Jonathan Clements's Blog, page 231
February 8, 2022
Retire Those Fears
THE DRUMBEAT of ���retirement crisis��� is much too loud. While 54% of retirees believe there���s a national retirement crisis, just 4% describe their own retirement situation as a crisis. And whereas 90% of recent retirees are able to spend freely, within reason, or can cover their needs and also engage in some discretionary spending, only 10% say that they���re on a strict budget.
Concern about running out of money is regularly exaggerated by inflated estimates of life expectancy. Social Security tables indicate that, on average, only one in 10 of today���s 65-year-old men will live to age 95. Moreover, older people spend less, in large part because physical limitations make them less able to spend and because they���re less inclined to spend for personal reasons.
Spending at age 84, adjusted for inflation, is 23% less than it was at age 62 among college-educated American couples. Spending on movies, theatre, opera and concerts declines by more than 50% between the ages of 60 and 80. Spending on hearing aids, nursing homes and funeral expenses increases by more than 50%.
We need not feel guilty about spending our hard-earned savings on ourselves. I wrote an article for TheWall Street Journal on the subject, prompting one reader to comment: ���During my career I was a very conscientious saver and investor. I always maxed out my 401(k) contribution and put a large percentage of my salary and bonus into a deferred compensation program. I have had a difficult time changing my mindset from a saver to a spender. This article helped me make that mental transition. The first thing I did was to go out and get fitted for a new set of PING golf clubs and I didn���t feel guilty about it!���
Some people derive no pleasure from spending on themselves. Another reader wrote: ���If one has never derived pleasure from material things, why would that change in retirement? A cup of coffee and a walk on the beach at dawn and I'm happy. The psychic income from being over-saved has value.���
I empathize with this reader. I, too, like a cup of coffee and a walk on the beach, even if not at dawn. But why not share ���over-saved��� money with family and the needy? One reader who has embraced this lesson wrote: ���I learned from my mom that the greatest joy in life is giving to your family. She would give something to all her six children, their spouses, the grandchildren, the great-grandchildren, and all their spouses on their birthdays, anniversaries, St. Patrick���s Day, Valentine���s Day, and no reason at all. If you want the closest thing to eternal life, try this.���
Another wrote about balancing spending on himself, his family and the needy: ���I am deriving pleasure from assuming the strategy of ���I am through saving. Now I am spending.��� Judiciously, to be sure, but nevertheless with a view to obtaining satisfaction. Thus, my wife and I have made some long-desired renovations to our home, plan to schedule at least two major overseas vacations a year, supplement our children���s financial needs at a time when they need it and when I can see the result. I devote more time and financial support to charitable work. I continue to spend time exercising at a local athletic club, now free thanks to Silver Sneakers. I read more, and indulge in my love of classical music. All of this gives me significant satisfaction.���
My wife and I have rebalanced our spending on ourselves, our family and the needy over the years. We have contributed a substantial amount toward the purchase of a house by our younger daughter, we bought a house for our disabled older daughter, and we���ve contributed much to the needy and to support the causes that matter to us.
One important rebalancing point occurred in late 2016, when United Airlines failed to upgrade us from economy to business class on either leg of a long trip from California to Israel. It dawned on us that we���re sufficiently old and sufficiently well-off to afford business class on long trips, and this is what we have done ever since. And we have increased substantially our contributions to the needy and to support the causes that matter to us.
One reader faulted me for failing to ���address preserving capital for the next generation, which is a priority for some of us octogenarians.��� But why not give money to the next generation with a warm hand rather than with a cold one?
I end with a story about the so-called dangers of giving adult children money without asking them to pay it back, a danger emphasized by some financial advisors who approached me after a conference presentation on the subject. One advisor stood aside, waiting until all the others had left.
���I burst out crying when you said, ���It is better to give with a warm hand than with a cold one���.��� Indeed, she had tears in her eyes when she spoke to me. It turned out that she lent her son some $27,000 for college tuition and now demanded that he pay her by the agreed schedule. She reasoned that paying by schedule would benefit her son, teaching him financial responsibility.
But the son was now financially squeezed, at the beginning of his career, lacking even money to buy his girlfriend an engagement ring, and his mother���s demand soured their relationship. The mother had more than enough to forgive the loan without imposing any hardship on her, giving with a warm hand rather than with a cold one. I hope this is what she did that day. And I hope that she shares her story and lessons with her clients.
Meir Statman is a finance professor at Santa Clara University and a leading expert on behavioral finance. His books include Finance for Normal People and What Investors Really Want.
��
Concern about running out of money is regularly exaggerated by inflated estimates of life expectancy. Social Security tables indicate that, on average, only one in 10 of today���s 65-year-old men will live to age 95. Moreover, older people spend less, in large part because physical limitations make them less able to spend and because they���re less inclined to spend for personal reasons.
Spending at age 84, adjusted for inflation, is 23% less than it was at age 62 among college-educated American couples. Spending on movies, theatre, opera and concerts declines by more than 50% between the ages of 60 and 80. Spending on hearing aids, nursing homes and funeral expenses increases by more than 50%.
We need not feel guilty about spending our hard-earned savings on ourselves. I wrote an article for TheWall Street Journal on the subject, prompting one reader to comment: ���During my career I was a very conscientious saver and investor. I always maxed out my 401(k) contribution and put a large percentage of my salary and bonus into a deferred compensation program. I have had a difficult time changing my mindset from a saver to a spender. This article helped me make that mental transition. The first thing I did was to go out and get fitted for a new set of PING golf clubs and I didn���t feel guilty about it!���
Some people derive no pleasure from spending on themselves. Another reader wrote: ���If one has never derived pleasure from material things, why would that change in retirement? A cup of coffee and a walk on the beach at dawn and I'm happy. The psychic income from being over-saved has value.���
I empathize with this reader. I, too, like a cup of coffee and a walk on the beach, even if not at dawn. But why not share ���over-saved��� money with family and the needy? One reader who has embraced this lesson wrote: ���I learned from my mom that the greatest joy in life is giving to your family. She would give something to all her six children, their spouses, the grandchildren, the great-grandchildren, and all their spouses on their birthdays, anniversaries, St. Patrick���s Day, Valentine���s Day, and no reason at all. If you want the closest thing to eternal life, try this.���
Another wrote about balancing spending on himself, his family and the needy: ���I am deriving pleasure from assuming the strategy of ���I am through saving. Now I am spending.��� Judiciously, to be sure, but nevertheless with a view to obtaining satisfaction. Thus, my wife and I have made some long-desired renovations to our home, plan to schedule at least two major overseas vacations a year, supplement our children���s financial needs at a time when they need it and when I can see the result. I devote more time and financial support to charitable work. I continue to spend time exercising at a local athletic club, now free thanks to Silver Sneakers. I read more, and indulge in my love of classical music. All of this gives me significant satisfaction.���
My wife and I have rebalanced our spending on ourselves, our family and the needy over the years. We have contributed a substantial amount toward the purchase of a house by our younger daughter, we bought a house for our disabled older daughter, and we���ve contributed much to the needy and to support the causes that matter to us.
One important rebalancing point occurred in late 2016, when United Airlines failed to upgrade us from economy to business class on either leg of a long trip from California to Israel. It dawned on us that we���re sufficiently old and sufficiently well-off to afford business class on long trips, and this is what we have done ever since. And we have increased substantially our contributions to the needy and to support the causes that matter to us.
One reader faulted me for failing to ���address preserving capital for the next generation, which is a priority for some of us octogenarians.��� But why not give money to the next generation with a warm hand rather than with a cold one?
I end with a story about the so-called dangers of giving adult children money without asking them to pay it back, a danger emphasized by some financial advisors who approached me after a conference presentation on the subject. One advisor stood aside, waiting until all the others had left.
���I burst out crying when you said, ���It is better to give with a warm hand than with a cold one���.��� Indeed, she had tears in her eyes when she spoke to me. It turned out that she lent her son some $27,000 for college tuition and now demanded that he pay her by the agreed schedule. She reasoned that paying by schedule would benefit her son, teaching him financial responsibility.
But the son was now financially squeezed, at the beginning of his career, lacking even money to buy his girlfriend an engagement ring, and his mother���s demand soured their relationship. The mother had more than enough to forgive the loan without imposing any hardship on her, giving with a warm hand rather than with a cold one. I hope this is what she did that day. And I hope that she shares her story and lessons with her clients.
Meir Statman is a finance professor at Santa Clara University and a leading expert on behavioral finance. His books include Finance for Normal People and What Investors Really Want.��
The post Retire Those Fears appeared first on HumbleDollar.
Valuing My Income
READER COMMENTS on one of my blog posts prompted me to dig deeper into my thinking about asset allocation. A trip to the HumbleDollar archive led me to a Charley Ellis article where he emphasized that readers should incorporate Social Security, pensions and annuity payments into any analysis of their asset allocation and portfolio risk.
A guaranteed stream of income is clearly valuable. I knew this, but I had missed the obvious conclusion���that the net present value (NPV) of these income streams should be considered part of a portfolio. Specifically, they���re bond substitutes but without the interest rate risk of true bonds.
I used the NPV function in Excel to value the three income streams I���m due, so I could then evaluate each as part of my portfolio���s asset allocation. This required some assumptions:
When will I begin Social Security? I decided to use my full Social Security retirement age, with benefit values based on my current statement, which I downloaded from the Social Security��website. I factored in my wife���s spousal benefit at 50% of my benefit. Since my start date for Social Security is in the future, the NPV calculation had to account for a few years with no payments.
For future cost-of-living adjustments for Social Security, I used the average for the past 10 years, which was 1.88% per year. Given current inflation, that may prove conservative.
The other two income streams I���m due are a pension and an income annuity. One has started and the other will start later this year. Both are fixed amounts, so there was no need to estimate annual inflation increases.
For all three income streams, I had to assume how long my wife and I would collect. For this I went to the IRS joint life��expectancy tables and, based on our ages, arrived at 28 years.
The final input was the discount rate. Ultimately, I decided to use 3%, recognizing that anywhere from 2% to 5% might be justified in today���s environment. I did want to acknowledge some credit risk implicit in pensions and income annuities, which justifies a small premium above the risk-free Treasury rate.
By building this model in Excel, it was easy to see the impact of changes in assumptions. What if we both live to 100? What is the impact of a 5% discount rate versus 3%? What if Social Security cost-of-living adjustments average 3% instead of 1.88%? I was also able to model the difference if I opt to defer Social Security until age 70.
Incorporating the three present value calculations into my portfolio added 25% to its worth. Treating them as bond substitutes led to a key conclusion: I could move considerable bond and cash investments into stocks, and still sleep at night.
This is a reversal of the quandary I discussed in my earlier blog post. One revelation: Because my three income streams aren���t subject to interest rate risk in the same way an investment in bonds would be, I already enjoy downside portfolio protection, and don���t need to shift money into bonds at a time when interest rates may rise. At the same time, this exercise highlighted how the cushion provided by regular income payments can help my wife and me weather a big stock market decline.
A guaranteed stream of income is clearly valuable. I knew this, but I had missed the obvious conclusion���that the net present value (NPV) of these income streams should be considered part of a portfolio. Specifically, they���re bond substitutes but without the interest rate risk of true bonds.
I used the NPV function in Excel to value the three income streams I���m due, so I could then evaluate each as part of my portfolio���s asset allocation. This required some assumptions:
When will I begin Social Security? I decided to use my full Social Security retirement age, with benefit values based on my current statement, which I downloaded from the Social Security��website. I factored in my wife���s spousal benefit at 50% of my benefit. Since my start date for Social Security is in the future, the NPV calculation had to account for a few years with no payments.
For future cost-of-living adjustments for Social Security, I used the average for the past 10 years, which was 1.88% per year. Given current inflation, that may prove conservative.
The other two income streams I���m due are a pension and an income annuity. One has started and the other will start later this year. Both are fixed amounts, so there was no need to estimate annual inflation increases.
For all three income streams, I had to assume how long my wife and I would collect. For this I went to the IRS joint life��expectancy tables and, based on our ages, arrived at 28 years.
The final input was the discount rate. Ultimately, I decided to use 3%, recognizing that anywhere from 2% to 5% might be justified in today���s environment. I did want to acknowledge some credit risk implicit in pensions and income annuities, which justifies a small premium above the risk-free Treasury rate.
By building this model in Excel, it was easy to see the impact of changes in assumptions. What if we both live to 100? What is the impact of a 5% discount rate versus 3%? What if Social Security cost-of-living adjustments average 3% instead of 1.88%? I was also able to model the difference if I opt to defer Social Security until age 70.
Incorporating the three present value calculations into my portfolio added 25% to its worth. Treating them as bond substitutes led to a key conclusion: I could move considerable bond and cash investments into stocks, and still sleep at night.
This is a reversal of the quandary I discussed in my earlier blog post. One revelation: Because my three income streams aren���t subject to interest rate risk in the same way an investment in bonds would be, I already enjoy downside portfolio protection, and don���t need to shift money into bonds at a time when interest rates may rise. At the same time, this exercise highlighted how the cushion provided by regular income payments can help my wife and me weather a big stock market decline.
The post Valuing My Income appeared first on HumbleDollar.
Scary Stuff
WOULD YOU BASE important financial or life choices on false or misleading information? Of course not. Yet, when deciding on key economic and social issues, that���s exactly what people often do.
I���m addicted to social media. I follow advocacy groups focused on Social Security, health care and taxes, as well as the politicians who are especially engaged in these issues.
Some tweets and memes reinforce what people want to believe or provide the easy answers they seek. Usually, no thought is given to investigating the facts. That may be comforting to some, but it���s a heck of a way to set economic and social policy.
The misinformation���and the related comments���are scary. One recent tweet read, ���Americans pay all the taxes and get NOTHING in return while the rich get richer.��� Get nothing mind you. Do Americans realize they live in one of the world���s lowest-taxed countries?
Another said Americans could have health care for free, just like other countries do. I���ll take anything that���s free, but health care is never that.
Are you among those who are convinced Congress stole the Social Security trust funds?�� Do you believe the $2.9 trillion in the trust isn���t reserved for incurred liabilities, but rather represents surplus funds that should be used to increase benefits? I hope not.
A favorite myth is that, to fix Social Security, all we need do is stop paying members of Congress. The fact is, their salaries would pay Social Security benefits for less than an hour.
My frustration is increased when it���s so easy to get the facts on most subjects. For example, check out the latest Social Security��Trustees Report. You only need to read the first few pages to get the message.
Politicians tweet that 70% of seniors don���t have dental insurance and therefore can���t afford dental care. Ah, the fallacy of generalization. A more recent report says a little over half of seniors have dental coverage. A whopping 93% of seniors favor adding dental coverage to Medicare, but that drops to 59% if additional premiums are required. And it appears only 20% say they delayed or avoided dental care because of cost.
I recently saw a bumper sticker reading ���Medicare for All.��� Most people will agree our health care system needs some major changes. But do they think beyond the ���Medicare for All��� phrase and consider its consequences?
Medicare pays significantly less for care than the private sector. What are the implications of paying all health care providers 20% to 30% less than they currently receive from their patients under age 65? There must be some. And what about managing costs? Do people realize that all health care systems use some strategy to manage costs���strategies that limit choice and access in some manner?
Do most Americans understand the cost of Medicare to beneficiaries? It���s not free. Start with the basic Part B premium of $170.10 per month. Add the average Part D premium of $31.47. Then there���s Medigap coverage for another $200 per month, although prices range from about $100 to nearly $1,000, depending on your age, where you live and the way the carrier sets premiums.
In total, we���re at about $400 per month per retiree, not considering income-based extra Medicare premiums, otherwise known as IRMAA, or the deductible and copays applicable to Part D coverage. Oh yeah, there���s also funding for Medicare that comes from those payroll taxes on all wages.
It���s possible today to get family Affordable Care Act (ACA) coverage for far less than what Medicare costs, once ACA subsidies are factored in. Don���t get me wrong, I���m not against health care reform. I am for people understanding all the moving parts and then deciding what they want to change���and pay for.
The general lack of understanding of economics is also frightening. Many believe corporate profits are bad���greedy even���and of little benefit to the average American. Yet these same people are banking on stock market growth in their 401(k) plan and IRA.
Corporate greed and CEO pay are blamed for inflation. Doesn���t that ignore global factors, notably ramped-up consumer spending and supply chain issues?
The link between spending, taxes and prices is often ignored. A good example is the tendency for the public to get behind workers in a labor dispute, while knowing little of the issues and being oblivious to the impact on consumer prices.
Are teachers underpaid? I���ve found most people believe they are. Do those folks make the link between teacher costs, the household incomes of local citizens and their property taxes? In my town, 59% of property taxes go to schools and, of that sum, 60% is for teacher compensation.
Everything we want has a price. Sometimes, it���s cash. Other times, it���s tradeoffs. Nearly everything is linked to something else. There are���many times unintended���consequences to how we act as individuals and as a country.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
The post Scary Stuff appeared first on HumbleDollar.
February 7, 2022
Wrong Bucket
IN HINDSIGHT, my wife and I made a mistake by over-saving in tax-deferred accounts. It���s not that we saved too much overall. Rather, we ended up with retirement savings that aren���t diversified among different account types. In fairness, this was caused by the limitations of our work-sponsored retirement plans, coupled with the stock market���s handsome appreciation in recent years.
The classic approach is to build a three-legged stool��for retirement���Social Security, a pension if available, and personal savings. I���d suggest a tweak to strengthen the personal savings leg. Savings can have any of three different tax treatments���taxable, tax-deferred and tax-free Roth money. You don���t want any one of these to become so big that it adds a wobble to the stool, as has happened to us.
When I retired in early 2017, our savings were 91% in traditional tax-deferred retirement accounts and 9% in taxable accounts. We didn���t have Roth IRA savings because our combined income put us above the income thresholds. Meanwhile, Roth backdoor conversions had only become available within our 401(k)s in our final working years. The upshot: Our lack of tax diversification prevents us from taking tax-free Roth withdrawals to keep our tax bracket low, and also means we pay higher Medicare Part B premiums.
How did this happen? We both followed the conventional wisdom to always maximize our 401(k) contributions, including the catch-up contributions I made in my final 10 working years. Along the way, we took two small pension obligations as lump-sum IRA payouts, adding further to the tax-deferred tilt of our savings. Forty years of stock appreciation and inflation did the rest.
Since retiring, the stock market has doubled again. Once our Social Security payments and required minimum distributions begin, we have a decent chance of being in as high a tax bracket as any we paid during our working years. I base this partly on the assumption that today���s lower tax brackets will sunset in 2026, as scheduled under current law.
I acknowledge that tax-bracket creep is a good problem to have. But believe me, we���ll be sharing plenty of our good fortune with Uncle Sam. In hindsight, we should have increased our taxable savings at the expense of our tax-deferred bucket. This would have been particularly farsighted during our earliest working years, when our income tax rates were the lowest we���d ever pay.
We could have limited our early year 401(k) contributions to only the amount required for the company match. Then we could have paid income taxes on the balance of our savings, and invested that reduced principal in a taxable account. Subsequent gains would have qualified as long-term capital gains, far lower than the income-tax rates we���ll pay on our required minimum distributions (RMDs). Also, the size of those RMDs would have been lower, helping to check tax-bracket creep.
Since retiring, we���ve been rebalancing our buckets by aggressively doing Roth conversions while tax rates are still relatively low. Our savings are now 86% in tax-deferred accounts, 7% in taxable accounts and 7% in Roth IRAs. That���s still highly skewed, but a little better than it was.
Perhaps we should have bitten the expensive tax bullet earlier and started a trickle into the Roth bucket through backdoor conversions. We could have paid the tax from our taxable accounts, effectively using taxable money to increase our Roth accounts. Larger Roth balances would have three advantages to us: tax-free future gains, lower RMDs and an ability to pass greater money to heirs.
Unfortunately, Roth contributions were mostly not available to us or came at a high tax cost. By contrast, today���s workers have lower tax rates and expanded Roth savings options, including within 401(k) plans. Younger workers, in particular, may want to add to their Roth or taxable savings buckets, since their tax rate may be lower now than it will be at any time in the future.
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 classic approach is to build a three-legged stool��for retirement���Social Security, a pension if available, and personal savings. I���d suggest a tweak to strengthen the personal savings leg. Savings can have any of three different tax treatments���taxable, tax-deferred and tax-free Roth money. You don���t want any one of these to become so big that it adds a wobble to the stool, as has happened to us.
When I retired in early 2017, our savings were 91% in traditional tax-deferred retirement accounts and 9% in taxable accounts. We didn���t have Roth IRA savings because our combined income put us above the income thresholds. Meanwhile, Roth backdoor conversions had only become available within our 401(k)s in our final working years. The upshot: Our lack of tax diversification prevents us from taking tax-free Roth withdrawals to keep our tax bracket low, and also means we pay higher Medicare Part B premiums.
How did this happen? We both followed the conventional wisdom to always maximize our 401(k) contributions, including the catch-up contributions I made in my final 10 working years. Along the way, we took two small pension obligations as lump-sum IRA payouts, adding further to the tax-deferred tilt of our savings. Forty years of stock appreciation and inflation did the rest.
Since retiring, the stock market has doubled again. Once our Social Security payments and required minimum distributions begin, we have a decent chance of being in as high a tax bracket as any we paid during our working years. I base this partly on the assumption that today���s lower tax brackets will sunset in 2026, as scheduled under current law.
I acknowledge that tax-bracket creep is a good problem to have. But believe me, we���ll be sharing plenty of our good fortune with Uncle Sam. In hindsight, we should have increased our taxable savings at the expense of our tax-deferred bucket. This would have been particularly farsighted during our earliest working years, when our income tax rates were the lowest we���d ever pay.
We could have limited our early year 401(k) contributions to only the amount required for the company match. Then we could have paid income taxes on the balance of our savings, and invested that reduced principal in a taxable account. Subsequent gains would have qualified as long-term capital gains, far lower than the income-tax rates we���ll pay on our required minimum distributions (RMDs). Also, the size of those RMDs would have been lower, helping to check tax-bracket creep.
Since retiring, we���ve been rebalancing our buckets by aggressively doing Roth conversions while tax rates are still relatively low. Our savings are now 86% in tax-deferred accounts, 7% in taxable accounts and 7% in Roth IRAs. That���s still highly skewed, but a little better than it was.
Perhaps we should have bitten the expensive tax bullet earlier and started a trickle into the Roth bucket through backdoor conversions. We could have paid the tax from our taxable accounts, effectively using taxable money to increase our Roth accounts. Larger Roth balances would have three advantages to us: tax-free future gains, lower RMDs and an ability to pass greater money to heirs.
Unfortunately, Roth contributions were mostly not available to us or came at a high tax cost. By contrast, today���s workers have lower tax rates and expanded Roth savings options, including within 401(k) plans. Younger workers, in particular, may want to add to their Roth or taxable savings buckets, since their tax rate may be lower now than it will be at any time in the future.
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 Wrong Bucket appeared first on HumbleDollar.
February 6, 2022
Motion Sickness
JUST HOW CRAZY WERE��some of last week���s market moves? The Wall Street Journal detailed how Amazon.com (symbol: AMZN) recorded the biggest-ever one-day market cap gain in stock market history. The largest company in the consumer discretionary sector was valued $191.3 billion higher after posting better-than-expected earnings Thursday evening.
Amazon���s monster move came just a day after Meta Platforms (FB) notched the single-biggest market cap decrease in market history. More widely known as Facebook, the social media giant shed $232 billion in market cap after posting its first drop in daily users in its 18-year history.
These unsettling shifts among the world���s most valuable companies had their impact on the Bloomberg��Billionaires Index. Jeff Bezos, founder of Amazon and owner of 10% of outstanding shares, surged to the No. 2 spot on the list, behind Tesla���s Elon Musk. Mark Zuckerberg has seen his net worth decline by more than $36 billion so far this year. The Meta CEO barely hangs on to his place among the top 10, with a net worth now under (gasp) $90 billion.
Amazon and Meta shares weren't the only ones moving and shaking last week. Post-earnings stock price volatility occurred among other large tech-related firms, including PayPal (-25%), Spotify (-17%), Alphabet (-8%) and Snap (+59%). Day traders were surely downing a few drinks after a stressful week. More earnings are on tap over the balance of the month.
Index fund investors and those focused on the long term are resting easier. Last week, the S&P 500 was up nearly 2%, while ex-U.S. markets again fared well. Developed nations slightly outpaced the U.S., while emerging markets rallied almost 3%.
Looking ahead, earnings continue to roll in, but the focus will undoubtedly be on the Consumer Price Index report on Thursday morning. Some experts are betting that this month and next could see ���peak inflation.���
Amazon���s monster move came just a day after Meta Platforms (FB) notched the single-biggest market cap decrease in market history. More widely known as Facebook, the social media giant shed $232 billion in market cap after posting its first drop in daily users in its 18-year history.
These unsettling shifts among the world���s most valuable companies had their impact on the Bloomberg��Billionaires Index. Jeff Bezos, founder of Amazon and owner of 10% of outstanding shares, surged to the No. 2 spot on the list, behind Tesla���s Elon Musk. Mark Zuckerberg has seen his net worth decline by more than $36 billion so far this year. The Meta CEO barely hangs on to his place among the top 10, with a net worth now under (gasp) $90 billion.
Amazon and Meta shares weren't the only ones moving and shaking last week. Post-earnings stock price volatility occurred among other large tech-related firms, including PayPal (-25%), Spotify (-17%), Alphabet (-8%) and Snap (+59%). Day traders were surely downing a few drinks after a stressful week. More earnings are on tap over the balance of the month.
Index fund investors and those focused on the long term are resting easier. Last week, the S&P 500 was up nearly 2%, while ex-U.S. markets again fared well. Developed nations slightly outpaced the U.S., while emerging markets rallied almost 3%.
Looking ahead, earnings continue to roll in, but the focus will undoubtedly be on the Consumer Price Index report on Thursday morning. Some experts are betting that this month and next could see ���peak inflation.���
The post Motion Sickness appeared first on HumbleDollar.
Lucky WOOFs
MY FATHER-IN-LAW was an avid tennis player and an astute coach. The first time he observed me play, he commented on how I���a soccer player growing up���had good speed and quick reactions. I had a terrible swing, however. As he put it, ���You can get to any ball. You have no idea what to do when you get there.���
He was correct. To this day, what looks like a great shot is often actually a mishit off my racquet frame. It still counts, so I coined a phrase for such shots: WOOFs, short for winners off of frame.
Truth be told, many of my successes have been WOOFs. I���ll be in the right place and just lucky enough to connect with an opportunity. I happened to watch a Kansas City Chiefs game one Sunday, and then successfully interviewed the next day with a law firm that represented the team���something I didn���t know beforehand.
Years later, I was asked by a prestigious school to teach a class���on the spot���about the Cuban Missile Crisis. I happened to see that the students were reading Frankenstein in English class. I used my own ancient remembrance of the novel to discuss the theme of disastrously losing control of technology. That lesson led to 20 years of teaching at the school.
I���ve had investment tips fall into my lap. Serendipitous encounters have often led to writing topics. Most valuable of all, I stumbled upon a certain woman���s profile in the early days of online dating. She was so cheap���and remains so���that she only kept the profile up a short time during the dating site���s free, introductory period. Some awkward courting later, I WOOFed my way into a great life partner.
A common adage is that luck happens when preparation meets opportunity. I wonder how much of that preparation is unintentional. I was never a great soccer player. But it helped me to pick up tennis later in life, and tennis was essential to getting a certain cheap woman to marry me, not to mention connecting with some business and social partners.
We need to appreciate the WOOFs of life, and be humble in the face of our good fortune. Often, the difference between successful and unsuccessful is the flying��fickle finger��of fate, rather than pure talent or whether a person is somehow worthy.
Andrew Carnegie���s first break came when he worked as a messenger boy in a telegraph office. Reputedly, he could understand Morse code��by ear without having to write it down. This not only impressed his boss, but also it meant he could get the inside financial scoop if he was in the right place. On the other hand, a talented friend of our son missed admission to a prestigious music school because a cello string broke during his audition.
We should never discount an experience���good or bad���as useless. Rather, we should hoard our experiences. What can we take away from them? Since we can���t know which parts may help later in life, how do we learn as much as possible from our experiences? Our son���s friend found a successful career as an investment advisor���because he made a good impression during the job interview by discussing music.
Often, ���being in the right place��� is a facet of privilege. Wealth buys broad exposure to both preparation and opportunity, especially when we���re young. It also gives people free time to have more experiences that might later be helpful.
Yes, we shouldn���t waste money because it can help us in the future. The same holds for experiences. We shouldn���t waste them���because we never know when they might come in handy.
He was correct. To this day, what looks like a great shot is often actually a mishit off my racquet frame. It still counts, so I coined a phrase for such shots: WOOFs, short for winners off of frame.
Truth be told, many of my successes have been WOOFs. I���ll be in the right place and just lucky enough to connect with an opportunity. I happened to watch a Kansas City Chiefs game one Sunday, and then successfully interviewed the next day with a law firm that represented the team���something I didn���t know beforehand.
Years later, I was asked by a prestigious school to teach a class���on the spot���about the Cuban Missile Crisis. I happened to see that the students were reading Frankenstein in English class. I used my own ancient remembrance of the novel to discuss the theme of disastrously losing control of technology. That lesson led to 20 years of teaching at the school.
I���ve had investment tips fall into my lap. Serendipitous encounters have often led to writing topics. Most valuable of all, I stumbled upon a certain woman���s profile in the early days of online dating. She was so cheap���and remains so���that she only kept the profile up a short time during the dating site���s free, introductory period. Some awkward courting later, I WOOFed my way into a great life partner.
A common adage is that luck happens when preparation meets opportunity. I wonder how much of that preparation is unintentional. I was never a great soccer player. But it helped me to pick up tennis later in life, and tennis was essential to getting a certain cheap woman to marry me, not to mention connecting with some business and social partners.
We need to appreciate the WOOFs of life, and be humble in the face of our good fortune. Often, the difference between successful and unsuccessful is the flying��fickle finger��of fate, rather than pure talent or whether a person is somehow worthy.
Andrew Carnegie���s first break came when he worked as a messenger boy in a telegraph office. Reputedly, he could understand Morse code��by ear without having to write it down. This not only impressed his boss, but also it meant he could get the inside financial scoop if he was in the right place. On the other hand, a talented friend of our son missed admission to a prestigious music school because a cello string broke during his audition.
We should never discount an experience���good or bad���as useless. Rather, we should hoard our experiences. What can we take away from them? Since we can���t know which parts may help later in life, how do we learn as much as possible from our experiences? Our son���s friend found a successful career as an investment advisor���because he made a good impression during the job interview by discussing music.
Often, ���being in the right place��� is a facet of privilege. Wealth buys broad exposure to both preparation and opportunity, especially when we���re young. It also gives people free time to have more experiences that might later be helpful.
Yes, we shouldn���t waste money because it can help us in the future. The same holds for experiences. We shouldn���t waste them���because we never know when they might come in handy.
The post Lucky WOOFs appeared first on HumbleDollar.
Mutual Distaste
I'D LIKE TO START with a seemingly simple question: If you purchased an investment for $19,000 and later sold it for $287,000, would there be a gain or a loss? If you answered that there would be a gain, I���d agree with you. Specifically, it appears the gain would be $268,000. But what if there was no gain and the investment was actually sold at a��loss? Could that be the case?
This scenario isn't hypothetical. This was the recent experience of a client. Let's call her Jane. Normally, I wouldn't discuss a specific family's finances. But in this case, Jane was so surprised���and I was too���that she felt it might benefit others to describe her experience.
How could a six-figure gain turn into a loss? In reality, Jane didn't experience a loss. She did quite well. What happened, though, was a function of the way mutual funds work, especially actively managed funds like the one Jane owned.
To understand this, we need to go back to the 1940 Investment Company Act, which governs mutual funds. One of its provisions allows mutual funds to be treated as ���pass-through entities��� for tax purposes. In other words, mutual funds themselves aren't subject to income taxes. Instead, a fund's tax bill can be shared pro-rata by its shareholders.
That���s an important and valuable provision because it prevents a situation in which income would be taxed twice, as it is in other cases, such as when a public company pays a dividend. A key stipulation of the law, however, is that a mutual fund must pay out at least 90% of its income to its shareholders to be eligible for this favorable tax treatment.
That's exactly what happened with Jane's fund. She first bought into the fund in the 1990s. In subsequent years, the fund's managers regularly bought and sold investments within the fund, booking profits in the process. When they did, those profits were passed along to shareholders. These are called distributions, and they're taxable to shareholders in the year that they're distributed.
When a distribution is paid, some shareholders elect to receive them in cash, while others choose to automatically reinvest the proceeds back into the fund. Jane opted for the latter. Each time her fund made a distribution, she ended up buying more shares. Those purchases added to her cost basis for tax purposes.
Over the decades, as the fund continued to realize gains, it made ever-larger distributions, and this brought down the fund's share price. Suppose a fund distributes 50 cents a share. When that distribution is made, the fund's share price will drop by a comparable amount. The upshot: Jane accumulated more shares over the years, but many of those shares ended up being worth less than her purchase price. At first glance, this might seem immaterial. If Jane made a profit overall���which she definitely did���then isn't that all that matters? In my opinion, no���for several reasons.
As I noted above, Jane���s holdings in the end were worth nearly $300,000 and yet, for tax purposes, she was able to declare a loss for 2021 when she sold her shares, thanks to all the distributions that she���d reinvested and which added to her cost basis. But there was no free lunch here. Jane did pay taxes on that big gain. It's just that she paid taxes on her gains��along the way. In 2014, for example, she had gains of $20,600, while in 2015 her taxable gains were $54,500.
On the surface, this might seem like a benefit. Isn't it better to pay a bill incrementally rather than all at once? You might even imagine that her fund was doing her a favor by spreading out the tax burden. But there's a few wrinkles to consider. The first is the time value of money. All things being equal, you'd much rather pay a bill later rather than sooner. In Jane's case, including state taxes, she probably paid more than $100,000 in taxes years earlier than she needed to. That's a problem because she could have invested or used that $100,000 in those earlier years.
There���s another aspect to this less-than-ideal tax result: Today, Jane and her husband are mostly retired and thus in a low tax bracket. But in many of the years when this fund was distributing big gains, Jane was in a much higher bracket. Result? She paid taxes sooner than necessary because of the fund���s active trading, and she paid those taxes at higher rates than she might have later.
Back in 1932, Alfred Cowles III published a��paper��titled, ���Can Stock Market Forecasters Forecast?��� Cowles���s finding: Active portfolio managers, on average, lag the overall market. In the years since, multiple other studies have come to the same conclusion.
Why this underperformance? For the most part, active managers trail the market averages for a simple reason: It���s hard to predict what will happen in the economy or with any one stock. Consider the stock of Meta Platforms���formerly Facebook���which dropped more than 25% on Thursday in response to negative news. As a portfolio manager, it���s extremely difficult to anticipate these sorts of events, which happen all the time.
But as Jane���s experience reveals, actively managed funds pose another obstacle for investors: They can be extremely tax-inefficient. That���s because active fund managers have the latitude to buy and sell investments as they see fit. That���s in contrast to index funds, which trade much less frequently���only when the index itself changes.
By way of comparison, the largest actively managed stock fund, the Growth Fund of America, had turnover of��24%��in the most recent year. Meanwhile, the largest index fund, the Vanguard 500 Fund, had turnover of just 1.1%. What���s worse, the gains generated by actively managed funds are totally unpredictable���subject to the portfolio manager���s choices.
Suppose Jane had owned an index fund rather than an actively managed fund. With an index fund, instead of having involuntarily paid all those taxes over the years, she could have chosen herself when to realize gains by selling some of her fund shares. Like a lot of high-net-worth investors, she might have paired those gains with some realized losses to further control her tax bill, or even donated some shares to charity. With an actively managed fund, investors lose much of that control.
I see this as another reason to steer clear of actively managed funds and to opt instead for index funds. To be sure, index funds aren't perfect���and they do sometimes make surprise distributions. But the reality is that the phenomenon Jane experienced is most pronounced among actively managed funds, where the manager is frequently buying and selling investments.
What if you want to hold an actively managed fund? Try to buy the fund in a retirement account, where distributions wouldn���t be taxable. What if that isn���t an option and you���re thinking of buying an actively managed fund in a taxable account? Check the fund���s turnover history. Some active managers trade much more frequently than others. In addition, consider taking your distributions in cash, rather than reinvesting them, so you have the option of investing the money elsewhere. Finally, in your taxable account, also avoid target-date funds and hybrid stock-bond funds, even if they���re composed of index funds, because these funds tend to trade more and thus can be quite tax-inefficient.
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.
This scenario isn't hypothetical. This was the recent experience of a client. Let's call her Jane. Normally, I wouldn't discuss a specific family's finances. But in this case, Jane was so surprised���and I was too���that she felt it might benefit others to describe her experience.
How could a six-figure gain turn into a loss? In reality, Jane didn't experience a loss. She did quite well. What happened, though, was a function of the way mutual funds work, especially actively managed funds like the one Jane owned.
To understand this, we need to go back to the 1940 Investment Company Act, which governs mutual funds. One of its provisions allows mutual funds to be treated as ���pass-through entities��� for tax purposes. In other words, mutual funds themselves aren't subject to income taxes. Instead, a fund's tax bill can be shared pro-rata by its shareholders.
That���s an important and valuable provision because it prevents a situation in which income would be taxed twice, as it is in other cases, such as when a public company pays a dividend. A key stipulation of the law, however, is that a mutual fund must pay out at least 90% of its income to its shareholders to be eligible for this favorable tax treatment.
That's exactly what happened with Jane's fund. She first bought into the fund in the 1990s. In subsequent years, the fund's managers regularly bought and sold investments within the fund, booking profits in the process. When they did, those profits were passed along to shareholders. These are called distributions, and they're taxable to shareholders in the year that they're distributed.
When a distribution is paid, some shareholders elect to receive them in cash, while others choose to automatically reinvest the proceeds back into the fund. Jane opted for the latter. Each time her fund made a distribution, she ended up buying more shares. Those purchases added to her cost basis for tax purposes.
Over the decades, as the fund continued to realize gains, it made ever-larger distributions, and this brought down the fund's share price. Suppose a fund distributes 50 cents a share. When that distribution is made, the fund's share price will drop by a comparable amount. The upshot: Jane accumulated more shares over the years, but many of those shares ended up being worth less than her purchase price. At first glance, this might seem immaterial. If Jane made a profit overall���which she definitely did���then isn't that all that matters? In my opinion, no���for several reasons.
As I noted above, Jane���s holdings in the end were worth nearly $300,000 and yet, for tax purposes, she was able to declare a loss for 2021 when she sold her shares, thanks to all the distributions that she���d reinvested and which added to her cost basis. But there was no free lunch here. Jane did pay taxes on that big gain. It's just that she paid taxes on her gains��along the way. In 2014, for example, she had gains of $20,600, while in 2015 her taxable gains were $54,500.
On the surface, this might seem like a benefit. Isn't it better to pay a bill incrementally rather than all at once? You might even imagine that her fund was doing her a favor by spreading out the tax burden. But there's a few wrinkles to consider. The first is the time value of money. All things being equal, you'd much rather pay a bill later rather than sooner. In Jane's case, including state taxes, she probably paid more than $100,000 in taxes years earlier than she needed to. That's a problem because she could have invested or used that $100,000 in those earlier years.
There���s another aspect to this less-than-ideal tax result: Today, Jane and her husband are mostly retired and thus in a low tax bracket. But in many of the years when this fund was distributing big gains, Jane was in a much higher bracket. Result? She paid taxes sooner than necessary because of the fund���s active trading, and she paid those taxes at higher rates than she might have later.
Back in 1932, Alfred Cowles III published a��paper��titled, ���Can Stock Market Forecasters Forecast?��� Cowles���s finding: Active portfolio managers, on average, lag the overall market. In the years since, multiple other studies have come to the same conclusion.
Why this underperformance? For the most part, active managers trail the market averages for a simple reason: It���s hard to predict what will happen in the economy or with any one stock. Consider the stock of Meta Platforms���formerly Facebook���which dropped more than 25% on Thursday in response to negative news. As a portfolio manager, it���s extremely difficult to anticipate these sorts of events, which happen all the time.
But as Jane���s experience reveals, actively managed funds pose another obstacle for investors: They can be extremely tax-inefficient. That���s because active fund managers have the latitude to buy and sell investments as they see fit. That���s in contrast to index funds, which trade much less frequently���only when the index itself changes.
By way of comparison, the largest actively managed stock fund, the Growth Fund of America, had turnover of��24%��in the most recent year. Meanwhile, the largest index fund, the Vanguard 500 Fund, had turnover of just 1.1%. What���s worse, the gains generated by actively managed funds are totally unpredictable���subject to the portfolio manager���s choices.
Suppose Jane had owned an index fund rather than an actively managed fund. With an index fund, instead of having involuntarily paid all those taxes over the years, she could have chosen herself when to realize gains by selling some of her fund shares. Like a lot of high-net-worth investors, she might have paired those gains with some realized losses to further control her tax bill, or even donated some shares to charity. With an actively managed fund, investors lose much of that control.
I see this as another reason to steer clear of actively managed funds and to opt instead for index funds. To be sure, index funds aren't perfect���and they do sometimes make surprise distributions. But the reality is that the phenomenon Jane experienced is most pronounced among actively managed funds, where the manager is frequently buying and selling investments.
What if you want to hold an actively managed fund? Try to buy the fund in a retirement account, where distributions wouldn���t be taxable. What if that isn���t an option and you���re thinking of buying an actively managed fund in a taxable account? Check the fund���s turnover history. Some active managers trade much more frequently than others. In addition, consider taking your distributions in cash, rather than reinvesting them, so you have the option of investing the money elsewhere. Finally, in your taxable account, also avoid target-date funds and hybrid stock-bond funds, even if they���re composed of index funds, because these funds tend to trade more and thus can be quite tax-inefficient.
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 Mutual Distaste appeared first on HumbleDollar.
February 5, 2022
Missing the Boat
I���VE BEEN WAITING since late last year for a stock market correction. No, I���m not sitting on a pile of cash and looking to time the market. Instead, I���m simply hoping to trim my tax bill.
Last October, I sold the recently vested shares of my company stock and used the proceeds to buy Vanguard Total Stock Market ETF (symbol: VTI). This sell-high-buy-high exchange was meant for diversification, but I also hoped that the market would drop later. I could then harvest tax losses by temporarily replacing the Vanguard fund with a combination of Russell 1000 and Russell 2000 ETFs. Given the prospect of an interest rate hike to counter rising inflation, a market correction was a distinct possibility.
The market seemed to move in my favor by November���s end. My Vanguard ETF dropped below my purchase price, but the extent of the unrealized loss wasn���t worth the effort of tax-loss harvesting. I waited for a bigger drop, but a market rally wiped out my unrealized loss.
My hopes were renewed during the fourth weekend of January, as I glanced through Barron���s. My Vanguard ETF shares had dropped more than 6% the week before. Another 3% drop would be enough for some meaningful tax-loss harvesting. I planned to keep an eye on the market on Monday.
I logged onto my brokerage account on the morning of the 24th and was pleased to see a further decline, but I didn���t pull the trigger. The rapid price swings made me nervous. What if the market rose substantially between selling my Vanguard Total Market shares and buying the replacement funds? Anything���s possible in a volatile market. I decided to wait another week, hoping the market would settle down.
Instead, the market pulled off a weekly gain and I missed the boat. For now, I���m keeping my fingers crossed, hoping the next boat will come along soon.
Last October, I sold the recently vested shares of my company stock and used the proceeds to buy Vanguard Total Stock Market ETF (symbol: VTI). This sell-high-buy-high exchange was meant for diversification, but I also hoped that the market would drop later. I could then harvest tax losses by temporarily replacing the Vanguard fund with a combination of Russell 1000 and Russell 2000 ETFs. Given the prospect of an interest rate hike to counter rising inflation, a market correction was a distinct possibility.
The market seemed to move in my favor by November���s end. My Vanguard ETF dropped below my purchase price, but the extent of the unrealized loss wasn���t worth the effort of tax-loss harvesting. I waited for a bigger drop, but a market rally wiped out my unrealized loss.
My hopes were renewed during the fourth weekend of January, as I glanced through Barron���s. My Vanguard ETF shares had dropped more than 6% the week before. Another 3% drop would be enough for some meaningful tax-loss harvesting. I planned to keep an eye on the market on Monday.
I logged onto my brokerage account on the morning of the 24th and was pleased to see a further decline, but I didn���t pull the trigger. The rapid price swings made me nervous. What if the market rose substantially between selling my Vanguard Total Market shares and buying the replacement funds? Anything���s possible in a volatile market. I decided to wait another week, hoping the market would settle down.
Instead, the market pulled off a weekly gain and I missed the boat. For now, I���m keeping my fingers crossed, hoping the next boat will come along soon.
The post Missing the Boat appeared first on HumbleDollar.
February 4, 2022
Buffett Is Human, Too
IMAGINE PUTTING your teenager behind a steering wheel to take a driving test without any prior preparation. The result is predictable���she would fail and you���d be lucky if she didn���t crash. Would you reprimand her for this result? Of course not.
So why is it that so many of us are merciless���both to ourselves and even our loved ones���when it comes to our investing blunders? You know what I���m talking about: putting money into a meme stock that subsequently cratered; getting caught up in the dot-com bubble of 2000 just before it burst; putting our entire 401(k) into company stock only to lose both our job and nest egg when the company went belly up; or selling Amazon at $50 a share after getting back to even���a prime example of the disposition��effect.
How many of us have a degree in finance or the CFA���Chartered Financial Analyst���designation after our names? The reality: Most of us have never received any formal training in personal finance or investing. Not surprisingly, only a third of Americans can pass the most basic of financial literacy tests.
What about the pros? Even the best of the best make mistakes���sometimes large ones. Legendary investor Warren Buffett recently sold his longtime stake in Wells Fargo, frustrated by the bank���s accounting scandal. He sold many shares at depressed prices during the COVID-19 recession. This turned out to be a costly error. It���s estimated that he missed out on some $10 billion in gains based on the stock���s recent rebound.
Interestingly, Charlie Munger���Warren Buffett���s longtime business partner at Berkshire Hathaway���had a different view on Wells Fargo's stock. As the chairman of Daily Journal Corp., Munger manages its investment portfolio, which also owns Wells Fargo. Unlike Buffett, Munger held on.
My point isn���t to pick on Warren Buffett, who is perhaps the greatest investor of our time. In fact, that���s the point. No one bats a thousand. Remember this the next time you start beating yourself up for making a lousy investment decision.
By the way, what knucklehead would sell shares of Amazon at $50? I plead the fifth.
So why is it that so many of us are merciless���both to ourselves and even our loved ones���when it comes to our investing blunders? You know what I���m talking about: putting money into a meme stock that subsequently cratered; getting caught up in the dot-com bubble of 2000 just before it burst; putting our entire 401(k) into company stock only to lose both our job and nest egg when the company went belly up; or selling Amazon at $50 a share after getting back to even���a prime example of the disposition��effect.
How many of us have a degree in finance or the CFA���Chartered Financial Analyst���designation after our names? The reality: Most of us have never received any formal training in personal finance or investing. Not surprisingly, only a third of Americans can pass the most basic of financial literacy tests.
What about the pros? Even the best of the best make mistakes���sometimes large ones. Legendary investor Warren Buffett recently sold his longtime stake in Wells Fargo, frustrated by the bank���s accounting scandal. He sold many shares at depressed prices during the COVID-19 recession. This turned out to be a costly error. It���s estimated that he missed out on some $10 billion in gains based on the stock���s recent rebound.
Interestingly, Charlie Munger���Warren Buffett���s longtime business partner at Berkshire Hathaway���had a different view on Wells Fargo's stock. As the chairman of Daily Journal Corp., Munger manages its investment portfolio, which also owns Wells Fargo. Unlike Buffett, Munger held on.
My point isn���t to pick on Warren Buffett, who is perhaps the greatest investor of our time. In fact, that���s the point. No one bats a thousand. Remember this the next time you start beating yourself up for making a lousy investment decision.
By the way, what knucklehead would sell shares of Amazon at $50? I plead the fifth.
The post Buffett Is Human, Too appeared first on HumbleDollar.
Making a Comeback
IT WAS JANUARY 2009 and my world���like the world around me���was coming apart at the seams.
A year and a half after our divorce, my now ex-wife and I were finally getting around to divvying up our investment assets, and it couldn���t have come at a worse time. The world���s financial system was melting down, and the stock market along with it. Every day, the market was down another percent or two, and that was on a good day. There seemed no limit to how low it could go.
Compounding my distress, we���d agreed on the terms of our financial settlement back in the fall when the stock market was higher. Four months later, our accounts were worth 30% less and, because my ex-wife���s split was based on absolute dollar amounts rather than percentages, the entirety of the market losses would be tallied on my side of the ledger.
For more than 20 years, I���d been following the playbook for financial security and independence: socking away money in my 401(k), taking advantage of the company match, contributing to my kids��� 529 college savings plans, living below my means, and investing whatever extra money I had at the end of the month in broad-based index funds within a taxable account. I was doing everything I was supposed to be doing, and now���after all that diligent saving and investing���I was going to be left with barely a six-figure portfolio.
To make matters worse, the multi-billion-dollar tech company where I was working as director of public and investor relations was struggling financially. Its stock price had dipped precariously below $1 and there was talk the company might have to declare bankruptcy. I was worried about my position at a time when the job market was in the tank, and I was on the hook to pay thousands of dollars every month in alimony and child support.
I was 49 years old and nowhere close to where I needed to be financially at that point in my life. I was effectively starting over���and I was terrified.
Beckoning better times. Like most human beings, I���m a security-seeking creature. I don���t like taking risks and I crave the feeling of having solid ground underneath me, which is one of the reasons I spent nearly my entire career working for large companies before��leaving the corporate world��last year. You���ll never find me jumping out of an airplane or bungee-jumping off a bridge toward a rushing river below. It���s just not me. I like certainty. I like knowing I have resources at hand should I need them. I have backup plans for my backup plans. It helps me sleep at night.
To be facing so much uncertainty���in my personal life, in my career, in my finances���was deeply unsettling. I remember one particularly cold, dark night that January when I was lying in bed unable to sleep, thinking about my financial situation, and thinking as well about how strange it felt to be single again after 14 years of marriage. Worries circled around my head like a cloud of buzzing flies. Would I be able to meet my financial responsibilities? Would I be able to recover from this and get back on track? Would I ever be able to retire?
One of my job duties at the time was to interact with Wall Street analysts and help them build their financial models for my employer. Given the concerns about the company���s finances, I was spending a lot of time on the phone talking the analysts and investors through arcane balance sheet items, like accounts receivable and working capital.
For that reason, I suppose, I had balance sheets on the brain one sleepless January night. As I lay there staring at the ceiling, I found myself doing a frank assessment of my own liabilities and assets at this crossroads in my life.
On the liabilities side, I had a sizable mortgage on a house I���d bought the year before. But aside from the mortgage, along with child support and alimony obligations, I had no other substantial debt. I owned my car, and I always paid off any balance on my credit cards at the end of the month. Those were all positives.
On the assets side of the balance sheet, I had the equity in my house. Unfortunately, it wasn���t much since I���d bought the place near the peak of the market, before the real estate bubble burst. I owned, along with my brother, a piece of property in northeastern Pennsylvania where I hoped to build a cabin one day.
I had whatever scraps would remain of my 401(k) and our taxable account after the financial settlement. I would be entitled, at retirement, to half of my pension, although the company had curtailed the defined benefit plan a number of years ago and my benefit wouldn���t amount to much.
Overall, a rather skimpy accounting. No financial analyst would issue a ���buy��� rating on my stock.
But I had other non-financial assets that could not be discounted. I was alive and in good health. I had a fantastic, loving family that supported me. I had a good relationship with my three sons. I had marketable skills should I need to get another job. For all of these things, I was deeply blessed.
I also had a deep well of resilience. I���d been through a lot of tough stuff in my life���periods of depression and anxiety, a long list of accidents and mishaps���and I���d somehow survived. Along the way, I���d done a lot of work on myself and had reached a point where I knew deep down that I could get through anything.
I���d always been a seeker and a big reader and, through my reading, I���d discovered meditation, mindfulness and other Eastern spiritual practices, all of which had helped me immensely.
Lately, I���d been reading about the so-called law of attraction.��The basic idea is that human beings attract into our lives whatever we���re focused on, both good and bad, and that we manifest states and experiences that match the energy of the thoughts we are putting out. If we���re putting out positive, optimistic energies about a happy and prosperous future, that���s what we will get. Conversely, if we are filling our minds with dark imaginings of a hopeless future and fears of what we don���t want, we���ll get that, too.
According to the principle of attraction, if we want to manifest something in our lives, we need only state our desires clearly and unambiguously to the ���universe��� and it will be delivered to us on a platter. The more specific we are in our requests, the better the chances that we will get what we want.
Now, in addition to being a security-seeking creature, I am also a highly rational one���too rational at times, my girlfriend will sometimes tell me. For me to believe something, I need facts. I need to see some objective evidence that this thing I���m being asked to believe actually exists.
I was skeptical about this so-called law. Gravity was a law. Entropy was a law. The law of attraction? It sounded like new-age psychological claptrap.
Still, much of what I was reading made logical sense to me. I knew, from my time both on and off the therapist���s couch, that our unconscious thoughts and belief patterns shape our realities in very real ways. I���d learned how to defuse anxiety and panic attacks by paying closer attention to the things I was saying to myself. I���d become undeniably a more peaceful, grounded and productive person through my daily practice of meditation and mindfulness.
All of this was clear evidence to me of the power of rightful thinking and intention in creating our outward circumstances. I thought, why not try this law of attraction? What could it hurt?
So that sleepless winter night, as I stared up at the dim-lit ceiling, I stated my intention in precise detail. In 10 years, when I was 59, I would be happy, healthy and peaceful. I would have a wonderful, supportive partner in my life. She would have dark hair and be a yoga teacher. She would get along well with my kids. Financially, I would be secure and independent. My portfolio would be worth 10 times what it was at the moment���enough for me to be able to step away early from the corporate world and pursue my passion for writing and storytelling.
A 10-fold increase in 10 years. Sure, why not? If I was wishing on a star, why not go big?
Item by item, I laid out my wish list, envisioning a new, more fulsome balance sheet for my life. It didn���t seem possible at the time, as dark as the world was back then, that these things would come true. But from what I read about the law of attraction, whether my desires seemed possible or not didn���t matter. All I had to do was set the intention and then give power over to the universe to deliver it to me.
Making it happen. Having stated my intention, I went to work. The law of attraction is clear about that as well. It���s not enough just to put your intention out there and roll back onto your pillow. You need to actively take steps toward it.
I didn���t have a problem with that. I liked working hard. I liked setting goals and seeing myself making progress toward them. I had a decade to bring this plan to fruition. It was possible. I just needed to be persistent and have faith.
That was, as I said, January 2009. Two months later, the stock market finally bottomed and began a slow, tenuous climb out of the abyss.
I knew from my MBA and investor-relations training that, despite the terrible market sentiment at the time, things would turn around in the long run and this was a good time to be putting money to work in the market. I also knew of the power of dollar-cost averaging and was a firm believer in John Bogle���s philosophy of investing in low-cost, broad-based index funds. In addition to my 401(k) contributions, I opened up a taxable account and started investing a set amount every month in low-cost Vanguard Group index funds.
At first, I favored bond funds, since they were doing well and seemed safer at the time. But within a few months, I went on the offensive and began investing all of my money in stock funds, weighted toward aggressive growth companies in the U.S.
My company was also on the upswing. A new CEO had come onboard, promising shareholders a turnaround. I appreciated his no-nonsense, MBWA (management by walking around) leadership style, and he and I developed a strong working relationship. I was put in charge of global communications and given the job of telling our story to the media and the public in general.
It wasn���t long before our financial results, and our stock price, started turning around. We were hitting our numbers and granting bonuses. In addition, as a member of the executive team, I was entitled to annual stock option grants. As the share price rose, those options were suddenly worth something. Whenever I got a bonus or cashed in any stock, I put the money in the market.
Looking back now, I was probably being too aggressive in allocating so much of my investments to the U.S. stock market. But I just felt the market was so low that the risk was also low. What���s more, I had faith in American business innovation and felt that, over time, my faith would pay off.
With my investment strategy set, I sat back and watched the seeds grow. We all know what happened in the market since that dark winter of 2008-09. Since hitting a low of 676 on March 9, 2009, the S&P 500 has risen almost sevenfold. It hasn���t been a straight line up, of course, but through the ups and downs of the market, I have stayed disciplined and kept my investments on autopilot.
Along the way, life has tossed me plenty of surprises, as it is wont to do. In 2013, I found out I had stage three colon cancer and had to go through six months of chemotherapy. Fortunately, I caught it early and am now cancer-free.
In 2016, at age 56, I lost my job at the tech company after 28 years���a profoundly unsettling experience that I write about in my new book�� The Long Walk Home , published by Blydyn Square Press. I was fortunate, however, to quickly find another job at a large and very successful financial technology company. That same year, I met my current girlfriend���and, yes, she has dark hair and is a yoga teacher. We���ve been together ever since.
As the market continued to do well and my investment accounts grew, I decided to move my investments at Vanguard into a managed account under an investment advisor. That advisor, who is terrific, has diversified my portfolio to a mix more appropriate for someone my age.
Faith rewarded. In 2019, 10 years after I set my intention, I hit my target investment number. That year, I downsized, sold my house, paid off my mortgage and built my dream mountain house up north. I worked for another two years at the financial technology company as my investments continued to grow. Then, last September, at age 61, I stepped away from the corporate world to pursue my long-held dream of being an author. I am now in the second act of my career, and loving every minute of it.
Some might say that it wasn���t the law of attraction that enabled me to get to financial independence. It was just plain dumb luck that I was putting money to work during one of the greatest market booms in history���a circumstance that���s unlikely to ever happen again.
To which I would reply: It may have been luck that got me here, but it certainly wasn���t dumb. I set the intention, worked hard, scrimped and saved, and made investment decisions based on accepted market wisdom.
It also took faith���both in myself and in the markets. Anyone who was investing back in those dark days of 2008-09 was taking a leap of faith. The greatest investment opportunities are found in the greatest periods of uncertainty. The equation goes something like this: opportunity + intention + knowledge + hard work + faith = good luck.
One thing we know for sure: There will be more downturns in the market. Those are the times that create opportunity. When they do, I will be ready.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books.��Check out his blog at
PeaceableMan.com
. Check out Jim's previous articles.
A year and a half after our divorce, my now ex-wife and I were finally getting around to divvying up our investment assets, and it couldn���t have come at a worse time. The world���s financial system was melting down, and the stock market along with it. Every day, the market was down another percent or two, and that was on a good day. There seemed no limit to how low it could go.
Compounding my distress, we���d agreed on the terms of our financial settlement back in the fall when the stock market was higher. Four months later, our accounts were worth 30% less and, because my ex-wife���s split was based on absolute dollar amounts rather than percentages, the entirety of the market losses would be tallied on my side of the ledger.
For more than 20 years, I���d been following the playbook for financial security and independence: socking away money in my 401(k), taking advantage of the company match, contributing to my kids��� 529 college savings plans, living below my means, and investing whatever extra money I had at the end of the month in broad-based index funds within a taxable account. I was doing everything I was supposed to be doing, and now���after all that diligent saving and investing���I was going to be left with barely a six-figure portfolio.To make matters worse, the multi-billion-dollar tech company where I was working as director of public and investor relations was struggling financially. Its stock price had dipped precariously below $1 and there was talk the company might have to declare bankruptcy. I was worried about my position at a time when the job market was in the tank, and I was on the hook to pay thousands of dollars every month in alimony and child support.
I was 49 years old and nowhere close to where I needed to be financially at that point in my life. I was effectively starting over���and I was terrified.
Beckoning better times. Like most human beings, I���m a security-seeking creature. I don���t like taking risks and I crave the feeling of having solid ground underneath me, which is one of the reasons I spent nearly my entire career working for large companies before��leaving the corporate world��last year. You���ll never find me jumping out of an airplane or bungee-jumping off a bridge toward a rushing river below. It���s just not me. I like certainty. I like knowing I have resources at hand should I need them. I have backup plans for my backup plans. It helps me sleep at night.
To be facing so much uncertainty���in my personal life, in my career, in my finances���was deeply unsettling. I remember one particularly cold, dark night that January when I was lying in bed unable to sleep, thinking about my financial situation, and thinking as well about how strange it felt to be single again after 14 years of marriage. Worries circled around my head like a cloud of buzzing flies. Would I be able to meet my financial responsibilities? Would I be able to recover from this and get back on track? Would I ever be able to retire?
One of my job duties at the time was to interact with Wall Street analysts and help them build their financial models for my employer. Given the concerns about the company���s finances, I was spending a lot of time on the phone talking the analysts and investors through arcane balance sheet items, like accounts receivable and working capital.
For that reason, I suppose, I had balance sheets on the brain one sleepless January night. As I lay there staring at the ceiling, I found myself doing a frank assessment of my own liabilities and assets at this crossroads in my life.
On the liabilities side, I had a sizable mortgage on a house I���d bought the year before. But aside from the mortgage, along with child support and alimony obligations, I had no other substantial debt. I owned my car, and I always paid off any balance on my credit cards at the end of the month. Those were all positives.
On the assets side of the balance sheet, I had the equity in my house. Unfortunately, it wasn���t much since I���d bought the place near the peak of the market, before the real estate bubble burst. I owned, along with my brother, a piece of property in northeastern Pennsylvania where I hoped to build a cabin one day.
I had whatever scraps would remain of my 401(k) and our taxable account after the financial settlement. I would be entitled, at retirement, to half of my pension, although the company had curtailed the defined benefit plan a number of years ago and my benefit wouldn���t amount to much.
Overall, a rather skimpy accounting. No financial analyst would issue a ���buy��� rating on my stock.
But I had other non-financial assets that could not be discounted. I was alive and in good health. I had a fantastic, loving family that supported me. I had a good relationship with my three sons. I had marketable skills should I need to get another job. For all of these things, I was deeply blessed.
I also had a deep well of resilience. I���d been through a lot of tough stuff in my life���periods of depression and anxiety, a long list of accidents and mishaps���and I���d somehow survived. Along the way, I���d done a lot of work on myself and had reached a point where I knew deep down that I could get through anything.
I���d always been a seeker and a big reader and, through my reading, I���d discovered meditation, mindfulness and other Eastern spiritual practices, all of which had helped me immensely.
Lately, I���d been reading about the so-called law of attraction.��The basic idea is that human beings attract into our lives whatever we���re focused on, both good and bad, and that we manifest states and experiences that match the energy of the thoughts we are putting out. If we���re putting out positive, optimistic energies about a happy and prosperous future, that���s what we will get. Conversely, if we are filling our minds with dark imaginings of a hopeless future and fears of what we don���t want, we���ll get that, too.
According to the principle of attraction, if we want to manifest something in our lives, we need only state our desires clearly and unambiguously to the ���universe��� and it will be delivered to us on a platter. The more specific we are in our requests, the better the chances that we will get what we want.
Now, in addition to being a security-seeking creature, I am also a highly rational one���too rational at times, my girlfriend will sometimes tell me. For me to believe something, I need facts. I need to see some objective evidence that this thing I���m being asked to believe actually exists.
I was skeptical about this so-called law. Gravity was a law. Entropy was a law. The law of attraction? It sounded like new-age psychological claptrap.
Still, much of what I was reading made logical sense to me. I knew, from my time both on and off the therapist���s couch, that our unconscious thoughts and belief patterns shape our realities in very real ways. I���d learned how to defuse anxiety and panic attacks by paying closer attention to the things I was saying to myself. I���d become undeniably a more peaceful, grounded and productive person through my daily practice of meditation and mindfulness.
All of this was clear evidence to me of the power of rightful thinking and intention in creating our outward circumstances. I thought, why not try this law of attraction? What could it hurt?
So that sleepless winter night, as I stared up at the dim-lit ceiling, I stated my intention in precise detail. In 10 years, when I was 59, I would be happy, healthy and peaceful. I would have a wonderful, supportive partner in my life. She would have dark hair and be a yoga teacher. She would get along well with my kids. Financially, I would be secure and independent. My portfolio would be worth 10 times what it was at the moment���enough for me to be able to step away early from the corporate world and pursue my passion for writing and storytelling.
A 10-fold increase in 10 years. Sure, why not? If I was wishing on a star, why not go big?
Item by item, I laid out my wish list, envisioning a new, more fulsome balance sheet for my life. It didn���t seem possible at the time, as dark as the world was back then, that these things would come true. But from what I read about the law of attraction, whether my desires seemed possible or not didn���t matter. All I had to do was set the intention and then give power over to the universe to deliver it to me.
Making it happen. Having stated my intention, I went to work. The law of attraction is clear about that as well. It���s not enough just to put your intention out there and roll back onto your pillow. You need to actively take steps toward it.
I didn���t have a problem with that. I liked working hard. I liked setting goals and seeing myself making progress toward them. I had a decade to bring this plan to fruition. It was possible. I just needed to be persistent and have faith.
That was, as I said, January 2009. Two months later, the stock market finally bottomed and began a slow, tenuous climb out of the abyss.
I knew from my MBA and investor-relations training that, despite the terrible market sentiment at the time, things would turn around in the long run and this was a good time to be putting money to work in the market. I also knew of the power of dollar-cost averaging and was a firm believer in John Bogle���s philosophy of investing in low-cost, broad-based index funds. In addition to my 401(k) contributions, I opened up a taxable account and started investing a set amount every month in low-cost Vanguard Group index funds.
At first, I favored bond funds, since they were doing well and seemed safer at the time. But within a few months, I went on the offensive and began investing all of my money in stock funds, weighted toward aggressive growth companies in the U.S.
My company was also on the upswing. A new CEO had come onboard, promising shareholders a turnaround. I appreciated his no-nonsense, MBWA (management by walking around) leadership style, and he and I developed a strong working relationship. I was put in charge of global communications and given the job of telling our story to the media and the public in general.
It wasn���t long before our financial results, and our stock price, started turning around. We were hitting our numbers and granting bonuses. In addition, as a member of the executive team, I was entitled to annual stock option grants. As the share price rose, those options were suddenly worth something. Whenever I got a bonus or cashed in any stock, I put the money in the market.
Looking back now, I was probably being too aggressive in allocating so much of my investments to the U.S. stock market. But I just felt the market was so low that the risk was also low. What���s more, I had faith in American business innovation and felt that, over time, my faith would pay off.
With my investment strategy set, I sat back and watched the seeds grow. We all know what happened in the market since that dark winter of 2008-09. Since hitting a low of 676 on March 9, 2009, the S&P 500 has risen almost sevenfold. It hasn���t been a straight line up, of course, but through the ups and downs of the market, I have stayed disciplined and kept my investments on autopilot.
Along the way, life has tossed me plenty of surprises, as it is wont to do. In 2013, I found out I had stage three colon cancer and had to go through six months of chemotherapy. Fortunately, I caught it early and am now cancer-free.
In 2016, at age 56, I lost my job at the tech company after 28 years���a profoundly unsettling experience that I write about in my new book�� The Long Walk Home , published by Blydyn Square Press. I was fortunate, however, to quickly find another job at a large and very successful financial technology company. That same year, I met my current girlfriend���and, yes, she has dark hair and is a yoga teacher. We���ve been together ever since.
As the market continued to do well and my investment accounts grew, I decided to move my investments at Vanguard into a managed account under an investment advisor. That advisor, who is terrific, has diversified my portfolio to a mix more appropriate for someone my age.
Faith rewarded. In 2019, 10 years after I set my intention, I hit my target investment number. That year, I downsized, sold my house, paid off my mortgage and built my dream mountain house up north. I worked for another two years at the financial technology company as my investments continued to grow. Then, last September, at age 61, I stepped away from the corporate world to pursue my long-held dream of being an author. I am now in the second act of my career, and loving every minute of it.
Some might say that it wasn���t the law of attraction that enabled me to get to financial independence. It was just plain dumb luck that I was putting money to work during one of the greatest market booms in history���a circumstance that���s unlikely to ever happen again.
To which I would reply: It may have been luck that got me here, but it certainly wasn���t dumb. I set the intention, worked hard, scrimped and saved, and made investment decisions based on accepted market wisdom.
It also took faith���both in myself and in the markets. Anyone who was investing back in those dark days of 2008-09 was taking a leap of faith. The greatest investment opportunities are found in the greatest periods of uncertainty. The equation goes something like this: opportunity + intention + knowledge + hard work + faith = good luck.
One thing we know for sure: There will be more downturns in the market. Those are the times that create opportunity. When they do, I will be ready.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books.��Check out his blog at
PeaceableMan.com
. Check out Jim's previous articles.The post Making a Comeback appeared first on HumbleDollar.
