Jonathan Clements's Blog, page 226
March 4, 2022
What, Me Worry?
I���M IN THE HABIT of checking my investments every day. Since I consolidated them into one Fidelity Investments��� account, it���s easy to see the impact of market movements on everything I own. I don���t depend on my investments for income, but it still shakes me up when I see big drops, especially several days in a row.
If market gyrations affect me, what must they do to retirees who depend heavily on their investments for income? I posed that question on a retirement planning Facebook group: ���If you are now retired or very close to retiring, have the recent stock market gyrations plus inflation shaken your confidence in your retirement financial plan?���
To my surprise, only a handful of responses showed any concern. Most folks displayed remarkable confidence: ���Our plan accounts for all this.��� ���Our plan is solid.��� ���Our plan is pretty well protected against market and inflation risk.��� ���Market correction is expected and planned. My portfolio is fully diversified.��� ���No. One quarter of poor stock market performance following the best year in ages and several strong years in a row does not shake my confidence in the least.���
Perhaps I���m the one who is too fiscally conservative. But I���m also thinking these folks, who take the time to discuss retirement issues on Facebook, aren���t typical.
There���s another world out there, those Americans with little or no investments to worry about and for whom inflation is a far greater concern than what the S&P 500 does next week. Only slightly more than half of Americans own stocks, including in retirement plans.
Rick Delaney, chairman of the Senior Citizen League, which is lobbying for a onetime $1,400 check for seniors, says the group has heard from thousands of seniors who have ���exhausted their retirement savings, started eating only one meal a day, started cutting their pills in half because they can���t afford prescription drugs. [These are] just a few of the drastic steps so many have had to take because of what inflation has done to them.���
What���s the truth? Research looking at the impact of inflation found that Americans age 65 and older were affected the least. Because of inflation, seniors find themselves spending an additional $194 per month, while those ages 45 to 54 were spending $305 more. Still, if you���re living mostly on Social Security, having to spend an extra $194 can be a big hit.
The post What, Me Worry? appeared first on HumbleDollar.
Making Good Time
PARKINSON���S LAW states that work expands to fill the time available for its completion. This law is a pervasive reality���and misguided practice���in much of the working world. But I recall first encountering it before I joined the ranks of the employed.
During the summer before my senior year of college, I spent several weeks in Fort Lewis, Washington, for the ROTC training required for a commission in the Army. On the day when it was my turn to lead my peers, we had just returned from several days in the field.
In military parlance, ���the field��� is shorthand for training outdoors, sleeping on the ground, and dealing with conditions meant to prepare you for war by being nearly as miserable. Consequently, everything was dirty, from our sleep-deprived bodies to our weapons.
Before we could clean ourselves, we had to clean our weapons and turn them in to the arms room. The whole platoon worked for several hours cleaning the weapons, shoving pipe cleaners into every crevice of our M-16s to remove the grime.
Here's a conundrum about weapons cleaning: You can never really get older weapons completely clean because a proper cleaning requires oil at the end to keep the weapons from rusting. Once applied, this oil generates a dirty-looking residue from the carbon that���s ossified on the weapon���s metal coils and springs. The smallest amount of carbon combined with oil makes it look like you never cleaned the weapon.
Arms room sergeants who want to mess with trainees go directly to those coiled springs during an inspection of older training weapons. When we went to turn the platoon���s weapons in at lunchtime, the arms room sergeant discovered dirty-looking substances in the first two weapons he inspected.
He sent us back to clean some more. This order provided me with an opportunity to subvert Parkinson���s Law, although I didn���t even know its name then. I looked at my tired, dirty, hungry teammates in the platoon and decided we would try something new.
We each took turns guarding the weapons while the others ate lunch, showered, called home and caught up on missed sleep. Then we took the same weapons back to the arms room sergeant just before it was time for him to close shop and head home for dinner. When he inspected the M-16s this time, he miraculously discovered that they were clean. Unknowingly, I had used Parkinson���s Law against the sergeant. With dinner in mind, he had run out of time to prolong his inspection���or our cleaning duties.
When my senior officer discovered my perfidy���though I still think of it as common sense���he dropped my ranking in my final evaluation. Yet I would do it all over again, if for no other reason than it taught me a valuable lesson about time.
Many of us operate under the misguided belief that the amount of time spent working on a project equates to the quality of our work. Truly meaningful work has very little to do with the amount of time spent on it. Avoiding the trap of Parkinson���s Law is a good idea for organizations that want to have happy teams. But it���s even more critical to those of us who want to make good use of our days on earth.
Because time is my most finite, precious resource, I try to invert Parkinson���s Law whenever I can. I ask myself: What is the least amount of time I can spend on menial tasks to produce a successful outcome? Then I used the time I���ve saved on other activities���those I find more meaningful.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.
During the summer before my senior year of college, I spent several weeks in Fort Lewis, Washington, for the ROTC training required for a commission in the Army. On the day when it was my turn to lead my peers, we had just returned from several days in the field.
In military parlance, ���the field��� is shorthand for training outdoors, sleeping on the ground, and dealing with conditions meant to prepare you for war by being nearly as miserable. Consequently, everything was dirty, from our sleep-deprived bodies to our weapons.
Before we could clean ourselves, we had to clean our weapons and turn them in to the arms room. The whole platoon worked for several hours cleaning the weapons, shoving pipe cleaners into every crevice of our M-16s to remove the grime.
Here's a conundrum about weapons cleaning: You can never really get older weapons completely clean because a proper cleaning requires oil at the end to keep the weapons from rusting. Once applied, this oil generates a dirty-looking residue from the carbon that���s ossified on the weapon���s metal coils and springs. The smallest amount of carbon combined with oil makes it look like you never cleaned the weapon.
Arms room sergeants who want to mess with trainees go directly to those coiled springs during an inspection of older training weapons. When we went to turn the platoon���s weapons in at lunchtime, the arms room sergeant discovered dirty-looking substances in the first two weapons he inspected.
He sent us back to clean some more. This order provided me with an opportunity to subvert Parkinson���s Law, although I didn���t even know its name then. I looked at my tired, dirty, hungry teammates in the platoon and decided we would try something new.
We each took turns guarding the weapons while the others ate lunch, showered, called home and caught up on missed sleep. Then we took the same weapons back to the arms room sergeant just before it was time for him to close shop and head home for dinner. When he inspected the M-16s this time, he miraculously discovered that they were clean. Unknowingly, I had used Parkinson���s Law against the sergeant. With dinner in mind, he had run out of time to prolong his inspection���or our cleaning duties.
When my senior officer discovered my perfidy���though I still think of it as common sense���he dropped my ranking in my final evaluation. Yet I would do it all over again, if for no other reason than it taught me a valuable lesson about time.
Many of us operate under the misguided belief that the amount of time spent working on a project equates to the quality of our work. Truly meaningful work has very little to do with the amount of time spent on it. Avoiding the trap of Parkinson���s Law is a good idea for organizations that want to have happy teams. But it���s even more critical to those of us who want to make good use of our days on earth.
Because time is my most finite, precious resource, I try to invert Parkinson���s Law whenever I can. I ask myself: What is the least amount of time I can spend on menial tasks to produce a successful outcome? Then I used the time I���ve saved on other activities���those I find more meaningful.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.The post Making Good Time appeared first on HumbleDollar.
March 3, 2022
A Matter of Timing
I RECENTLY WROTE about missing the chance to harvest tax losses. A reader decried this as market timing, which I found surprising. But on second thought, I can see where the reader was coming from.
Suppose we define market timing as any buy or sell decision that���s taken only when the time is right. Using this definition, I���m guilty as charged.
But if that���s the case, is all market timing bad? I���d argue it depends on the intent behind the action. Take the example of Tim, a fictitious investor with a 50% stocks-50% cash portfolio. Consider three scenarios.
Scenario 1: Tim wants to put more money into stocks, but he���s waiting for the market to drop. As the market drops a bit, he buys stocks with half of his cash. When the market dips further, he goes all-in.
Scenario 2: During his annual portfolio checkup, Tim notices that the recent bull market has inflated his stock allocation. He rebalances his portfolio, selling some stocks and thereby bringing his portfolio allocation back to 50-50.
Scenario 3: Tim notices during a down market that the stocks in his taxable account are trading below their original purchase price. To realize the tax loss, Tim sells the losing stocks and immediately buys others that give him similar market exposure.
One could argue that all three scenarios are market timing. The first scenario is an investment strategy that doesn���t work so reliably. The second scenario is a risk-management strategy to keep Tim���s portfolio aligned with his risk tolerance. The jury is still out on whether rebalancing also improves portfolio performance.
The third scenario is neither an investment strategy nor a risk-control strategy. There���s no material change in Tim���s market exposure, and hence no change in expected return or risk. It���s merely a tax-cutting strategy. The strategy is possible only if the market drops below a certain mark. It could indeed be considered a market-timing strategy, but it isn���t one to frown upon.
Suppose we define market timing as any buy or sell decision that���s taken only when the time is right. Using this definition, I���m guilty as charged.
But if that���s the case, is all market timing bad? I���d argue it depends on the intent behind the action. Take the example of Tim, a fictitious investor with a 50% stocks-50% cash portfolio. Consider three scenarios.
Scenario 1: Tim wants to put more money into stocks, but he���s waiting for the market to drop. As the market drops a bit, he buys stocks with half of his cash. When the market dips further, he goes all-in.
Scenario 2: During his annual portfolio checkup, Tim notices that the recent bull market has inflated his stock allocation. He rebalances his portfolio, selling some stocks and thereby bringing his portfolio allocation back to 50-50.
Scenario 3: Tim notices during a down market that the stocks in his taxable account are trading below their original purchase price. To realize the tax loss, Tim sells the losing stocks and immediately buys others that give him similar market exposure.
One could argue that all three scenarios are market timing. The first scenario is an investment strategy that doesn���t work so reliably. The second scenario is a risk-management strategy to keep Tim���s portfolio aligned with his risk tolerance. The jury is still out on whether rebalancing also improves portfolio performance.
The third scenario is neither an investment strategy nor a risk-control strategy. There���s no material change in Tim���s market exposure, and hence no change in expected return or risk. It���s merely a tax-cutting strategy. The strategy is possible only if the market drops below a certain mark. It could indeed be considered a market-timing strategy, but it isn���t one to frown upon.
The post A Matter of Timing appeared first on HumbleDollar.
No Harm in Asking
IN MY COLLEGE DAYS, a roommate taught me something about bargaining. He was a clothes horse, a rarity among college students then and, for all I know, still today. When he was feeling down, his best medicine was to take a stroll down the Drag, as Guadalupe Street in front of the University of Texas is known, and buy a new shirt.
In those days, there were several small mom-and-pop haberdashers on the Drag, and shopping there usually meant dealing with the owners. My friend would pick out a shirt he liked and say to the proprietor something along the lines of, ���This is a nice shirt but I can���t do $19.95 on my budget. But I can manage $15.��� Often as not, he got his deal.
I guess I���d had a sheltered life before leaving for college���I���d never even thought to take this approach in a retail establishment. But seeing my friend pull it off made an impression on me. And why not? He was invariably polite and pleasant, no one���s feelings were hurt, and the worst they could say was no.
I���ve taken this approach pretty much ever since and have been pleasantly surprised to see this negotiation tactic work in a wide variety of everyday transactions.
We have no dental insurance. When we went shopping for a new dentist, I asked if he would give us a discount for cash. After all, it would save him the hassle of dealing with insurance. He agreed to a modest discount.
We���ve always had dogs, in recent years as many as four. Needless to say, we spend a lot of money on vet bills. I became aware that many of the medications our elderly dogs require are available from online pet pharmacies at much lower prices than our vet charges. He kindly agreed to either match the best online price or else just write the prescription so we can order online ourselves.
One thing you inevitably run into is: ���I���d like to help you but our policy says���.��� If you can reach someone with authority, that policy can almost always be relaxed. For instance, not long ago, my wife and I were shopping for a large screen TV.
We drove a good distance to a Best Buy, relying on an ad promising a certain price. At the store, the employee claimed the advertised price didn���t apply for some reason and ���policy��� didn���t allow for any deviations. We held firm until they finally brought in the manager, who told us the same thing. Knowing that he almost certainly had the authority to do what we asked, we just hung in there until he did.
In some businesses, flexibility on prices is practically built into the system, as I���ve found with the cable company. I���ve written separately about this never-ending war. Suffice it to say that this ongoing negotiation is a pain, but completely necessary to keep our cable costs tolerable. In fact, I wonder about all those folks who don���t call up to complain. Likewise, I���ve always wanted to meet someone who paid full price for a suit at Jos. A. Bank, where there���s a new sale announced about every three days.
The internet has revolutionized bargain shopping, and a prime example is cars. We���ve followed the same plan with our last several car purchases, which I should mention were before the current supply crunch made bargains scarce.
After a test drive or two to identify the model we want, the rest is done from my laptop. I contact every dealer within 100 miles and simply ask for their best price, giving them the model, color schemes and option packages that we���ll accept. I never provide my phone number, only my email address. I usually hear from a handful of dealers who are truly aggressive on price, and eventually the best deal emerges.
I���m an introvert by nature, so all this bargaining isn���t something that comes naturally to me. But by now, it���s pretty much second nature and, I���ll admit, there���s some sport in it. Sometimes, I find myself spending an unreasonable amount of time to secure a modest discount. Yet there���s still some competitive satisfaction in getting it.
A final tip: When negotiating, it���s almost always best to be polite and respectful. If the person on the other end of the deal feels like he or she wants to help you, you���ll both feel better once the deal is done.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.
In those days, there were several small mom-and-pop haberdashers on the Drag, and shopping there usually meant dealing with the owners. My friend would pick out a shirt he liked and say to the proprietor something along the lines of, ���This is a nice shirt but I can���t do $19.95 on my budget. But I can manage $15.��� Often as not, he got his deal.
I guess I���d had a sheltered life before leaving for college���I���d never even thought to take this approach in a retail establishment. But seeing my friend pull it off made an impression on me. And why not? He was invariably polite and pleasant, no one���s feelings were hurt, and the worst they could say was no.
I���ve taken this approach pretty much ever since and have been pleasantly surprised to see this negotiation tactic work in a wide variety of everyday transactions.
We have no dental insurance. When we went shopping for a new dentist, I asked if he would give us a discount for cash. After all, it would save him the hassle of dealing with insurance. He agreed to a modest discount.
We���ve always had dogs, in recent years as many as four. Needless to say, we spend a lot of money on vet bills. I became aware that many of the medications our elderly dogs require are available from online pet pharmacies at much lower prices than our vet charges. He kindly agreed to either match the best online price or else just write the prescription so we can order online ourselves.
One thing you inevitably run into is: ���I���d like to help you but our policy says���.��� If you can reach someone with authority, that policy can almost always be relaxed. For instance, not long ago, my wife and I were shopping for a large screen TV.
We drove a good distance to a Best Buy, relying on an ad promising a certain price. At the store, the employee claimed the advertised price didn���t apply for some reason and ���policy��� didn���t allow for any deviations. We held firm until they finally brought in the manager, who told us the same thing. Knowing that he almost certainly had the authority to do what we asked, we just hung in there until he did.
In some businesses, flexibility on prices is practically built into the system, as I���ve found with the cable company. I���ve written separately about this never-ending war. Suffice it to say that this ongoing negotiation is a pain, but completely necessary to keep our cable costs tolerable. In fact, I wonder about all those folks who don���t call up to complain. Likewise, I���ve always wanted to meet someone who paid full price for a suit at Jos. A. Bank, where there���s a new sale announced about every three days.
The internet has revolutionized bargain shopping, and a prime example is cars. We���ve followed the same plan with our last several car purchases, which I should mention were before the current supply crunch made bargains scarce.
After a test drive or two to identify the model we want, the rest is done from my laptop. I contact every dealer within 100 miles and simply ask for their best price, giving them the model, color schemes and option packages that we���ll accept. I never provide my phone number, only my email address. I usually hear from a handful of dealers who are truly aggressive on price, and eventually the best deal emerges.
I���m an introvert by nature, so all this bargaining isn���t something that comes naturally to me. But by now, it���s pretty much second nature and, I���ll admit, there���s some sport in it. Sometimes, I find myself spending an unreasonable amount of time to secure a modest discount. Yet there���s still some competitive satisfaction in getting it.
A final tip: When negotiating, it���s almost always best to be polite and respectful. If the person on the other end of the deal feels like he or she wants to help you, you���ll both feel better once the deal is done.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.The post No Harm in Asking appeared first on HumbleDollar.
March 2, 2022
What Price Evil?
MUCH HAS BEEN written about the virtues and pitfalls of index funds that weight stocks based on their market value. In theory, every company���s stock market value reflects the collective wisdom of market participants. Apple the biggest stock in the world? Must be for good reasons, the thinking goes, so it should get a big index-fund weighting.
Well, the market cap of Russia in the Vanguard FTSE Emerging Markets ETF (symbol: VWO) as of Oct. 31 was 3.5%, bigger than Thailand, Mexico and Malaysia. That���s both low���reflecting the obvious risks and the small size of Russia���s kleptocratic economy���and, as it turned out, too high. I don���t claim that investors should have seen the expanded war in Ukraine coming four months ago, when iShares MSCI Russia ETF (ERUS) rose to its highest level since its 2010 inception. The fund has since plunged 76% from Oct. 25 through March 1. But there have been huge red flags about Vladimir Putin���s regime for more than a decade.
Those of a value bent, thinking they can beat the market with cheap stocks, might have seen opportunity in the Russian market���s price-earnings (P/E) ratio of seven as of Dec. 31, based on trailing 12-month earnings, versus 26 for the U.S. market. Perhaps the market isn���t pricing Russia correctly, some may have felt. The theory goes there���s a price at which everything becomes a bargain, even the bonds of a bankrupt company. But instead, Russia���s trailing P/E ratio has since fallen to three. Investors have lost billions bottom fishing.
A ballyhooed alternative to market-cap indexing is fundamental indexing, weighting stocks based on characteristics such as the size and sustainability of their dividend yields. How has that approach fared? As recently as October, iShares Emerging Markets Dividend ETF (DVYE) had nearly 23% in Russia, even more than it had in China. At the time of its June shareholder report, WisdomTree Emerging Markets High Dividend Fund (DEM) had 15% in Russia. In August, Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE) reported 13% in Russia.
I pointed out the risk in these funds in an August 2019 article. Am I a genius? Believe me, given my many investment missteps, I���m best thought of as a contrarian indicator, hence my embrace���too late in life���of indexing.
Yet how smart did anyone have to be to realize that 23%, or even 13%, in Putin���s Russia was folly? But the dividend-weighted index creators had their blinders on. In a way, intentionally so.
Fundamental indexing has similarities to market-cap indexing to the extent that it seeks to take individual judgment���such as a stock-picker might exercise���out of the equation. Instead, it���s a rules-based system attempting to capture a universe of stocks exhibiting characteristics historically associated with market outperformance. A value judgment about Russia���or China, for that matter���was never part of the equation.
But should it have been? It���s dangerous to think you know more than the market���that���s nearly always an ego-driven loser���s bet.��That���s one reason I inserted the caveat in my article two-and-a-half years ago that, with Russia���s P/E so low, the risks might be priced in. Yet, as fraught with emotion and fallibility as our judgment is, at a certain point, we must exercise it.
That judgment may be based on our moral values: Personally, I have tried for years to avoid much exposure to autocratic regimes that abuse their people, and there���s a lot of that among emerging markets. But I could also chalk up my judgment to common sense: It���s smart to avoid countries where an autocratic regime has the power and inclination to meddle deeply in its economy, its companies and its markets, and offers few protections to individual���especially foreign���shareholders.
There is one fund manager who cares deeply about the moral dimension, while also asserting that countries lacking freedom are fundamentally bad places to invest. I interviewed Perth Tolle, creator of the Freedom Emerging Markets 100 Index Fund (FRDM), in July 2020 and have since become an investor in her fund. Based on her unique ���freedom-weighted��� index, the fund has no exposure to Russia, China or Saudi Arabia, among others.
It���s an approach with risks of its own: 17% of the fund is in Poland and 15% in Chile, both hugely outsized positions relative to the market-cap indexes. Yet since inception in May 2019 through February, the fund is up 39%, outperforming Vanguard���s emerging markets index fund, which is up 30%, and iShares Core MSCI Emerging Markets Index Fund (IEMG), up 29%, and it���s even further ahead of the big fundamental-weighted funds mentioned above.
My suggestion: With Ukrainians fighting for their freedom���and indeed their lives���maybe we should give greater weight to our values not just in our political decisions, but also in our investment choices.
Well, the market cap of Russia in the Vanguard FTSE Emerging Markets ETF (symbol: VWO) as of Oct. 31 was 3.5%, bigger than Thailand, Mexico and Malaysia. That���s both low���reflecting the obvious risks and the small size of Russia���s kleptocratic economy���and, as it turned out, too high. I don���t claim that investors should have seen the expanded war in Ukraine coming four months ago, when iShares MSCI Russia ETF (ERUS) rose to its highest level since its 2010 inception. The fund has since plunged 76% from Oct. 25 through March 1. But there have been huge red flags about Vladimir Putin���s regime for more than a decade.
Those of a value bent, thinking they can beat the market with cheap stocks, might have seen opportunity in the Russian market���s price-earnings (P/E) ratio of seven as of Dec. 31, based on trailing 12-month earnings, versus 26 for the U.S. market. Perhaps the market isn���t pricing Russia correctly, some may have felt. The theory goes there���s a price at which everything becomes a bargain, even the bonds of a bankrupt company. But instead, Russia���s trailing P/E ratio has since fallen to three. Investors have lost billions bottom fishing.
A ballyhooed alternative to market-cap indexing is fundamental indexing, weighting stocks based on characteristics such as the size and sustainability of their dividend yields. How has that approach fared? As recently as October, iShares Emerging Markets Dividend ETF (DVYE) had nearly 23% in Russia, even more than it had in China. At the time of its June shareholder report, WisdomTree Emerging Markets High Dividend Fund (DEM) had 15% in Russia. In August, Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE) reported 13% in Russia.
I pointed out the risk in these funds in an August 2019 article. Am I a genius? Believe me, given my many investment missteps, I���m best thought of as a contrarian indicator, hence my embrace���too late in life���of indexing.
Yet how smart did anyone have to be to realize that 23%, or even 13%, in Putin���s Russia was folly? But the dividend-weighted index creators had their blinders on. In a way, intentionally so.
Fundamental indexing has similarities to market-cap indexing to the extent that it seeks to take individual judgment���such as a stock-picker might exercise���out of the equation. Instead, it���s a rules-based system attempting to capture a universe of stocks exhibiting characteristics historically associated with market outperformance. A value judgment about Russia���or China, for that matter���was never part of the equation.
But should it have been? It���s dangerous to think you know more than the market���that���s nearly always an ego-driven loser���s bet.��That���s one reason I inserted the caveat in my article two-and-a-half years ago that, with Russia���s P/E so low, the risks might be priced in. Yet, as fraught with emotion and fallibility as our judgment is, at a certain point, we must exercise it.
That judgment may be based on our moral values: Personally, I have tried for years to avoid much exposure to autocratic regimes that abuse their people, and there���s a lot of that among emerging markets. But I could also chalk up my judgment to common sense: It���s smart to avoid countries where an autocratic regime has the power and inclination to meddle deeply in its economy, its companies and its markets, and offers few protections to individual���especially foreign���shareholders.
There is one fund manager who cares deeply about the moral dimension, while also asserting that countries lacking freedom are fundamentally bad places to invest. I interviewed Perth Tolle, creator of the Freedom Emerging Markets 100 Index Fund (FRDM), in July 2020 and have since become an investor in her fund. Based on her unique ���freedom-weighted��� index, the fund has no exposure to Russia, China or Saudi Arabia, among others.
It���s an approach with risks of its own: 17% of the fund is in Poland and 15% in Chile, both hugely outsized positions relative to the market-cap indexes. Yet since inception in May 2019 through February, the fund is up 39%, outperforming Vanguard���s emerging markets index fund, which is up 30%, and iShares Core MSCI Emerging Markets Index Fund (IEMG), up 29%, and it���s even further ahead of the big fundamental-weighted funds mentioned above.
My suggestion: With Ukrainians fighting for their freedom���and indeed their lives���maybe we should give greater weight to our values not just in our political decisions, but also in our investment choices.
The post What Price Evil? appeared first on HumbleDollar.
March 1, 2022
A Creation Story
ACCORDING TO GMO investment strategist Jeremy Grantham, we���re in the midst of a rare ���superbubble,��� which he defines as a three-sigma event. Three sigma is a statistical term in probability, referring to an event which should occur less than 0.3% of the time or about once every 333 years.
Calling a bubble, let alone a superbubble, can be hazardous both to one���s reputation and one���s wallet. Even if Grantham���s call is correct, using that information to make money���or avoid losses���is easier said than done. Anyone who tried shorting the Nasdaq in the late 1990s can attest to that. Trying to time the market by selling out of stocks is a fool���s errand.
Grantham contends that this is the mother of all bubbles���a bubble in stocks, bonds, real estate and commodities. I���m not sure I agree with him about commodities. Still, it seems bonds, real estate and stocks���particularly U.S. growth stocks���are priced for perfection.
What follows is a condensed story of how we got here. To be clear, this is my view, not Grantham���s.
Day 1: In the beginning���circa 2008���the Fed said, ���Let there be zero interest rates.��� It came to pass and the Fed saw that it was good.
Day 2: The Fed embarked on quantitative easing (QE) and forward guidance, promising to keep rates low for as far as the eye could see. The potent triad of zero short-term rates, QE and forward guidance gave birth to the first bubble���the bubble in bonds. As Treasury yields cratered, income-seeking investors were pushed further out on the risk spectrum���first investment-grade corporate bonds, then junk bonds and ultimately into stocks.
Day 3: As credit spreads narrowed, the yield on U.S. junk bonds reached a nadir of 4%. Outside the U.S., government bond yields turned negative. Yield-starved investors held their noses and bought stocks. As share prices began their long ascent, the wealth effect was reborn. The Fed looked upon what was happening and saw that it was good.
Day 4: With the price of money near zero, investors succumbed to the original sin���the misallocation of capital. Companies with no profits raised��record amounts of cash through public stock offerings. SPACs���special purpose acquisition companies with no profits and no business plan���were warmly embraced by investors. Corporate officers resorted to financial engineering, borrowing hordes of cash to buy back stock rather than invest in their business. The Fed looked the other way.
Day 5: Easy money, in the form of low interest rates, made its way to Main Street. Thirty-year mortgage rates fell to once unthinkable levels. This fueled another bubble in housing prices, the second in under two decades. The S&P/Case-Shiller U.S. National Home Price Index recently reached a level 50% higher than in 2006, the peak of the last housing bubble. Household net worth soared. The Fed saw that it was good.
Day 6: A pandemic appeared out of nowhere. In a frantic attempt to save lives, the economy was shuttered. The stock market cratered and an economic depression loomed. Emboldened by its recent successes, the Fed leapt into action with the aplomb of a superhero. In conjunction with aggressive fiscal measures, money supply ballooned. Plunging share prices were stopped in their track, marking the shortest bear market in history. The Fed, once again, had saved the day.
Day 7: Seeing all the good it had created, the Fed rested on the seventh day. The serpent of inflation, meanwhile, began to scheme.
Calling a bubble, let alone a superbubble, can be hazardous both to one���s reputation and one���s wallet. Even if Grantham���s call is correct, using that information to make money���or avoid losses���is easier said than done. Anyone who tried shorting the Nasdaq in the late 1990s can attest to that. Trying to time the market by selling out of stocks is a fool���s errand.
Grantham contends that this is the mother of all bubbles���a bubble in stocks, bonds, real estate and commodities. I���m not sure I agree with him about commodities. Still, it seems bonds, real estate and stocks���particularly U.S. growth stocks���are priced for perfection.
What follows is a condensed story of how we got here. To be clear, this is my view, not Grantham���s.
Day 1: In the beginning���circa 2008���the Fed said, ���Let there be zero interest rates.��� It came to pass and the Fed saw that it was good.
Day 2: The Fed embarked on quantitative easing (QE) and forward guidance, promising to keep rates low for as far as the eye could see. The potent triad of zero short-term rates, QE and forward guidance gave birth to the first bubble���the bubble in bonds. As Treasury yields cratered, income-seeking investors were pushed further out on the risk spectrum���first investment-grade corporate bonds, then junk bonds and ultimately into stocks.
Day 3: As credit spreads narrowed, the yield on U.S. junk bonds reached a nadir of 4%. Outside the U.S., government bond yields turned negative. Yield-starved investors held their noses and bought stocks. As share prices began their long ascent, the wealth effect was reborn. The Fed looked upon what was happening and saw that it was good.
Day 4: With the price of money near zero, investors succumbed to the original sin���the misallocation of capital. Companies with no profits raised��record amounts of cash through public stock offerings. SPACs���special purpose acquisition companies with no profits and no business plan���were warmly embraced by investors. Corporate officers resorted to financial engineering, borrowing hordes of cash to buy back stock rather than invest in their business. The Fed looked the other way.
Day 5: Easy money, in the form of low interest rates, made its way to Main Street. Thirty-year mortgage rates fell to once unthinkable levels. This fueled another bubble in housing prices, the second in under two decades. The S&P/Case-Shiller U.S. National Home Price Index recently reached a level 50% higher than in 2006, the peak of the last housing bubble. Household net worth soared. The Fed saw that it was good.
Day 6: A pandemic appeared out of nowhere. In a frantic attempt to save lives, the economy was shuttered. The stock market cratered and an economic depression loomed. Emboldened by its recent successes, the Fed leapt into action with the aplomb of a superhero. In conjunction with aggressive fiscal measures, money supply ballooned. Plunging share prices were stopped in their track, marking the shortest bear market in history. The Fed, once again, had saved the day.
Day 7: Seeing all the good it had created, the Fed rested on the seventh day. The serpent of inflation, meanwhile, began to scheme.
The post A Creation Story appeared first on HumbleDollar.
All Safe
I NOTICED AN AD from a discount airline the other week for a ticket from Cincinnati to Fort Lauderdale for $76 roundtrip. Folks, you can���t drive between those two cities for $76. The same carrier was advertising a bunch of other roundtrip tickets with similar prices.
Crazy cheap.
I get questioned all the time: Are these airlines safe? Do they have good pilots? Are their jets kept in good mechanical condition? Are they as safe to fly as American Airlines���my old employer���or Delta or United?
My answer: Yes. I have no issue flying on these budget airlines.
The Federal Aviation Administration (FAA) oversees the airline business. It makes and enforces the regulations, overseeing pilots, mechanics and aircraft. It has the authority to completely shut down any airline, aircraft or individual if it deems that safety is compromised, and it���s done so on numerous occasions.
The FAA is the ultimate authority regarding airline safety. But the companies themselves���at least in the U.S.���are easily as responsible and thorough as the FAA. Safety is first and foremost at each airline. It has to be. Lives depend on it.
Why exactly are these discount airlines equally safe? Let���s start with the pilots.
It isn���t an easy road to the captain���s seat of an airline, regardless of the company. While the time it takes from first learning to fly to gaining that seat varies according to supply and demand, the experience level required is regulated by the FAA. You need an Airline Transport Pilot (ATP) license, and that requires anywhere from 800 to 1,500 hours of flying time, depending on your educational background.
In addition, you need a specialized ���type rating��� license for the aircraft you���ll be commanding. That requires at least a month or two of specialized training specific to that aircraft. In all, to be the pilot in command, you���ll need to prove your skills to a number of pilot inspectors over the course of your training.
Different FAA or management pilots will judge you, in a simulator and the aircraft, on your abilities. That���s in addition to your knowledge of the aircraft and its many systems, such as fuel, electrical and hydraulic.
Most important, they will evaluate you on your judgment. Suffice it to say, the pilot who is flying your airplane is extremely competent, or he or she wouldn���t be there. Keep in mind these are just minimum standards.
After these requirements are met, every six to nine months, each pilot must be assessed and tested in the simulator. I assure you that your jet���s captain and first officer have experience far beyond the minimum, regardless of the airline.
Also, all pilots have required medical examinations. To hold an ATP license, you must have a physical exam every six months. If you don���t pass the exam, you���re prohibited from flying until you do. And you can���t fly airliners if you���re too old. FAA mandatory retirement is 65.
One Tuesday, at age 64, I had 300 folks in my A-330 crossing the Atlantic Ocean going from Rome to Charlotte. They were all depending on me to get them there safely using my skill and experience. On Wednesday, I was no longer ���safe��� to fly because it was my 65th birthday. The FAA decided this was a reasonable medical requirement. It���s an example of the seriousness of the people overseeing the industry.
The same safety culture is required of the aircraft and the mechanics who work on them. Again, the FAA has responsibility for oversight and compliance. The mechanics who are employed by American, United and Delta���or Allegiant or Spirit���must all pass the same stringent FAA testing and licensing requirements. To be a mechanic at any airline requires the same rigorous level of licensing and testing as a pilot.
You must pass many tests and have many hours of experience working on aircraft to attain the licenses, and then compete with many other applicants to get hired by an airline. Once hired, these folks are continuously evaluated and tested, just as the pilots are. In fact, some of the low-fare airlines actually have better working conditions for their maintenance personnel than some of the major carriers. The dedicated people who maintain the mechanical integrity of aircraft���regardless of the carrier���are competent and qualified.
The aircraft in service at these low-fare carriers must pass the same inspections and comply with the same required maintenance schedules as those flown by the major airlines. The Airbus 320 that���s flying in a Spirit Airlines paint job is maintained and inspected to the same standard as one with a United Airlines paint job. While the configurations of the aircraft may differ���seating, lavatories, galleys and so on���the requirements for safety set forth by the FAA are exactly the same.
The discount carriers have a different business model than the majors. They keep their costs down in many ways that differ from larger, established carriers. How they do that is a topic for another article. But the one thing they don���t skimp on is safety.
It���s absolutely essential that safety comes first for every airline company, not because the FAA requires it, but because it���s the very first rule of the business. If you aren���t safe, you aren���t going to be in business. It���s a simple concept, and the airlines in the U.S. are the gold standard for safety.
There���s a bunch of reasons to spend more or less on an airline ticket. Schedule, convenience, legroom, first-class comforts and other factors will help you decide how much you want to spend on your trip.
Safety is not a consideration. All of our airlines are safe. My family will fly on any U.S. airline if it meets our needs, regardless of the name on the side of the aircraft.
Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Faced with this upheaval, he also had a side business as a homebuilder. Today, Tom and his wife still travel extensively.��Three children and seven grandchildren keep them on the go. Tom's previous articles were Cutting Their Cut,��Why Am I Late and��The Unfriendly Skies.
Crazy cheap.
I get questioned all the time: Are these airlines safe? Do they have good pilots? Are their jets kept in good mechanical condition? Are they as safe to fly as American Airlines���my old employer���or Delta or United?
My answer: Yes. I have no issue flying on these budget airlines.
The Federal Aviation Administration (FAA) oversees the airline business. It makes and enforces the regulations, overseeing pilots, mechanics and aircraft. It has the authority to completely shut down any airline, aircraft or individual if it deems that safety is compromised, and it���s done so on numerous occasions.
The FAA is the ultimate authority regarding airline safety. But the companies themselves���at least in the U.S.���are easily as responsible and thorough as the FAA. Safety is first and foremost at each airline. It has to be. Lives depend on it.
Why exactly are these discount airlines equally safe? Let���s start with the pilots.
It isn���t an easy road to the captain���s seat of an airline, regardless of the company. While the time it takes from first learning to fly to gaining that seat varies according to supply and demand, the experience level required is regulated by the FAA. You need an Airline Transport Pilot (ATP) license, and that requires anywhere from 800 to 1,500 hours of flying time, depending on your educational background.
In addition, you need a specialized ���type rating��� license for the aircraft you���ll be commanding. That requires at least a month or two of specialized training specific to that aircraft. In all, to be the pilot in command, you���ll need to prove your skills to a number of pilot inspectors over the course of your training.
Different FAA or management pilots will judge you, in a simulator and the aircraft, on your abilities. That���s in addition to your knowledge of the aircraft and its many systems, such as fuel, electrical and hydraulic.
Most important, they will evaluate you on your judgment. Suffice it to say, the pilot who is flying your airplane is extremely competent, or he or she wouldn���t be there. Keep in mind these are just minimum standards.
After these requirements are met, every six to nine months, each pilot must be assessed and tested in the simulator. I assure you that your jet���s captain and first officer have experience far beyond the minimum, regardless of the airline.
Also, all pilots have required medical examinations. To hold an ATP license, you must have a physical exam every six months. If you don���t pass the exam, you���re prohibited from flying until you do. And you can���t fly airliners if you���re too old. FAA mandatory retirement is 65.
One Tuesday, at age 64, I had 300 folks in my A-330 crossing the Atlantic Ocean going from Rome to Charlotte. They were all depending on me to get them there safely using my skill and experience. On Wednesday, I was no longer ���safe��� to fly because it was my 65th birthday. The FAA decided this was a reasonable medical requirement. It���s an example of the seriousness of the people overseeing the industry.
The same safety culture is required of the aircraft and the mechanics who work on them. Again, the FAA has responsibility for oversight and compliance. The mechanics who are employed by American, United and Delta���or Allegiant or Spirit���must all pass the same stringent FAA testing and licensing requirements. To be a mechanic at any airline requires the same rigorous level of licensing and testing as a pilot.
You must pass many tests and have many hours of experience working on aircraft to attain the licenses, and then compete with many other applicants to get hired by an airline. Once hired, these folks are continuously evaluated and tested, just as the pilots are. In fact, some of the low-fare airlines actually have better working conditions for their maintenance personnel than some of the major carriers. The dedicated people who maintain the mechanical integrity of aircraft���regardless of the carrier���are competent and qualified.
The aircraft in service at these low-fare carriers must pass the same inspections and comply with the same required maintenance schedules as those flown by the major airlines. The Airbus 320 that���s flying in a Spirit Airlines paint job is maintained and inspected to the same standard as one with a United Airlines paint job. While the configurations of the aircraft may differ���seating, lavatories, galleys and so on���the requirements for safety set forth by the FAA are exactly the same.
The discount carriers have a different business model than the majors. They keep their costs down in many ways that differ from larger, established carriers. How they do that is a topic for another article. But the one thing they don���t skimp on is safety.
It���s absolutely essential that safety comes first for every airline company, not because the FAA requires it, but because it���s the very first rule of the business. If you aren���t safe, you aren���t going to be in business. It���s a simple concept, and the airlines in the U.S. are the gold standard for safety.
There���s a bunch of reasons to spend more or less on an airline ticket. Schedule, convenience, legroom, first-class comforts and other factors will help you decide how much you want to spend on your trip.
Safety is not a consideration. All of our airlines are safe. My family will fly on any U.S. airline if it meets our needs, regardless of the name on the side of the aircraft.
Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Faced with this upheaval, he also had a side business as a homebuilder. Today, Tom and his wife still travel extensively.��Three children and seven grandchildren keep them on the go. Tom's previous articles were Cutting Their Cut,��Why Am I Late and��The Unfriendly Skies.The post All Safe appeared first on HumbleDollar.
February’s Hits
ALL EYES HAVE BEEN on��Ukraine, and the death and destruction there have made our financial worries seem inconsequential. Nonetheless, folks have still found time to read about money. Here were the most popular articles on HumbleDollar in February:
"I acknowledge that tax-bracket creep is a good problem to have," writes John Yeigh. "But believe me, we���ll be sharing plenty of our good fortune with Uncle Sam."
Is the 4% withdrawal rate safe? When to claim Social Security? Pay off your mortgage early? Buy bitcoin? Adam Grossman looks at four of the financial world's raging debates.
"I could afford a fancy car, but every sage piece of financial advice I���d read advised me not to fall into that trap," writes Tanvir Alam.��"Was the sacrifice worth it?"
"I tried to get colleagues to embrace the checklist, but I completely failed," recalls Michael Flack. "I could see the glaze appear in their eyes or���worse���the smirk appear on their faces."
Recent retiree Michael Perry has a lump sum from his old employer to invest. Where should he stash these dollars? Michael takes readers through his internal debate over indexing, foreign stocks and more.
"I knew a couple who relied on the choir director at their church for investment advice," recounts Paul Merriman. "He persuaded them to invest in limited partnerships���thus earning hefty sales commissions."
Among blog posts, the most popular were Don Southworth on treasured possessions, Mike Flack on Series I savings bonds, Howard Rohleder on valuing��his income streams, Dick Quinn on survivor benefits and Kenyon Sayler on enough, as well as a piece I wrote��upon hearing that Russia had invaded Ukraine.
What about our Wednesday and Saturday newsletters? The four most popular were Mike Zaccardi's Early and Often, my piece on Paying It Forward, Rick Connor's Making Your Claim and Jim Kerr on Making a Comeback.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
"I acknowledge that tax-bracket creep is a good problem to have," writes John Yeigh. "But believe me, we���ll be sharing plenty of our good fortune with Uncle Sam."
Is the 4% withdrawal rate safe? When to claim Social Security? Pay off your mortgage early? Buy bitcoin? Adam Grossman looks at four of the financial world's raging debates.
"I could afford a fancy car, but every sage piece of financial advice I���d read advised me not to fall into that trap," writes Tanvir Alam.��"Was the sacrifice worth it?"
"I tried to get colleagues to embrace the checklist, but I completely failed," recalls Michael Flack. "I could see the glaze appear in their eyes or���worse���the smirk appear on their faces."
Recent retiree Michael Perry has a lump sum from his old employer to invest. Where should he stash these dollars? Michael takes readers through his internal debate over indexing, foreign stocks and more.
"I knew a couple who relied on the choir director at their church for investment advice," recounts Paul Merriman. "He persuaded them to invest in limited partnerships���thus earning hefty sales commissions."
Among blog posts, the most popular were Don Southworth on treasured possessions, Mike Flack on Series I savings bonds, Howard Rohleder on valuing��his income streams, Dick Quinn on survivor benefits and Kenyon Sayler on enough, as well as a piece I wrote��upon hearing that Russia had invaded Ukraine.
What about our Wednesday and Saturday newsletters? The four most popular were Mike Zaccardi's Early and Often, my piece on Paying It Forward, Rick Connor's Making Your Claim and Jim Kerr on Making a Comeback.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post February’s Hits appeared first on HumbleDollar.
Low-Cost Protection
I���VE BEEN IN LOVE with index funds for a long time, especially for a reason that doesn���t get enough attention. Lots of financial writers correctly praise index funds for their low costs, low turnover, low drama, massive and easy diversification, and numerous other good attributes.
But the No. 1 reason you should love index funds is they will keep you out of the hands of pushy, unethical financial salespeople. If Wall Street knows you���re committed to index funds, you���ll probably drop to the bottom���where you want to be, I assure you���of cold-call lists used by security salespeople looking for business.
The reason is obvious: The paltry expenses paid by index fund investors will never be enough to satisfy Wall Street���s seemingly insatiable need for hefty sales commissions, sky-high salaries, fancy offices, expense-paid trips and other perks.
Millions of investors seem willing to pay significant annual expenses for actively managed mutual funds. In the popular large-cap blend fund category, the average expense ratio is almost 1%. Index funds typically charge no more than one-fifth that much, and often less than 10% as much.
Even worse���in fact, unconscionable from Wall Street���s point of view���Fidelity Investments offers index funds in that category with no charge at all for expenses. But what���s bad for Wall Street is good for investors. In fact, there���s general agreement among academics and investment advisors who don���t sell products that the most reliable way to boost investment returns is to cut your expenses.
Salespeople often pretend to be our friends under the guise of a professional relationship, and then turn around and do their best to screw us over for their own purposes. Back in 2012, I coauthored a free book on the topic. Since then, things haven���t gotten better.
Consider a 2019 article in Financial Planning magazine under this headline: ���Advisor Who Touts His Holiday Giving Faces SEC Fraud Charges.��� The Securities and Exchange Commission alleged that the advisor, Keith Springer, most of whose clients are over age 55, failed to tell those clients about millions of dollars in compensation he received for directing their investments into annuities and other high-cost products.
Springer���s Northern California radio show has a tagline that reads ���Invest for need, not for greed.��� Yet his sales agents were heavily incentivized to sell high-cost annuities, for which they could win free trips, high commissions, and tickets to concerts and sports events. The more annuities they sold, the more benefits they received.
Springer denied the SEC���s charges. ���The SEC wants to put us out of business for issues that were fixed long ago,��� he wrote in an e-mail sent to MarketWatch . ���I���m just an easy target for them.��They know I don���t have the resources to fight them properly.���
Sure, I understand that salesmen should be paid for selling what they are paid to sell. But Springer���s sales agents sold annuities, then somehow discovered that they could earn even more rewards by persuading clients to turn around and sell those very annuities���incurring expensive surrender charges���so those same clients could buy new annuities. That, of course, generated new sales commissions.
Great for the sales agent. Toxic for the client. A textbook example of a conflict of interest. Can you imagine somebody doing that to investors in index funds? I can���t either.
Speaking of conflict of interest, Springer���s firm never bothered to tell clients, as it should have, that it was receiving much more compensation from annuities than if the clients had made other investments. Or that the firm received kickbacks from a third-party portfolio manager.
So far, what I���ve described could be called passive deception���failing to tell clients what they have a legal right to know. But it���s worse than that. Think active deception.
You may have heard of ���search engine optimization,��� a process that involves finding the keywords that are likely to bring visitors to your website. This requires you to understand your target audience and what motivates them. That might seem relatively benign and positive.
But now investment companies, including Springer���s, have discovered a new kind of organized deception. It���s called search engine suppression. It���s the dark side of manipulating what you will see when you search for a company or an advisor online.
Here���s how it works: In the old days of the internet, I used to occasionally search for ���pros and cons��� related to one of the industry���s largest advisory firms, which spends tons of money on advertising and has lots of fans, but also thousands of detractors.
I would always find enough negative reviews to keep me reading for hours. Of course, I could also find dozens of positive reviews apparently written by satisfied clients.
What���s different now is that I still get the gushing positive links, but only a few negative ones from people complaining about relatively minor infractions like not returning phone calls reliably. I���ve talked to enough clients of this firm to know it hasn���t changed its business model or its practices. As it turns out, the firm seems to have hired one or more companies to suppress the negative reviews.
Suppression companies promise in their advertising that they will use ���patented technology��� to ���bury��� negative blogs, articles, legal links and bad press. Now such criticism can be found only by scrolling through multiple pages of search results, far from the top hits.
Investors in index funds don���t have to worry about these tactics because there are no lucrative sales commissions or fees to attract shady third parties. When you invest in index funds, you don���t have to monitor a fund manager or pay attention to the ups and downs of what analysts think of individual stocks. In fact, index funds are boring���and that���s a good thing for investors who want to adopt a strategy and then let it do its thing.
I like to describe index funds as ���the sleep-easy investment.��� I could write endlessly about the schemes that have been devised to separate investors from their money. But if your money is in index funds, you don���t need to be concerned about all that.
Paul Merriman runs
PaulMerriman.com
, a site dedicated to financial education. Richard Buck contributed to the above article. Paul and Richard are the
authors
of�����We���re Talking Millions! 12 Simple Ways to Supercharge Your Retirement,��� which is also available as a free PDF. Paul's previous article was Be Suspicious.
But the No. 1 reason you should love index funds is they will keep you out of the hands of pushy, unethical financial salespeople. If Wall Street knows you���re committed to index funds, you���ll probably drop to the bottom���where you want to be, I assure you���of cold-call lists used by security salespeople looking for business.
The reason is obvious: The paltry expenses paid by index fund investors will never be enough to satisfy Wall Street���s seemingly insatiable need for hefty sales commissions, sky-high salaries, fancy offices, expense-paid trips and other perks.
Millions of investors seem willing to pay significant annual expenses for actively managed mutual funds. In the popular large-cap blend fund category, the average expense ratio is almost 1%. Index funds typically charge no more than one-fifth that much, and often less than 10% as much.
Even worse���in fact, unconscionable from Wall Street���s point of view���Fidelity Investments offers index funds in that category with no charge at all for expenses. But what���s bad for Wall Street is good for investors. In fact, there���s general agreement among academics and investment advisors who don���t sell products that the most reliable way to boost investment returns is to cut your expenses.
Salespeople often pretend to be our friends under the guise of a professional relationship, and then turn around and do their best to screw us over for their own purposes. Back in 2012, I coauthored a free book on the topic. Since then, things haven���t gotten better.
Consider a 2019 article in Financial Planning magazine under this headline: ���Advisor Who Touts His Holiday Giving Faces SEC Fraud Charges.��� The Securities and Exchange Commission alleged that the advisor, Keith Springer, most of whose clients are over age 55, failed to tell those clients about millions of dollars in compensation he received for directing their investments into annuities and other high-cost products.
Springer���s Northern California radio show has a tagline that reads ���Invest for need, not for greed.��� Yet his sales agents were heavily incentivized to sell high-cost annuities, for which they could win free trips, high commissions, and tickets to concerts and sports events. The more annuities they sold, the more benefits they received.
Springer denied the SEC���s charges. ���The SEC wants to put us out of business for issues that were fixed long ago,��� he wrote in an e-mail sent to MarketWatch . ���I���m just an easy target for them.��They know I don���t have the resources to fight them properly.���
Sure, I understand that salesmen should be paid for selling what they are paid to sell. But Springer���s sales agents sold annuities, then somehow discovered that they could earn even more rewards by persuading clients to turn around and sell those very annuities���incurring expensive surrender charges���so those same clients could buy new annuities. That, of course, generated new sales commissions.
Great for the sales agent. Toxic for the client. A textbook example of a conflict of interest. Can you imagine somebody doing that to investors in index funds? I can���t either.
Speaking of conflict of interest, Springer���s firm never bothered to tell clients, as it should have, that it was receiving much more compensation from annuities than if the clients had made other investments. Or that the firm received kickbacks from a third-party portfolio manager.
So far, what I���ve described could be called passive deception���failing to tell clients what they have a legal right to know. But it���s worse than that. Think active deception.
You may have heard of ���search engine optimization,��� a process that involves finding the keywords that are likely to bring visitors to your website. This requires you to understand your target audience and what motivates them. That might seem relatively benign and positive.
But now investment companies, including Springer���s, have discovered a new kind of organized deception. It���s called search engine suppression. It���s the dark side of manipulating what you will see when you search for a company or an advisor online.
Here���s how it works: In the old days of the internet, I used to occasionally search for ���pros and cons��� related to one of the industry���s largest advisory firms, which spends tons of money on advertising and has lots of fans, but also thousands of detractors.
I would always find enough negative reviews to keep me reading for hours. Of course, I could also find dozens of positive reviews apparently written by satisfied clients.
What���s different now is that I still get the gushing positive links, but only a few negative ones from people complaining about relatively minor infractions like not returning phone calls reliably. I���ve talked to enough clients of this firm to know it hasn���t changed its business model or its practices. As it turns out, the firm seems to have hired one or more companies to suppress the negative reviews.
Suppression companies promise in their advertising that they will use ���patented technology��� to ���bury��� negative blogs, articles, legal links and bad press. Now such criticism can be found only by scrolling through multiple pages of search results, far from the top hits.
Investors in index funds don���t have to worry about these tactics because there are no lucrative sales commissions or fees to attract shady third parties. When you invest in index funds, you don���t have to monitor a fund manager or pay attention to the ups and downs of what analysts think of individual stocks. In fact, index funds are boring���and that���s a good thing for investors who want to adopt a strategy and then let it do its thing.
I like to describe index funds as ���the sleep-easy investment.��� I could write endlessly about the schemes that have been devised to separate investors from their money. But if your money is in index funds, you don���t need to be concerned about all that.
Paul Merriman runs
PaulMerriman.com
, a site dedicated to financial education. Richard Buck contributed to the above article. Paul and Richard are the
authors
of�����We���re Talking Millions! 12 Simple Ways to Supercharge Your Retirement,��� which is also available as a free PDF. Paul's previous article was Be Suspicious.The post Low-Cost Protection appeared first on HumbleDollar.
February 28, 2022
The Last Taboo
WE ALL HAVE microphones���be it our social media accounts, our podcast or our blog posts. We all have something we want to say, and we want the world to hear it.
Our venting can be shrill and insufferable at times. Who among us hasn���t grown tired of never-ending political arguments and culture wars? Other times our sharing is just inane: If you've ever posted a selfie while looking in a bathroom mirror, you���re guilty.
But every once in a while, someone���s venting truly surprises me.
This happened a few weeks ago when I saw someone share her net worth on Twitter. She was celebrating how far she���d come, and rightfully so. She���d paid off a boatload of debt and found herself financially right-side-up for the first time. But she shared her actual net worth number, down to the dollar. She just let it all hang out, so to speak.
There���s been a growing willingness to share personal information within��the online financial community, including on HumbleDollar, such as��here and here. People are tweeting about their investment gains, their portfolio performance, their ability to retire early, and so on. But this was the first time I'd seen someone broadcast his or her precise net worth to the world.
I can���t imagine sharing something so private. If my net worth was low, I���d probably feel too embarrassed to tell anyone. If my net worth was high, I���d probably worry about looking like a showboat. I���m not a prude by any stretch, but some things are best left to the imagination, no?
I imagine people who share their financial stats publicly are more likely to be successful. It may feel good to brag. It would be a wholly different and harder thing to disclose when times are financially tough. I���m reminded of this couple on TikTok talking about how easy it is to make money in the stock market. You simply buy stocks when they���re going up and sell them before they go down. Eureka!
I wonder how the couple is doing now? It was pretty easy to make money in stocks in 2021. It hasn���t been so easy thus far in 2022. I hope they���re doing better than this person, who nearly lost everything following the cryptocurrency crowd. You���ll notice that he didn���t use a real name or face when disclosing this failure.
All jokes aside, the best argument I���ve heard for sharing personal financial information publicly is actually somewhat compelling. The more we talk about our money, the more normal it becomes to talk about money in general. We may be turning into a nation of venters, but money stubbornly stands as the last conversational taboo. That might be to our collective detriment.
I grew up in a family where stocks and investing were common topics at the dinner table. I like to joke that each of my uncles had his own way to ���play the market,��� but that I���m not sure any of their methods actually worked. Nevertheless, those dinner conversations undoubtedly set me on the path to becoming a financial advisor. I was fortunate in that regard. Far too many Americans lack an understanding of basic money concepts, which limits their ability to succeed financially.
One of the questions I often ask potential clients is, ���What was money like for you growing up?��� I ask because our childhood memories and experiences with money can have a powerful influence on how we behave with money as adults. For example, I was raised by my grandmother. She lived through the Great Depression. We weren���t poor by any stretch, but she never let me think that money came easily. As a result, I still carry an unnecessary scarcity mindset with me at all times.
Often, people tell me their families never talked about money. I once spoke with someone who implied that he got his formative financial advice from coworkers. Unfortunately, that advice came in 2009, right after the stock market crashed.
His coworkers told him that the market was just another form of gambling, and dissuaded him from contributing to his 401(k), despite a generous company match. By the time we spoke, he���d missed 12 years of one of the best bull runs in stock market history. Had money been a conversation topic he���d encountered more widely, his financial position might be quite different today.
While I���m not suggesting we all share our deepest money secrets with strangers on the internet, I do believe we should talk about it more with our loved ones. If you���re a parent, I���d suggest sharing a little bit of your family���s financial situation with your kids. And if you���re a kid, I���d suggest trying to break the financial ice with your parents. If you���re in a marriage in which money remains an unspoken topic, I suggest you talk to your partner, maybe over a glass of wine���but probably not more than one.
Matt Trogdon is a financial planner with Craftwork Capital, LLC. He's based in Washington, D.C., and has a special interest in helping Gen X and Gen Y families. He also serves as a workshop instructor for the Babson College Financial Literacy Project. Matt's previous articles were Answers��About Life,��Preservation Mode and��What It Really Costs. Follow him on Twitter��@Matt_Trogdon.
Our venting can be shrill and insufferable at times. Who among us hasn���t grown tired of never-ending political arguments and culture wars? Other times our sharing is just inane: If you've ever posted a selfie while looking in a bathroom mirror, you���re guilty.
But every once in a while, someone���s venting truly surprises me.
This happened a few weeks ago when I saw someone share her net worth on Twitter. She was celebrating how far she���d come, and rightfully so. She���d paid off a boatload of debt and found herself financially right-side-up for the first time. But she shared her actual net worth number, down to the dollar. She just let it all hang out, so to speak.
There���s been a growing willingness to share personal information within��the online financial community, including on HumbleDollar, such as��here and here. People are tweeting about their investment gains, their portfolio performance, their ability to retire early, and so on. But this was the first time I'd seen someone broadcast his or her precise net worth to the world.
I can���t imagine sharing something so private. If my net worth was low, I���d probably feel too embarrassed to tell anyone. If my net worth was high, I���d probably worry about looking like a showboat. I���m not a prude by any stretch, but some things are best left to the imagination, no?
I imagine people who share their financial stats publicly are more likely to be successful. It may feel good to brag. It would be a wholly different and harder thing to disclose when times are financially tough. I���m reminded of this couple on TikTok talking about how easy it is to make money in the stock market. You simply buy stocks when they���re going up and sell them before they go down. Eureka!
I wonder how the couple is doing now? It was pretty easy to make money in stocks in 2021. It hasn���t been so easy thus far in 2022. I hope they���re doing better than this person, who nearly lost everything following the cryptocurrency crowd. You���ll notice that he didn���t use a real name or face when disclosing this failure.
All jokes aside, the best argument I���ve heard for sharing personal financial information publicly is actually somewhat compelling. The more we talk about our money, the more normal it becomes to talk about money in general. We may be turning into a nation of venters, but money stubbornly stands as the last conversational taboo. That might be to our collective detriment.
I grew up in a family where stocks and investing were common topics at the dinner table. I like to joke that each of my uncles had his own way to ���play the market,��� but that I���m not sure any of their methods actually worked. Nevertheless, those dinner conversations undoubtedly set me on the path to becoming a financial advisor. I was fortunate in that regard. Far too many Americans lack an understanding of basic money concepts, which limits their ability to succeed financially.
One of the questions I often ask potential clients is, ���What was money like for you growing up?��� I ask because our childhood memories and experiences with money can have a powerful influence on how we behave with money as adults. For example, I was raised by my grandmother. She lived through the Great Depression. We weren���t poor by any stretch, but she never let me think that money came easily. As a result, I still carry an unnecessary scarcity mindset with me at all times.
Often, people tell me their families never talked about money. I once spoke with someone who implied that he got his formative financial advice from coworkers. Unfortunately, that advice came in 2009, right after the stock market crashed.
His coworkers told him that the market was just another form of gambling, and dissuaded him from contributing to his 401(k), despite a generous company match. By the time we spoke, he���d missed 12 years of one of the best bull runs in stock market history. Had money been a conversation topic he���d encountered more widely, his financial position might be quite different today.
While I���m not suggesting we all share our deepest money secrets with strangers on the internet, I do believe we should talk about it more with our loved ones. If you���re a parent, I���d suggest sharing a little bit of your family���s financial situation with your kids. And if you���re a kid, I���d suggest trying to break the financial ice with your parents. If you���re in a marriage in which money remains an unspoken topic, I suggest you talk to your partner, maybe over a glass of wine���but probably not more than one.
Matt Trogdon is a financial planner with Craftwork Capital, LLC. He's based in Washington, D.C., and has a special interest in helping Gen X and Gen Y families. He also serves as a workshop instructor for the Babson College Financial Literacy Project. Matt's previous articles were Answers��About Life,��Preservation Mode and��What It Really Costs. Follow him on Twitter��@Matt_Trogdon.The post The Last Taboo appeared first on HumbleDollar.
