Jonathan Clements's Blog, page 232
February 4, 2022
Collecting Taxes
WHEN A FRIEND TOLD me about his newfound interest in buying and selling sports trading cards, it reminded me of the joy that collecting brought me in my childhood. And when he asked me to explain the relevant taxation, it got me thinking: The core of the tax code is more logical than we give it credit for. It's the ever-changing details that make it squirrelly.
If you buy and sell collectibles���whether it be sports cards, coins or antiques���the tax code assigns your activity to one of three tracks:
Hobby
Investment
Business
What factors determine the tax track you should follow? It's a question worth considering, but don't overcomplicate it. Instead, try some simple self-reflection. Why are you engaging in the activity? Hobbyists are doing it for fun, investors are holding assets for appreciation and businesses are spending money to make money.
As a kid, I couldn't get enough of sports trading cards and memorabilia, including Starting Lineup figures, autographs and pennants. Next to playing sports, nothing brought me more hours of fun.
Sure, I was intrigued by the possibility that these things might be worth something someday, but that wasn���t why I did it. I collected because it made me feel like I had VIP access to the players I looked up to���like I belonged to an exclusive club. I knew that, even if I never made a dime from selling my treasures, it would make no difference to me.
In other words, I was a hobbyist. But even hobbyists occasionally decide to part with a prized possession for the right price. This gain���like any realized gain in the tax code���is taxable income.
I remember a handful of times when I sold a card for what felt like a fortune. Those sales were taxable capital gains, but I never had enough income in one year to trigger an income tax filing requirement. I think $200 was my record sale. That's typical for hobbyists' gains: They're usually small and infrequent.
But while their gains are taxable, hobbyists' losses aren't deductible, and I'm fine with that. From the government's perspective, an allowed tax deduction is an expense. I don't want Congress spending tax dollars to subsidize hobbies���not mine or anyone else's.
Skip over to the next track���investment���and you'll find that investors have the same capital gains treatment as hobbyists. But unlike them, investors can deduct capital losses. How can you prove that an activity is an investment instead of a hobby? If you had the foresight to keep adequate records to supply your tax cost basis to support a capital loss, that's a good sign that financial appreciation was your motive, and hence you���re an investor rather than a hobbyist.
But please don't misunderstand: A regular investor is willing to sell at a loss for specific profit-motivated reasons. For example, he or she might want to free up capital for a better financial opportunity, or to rebalance a portfolio���s asset allocation. But if you're just offloading your personal stuff, you probably aren���t creating capital losses, even if you have pristine records. No, in that case, you're more likely a hobbyist who's decluttering.
Think about it: Do we really want the tax system turning yard sales into tax-loss harvesting opportunities? I don't. If you want a tax break for cleaning out your closet, that's what the noncash charitable deduction is for. You can donate to a charitable thrift store, like AMVETS, and create a deduction for the fair market value���the price the thrift store might charge for your things.
I still enjoy reminiscing over my old collection from time to time. Even though I've been a hobbyist, there's no reason why I couldn't try my hand as a collectibles investor today���now that I have more capital to work with than I did as a kid.
Maybe I'll reallocate a portion of my investment portfolio and buy a few special cards for their appreciation potential. But what if I then spot an even better card, one that I just know is poised to shoot the moon? Maybe I would sell some of my investment cards to free up the capital to make the new investment, perhaps doing so at a loss. A capital loss supported by good records and reasonable facts would be pretty hard to argue against.
The third track���business���shifts to an entirely different tax regime. No more capital gains or losses. Sales proceeds become revenue, cards become inventory, and every business-related expense becomes deductible in the determination of net taxable business income.
My old card shop hangouts were easy to spot. They had a sign, a front door and people standing behind a glass display case, eager to swap stories about rookie cards and complete sets. By contrast, today a collectibles business might look like a guy with a computer���like my friend.
This is the tax track his collectibles activity took. He was implementing a plan���researching the market, locating undervalued cards he could buy, and reselling them for a profit. He was starting a collectibles business.
Now for the squirrelly details.
Collectors incur expenses like storage supplies, grading services and subscriptions. In the past, hobbyists could deduct these, but only up to the amount of hobby income. Investors could deduct them regardless of investment income. And both got the benefit only if they itemized instead of taking the standard deduction. Even then, the amount of the deduction had to exceed another hurdle to make a difference���2% of adjusted gross income. But just to complicate things further, the law changed starting in 2018, and this deduction no longer exists, at least through 2025.
There���s a separate long-term capital gains rate for collectibles of 28%. That���s not as favorable as the regular long-term capital gains rates of 0%, 15% or 20%, depending on your tax bracket. But unlike standard long-term capital gains rates, the 28% collectibles rate is a cap. If your marginal, ordinary tax rate is less than 28%, then that's also the rate you pay on long-term sales of collectibles. This is an often-misunderstood nuance.
And of course, if you're a business, there's a host of other tax considerations���many of them influenced by factors such as your choice of business entity, whether you have employees and your home state.
These squirrelly details are the bane of accountants���but also their job security. You'll know you've found a good one when you���re guided with the kind of healthy tax thinking that maps the economic reality of your activity to the principles of the tax code, and prepares you to make informed decisions on future activities.
Matt Christopher White is a CPA and CFP�� who writes about money and apprenticeship to Jesus. You can get his book ���How to Love Money: Four Paradoxes that Breathe Life Into Your Finances��� at MattChristopherWhite.com. Follow Matt on Twitter @WriteMattWhite. His previous��articles were Christmas All Year and��When Fantasy Fails.
If you buy and sell collectibles���whether it be sports cards, coins or antiques���the tax code assigns your activity to one of three tracks:
Hobby
Investment
Business
What factors determine the tax track you should follow? It's a question worth considering, but don't overcomplicate it. Instead, try some simple self-reflection. Why are you engaging in the activity? Hobbyists are doing it for fun, investors are holding assets for appreciation and businesses are spending money to make money.
As a kid, I couldn't get enough of sports trading cards and memorabilia, including Starting Lineup figures, autographs and pennants. Next to playing sports, nothing brought me more hours of fun.
Sure, I was intrigued by the possibility that these things might be worth something someday, but that wasn���t why I did it. I collected because it made me feel like I had VIP access to the players I looked up to���like I belonged to an exclusive club. I knew that, even if I never made a dime from selling my treasures, it would make no difference to me.
In other words, I was a hobbyist. But even hobbyists occasionally decide to part with a prized possession for the right price. This gain���like any realized gain in the tax code���is taxable income.
I remember a handful of times when I sold a card for what felt like a fortune. Those sales were taxable capital gains, but I never had enough income in one year to trigger an income tax filing requirement. I think $200 was my record sale. That's typical for hobbyists' gains: They're usually small and infrequent.
But while their gains are taxable, hobbyists' losses aren't deductible, and I'm fine with that. From the government's perspective, an allowed tax deduction is an expense. I don't want Congress spending tax dollars to subsidize hobbies���not mine or anyone else's.
Skip over to the next track���investment���and you'll find that investors have the same capital gains treatment as hobbyists. But unlike them, investors can deduct capital losses. How can you prove that an activity is an investment instead of a hobby? If you had the foresight to keep adequate records to supply your tax cost basis to support a capital loss, that's a good sign that financial appreciation was your motive, and hence you���re an investor rather than a hobbyist.
But please don't misunderstand: A regular investor is willing to sell at a loss for specific profit-motivated reasons. For example, he or she might want to free up capital for a better financial opportunity, or to rebalance a portfolio���s asset allocation. But if you're just offloading your personal stuff, you probably aren���t creating capital losses, even if you have pristine records. No, in that case, you're more likely a hobbyist who's decluttering.
Think about it: Do we really want the tax system turning yard sales into tax-loss harvesting opportunities? I don't. If you want a tax break for cleaning out your closet, that's what the noncash charitable deduction is for. You can donate to a charitable thrift store, like AMVETS, and create a deduction for the fair market value���the price the thrift store might charge for your things.
I still enjoy reminiscing over my old collection from time to time. Even though I've been a hobbyist, there's no reason why I couldn't try my hand as a collectibles investor today���now that I have more capital to work with than I did as a kid.
Maybe I'll reallocate a portion of my investment portfolio and buy a few special cards for their appreciation potential. But what if I then spot an even better card, one that I just know is poised to shoot the moon? Maybe I would sell some of my investment cards to free up the capital to make the new investment, perhaps doing so at a loss. A capital loss supported by good records and reasonable facts would be pretty hard to argue against.
The third track���business���shifts to an entirely different tax regime. No more capital gains or losses. Sales proceeds become revenue, cards become inventory, and every business-related expense becomes deductible in the determination of net taxable business income.
My old card shop hangouts were easy to spot. They had a sign, a front door and people standing behind a glass display case, eager to swap stories about rookie cards and complete sets. By contrast, today a collectibles business might look like a guy with a computer���like my friend.
This is the tax track his collectibles activity took. He was implementing a plan���researching the market, locating undervalued cards he could buy, and reselling them for a profit. He was starting a collectibles business.
Now for the squirrelly details.
Collectors incur expenses like storage supplies, grading services and subscriptions. In the past, hobbyists could deduct these, but only up to the amount of hobby income. Investors could deduct them regardless of investment income. And both got the benefit only if they itemized instead of taking the standard deduction. Even then, the amount of the deduction had to exceed another hurdle to make a difference���2% of adjusted gross income. But just to complicate things further, the law changed starting in 2018, and this deduction no longer exists, at least through 2025.
There���s a separate long-term capital gains rate for collectibles of 28%. That���s not as favorable as the regular long-term capital gains rates of 0%, 15% or 20%, depending on your tax bracket. But unlike standard long-term capital gains rates, the 28% collectibles rate is a cap. If your marginal, ordinary tax rate is less than 28%, then that's also the rate you pay on long-term sales of collectibles. This is an often-misunderstood nuance.
And of course, if you're a business, there's a host of other tax considerations���many of them influenced by factors such as your choice of business entity, whether you have employees and your home state.
These squirrelly details are the bane of accountants���but also their job security. You'll know you've found a good one when you���re guided with the kind of healthy tax thinking that maps the economic reality of your activity to the principles of the tax code, and prepares you to make informed decisions on future activities.
Matt Christopher White is a CPA and CFP�� who writes about money and apprenticeship to Jesus. You can get his book ���How to Love Money: Four Paradoxes that Breathe Life Into Your Finances��� at MattChristopherWhite.com. Follow Matt on Twitter @WriteMattWhite. His previous��articles were Christmas All Year and��When Fantasy Fails.The post Collecting Taxes appeared first on HumbleDollar.
February 3, 2022
Bonus Round
LAST AUGUST, I wrote about the retention bonuses I scored by simply initiating a transfer of assets from one brokerage firm to another. Back then, I said I���d wait six months and then try again to capture this free money.
This time around, one broker offered me a promotion simply to stay put, but two others wouldn���t. I did some quick Google searches and found offers elsewhere, so I initiated the transfers and collected those bonuses. The whole process was fast and simple. And because I don���t actively trade, I don���t much care how one broker���s offerings compare to another's.
What���s the downside? I have more accounts to track and I have to pay small fees to close out old accounts, though the receiving brokerage firm often reimburses those fees. Come tax time, I���ll have a few extra 1099-DIVs. But most tax software packages can import those forms easy-peasy.
In all, I���ve scored $2,250 between retention bonuses and new account offers. That money is taxable, so I mentally shave 22%���my marginal��tax rate���off that sum to get a true measure of my winnings.
Being an investment nerd, I find it fun to poke around on the new trading platforms to see what tools I can use for my analytical work and financial writing. I like Fidelity Investments��� exchange-traded fund (ETF) comparison tool. I find Charles Schwab���s mutual fund research helpful when I do work for advisors. TD Ameritrade���s thinkorswim is great for charting. And most of these firms offer solid research reports on companies and ETFs. I can always keep a few bucks in old accounts if I want to continue accessing such features.
This time around, one broker offered me a promotion simply to stay put, but two others wouldn���t. I did some quick Google searches and found offers elsewhere, so I initiated the transfers and collected those bonuses. The whole process was fast and simple. And because I don���t actively trade, I don���t much care how one broker���s offerings compare to another's.
What���s the downside? I have more accounts to track and I have to pay small fees to close out old accounts, though the receiving brokerage firm often reimburses those fees. Come tax time, I���ll have a few extra 1099-DIVs. But most tax software packages can import those forms easy-peasy.
In all, I���ve scored $2,250 between retention bonuses and new account offers. That money is taxable, so I mentally shave 22%���my marginal��tax rate���off that sum to get a true measure of my winnings.
Being an investment nerd, I find it fun to poke around on the new trading platforms to see what tools I can use for my analytical work and financial writing. I like Fidelity Investments��� exchange-traded fund (ETF) comparison tool. I find Charles Schwab���s mutual fund research helpful when I do work for advisors. TD Ameritrade���s thinkorswim is great for charting. And most of these firms offer solid research reports on companies and ETFs. I can always keep a few bucks in old accounts if I want to continue accessing such features.
The post Bonus Round appeared first on HumbleDollar.
Goodbye DIY
I GREW UP IN INDIA. There, it���s quite common to have outside help for household chores. Most middle-class families hire someone to help with washing, dishes and cleaning. Affluent households typically have a cook, driver and housekeeper.
After coming to the U.S., I noticed that most households weren���t dependent on domestic help, thanks to appliances like a dishwasher, vacuum cleaner and washer-dryer. A few coworkers went as far as building their own cabinets and decks, painting their homes and changing the oil in the car.
This do-it-yourself culture resonated with me for three reasons. First, I valued independence���the ability to do things at my own pace, rather than waiting on someone else. Second, the idea of working equally hard at work and at home gave me a kick. Third, it appealed to my sense of frugality. I wanted to be like my DIY coworkers.
But it was wishful thinking on my part. I tried various home maintenance jobs that required no special tools or expertise. But I didn���t especially enjoy fixing toilets, repairing garage doors, blowing leaves or mowing lawns. These mundane tasks felt increasingly burdensome. Still, the idea of getting outside help was at odds with my values. I���d no longer be the independent, hardworking and frugal person I perceived myself to be.
But in truth, I was being stupid and stingy. If I could afford it, why not pay someone to do these unexciting chores? Reluctantly, I availed myself of yardwork and housecleaning services, but I still resisted offloading anything else. That changed when I cut back the number of hours I worked.
How did a smaller paycheck motivate me to spend more for domestic help? My reasoning was simple. With my part-time job, I was effectively paying back a prorated percentage of my fulltime salary to my employer, so I could have a few extra hours for myself. If my personal time was as valuable as that pay cut, it made no sense to spend it on uninteresting tasks that someone else could do for an even smaller price.
After coming to the U.S., I noticed that most households weren���t dependent on domestic help, thanks to appliances like a dishwasher, vacuum cleaner and washer-dryer. A few coworkers went as far as building their own cabinets and decks, painting their homes and changing the oil in the car.
This do-it-yourself culture resonated with me for three reasons. First, I valued independence���the ability to do things at my own pace, rather than waiting on someone else. Second, the idea of working equally hard at work and at home gave me a kick. Third, it appealed to my sense of frugality. I wanted to be like my DIY coworkers.
But it was wishful thinking on my part. I tried various home maintenance jobs that required no special tools or expertise. But I didn���t especially enjoy fixing toilets, repairing garage doors, blowing leaves or mowing lawns. These mundane tasks felt increasingly burdensome. Still, the idea of getting outside help was at odds with my values. I���d no longer be the independent, hardworking and frugal person I perceived myself to be.
But in truth, I was being stupid and stingy. If I could afford it, why not pay someone to do these unexciting chores? Reluctantly, I availed myself of yardwork and housecleaning services, but I still resisted offloading anything else. That changed when I cut back the number of hours I worked.
How did a smaller paycheck motivate me to spend more for domestic help? My reasoning was simple. With my part-time job, I was effectively paying back a prorated percentage of my fulltime salary to my employer, so I could have a few extra hours for myself. If my personal time was as valuable as that pay cut, it made no sense to spend it on uninteresting tasks that someone else could do for an even smaller price.
The post Goodbye DIY appeared first on HumbleDollar.
Measuring Up
AS I PULLED UP in my used Subaru wagon to the high school drop-off line with two grumpy teenagers on the first day of school, I noticed something was different.
Because of the pandemic, our sleepy, semi-rural town in upstate New York had seen an influx of Manhattanites and Brooklyners over the past year. My Subaru was now bracketed by a shiny Tesla sedan and a polished Mercedes SUV. The usual collection of less flashy cars and trucks seemed to be missing.
The thought then buzzed through my head: Was our sacrifice worth it?
After arriving as a Bangladeshi immigrant on a snowy Boston evening in 1980, I had somehow managed to stumble, fall, get up, run, stumble, rumble, fall, rise, fall and then bootstrap myself into the American upper-middle class. I could afford a fancy car, but every sage piece of financial advice I���d read advised me not to fall into that trap.
As a result, I have sacrificed some markers of affluence. Those savings were plowed into investments that will hopefully allow me to reach retirement earlier. But was I fooling myself? Was the sacrifice worth it? Where was our household compared to similar households?
After a career negotiating commercial contracts, I knew the best way to answer that question was to benchmark myself. Federal Reserve data available online, combined with the incredibly helpful financial blogging community, would allow me to do so in a matter of minutes.
Every three years, the Federal Reserve publishes its Survey of Consumer Finances that contains a wide array of household financial data. From this information, we can painstakingly craft useful calculators, data sets, charts and graphs. Unfortunately, I have no idea how to do any of that. Fortunately, there are many bloggers who do.
For example, the smart people at DQYDJ.com, short for ���don���t quit your day job,��� have created a handy net worth��calculator that will compute your net worth percentile based on the latest Fed survey. If you���re wondering, the median net worth in America is $121,411. Based on DQYDJ���s calculator, our net worth puts us in the top 5% of American households. Wow, I thought, we���re doing great.
On the other hand, we should be doing great. Our household income is far above the U.S. median��of $67,463. My wife and I are a college-educated, dual-income household in our prime earning years. It makes no sense to compare our net worth to the average kid coming out of college or to a recent retiree. The question is, how are we doing compared to our peers?
Again, smart bloggers have already crunched the data. Over at OfDollarsAnd Data.com, one of my favorite bloggers, Nick Maggiulli, has spliced average��net worth data to control for education and age. According to Nick���s numbers, the median net worth of a household headed by a college-educated 45-to-54-year-old is $488,000. This doesn���t take into account, however, the wide range of incomes that a college-educated person might enjoy.
It would make no sense to compare a working actor���s salary to that of an actuarial data scientist, even though both might have degrees from a top-rated college and be the same age. Here, Nick obliges us again by revealing that the net worth of a household headed by a college-educated 45-to-54-year-old is $1.3 million at the 75th percentile��and $3.8 million at the 90th percentile.
For the tech-savvy, there���s a myriad of new apps that will not only calculate your net worth, but also do so on a daily basis. I���ve heard good things about Mint and Personal Capital. I use an app called Status that will calculate my net worth percentile compared to peers based on my region, homeownership status, credit score and income range.
As you can tell, the hard data exist to benchmark your financial condition. Everyone, regardless of income, should try it out. If you don���t feel like crunching numbers online, there���s a formula that I first discovered 20 years ago while reading The Millionaire Next Door by Thomas Stanley and William Danko. According to the book, your net worth should be your age multiplied by your gross income, divided by 10. If you���re age 45 and your household gross income is $100,000, your net worth should be $450,000 (45 x 100,000/10).
That���s your benchmark. If you���re close or above it, that���s great. What if you���re way below? That can easily happen if you���re early in your career and are just starting to save. But if you���re in your 40s or 50s and falling short, you need to come up with a plan.
Meanwhile, if you���re twice the benchmark, perhaps you should be imparting your financial wisdom to others. Stanley and Danko call these people PAWs, or prodigious accumulators of wealth. My goal has always been to reach the vaunted PAW status. I think I���ll get there in the next few years. That will have made the sacrifices worth it���and part of the thanks will go to my trusty used Subaru.
Tanvir Alam has been practicing corporate law for more than two decades, but you shouldn���t hold that against him. He lives in New York���s Hudson Valley with his patient wife and two skeptical teenagers. Tanvir is interested in personal finance and travel, and is trying desperately to become a runner.
Because of the pandemic, our sleepy, semi-rural town in upstate New York had seen an influx of Manhattanites and Brooklyners over the past year. My Subaru was now bracketed by a shiny Tesla sedan and a polished Mercedes SUV. The usual collection of less flashy cars and trucks seemed to be missing.
The thought then buzzed through my head: Was our sacrifice worth it?
After arriving as a Bangladeshi immigrant on a snowy Boston evening in 1980, I had somehow managed to stumble, fall, get up, run, stumble, rumble, fall, rise, fall and then bootstrap myself into the American upper-middle class. I could afford a fancy car, but every sage piece of financial advice I���d read advised me not to fall into that trap.
As a result, I have sacrificed some markers of affluence. Those savings were plowed into investments that will hopefully allow me to reach retirement earlier. But was I fooling myself? Was the sacrifice worth it? Where was our household compared to similar households?
After a career negotiating commercial contracts, I knew the best way to answer that question was to benchmark myself. Federal Reserve data available online, combined with the incredibly helpful financial blogging community, would allow me to do so in a matter of minutes.
Every three years, the Federal Reserve publishes its Survey of Consumer Finances that contains a wide array of household financial data. From this information, we can painstakingly craft useful calculators, data sets, charts and graphs. Unfortunately, I have no idea how to do any of that. Fortunately, there are many bloggers who do.
For example, the smart people at DQYDJ.com, short for ���don���t quit your day job,��� have created a handy net worth��calculator that will compute your net worth percentile based on the latest Fed survey. If you���re wondering, the median net worth in America is $121,411. Based on DQYDJ���s calculator, our net worth puts us in the top 5% of American households. Wow, I thought, we���re doing great.
On the other hand, we should be doing great. Our household income is far above the U.S. median��of $67,463. My wife and I are a college-educated, dual-income household in our prime earning years. It makes no sense to compare our net worth to the average kid coming out of college or to a recent retiree. The question is, how are we doing compared to our peers?
Again, smart bloggers have already crunched the data. Over at OfDollarsAnd Data.com, one of my favorite bloggers, Nick Maggiulli, has spliced average��net worth data to control for education and age. According to Nick���s numbers, the median net worth of a household headed by a college-educated 45-to-54-year-old is $488,000. This doesn���t take into account, however, the wide range of incomes that a college-educated person might enjoy.
It would make no sense to compare a working actor���s salary to that of an actuarial data scientist, even though both might have degrees from a top-rated college and be the same age. Here, Nick obliges us again by revealing that the net worth of a household headed by a college-educated 45-to-54-year-old is $1.3 million at the 75th percentile��and $3.8 million at the 90th percentile.
For the tech-savvy, there���s a myriad of new apps that will not only calculate your net worth, but also do so on a daily basis. I���ve heard good things about Mint and Personal Capital. I use an app called Status that will calculate my net worth percentile compared to peers based on my region, homeownership status, credit score and income range.
As you can tell, the hard data exist to benchmark your financial condition. Everyone, regardless of income, should try it out. If you don���t feel like crunching numbers online, there���s a formula that I first discovered 20 years ago while reading The Millionaire Next Door by Thomas Stanley and William Danko. According to the book, your net worth should be your age multiplied by your gross income, divided by 10. If you���re age 45 and your household gross income is $100,000, your net worth should be $450,000 (45 x 100,000/10).
That���s your benchmark. If you���re close or above it, that���s great. What if you���re way below? That can easily happen if you���re early in your career and are just starting to save. But if you���re in your 40s or 50s and falling short, you need to come up with a plan.
Meanwhile, if you���re twice the benchmark, perhaps you should be imparting your financial wisdom to others. Stanley and Danko call these people PAWs, or prodigious accumulators of wealth. My goal has always been to reach the vaunted PAW status. I think I���ll get there in the next few years. That will have made the sacrifices worth it���and part of the thanks will go to my trusty used Subaru.
Tanvir Alam has been practicing corporate law for more than two decades, but you shouldn���t hold that against him. He lives in New York���s Hudson Valley with his patient wife and two skeptical teenagers. Tanvir is interested in personal finance and travel, and is trying desperately to become a runner.The post Measuring Up appeared first on HumbleDollar.
February 1, 2022
Out of Reach
HOME AFFORDABILITY is finally taking a hit now that mortgage rates have ticked higher. Last May, I wrote that property prices were through the roof but homes were still affordable. The reason: Historically low borrowing rates, coupled with record high median family income, had offset robust home prices.
The National Association of Realtors��� latest figures show housing affordability rivals that of last May. But the figures don���t yet reflect higher interest rates. Freddie Mac posts the latest set of mortgage rates each Thursday. The most recent data show that the average 30-year fixed-rate mortgage has surged from 2.77% last August to 3.55% for the week ending Jan. 27. Similarly, 15-year fixed-rate mortgages have jumped 0.7 percentage point since August.
Meanwhile, the most recent S&P CoreLogic Case-Shiller National Home Price Index shows that real estate prices continue to rise sharply, up 18.8% in the year through November. Zillow���s price index, which was updated Dec. 31, indicates that the median home value is now $320,662, up 19.6% from a year earlier.
On the income front, families might have tighter purse strings this year, since further stimulus payments are unlikely. Recall that in 2021 stimulus checks were doled out to low- and middle-income individuals and families in January and March. Enhanced child tax credits also boosted checking accounts. In January, for the first time in six months, families didn���t receive those payments.
All these factors should result in worse home affordability readings from the National Association of Realtors. Housing, it seems, might finally be out of reach for some prospective buyers.
The National Association of Realtors��� latest figures show housing affordability rivals that of last May. But the figures don���t yet reflect higher interest rates. Freddie Mac posts the latest set of mortgage rates each Thursday. The most recent data show that the average 30-year fixed-rate mortgage has surged from 2.77% last August to 3.55% for the week ending Jan. 27. Similarly, 15-year fixed-rate mortgages have jumped 0.7 percentage point since August.
Meanwhile, the most recent S&P CoreLogic Case-Shiller National Home Price Index shows that real estate prices continue to rise sharply, up 18.8% in the year through November. Zillow���s price index, which was updated Dec. 31, indicates that the median home value is now $320,662, up 19.6% from a year earlier.
On the income front, families might have tighter purse strings this year, since further stimulus payments are unlikely. Recall that in 2021 stimulus checks were doled out to low- and middle-income individuals and families in January and March. Enhanced child tax credits also boosted checking accounts. In January, for the first time in six months, families didn���t receive those payments.
All these factors should result in worse home affordability readings from the National Association of Realtors. Housing, it seems, might finally be out of reach for some prospective buyers.
The post Out of Reach appeared first on HumbleDollar.
Paying It Forward
ROUGHLY A QUARTER of my investment portfolio sits in three Roth retirement accounts. Ever since I first funded a Roth a dozen years ago, I���ve thought of this as money I���d avoid spending for as long as possible, so I milk maximum gain from the tax-free growth. But lately, it���s dawned on me that it���s highly unlikely I���ll ever dip into these accounts���and that realization has triggered a slew of investment decisions.
My three Roth accounts are all at Vanguard Group. They consist of a solo 401(k) that I continue to fund each year, a nondeductible IRA I converted to a Roth in 2010, and a rollover Roth 401(k) from my time at Citigroup. Because a Roth���s growth is tax-free, that���s the place where you want to earn your portfolio���s highest returns���and that���s why I have my Roth accounts invested 100% in stocks.
But until December, I managed my Roth accounts as part of my overall investment portfolio. That meant I used my Roth to own part of my portfolio���s allocation to, say, small-cap value stocks, small-cap international stocks, emerging markets and so on.
Now that I realize I���ll almost certainly never spend my Roth accounts, and instead they���ll go to my two children, I���ve changed my approach. In essence, I���m now managing two portfolios���the Roth accounts that my kids will inherit and the rest of my portfolio, almost all in a traditional IRA, which will fund my own retirement.
To be sure, a Roth isn���t quite as good an inheritance as it once was, now that Congress has nixed the ability for many beneficiaries to draw down inherited IRAs over their lifetime. Still, for my kids, my Roth accounts will come free of income taxes, plus they could get 10 more years of tax-free growth from the accounts after my death.
Meanwhile, as I���ve written about before, I���m aiming to simplify my investment portfolio���and, indeed, my overall financial life���as I look ahead to retirement. In my recent portfolio revamping, I didn���t change my asset allocation. I still have the same percentage in U.S. stocks, foreign shares and bonds, and I kept my various portfolio tilts, such as overweighting smaller companies, value stocks and emerging markets.
But I moved all of these portfolio tilts to my traditional IRA���and invested each of my three Roth accounts entirely in one fund. It���s a fund I believe I���ll be happy to hold for the rest of my life, and this part of my portfolio shouldn't require any maintenance whatsoever. The fund: Vanguard Total World Stock Index Fund, which is available both as a mutual fund that charges 0.1% in annual expenses and as an exchange-traded fund that costs 0.08%.
The fund represents, I believe, the ultimate in stock market diversification. With it, you get exposure to every stock around the world of any significance. Right now, the fund has roughly 60% in U.S. stocks, 30% in developed foreign markets and 10% in emerging markets. It represents the global market portfolio for stock investors���a single fund that holds what all other stock investors hold and in the percentages that they collectively hold them.
Does my strategy have drawbacks? I can think of five:
I may be wrong and end up needing the money. This doesn���t strike me as a huge issue. Until I shuffle off my mortal coil, the money remains mine and, if it looks like I���ll need to tap my Roth, I should have plenty of warning, so I can dial down the risk level.
In terms of fund expenses, it would be slightly cheaper to own a separate total U.S. stock market index fund and a total international stock index fund. But I���m happy to pay a few more pennies each year per $100 for simplicity.
I���ll miss out on the potential performance bonus that could come from earmarking, say, 60% for U.S. stocks and 40% for foreign stocks, and thereafter regularly rebalancing back to those target percentages, thus selling high and buying low. But again, for this money, my goal is simplicity, plus zero ongoing maintenance.
My less rational side���the part that thinks it has some sense for where markets are headed���feels Vanguard Total World is too exposed to the U.S. market and to the biggest U.S. stocks, especially tech companies. But the fact is, Vanguard Total World reflects the collective judgment of all stock investors around the world. They���ve voted with their buys and sells, and this is what they���ve chosen to own. Who am I to question their judgment?
Congress could institute required minimum distributions for Roth IRAs, which means I���d be forced to draw down the account. I hope that doesn���t happen, but there isn���t a whole lot I can do about it.
Many���and perhaps most���parents strive to leave behind something of value for their kids. Still, I consider myself to be in a privileged position. I can���t give my kids full financial security and, in any case, I���m not sure that���s desirable, because we all need something to strive for. But I can give them the sense that, down the road, a financial safety net awaits them. It���s my gift to my kids. My hope: They���ll pay it forward to their children.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
My three Roth accounts are all at Vanguard Group. They consist of a solo 401(k) that I continue to fund each year, a nondeductible IRA I converted to a Roth in 2010, and a rollover Roth 401(k) from my time at Citigroup. Because a Roth���s growth is tax-free, that���s the place where you want to earn your portfolio���s highest returns���and that���s why I have my Roth accounts invested 100% in stocks.
But until December, I managed my Roth accounts as part of my overall investment portfolio. That meant I used my Roth to own part of my portfolio���s allocation to, say, small-cap value stocks, small-cap international stocks, emerging markets and so on.
Now that I realize I���ll almost certainly never spend my Roth accounts, and instead they���ll go to my two children, I���ve changed my approach. In essence, I���m now managing two portfolios���the Roth accounts that my kids will inherit and the rest of my portfolio, almost all in a traditional IRA, which will fund my own retirement.
To be sure, a Roth isn���t quite as good an inheritance as it once was, now that Congress has nixed the ability for many beneficiaries to draw down inherited IRAs over their lifetime. Still, for my kids, my Roth accounts will come free of income taxes, plus they could get 10 more years of tax-free growth from the accounts after my death.
Meanwhile, as I���ve written about before, I���m aiming to simplify my investment portfolio���and, indeed, my overall financial life���as I look ahead to retirement. In my recent portfolio revamping, I didn���t change my asset allocation. I still have the same percentage in U.S. stocks, foreign shares and bonds, and I kept my various portfolio tilts, such as overweighting smaller companies, value stocks and emerging markets.
But I moved all of these portfolio tilts to my traditional IRA���and invested each of my three Roth accounts entirely in one fund. It���s a fund I believe I���ll be happy to hold for the rest of my life, and this part of my portfolio shouldn't require any maintenance whatsoever. The fund: Vanguard Total World Stock Index Fund, which is available both as a mutual fund that charges 0.1% in annual expenses and as an exchange-traded fund that costs 0.08%.
The fund represents, I believe, the ultimate in stock market diversification. With it, you get exposure to every stock around the world of any significance. Right now, the fund has roughly 60% in U.S. stocks, 30% in developed foreign markets and 10% in emerging markets. It represents the global market portfolio for stock investors���a single fund that holds what all other stock investors hold and in the percentages that they collectively hold them.
Does my strategy have drawbacks? I can think of five:
I may be wrong and end up needing the money. This doesn���t strike me as a huge issue. Until I shuffle off my mortal coil, the money remains mine and, if it looks like I���ll need to tap my Roth, I should have plenty of warning, so I can dial down the risk level.
In terms of fund expenses, it would be slightly cheaper to own a separate total U.S. stock market index fund and a total international stock index fund. But I���m happy to pay a few more pennies each year per $100 for simplicity.
I���ll miss out on the potential performance bonus that could come from earmarking, say, 60% for U.S. stocks and 40% for foreign stocks, and thereafter regularly rebalancing back to those target percentages, thus selling high and buying low. But again, for this money, my goal is simplicity, plus zero ongoing maintenance.
My less rational side���the part that thinks it has some sense for where markets are headed���feels Vanguard Total World is too exposed to the U.S. market and to the biggest U.S. stocks, especially tech companies. But the fact is, Vanguard Total World reflects the collective judgment of all stock investors around the world. They���ve voted with their buys and sells, and this is what they���ve chosen to own. Who am I to question their judgment?
Congress could institute required minimum distributions for Roth IRAs, which means I���d be forced to draw down the account. I hope that doesn���t happen, but there isn���t a whole lot I can do about it.
Many���and perhaps most���parents strive to leave behind something of value for their kids. Still, I consider myself to be in a privileged position. I can���t give my kids full financial security and, in any case, I���m not sure that���s desirable, because we all need something to strive for. But I can give them the sense that, down the road, a financial safety net awaits them. It���s my gift to my kids. My hope: They���ll pay it forward to their children.
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 Paying It Forward appeared first on HumbleDollar.
January’s Hits
LAST MONTH WAS OUR best ever for readership, with folks looking at 487,000 HumbleDollar pages. What got the most eyeballs? Here were January's seven most popular articles:
How does Ron Wayne cover his retirement expenses with a less-than-average income? He details how he holds down housing, entertainment, grocery, vacation and other costs.
"If you choose to age in place, take a realistic look around and decide what needs to change," advises Rick Connor. "With minor modifications, you can often remain at home for many years."
With bond yields so low, does owning a classic 60% stock-40% bond balanced portfolio still make sense? John Lim looks at some alternatives.
"Jeff Bezos is a bad role model," writes Adam Grossman. "So are Bill Gates, Elon Musk and every other billionaire. The problem is how they made their money. In each case, they owned exactly one stock."
How many ways can we mess up financially? Greg Spears offers a guided tour of 17 finance biases.
Planning for retirement? Sure, you should worry about market volatility and sequence-of-return risk. But Adam Grossman suggests three other pitfalls to keep in mind.
"The best way to protect yourself from Mr. Market’s manipulations is to be expert on that other important person: yourself," says Charley Ellis. "It’s important to learn about your weaknesses."
Last month also saw a large amount of traffic for Tom Kubik's The Unfriendly Skies, an article published at the end of December.
What about our daily blog posts? The best read were John Lim on his portfolio's performance, Dennis Friedman on his best money moves, Greg Spears on the 4% rule, Mike Drak on what retirees want and on cognitive decline, and Mike Zaccardi on the rocky stock market and on selling covered calls.
Meanwhile, the most popular newsletters were Bill Bernstein's A Day to Remember and Dennis Friedman's Road to Retirement. Both essays will appear in the book My Money Journey, slated to be published by Harriman House in March 2023. Did you notice the new, mid-week newsletter? Last month, we increased our free newsletter's frequency from weekly to twice a week. If you haven't already, how about signing up?
How does Ron Wayne cover his retirement expenses with a less-than-average income? He details how he holds down housing, entertainment, grocery, vacation and other costs.
"If you choose to age in place, take a realistic look around and decide what needs to change," advises Rick Connor. "With minor modifications, you can often remain at home for many years."
With bond yields so low, does owning a classic 60% stock-40% bond balanced portfolio still make sense? John Lim looks at some alternatives.
"Jeff Bezos is a bad role model," writes Adam Grossman. "So are Bill Gates, Elon Musk and every other billionaire. The problem is how they made their money. In each case, they owned exactly one stock."
How many ways can we mess up financially? Greg Spears offers a guided tour of 17 finance biases.
Planning for retirement? Sure, you should worry about market volatility and sequence-of-return risk. But Adam Grossman suggests three other pitfalls to keep in mind.
"The best way to protect yourself from Mr. Market’s manipulations is to be expert on that other important person: yourself," says Charley Ellis. "It’s important to learn about your weaknesses."
Last month also saw a large amount of traffic for Tom Kubik's The Unfriendly Skies, an article published at the end of December.
What about our daily blog posts? The best read were John Lim on his portfolio's performance, Dennis Friedman on his best money moves, Greg Spears on the 4% rule, Mike Drak on what retirees want and on cognitive decline, and Mike Zaccardi on the rocky stock market and on selling covered calls.
Meanwhile, the most popular newsletters were Bill Bernstein's A Day to Remember and Dennis Friedman's Road to Retirement. Both essays will appear in the book My Money Journey, slated to be published by Harriman House in March 2023. Did you notice the new, mid-week newsletter? Last month, we increased our free newsletter's frequency from weekly to twice a week. If you haven't already, how about signing up?
The post January’s Hits appeared first on HumbleDollar.
The Student Trap
NOT ALL DEBT IS created equal—and that’s especially true when it comes to student loans.
For the vast majority of debt, we can calculate the ongoing monthly payment if we know the interest rate, number of payment periods, current balance and if the payment is due at the beginning or end of the period. But for federal student loans, we may need to know one more variable: the borrower’s discretionary income.
With federal student loans, there are different income-driven repayment (IDR) plans, each with its own a method for calculating loan payments. But all of these plans base their payments on the discretionary income of the borrower, and potentially his or her spouse.
I want to emphasize federal loans here. What if you refinance your student loans with a private company, as some loan websites encourage you to do? Gone is the federal government’s income-based payment plan, with the flexibility it offers, and the standard debt rules will apply.
My advice: Think long and hard before you follow advice—often provided with a convenient link to a private student loan lender—to refinance with a private company because it'll lower your interest rate and purportedly save you money over the life of the loan. The decision has aspects that go far beyond the loan’s interest rate.
Student loans are extremely complicated and nuanced, and each individual’s circumstances need to be considered. What if you go ahead and refinance with a private lender? Once it’s done, it is irrevocable. No take-backs.
Here are some of the perks that federal student loans offer, which borrowers give up when they choose to refinance with a private lender:
Loan forgiveness. Federal student loans on an IDR plan can be forgiven after 10 and 25 years, depending on the type of employer you work for, as well as the IDR plan used.
Income-based payments. Federal student loans have flexible payment options that allow for a change in monthly payments due to a change in income. By contrast, private student loans operate on a set repayment schedule.
Payment freezes. Private companies can choose to pause payments, and many did at the start of the pandemic. None, however, has suspended payments for the two-plus years that the federal government has offered through May 1. Federal loans also include the flexibility to pause payments for changes in individual circumstances, such as going back to school, changing jobs, encountering financial difficulties and more.
Uncapitalized interest. Student loans operate with simple interest. That means interest accrues on the original balance of the loan. In certain situations, individuals on an IDR plan have more interest accruing each month than they’re paying, so their debt is actually growing larger. Refinancing will capitalize that full amount, including the accrued interest. The interest rate may be lower on the private loan, but it would be applied to a higher loan balance.
Future policy changes. There’s plenty of speculation in Washington surrounding federal debt cancellation and the introduction of a friendlier IDR plan. Private loans are not likely to benefit from any such policy changes.
The bottom line: “Experts” should think carefully before blithely recommending refinancing federal student loans with a private company. It’s a classic cost-versus-value discussion. Refinancing may save you money in the form of interest payments, but cost you the flexible terms you get with federal student loans.
Usually, securing a lower interest rate is the sole goal of refinancing. Not in this case. Make sure you understand the benefits you’d be giving up—permanently—before deciding what to do.
Logan Murray is a solo financial advisor. His company
Pocket Project
offers subscription-based financial planning services to young professionals. For more financial insights, check out Logan’s
blog
or connect with him on
LinkedIn
. His previous articles were Year-Round Planning and COBRA Call Option.
For the vast majority of debt, we can calculate the ongoing monthly payment if we know the interest rate, number of payment periods, current balance and if the payment is due at the beginning or end of the period. But for federal student loans, we may need to know one more variable: the borrower’s discretionary income.
With federal student loans, there are different income-driven repayment (IDR) plans, each with its own a method for calculating loan payments. But all of these plans base their payments on the discretionary income of the borrower, and potentially his or her spouse.
I want to emphasize federal loans here. What if you refinance your student loans with a private company, as some loan websites encourage you to do? Gone is the federal government’s income-based payment plan, with the flexibility it offers, and the standard debt rules will apply.
My advice: Think long and hard before you follow advice—often provided with a convenient link to a private student loan lender—to refinance with a private company because it'll lower your interest rate and purportedly save you money over the life of the loan. The decision has aspects that go far beyond the loan’s interest rate.
Student loans are extremely complicated and nuanced, and each individual’s circumstances need to be considered. What if you go ahead and refinance with a private lender? Once it’s done, it is irrevocable. No take-backs.
Here are some of the perks that federal student loans offer, which borrowers give up when they choose to refinance with a private lender:
Loan forgiveness. Federal student loans on an IDR plan can be forgiven after 10 and 25 years, depending on the type of employer you work for, as well as the IDR plan used.
Income-based payments. Federal student loans have flexible payment options that allow for a change in monthly payments due to a change in income. By contrast, private student loans operate on a set repayment schedule.
Payment freezes. Private companies can choose to pause payments, and many did at the start of the pandemic. None, however, has suspended payments for the two-plus years that the federal government has offered through May 1. Federal loans also include the flexibility to pause payments for changes in individual circumstances, such as going back to school, changing jobs, encountering financial difficulties and more.
Uncapitalized interest. Student loans operate with simple interest. That means interest accrues on the original balance of the loan. In certain situations, individuals on an IDR plan have more interest accruing each month than they’re paying, so their debt is actually growing larger. Refinancing will capitalize that full amount, including the accrued interest. The interest rate may be lower on the private loan, but it would be applied to a higher loan balance.
Future policy changes. There’s plenty of speculation in Washington surrounding federal debt cancellation and the introduction of a friendlier IDR plan. Private loans are not likely to benefit from any such policy changes.
The bottom line: “Experts” should think carefully before blithely recommending refinancing federal student loans with a private company. It’s a classic cost-versus-value discussion. Refinancing may save you money in the form of interest payments, but cost you the flexible terms you get with federal student loans.
Usually, securing a lower interest rate is the sole goal of refinancing. Not in this case. Make sure you understand the benefits you’d be giving up—permanently—before deciding what to do.
Logan Murray is a solo financial advisor. His company
Pocket Project
offers subscription-based financial planning services to young professionals. For more financial insights, check out Logan’s
blog
or connect with him on
LinkedIn
. His previous articles were Year-Round Planning and COBRA Call Option.The post The Student Trap appeared first on HumbleDollar.
January 31, 2022
The Sun-Tzu Also Rises
I WAS SURPRISED to realize the other day that, despite the varied topics HumbleDollar has addressed, I couldn���t recall a single mention of Sun-Tzu, the 6th century B.C. military commander who purportedly wrote The Art of War. The book is a favorite read of business schools. Even a cursory search on Amazon shows how often Sun-Tzu and The Art of War are invoked regarding business, finance and investing.
For many years, I taught The Art of War in classes ranging from military history to government to religion. Sun-Tzu is sometimes wrongly used to justify business and financial aggressiveness���always moving forward���rather than to encourage thoughtful planning. Ironically, some who recognize Sun-Tzu���s message of thoughtfulness lambaste��him for it.
Most of The Art of War is not about actual battle. As much as possible, for Sun-Tzu, the moment of conflict should be as predetermined as possible, with little room for spontaneous heroism. A general doing right by Sun-Tzu has few surprises to overcome nor any need to save the day.
In more modern terms, trial lawyers often say the perfect trial, unlike those on TV, is one with no surprises. Even better, the ideal trial might be one that doesn���t actually occur, because the matter is successfully resolved without a costly and time-consuming trip to court.
Investors could learn much from The Art of War. They would find guidance on how to make choosing the right option more of a thoughtful process, rather than an impulsive horse-race bet.
If you read The Art of War, choose your translation carefully. I like Samuel Griffith's for its concise martial understanding and Roger Ames���s for most all else. Once you dip inside, you���ll find not just specific rules, but general attitudes and approaches that maximize the odds of success in a variety of life situations. Here are three:
Know yourself and your resources. How much money do you have to risk? What���s your risk tolerance? What do you anticipate your needs will be in five, 10, 20 years? Before you step into any long-term commitment���from war to investment to marriage���start with a ���should I?��� analysis. This means taking a full inventory of yourself and your situation. A general knows the strength of his material and troops. An investor knows all his financial assets and has trustworthy advisors to counsel him. Both know their ���acceptable losses.���
When considering a long-term engagement, supply lines are especially important. As your operation goes along, how do you plan to secure your daily needs? Will you be cash strapped, with your income consumed by the mortgage, with no extra for upkeep or repairs?
Understand the situation. You might hear a ���gotta get in now��� hot tip. But what���s the bigger picture? Is the market booming, perhaps bubbled? What does your market analysis say? What do you know of the nature and quality of the money arena you���re about to step into? From famed generals rushing into an ambush to daily investors being hooked by a pump-and-dump stock scheme, Sun-Tzu and Elvis will tell you that only fools heedlessly rush in.
Be flexible. The Art of War really can't be understood without reference to the prevailing Daoist religious philosophy of its time. The good tactician is constantly moving, evaluating and adjusting. Westerners might think of the turning Taijitu or yin-yang symbol. A better invocation: We should try to be like flowing water, powerful but always moving, and even seeming to yield at times, until we ultimately prevail.
Sun-Tzu explains that we should alternate between a direct (Cheng) and indirect (Ch���i) force. Cheng��confronts an opponent or obstacle. Ch'i circles around and tries to flank. If Ch���i is discovered, it can then become the Cheng main force, while a new indirect Ch'i is devised, perhaps even the old Cheng.
The same fluidity is true for investing. Got a great investment strategy today? How will it work tomorrow? Life changes, and we should adapt. Perhaps those high-risk, high-yield stocks should give way to safer annuities as you approach retirement or see an obstacle arising. What was good advice in driving school at age 16 is good investment advice for the rest of life: Keep your eyes on the horizon to spot changing circumstances and be ready to react.
You might notice I didn���t quote directly from The Art of War here. Besides wanting you to read it yourself, I also believe no single line should be taken as conveying a complete message, not even the ubiquitous, ���All warfare is based on deception.��� Rather, Sun-Tzu���s writings need to be understood as an interlocking whole, like an articulated army of many components, or a varied investment portfolio built to prosper under many circumstances over many years.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.
For many years, I taught The Art of War in classes ranging from military history to government to religion. Sun-Tzu is sometimes wrongly used to justify business and financial aggressiveness���always moving forward���rather than to encourage thoughtful planning. Ironically, some who recognize Sun-Tzu���s message of thoughtfulness lambaste��him for it.
Most of The Art of War is not about actual battle. As much as possible, for Sun-Tzu, the moment of conflict should be as predetermined as possible, with little room for spontaneous heroism. A general doing right by Sun-Tzu has few surprises to overcome nor any need to save the day.
In more modern terms, trial lawyers often say the perfect trial, unlike those on TV, is one with no surprises. Even better, the ideal trial might be one that doesn���t actually occur, because the matter is successfully resolved without a costly and time-consuming trip to court.
Investors could learn much from The Art of War. They would find guidance on how to make choosing the right option more of a thoughtful process, rather than an impulsive horse-race bet.
If you read The Art of War, choose your translation carefully. I like Samuel Griffith's for its concise martial understanding and Roger Ames���s for most all else. Once you dip inside, you���ll find not just specific rules, but general attitudes and approaches that maximize the odds of success in a variety of life situations. Here are three:
Know yourself and your resources. How much money do you have to risk? What���s your risk tolerance? What do you anticipate your needs will be in five, 10, 20 years? Before you step into any long-term commitment���from war to investment to marriage���start with a ���should I?��� analysis. This means taking a full inventory of yourself and your situation. A general knows the strength of his material and troops. An investor knows all his financial assets and has trustworthy advisors to counsel him. Both know their ���acceptable losses.���
When considering a long-term engagement, supply lines are especially important. As your operation goes along, how do you plan to secure your daily needs? Will you be cash strapped, with your income consumed by the mortgage, with no extra for upkeep or repairs?
Understand the situation. You might hear a ���gotta get in now��� hot tip. But what���s the bigger picture? Is the market booming, perhaps bubbled? What does your market analysis say? What do you know of the nature and quality of the money arena you���re about to step into? From famed generals rushing into an ambush to daily investors being hooked by a pump-and-dump stock scheme, Sun-Tzu and Elvis will tell you that only fools heedlessly rush in.
Be flexible. The Art of War really can't be understood without reference to the prevailing Daoist religious philosophy of its time. The good tactician is constantly moving, evaluating and adjusting. Westerners might think of the turning Taijitu or yin-yang symbol. A better invocation: We should try to be like flowing water, powerful but always moving, and even seeming to yield at times, until we ultimately prevail.
Sun-Tzu explains that we should alternate between a direct (Cheng) and indirect (Ch���i) force. Cheng��confronts an opponent or obstacle. Ch'i circles around and tries to flank. If Ch���i is discovered, it can then become the Cheng main force, while a new indirect Ch'i is devised, perhaps even the old Cheng.
The same fluidity is true for investing. Got a great investment strategy today? How will it work tomorrow? Life changes, and we should adapt. Perhaps those high-risk, high-yield stocks should give way to safer annuities as you approach retirement or see an obstacle arising. What was good advice in driving school at age 16 is good investment advice for the rest of life: Keep your eyes on the horizon to spot changing circumstances and be ready to react.
You might notice I didn���t quote directly from The Art of War here. Besides wanting you to read it yourself, I also believe no single line should be taken as conveying a complete message, not even the ubiquitous, ���All warfare is based on deception.��� Rather, Sun-Tzu���s writings need to be understood as an interlocking whole, like an articulated army of many components, or a varied investment portfolio built to prosper under many circumstances over many years.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.The post The Sun-Tzu Also Rises appeared first on HumbleDollar.
January 30, 2022
Wrestling With Rates
THE S&P 500 WAS UP 0.8% last week. It was a wild ride, with the Volatility Index climbing to almost 40���the highest level in 15 months���as investors grappled with the threat of rising interest rates. The Federal Reserve is steadfast in its plans to aggressively raise short-term interest rates. Bank of America Global Research was the buzz of Wall Street on Friday morning, with its economic team saying it now expects the Fed to hike rates by a quarter-point at all seven remaining meetings this year.
If Bank of America is right, we���ll be able to earn upwards of 2��% to 3% on money market accounts by the end of 2023. But keep in mind that forecasts vary widely. Still, the fear is that tighter Fed policy will lead to slower economic growth.
Amid the monetary policy uncertainty, corporate earnings are coming in fast. FactSet���s earnings insight��blog provides the latest earnings season figures. It���s been a solid but not spectacular reporting period thus far. FactSet says that 77% of S&P 500 companies have beaten earnings estimates, near the five-year average beat rate. Aggregate earnings, however, are just 4% above analysts��� expectations, well below the 8.6% five-year average.
With the S&P 500 down 7% year-to-date and earnings continuing to climb, price-earnings (P/E) ratios are becoming more reasonable. The U.S. stock market now looks cheaper than at any time last year. The ratio based on expected earnings is at 19.2, near the five-year average of 18.5, says FactSet. Outside the S&P 500���such as among foreign stocks���valuations appear much better.
Meanwhile, the economy was humming along until Omicron hit. The Commerce Department reported Thursday that real gross domestic product grew at a 6.9% annualized clip in the fourth quarter. That���s the fourth��fastest pace since the high-growth days of the mid-1980s. Much of the huge growth in the economy was the result of inventory restocking, which is seen as less indicative of sustainable growth.
Looking ahead, economists expect the latest COVID variant to hurt job growth in January. We���ll get a fresh look at the employment situation on Friday. Some forecasters expect the Labor Department to report a drop in jobs after a stellar 807,000 gain in December���s employment report.
If Bank of America is right, we���ll be able to earn upwards of 2��% to 3% on money market accounts by the end of 2023. But keep in mind that forecasts vary widely. Still, the fear is that tighter Fed policy will lead to slower economic growth.
Amid the monetary policy uncertainty, corporate earnings are coming in fast. FactSet���s earnings insight��blog provides the latest earnings season figures. It���s been a solid but not spectacular reporting period thus far. FactSet says that 77% of S&P 500 companies have beaten earnings estimates, near the five-year average beat rate. Aggregate earnings, however, are just 4% above analysts��� expectations, well below the 8.6% five-year average.
With the S&P 500 down 7% year-to-date and earnings continuing to climb, price-earnings (P/E) ratios are becoming more reasonable. The U.S. stock market now looks cheaper than at any time last year. The ratio based on expected earnings is at 19.2, near the five-year average of 18.5, says FactSet. Outside the S&P 500���such as among foreign stocks���valuations appear much better.
Meanwhile, the economy was humming along until Omicron hit. The Commerce Department reported Thursday that real gross domestic product grew at a 6.9% annualized clip in the fourth quarter. That���s the fourth��fastest pace since the high-growth days of the mid-1980s. Much of the huge growth in the economy was the result of inventory restocking, which is seen as less indicative of sustainable growth.
Looking ahead, economists expect the latest COVID variant to hurt job growth in January. We���ll get a fresh look at the employment situation on Friday. Some forecasters expect the Labor Department to report a drop in jobs after a stellar 807,000 gain in December���s employment report.
The post Wrestling With Rates appeared first on HumbleDollar.
