worry about IRA distributions.��In years when the stock market is down, investors often fret about taking required minimum distributions from their retirement accounts. They hate the idea of selling when the market is low. Here���s the reality: While IRA distributions need to come out in cash, there���s no reason you can���t immediately reinvest the distributed funds. In your taxable account, you can always buy back the investments you just sold in your IRA.
Taking an IRA distribution when the market is down actually results in a��more��favorable outcome than if you���d taken the distribution when the market was higher. For the same number of dollars���and thus the same tax bill���you���ll end up with more shares of a given investment outside your IRA. This will provide greater appreciation potential in your taxable account, which is advantageous because the lower capital-gains tax rate will now apply.
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.
Investing requires us, quite often, to act contrary to our own intuition. Here are four examples.
1. Don���t equate price with quality.��When consumers walk into a retail store, do they prefer the products that are on sale or do they head straight for the full-price items? All things being equal, most people prefer to pay less rather than more. But when it comes to the stock market, intuition often leads us in the opposite direction.
In our minds, price is associated with quality, so we end up being attracted to investments that are more expensive, not less. On top of that, because it���s natural to expect trends to continue, we assume that if the price of an item has been going up, it���ll continue rising. On the other hand, if a stock has been falling, we assume that there must be something wrong with it and we expect it to keep falling.
This logic is, of course, backwards. Like any other prospective purchase, we should be more interested in buying an investment when its price is lower. I���ll acknowledge that this is easier said than done. If an investment has been beaten up���and especially if you���ve incurred a loss on it���it���s understandable to want to distance yourself from it. Even though the price might be attractive, it���s difficult to buy more of an investment at a time like that. It just doesn���t feel right, and for good reason. One definition of insanity is doing the same thing over and over, expecting a different result. It can seem insane to put more money into an investment that���s declined in price, expecting it to suddenly behave differently.
As consumers, we���ve been trained to think this way���to see price as an indicator of quality���so it���s a deeply ingrained intuition. There���s a famous story, in fact, about the eyeglass company Warby Parker. The founders���a group of business school students���believed they could run a profitable business selling glasses online for $49. When they consulted their marketing��professor, however, he argued that this was a bad idea. Consumers, he said, wouldn���t trust the quality of a product that was too inexpensive. Instead, he suggested they set the price much higher. Warby Parker is now a very��successful��business selling glasses for $95.
How can you get over the psychological hurdle of buying something that looks unattractive only because of its low price? The simple solution, in my view, is regular rebalancing. Suppose you start with an asset allocation of 50% stocks and 50% bonds. If the stock market drops so your allocation to stocks falls to 45%, you would buy more stocks���enough to get back to 50%. It still may not be easy to buy stocks when they���re depressed, but I find this framework can make the decision easier.
2. Don���t look back.��When I think about the stock market, I often think of Charles Dickens���s line: ���It was the best of times, it was the worst of times.��� This describes the stock market perfectly. Virtually every year, some categories of stocks deliver strong performance while others lag. The challenge is that these categories change from year to year. There���s no such thing as permanent outperformance.
Between June 2001 and June 2007, for example, European stocks climbed 120%, while the U.S. stock market gained just 46%. Since then, things have reversed. Through the end of March, domestic stocks have gained 296%, while European stocks are up just 45%.
We���ve seen similar reversals in highflying tech stocks. In the depths of the pandemic, stocks like Shopify, Zoom and Peloton were all home runs. But this year, Peloton is down 26%, Zoom 36% and Shopify 50%.
Even in the quieter world of bonds, investment categories frequently trade places. Two years ago, municipal bonds���traditionally a very stable asset class���lost value quickly in response to worries about municipal finances when the economy shut down. High-yield bonds also lost value at that time. Both categories subsequently bounced back, more or less in unison. This year, though, they���ve again lost value in response to rising interest rates. Meanwhile, the big winner recently has been something else entirely: inflation-protected bonds, which for years were uninteresting because inflation was so low. Suddenly, they���re everyone���s favorite bond.
How should investors navigate this constantly shifting landscape of winners and losers? Again, it helps to have a framework. Continuing with the above example, if your portfolio has a 50% allocation to bonds, you might designate further targets within that 50% to specific categories of bonds, such as 20% to municipal bonds, 20% to standard Treasury bonds and 10% to inflation-protected Treasury bonds. Then try hard to stick to these allocations through good years and bad, recognizing that the three categories will inevitably trade off over time.
When I was a kid, I remember going to a horse race with a friend���s family. My friend won $2 on one of his bets and immediately said, ���I wish I���d bet more.��� It���s the same with investing. At any given time, every investor will wish they���d owned more of a particular category. But that���s the price investors pay for the benefits of diversification. When you own a diversified portfolio, you���re accepting that each year you���ll own some winners and some losers. But you can���t know in advance which will be which. That���s why I suggest choosing a sensible mix of investments���and then not looking back.
3. Don���t put the tax cart before the investment horse.��Many investors, I���ve noticed, prefer to sell only investments that have losses, or perhaps just small gains, so they minimize their tax bill. On the surface, this makes sense. But this is another area of investing that���s counterintuitive.
From an investment perspective, the right thing to do is to sell investments that have done well. That���s because they���re the ones that may now be overvalued. At the very least, they���re the ones that may be overweight relative to your asset allocation targets. Problem is, from a tax perspective, these are the investments you���d least like to sell.
How can you manage this inherent conflict? In my experience, it doesn���t need to be an either-or decision. If you want to sell some investments, I generally recommend selling a mix. Sell some with big gains, some with small gains and some with losses. That, in my view, is the way to balance both the investment and tax objectives.
4. Don���t worry about IRA distributions.��In years when the stock market is down, investors often fret about taking required minimum distributions from their retirement accounts. They hate the idea of selling when the market is low. Here���s the reality: While IRA distributions need to come out in cash, there���s no reason you can���t immediately reinvest the distributed funds. In your taxable account, you can always buy back the investments you just sold in your IRA.
Taking an IRA distribution when the market is down actually results in a��more��favorable outcome than if you���d taken the distribution when the market was higher. For the same number of dollars���and thus the same tax bill���you���ll end up with more shares of a given investment outside your IRA. This will provide greater appreciation potential in your taxable account, which is advantageous because the lower capital-gains tax rate will now apply.
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 Misleading Ourselves appeared first on HumbleDollar.
