Jonathan Clements's Blog, page 235
January 20, 2022
Taking Their Chances
QUICK FINANCIAL scores can be thrilling. The idea of plopping down a few bucks to hit it big with a lottery ticket or the roulette wheel is alluring to many. Even folks who know the odds are stacked in favor of the house engage in these gambles.
That brings me to a recent M1 Finance survey of more than 2,000 investors. A particularly sobering stat involved alternative assets: 73% of those who described their situation as “struggling to survive financially” planned to invest in some form of alternative asset, such as cryptocurrencies, in the next 12 months.
I’m not here to cast shame on gamblers. But it’s sad when people feel the need to go for broke in the financial markets. What makes such gambling especially disheartening is that a disciplined investment approach can build substantial wealth over time. For example, $40 invested in a low-cost stock index fund each month for 40 years would grow to more than $160,000, assuming a 9% annual return.
Also striking about the survey’s results: Over half of Gen Z and millennials—those born since the early 1980s—have taken an investment action because of social media. That includes me. I put money to work in some fringe investments last year, partly because of what I saw on social media. I’m sure we all know someone who dabbled in crypto or meme stocks in 2021 simply because others were doing so.
Daniel Crosby, the author of The Behavioral Investor , described some of last year’s herd mentality as community behavior. The pandemic forced many of us into isolation, leading some to seek social connectedness via a group of meme stock traders.
A little play money is fine. Dabbling in speculative trading with a small piece of your portfolio probably won’t hurt you much. Just be sure to keep your long-term objectives in mind—and strive to invest sensibly with the money earmarked for those goals.
That brings me to a recent M1 Finance survey of more than 2,000 investors. A particularly sobering stat involved alternative assets: 73% of those who described their situation as “struggling to survive financially” planned to invest in some form of alternative asset, such as cryptocurrencies, in the next 12 months.
I’m not here to cast shame on gamblers. But it’s sad when people feel the need to go for broke in the financial markets. What makes such gambling especially disheartening is that a disciplined investment approach can build substantial wealth over time. For example, $40 invested in a low-cost stock index fund each month for 40 years would grow to more than $160,000, assuming a 9% annual return.
Also striking about the survey’s results: Over half of Gen Z and millennials—those born since the early 1980s—have taken an investment action because of social media. That includes me. I put money to work in some fringe investments last year, partly because of what I saw on social media. I’m sure we all know someone who dabbled in crypto or meme stocks in 2021 simply because others were doing so.
Daniel Crosby, the author of The Behavioral Investor , described some of last year’s herd mentality as community behavior. The pandemic forced many of us into isolation, leading some to seek social connectedness via a group of meme stock traders.
A little play money is fine. Dabbling in speculative trading with a small piece of your portfolio probably won’t hurt you much. Just be sure to keep your long-term objectives in mind—and strive to invest sensibly with the money earmarked for those goals.
The post Taking Their Chances appeared first on HumbleDollar.
Too Much Talk
OVER THE PAST 25 years, the Federal Reserve has become more transparent than ever. Much of this is the result of political pressure. Still, the Fed has taken it further, believing greater transparency to be a good thing in helping the public understand the likelihood of future policy changes. Talking more may have helped us move past the 2008 financial crisis. But it isn't helping us now.
Congress created the Federal Reserve in 1913. The Fed is nominally independent but must answer to Congress, which can change the rules under which it operates or dissolve it altogether. For the first 60 years, Congress granted a great deal of latitude to the Fed, which communicated as little as possible, believing that transparency made policy less effective. Market participants could only divine policy decisions based on open market operations.
That changed in the late 1970s, as inflation breached 10% amid an 18-month recession. Congress revised the Federal Reserve Act to forcibly impose new disclosure requirements on the Federal Reserve after the Fed���s policymakers rejected repeated requests to explain themselves publicly.
In the 1990s, Congress raised the issue of greater transparency again. The Fed's degree of insularity was such that it took years for lawmakers to determine that the Fed even kept transcripts of its deliberations. When the Fed rebuffed Congress's request for those transcripts to be released regularly, Congress threatened to legislate again. The Fed eventually complied by releasing a post-meeting statement and the meeting transcripts themselves, after a lag.
Over the next decade, the Fed took steps toward greater transparency, augmenting the disclosures required by Congress. Self-mandated communication grew by leaps and bounds following the 2008 financial crisis, when traditional monetary tools proved far less effective and were quickly cast aside in favor of new approaches.
Many of these new monetary tools relied on verbal guidance from the Fed to help set public expectations. This meant talking more, giving more speeches and engaging in more interviews. It worked well when the plan was essentially to keep interest rates lower for longer. The same idea was behind the 2% inflation target offered up publicly in 2012, following a long debate about inflation that had started in the mid-1990s.
But a turning point came in late 2018. For two years, the Fed had been slowly raising interest rates. Fed Chair Jerome Powell gave an interview stating that the U.S. economy was "a long way from neutral," meaning the point at which interest rates are neither spurring nor slowing economic growth���and thus interest rates would potentially be raised further.
Stock markets and President Trump registered their displeasure at his remarks. The latter let loose a series of disparaging tweets, breaking with a tradition that kept presidents removed from commenting publicly on monetary policy.
Meanwhile, the stock market fell 13%. The Fed raised rates for the last time in December 2018. The economy hadn't fundamentally changed. It was still growing slowly, but public pressure took control of the Fed narrative. Reflecting that pressure, the Fed ushered in a series of interest rate reductions in 2019, even before the onset of the pandemic in 2020.
We now sit nearly two years into the pandemic. The U.S. economy is expanding modestly due to growing consumer demand, with supply chains that can't keep up. The Omicron COVID variant is the current challenge. Others will follow. Fiscal policy is uncertain and inflation has taken root, forcing the Fed to react.
The transparency, which served the public well when the Federal Reserve could better see the future, isn't helping now. Things are moving fast, conditions are changing quickly and the Fed���s policymakers are working on a meeting-by-meeting basis.
Their public commentaries, interviews and speeches don't help clarify matters. They���re thinking aloud and trying to develop their views in a public forum. They can't tell us where rates will be six to 12 months from now. We are in uncharted waters, and Fed officials have no better idea than anyone else.
The Fed must meet the politically mandated transparency required by Congress. Beyond those minimum expectations, however, it���s time for the Fed to walk back some of the communication methods adopted over the past decade. In being transparent, sometimes you can say too much and cloud the message you���re striving so hard to clarify.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.
Congress created the Federal Reserve in 1913. The Fed is nominally independent but must answer to Congress, which can change the rules under which it operates or dissolve it altogether. For the first 60 years, Congress granted a great deal of latitude to the Fed, which communicated as little as possible, believing that transparency made policy less effective. Market participants could only divine policy decisions based on open market operations.
That changed in the late 1970s, as inflation breached 10% amid an 18-month recession. Congress revised the Federal Reserve Act to forcibly impose new disclosure requirements on the Federal Reserve after the Fed���s policymakers rejected repeated requests to explain themselves publicly.
In the 1990s, Congress raised the issue of greater transparency again. The Fed's degree of insularity was such that it took years for lawmakers to determine that the Fed even kept transcripts of its deliberations. When the Fed rebuffed Congress's request for those transcripts to be released regularly, Congress threatened to legislate again. The Fed eventually complied by releasing a post-meeting statement and the meeting transcripts themselves, after a lag.
Over the next decade, the Fed took steps toward greater transparency, augmenting the disclosures required by Congress. Self-mandated communication grew by leaps and bounds following the 2008 financial crisis, when traditional monetary tools proved far less effective and were quickly cast aside in favor of new approaches.
Many of these new monetary tools relied on verbal guidance from the Fed to help set public expectations. This meant talking more, giving more speeches and engaging in more interviews. It worked well when the plan was essentially to keep interest rates lower for longer. The same idea was behind the 2% inflation target offered up publicly in 2012, following a long debate about inflation that had started in the mid-1990s.
But a turning point came in late 2018. For two years, the Fed had been slowly raising interest rates. Fed Chair Jerome Powell gave an interview stating that the U.S. economy was "a long way from neutral," meaning the point at which interest rates are neither spurring nor slowing economic growth���and thus interest rates would potentially be raised further.
Stock markets and President Trump registered their displeasure at his remarks. The latter let loose a series of disparaging tweets, breaking with a tradition that kept presidents removed from commenting publicly on monetary policy.
Meanwhile, the stock market fell 13%. The Fed raised rates for the last time in December 2018. The economy hadn't fundamentally changed. It was still growing slowly, but public pressure took control of the Fed narrative. Reflecting that pressure, the Fed ushered in a series of interest rate reductions in 2019, even before the onset of the pandemic in 2020.
We now sit nearly two years into the pandemic. The U.S. economy is expanding modestly due to growing consumer demand, with supply chains that can't keep up. The Omicron COVID variant is the current challenge. Others will follow. Fiscal policy is uncertain and inflation has taken root, forcing the Fed to react.
The transparency, which served the public well when the Federal Reserve could better see the future, isn't helping now. Things are moving fast, conditions are changing quickly and the Fed���s policymakers are working on a meeting-by-meeting basis.
Their public commentaries, interviews and speeches don't help clarify matters. They���re thinking aloud and trying to develop their views in a public forum. They can't tell us where rates will be six to 12 months from now. We are in uncharted waters, and Fed officials have no better idea than anyone else.
The Fed must meet the politically mandated transparency required by Congress. Beyond those minimum expectations, however, it���s time for the Fed to walk back some of the communication methods adopted over the past decade. In being transparent, sometimes you can say too much and cloud the message you���re striving so hard to clarify.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.The post Too Much Talk appeared first on HumbleDollar.
January 19, 2022
Tale of the Tape
MY PORTFOLIO GAINED some 4% in 2021. While I certainly didn���t expect to match the S&P 500���s impressive 28.6% performance, I was surprised at how low my return actually was. This surprise is a lesson unto itself: We often overestimate our own performance.
There���s a number of reasons for my portfolio���s middling returns. First, I began 2021 with my stock allocation at around 40%. Bonds, cash, and gold and gold mining companies rounded out the rest of my portfolio. These other asset classes had poor returns last year, including -1.9% for bonds to -4.2% for gold.
On top of that, I have an unusually low allocation to U.S. stocks, which had a banner year in 2021. My stock allocation tilts strongly international, with an outsized allocation to emerging markets stocks. Emerging markets woefully underperformed last year, as this chart illustrates.
In fact, had it not been for the two individual stocks I own, my portfolio���s performance would have been even worse. Wells Fargo (symbol: WFC) and TotalEnergies (TTE) had a great 2021.
Still, there are five reasons I don���t fret about underperforming the S&P 500 in 2021 and why you shouldn���t, either:
1. The S&P 500 is not my benchmark (not even close).��Unless you���re 100% invested in U.S. large-cap stocks, the S&P 500 is, at best, an arbitrary benchmark and, at worst, irrelevant. If you feel compelled to measure your relative performance���certainly not an imperative, as I discuss below���what's a more relevant benchmark?
I used my end-of-year asset allocation to create a blended benchmark, using exchange-traded funds to measure asset class performance for 2021. The results are summarized below:
The 2021 return of this portfolio was 6.1%, two percentage points higher than my 4% gain. As my asset allocation varied over the course of 2021���with progressively more in stocks���the benchmark I created is imperfect. Nonetheless, it���s a reasonable starting point. The verdict: My portfolio clearly underperformed its benchmark in 2021.
2. Last year enabled me to invest more at lower prices.��I added significantly to my stock allocation in 2021, particularly emerging markets. As those stocks fell in price, I happily bought more. This is the one corner of the global stock market that���s truly cheap, with a cyclically adjusted price-earnings (CAPE) ratio that���s less than half that of the U.S. But as 2021 clearly demonstrates, a low CAPE ratio shouldn���t be the basis for a market-timing strategy, at least in the short term. Which brings me to my next point���.
3. The short run makes headlines, but it's the long run that matters.��In this frenetic age of instantaneous market quotes, it���s easy to forget that one-year performance still constitutes the short run. If you���re a decade or more from retirement, as I am, annual returns are largely meaningless. What really matters is your compounded returns over multiple decades.
While I have no idea what���s in store for markets in 2022 or 2023, I���m confident that my portfolio will perform well over the long run, by which I mean a decade or longer. Paradoxically, investment returns over the long run are far easier to predict, yet nearly everyone is obsessed with the short run. A decade from now, you���ll more than likely be reading articles like this one.
4. Investing is neither a competition nor a beauty contest.��We live in a hypercompetitive, comparison-obsessed age. This mentality is further inflamed by social media. But personal finance and investing are not competitive sports. My financial goals are different from yours, and yours are different from your neighbor's.
A friend of mine has just 10% of his portfolio in stocks. In financial parlance, he has a very high degree of loss aversion���he really dislikes losing money. But that���s the right asset allocation for him.
As I���ve aged, my risk tolerance has also fallen. The idea of holding a 100% stock portfolio���which I did for many years���would today make my stomach churn. Having about two-thirds of my money in stocks feels about right. As a result, when it comes to investment returns, I���ll never ���knock it out of the park.��� On the other hand, I���m confident that my portfolio will enable me to reach my financial goals without losing sleep.
5. The calendar year is an arbitrary point of reference.��Market returns are lumpy. Case in point: If you measure my portfolio���s return from Jan. 14, 2021 to Jan. 14, 2022, it comes in around 8.5%. Yes, the first 10 trading days of 2022 have been very good for my portfolio.
I don���t give much credence to short-term performance, let alone to two weeks of outsized gains. My point is that markets are unpredictable in the short run���and that investors pay far too much attention to annual returns.
There���s a number of reasons for my portfolio���s middling returns. First, I began 2021 with my stock allocation at around 40%. Bonds, cash, and gold and gold mining companies rounded out the rest of my portfolio. These other asset classes had poor returns last year, including -1.9% for bonds to -4.2% for gold.
On top of that, I have an unusually low allocation to U.S. stocks, which had a banner year in 2021. My stock allocation tilts strongly international, with an outsized allocation to emerging markets stocks. Emerging markets woefully underperformed last year, as this chart illustrates.
In fact, had it not been for the two individual stocks I own, my portfolio���s performance would have been even worse. Wells Fargo (symbol: WFC) and TotalEnergies (TTE) had a great 2021.
Still, there are five reasons I don���t fret about underperforming the S&P 500 in 2021 and why you shouldn���t, either:
1. The S&P 500 is not my benchmark (not even close).��Unless you���re 100% invested in U.S. large-cap stocks, the S&P 500 is, at best, an arbitrary benchmark and, at worst, irrelevant. If you feel compelled to measure your relative performance���certainly not an imperative, as I discuss below���what's a more relevant benchmark?
I used my end-of-year asset allocation to create a blended benchmark, using exchange-traded funds to measure asset class performance for 2021. The results are summarized below:
The 2021 return of this portfolio was 6.1%, two percentage points higher than my 4% gain. As my asset allocation varied over the course of 2021���with progressively more in stocks���the benchmark I created is imperfect. Nonetheless, it���s a reasonable starting point. The verdict: My portfolio clearly underperformed its benchmark in 2021.
2. Last year enabled me to invest more at lower prices.��I added significantly to my stock allocation in 2021, particularly emerging markets. As those stocks fell in price, I happily bought more. This is the one corner of the global stock market that���s truly cheap, with a cyclically adjusted price-earnings (CAPE) ratio that���s less than half that of the U.S. But as 2021 clearly demonstrates, a low CAPE ratio shouldn���t be the basis for a market-timing strategy, at least in the short term. Which brings me to my next point���.
3. The short run makes headlines, but it's the long run that matters.��In this frenetic age of instantaneous market quotes, it���s easy to forget that one-year performance still constitutes the short run. If you���re a decade or more from retirement, as I am, annual returns are largely meaningless. What really matters is your compounded returns over multiple decades.
While I have no idea what���s in store for markets in 2022 or 2023, I���m confident that my portfolio will perform well over the long run, by which I mean a decade or longer. Paradoxically, investment returns over the long run are far easier to predict, yet nearly everyone is obsessed with the short run. A decade from now, you���ll more than likely be reading articles like this one.
4. Investing is neither a competition nor a beauty contest.��We live in a hypercompetitive, comparison-obsessed age. This mentality is further inflamed by social media. But personal finance and investing are not competitive sports. My financial goals are different from yours, and yours are different from your neighbor's.
A friend of mine has just 10% of his portfolio in stocks. In financial parlance, he has a very high degree of loss aversion���he really dislikes losing money. But that���s the right asset allocation for him.
As I���ve aged, my risk tolerance has also fallen. The idea of holding a 100% stock portfolio���which I did for many years���would today make my stomach churn. Having about two-thirds of my money in stocks feels about right. As a result, when it comes to investment returns, I���ll never ���knock it out of the park.��� On the other hand, I���m confident that my portfolio will enable me to reach my financial goals without losing sleep.
5. The calendar year is an arbitrary point of reference.��Market returns are lumpy. Case in point: If you measure my portfolio���s return from Jan. 14, 2021 to Jan. 14, 2022, it comes in around 8.5%. Yes, the first 10 trading days of 2022 have been very good for my portfolio.
I don���t give much credence to short-term performance, let alone to two weeks of outsized gains. My point is that markets are unpredictable in the short run���and that investors pay far too much attention to annual returns.
The post Tale of the Tape appeared first on HumbleDollar.
January 18, 2022
Five Money Moves
WHEN FOLKS TALK about their best financial decisions, they���ll often mention the investments they bought. But my list is quite different. Here are the five best money moves I���ve made during my dozen years in retirement:
1. Updating my estate plan. When I was my mother���s primary caregiver, she was the major of my estate. If something happened to me, I wanted to make sure she could afford the care she needed.
My mother passed away in 2019. I was married in 2020. Afterward, I updated my living trust and changed the beneficiaries on all my retirement accounts. My wife is now financially secure if I should pass away before her. If I didn���t take these actions, it would have been a failure to fulfill my moral and financial obligation to my wife.
2. Consolidating financial accounts. If I was to give my wife a nickname, it would be JIT. My wife likes to buy things just-in-time���only when they���re needed. She also doesn���t like clutter. She likes her life orderly and easily understood.
In 2020, I consolidated all my financial accounts. I now have 95% of my money at Vanguard Group and the rest at a local credit union. My finances are now simple and transparent, which is just the way my wife likes her life. My heirs will have fewer accounts to deal with when I���m gone.
3. Choosing traditional Medicare. If you live long enough, you're probably going to have a health scare. I���ve had two of them since I retired. The unknown is what���s so frightening about them. Not knowing what���s wrong with your failing body can turn your world upside down.
One good thing about traditional Medicare is that you don���t need approval for tests or to see a specialist. You can cut through the red tape and other nonsense to get to the root of your health problem fairly quickly. When my specialist recommended a CT scan, I made an appointment for the test before I left his office. I got a CT scan three days later. If I had Medicare Advantage, I���d probably still be waiting on the referral.
If you can afford the higher costs associated with traditional Medicare and a Medigap policy, they can expedite your medical care and put your world back together faster.
4. Delaying Social Security to age 70. The main reason I took my Social Security benefit at 70 is because it gives me a peace of mind. I wanted to make sure my wife and I are financially secure in our later years. If I should die before her, my larger check should cover her basic living expenses.
5. Taking a trip to La Jolla. After my wife and I got our COVID-19 vaccination shots in March 2021, we went on a weekend trip to La Jolla, California. We stayed at a hotel and ate at a good restaurant. It was a welcome break amid our long struggle with the pandemic.
The $400 we spent on this trip provided an emotional boost we truly needed. The change of scenery gave us a necessary��reprieve from COVID-19. It was some of the best money I���ve spent in retirement.
1. Updating my estate plan. When I was my mother���s primary caregiver, she was the major of my estate. If something happened to me, I wanted to make sure she could afford the care she needed.
My mother passed away in 2019. I was married in 2020. Afterward, I updated my living trust and changed the beneficiaries on all my retirement accounts. My wife is now financially secure if I should pass away before her. If I didn���t take these actions, it would have been a failure to fulfill my moral and financial obligation to my wife.
2. Consolidating financial accounts. If I was to give my wife a nickname, it would be JIT. My wife likes to buy things just-in-time���only when they���re needed. She also doesn���t like clutter. She likes her life orderly and easily understood.
In 2020, I consolidated all my financial accounts. I now have 95% of my money at Vanguard Group and the rest at a local credit union. My finances are now simple and transparent, which is just the way my wife likes her life. My heirs will have fewer accounts to deal with when I���m gone.
3. Choosing traditional Medicare. If you live long enough, you're probably going to have a health scare. I���ve had two of them since I retired. The unknown is what���s so frightening about them. Not knowing what���s wrong with your failing body can turn your world upside down.
One good thing about traditional Medicare is that you don���t need approval for tests or to see a specialist. You can cut through the red tape and other nonsense to get to the root of your health problem fairly quickly. When my specialist recommended a CT scan, I made an appointment for the test before I left his office. I got a CT scan three days later. If I had Medicare Advantage, I���d probably still be waiting on the referral.
If you can afford the higher costs associated with traditional Medicare and a Medigap policy, they can expedite your medical care and put your world back together faster.
4. Delaying Social Security to age 70. The main reason I took my Social Security benefit at 70 is because it gives me a peace of mind. I wanted to make sure my wife and I are financially secure in our later years. If I should die before her, my larger check should cover her basic living expenses.
5. Taking a trip to La Jolla. After my wife and I got our COVID-19 vaccination shots in March 2021, we went on a weekend trip to La Jolla, California. We stayed at a hotel and ate at a good restaurant. It was a welcome break amid our long struggle with the pandemic.
The $400 we spent on this trip provided an emotional boost we truly needed. The change of scenery gave us a necessary��reprieve from COVID-19. It was some of the best money I���ve spent in retirement.
The post Five Money Moves appeared first on HumbleDollar.
Why Am I Late?
WHEN I STARTED flying for American Airlines in 1978, the industry was regulated. Routes, fares, airline size, pretty much everything the airlines did was controlled by the Civil Aeronautics Board. Then, later that year, the Airline Deregulation Act became law. Overnight, rules governing the industry changed.
This had far-reaching effects. But the biggest change was the cost of airline tickets. They became a lot cheaper.
Over the next 40 years, established carriers went bankrupt and disappeared. Others reorganized under bankruptcy laws. New carriers came in. Fares dropped, new routes opened and flying became as common as bus travel.
Capitalism works well, as you know. Today, pretty much anyone can fly at a very reasonable cost, as opposed to the old days when only upper-income folks could afford a ticket.
The airlines were a service business when I started. You were treated as a loyal customer. Polite employees served you as you traveled on their airline. It morphed into a commodity business by the time I retired. The commodity is the seat you buy. The service aspect is not so common today.
Getting you there on time is about the best you can hope for. The on-time performance is dependent on the way the carriers run their schedules, which is a major reason for cheap tickets. It���s called hub-and-spoke. Fly everyone to a central hub, then spoke them out to their destinations.
Federal Express pioneered the hub-and-spoke concept with packages in 1973. I actually flew for them from 1976 to 1977 and saw it firsthand. It worked spectacularly well. With deregulation, the airlines figured out they could do the same thing with people. Unlike going solely back and forth between two airports, hub-and-spoke keeps airplanes flying and making money pretty much all day and night.
Costs came down, and some of those savings showed up as cheap tickets. Thanks to the cheaper fares, people didn���t mind being treated as packages. Still, with hub-and-spoke, the occasional snafu can make your travel experience very frustrating.
Let���s say you want to go from Savannah to Des Moines to see the kids. You book a 1 p.m. flight that will get you to Des Moines at 6 p.m. Neither of the two airports is a hub. Both are spokes. That means you have to fly to a hub airport from SAV, so you can travel on to DSM.
At the hub airport, likely Charlotte, you���ll change planes to go on to DSM. You���ll have an hour or less to connect to your flight in CLT. Normally, that isn���t a problem.
But wait, there���s a problem. The flight from SAV is on an airplane that started its day in Miami at 8 a.m. and has to go to CLT first to drop off its MIA passengers. Then it loads up with some passengers and takes them to SAV, where it becomes your flight to CLT. But there was a delay this morning in MIA due to a brake problem on the airplane.
That fix delayed the flight to CLT. It was just 30 minutes late. But by the time it got turned around to SAV, that delay was now 40 minutes. You depart SAV 50 minutes late. These delays put you into CLT with just 10 minutes to get to your DSM flight. Uh-oh. You just missed it because it���s 20 gates from your incoming flight.
No problem���you���ll get the next one. But the next one is full, so the airline rebooks you on the one after that. After four hours enjoying your time in CLT, your rebooked DSM flight is now ready.
Except that airplane has amassed a two-hour compounded delay for similar maintenance and weather issues. Eventually, you get to DSM. Instead of 6 p.m., you land in Des Moines at midnight. That can be frustrating.
In a nutshell, this is one of the major problems with airline travel. Normally, everything runs pretty well. But when the weather gets bad or the airplane needs fixing, the delays compound. An easy day on paper turns into one that���s very long and sometimes stressful.
There are many other issues that can delay or cancel originating or connecting flights. Recently, we���ve seen a lack of flight crews due to COVID virus issues. Mostly, though, the weather plays the biggest role in delays.
The system is very busy on a daily basis. The domino effect of bad weather 10 states away can sometimes wreak havoc on the entire system. Although we are mostly at the mercy of the airlines��� systems and Mother Nature, I can give you one very big tip to make things go easier: If you���re thinking of moving or downsizing for retirement, consider being near a hub airport city.
We live near Charlotte. We can pretty much go wherever we want to go nonstop. That���s a big deal. We���ve been able to fly directly to some towns that didn���t have air service before deregulation. This was another benefit of the law that changed everything in 1978.
Hub cities such as Denver, Chicago, Dallas, Houston, Miami, Phoenix and Minneapolis are solid choices. All those cities can offer a lot of amenities, in addition to nonstop flights to pretty much anywhere. It���s something to consider.
Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Faced with this upheaval, he also had a side business as a homebuilder. Today, Tom and his wife still travel extensively.��Three children and seven grandchildren keep them on the go. Tom's previous article was The Unfriendly Skies.
This had far-reaching effects. But the biggest change was the cost of airline tickets. They became a lot cheaper.
Over the next 40 years, established carriers went bankrupt and disappeared. Others reorganized under bankruptcy laws. New carriers came in. Fares dropped, new routes opened and flying became as common as bus travel.
Capitalism works well, as you know. Today, pretty much anyone can fly at a very reasonable cost, as opposed to the old days when only upper-income folks could afford a ticket.
The airlines were a service business when I started. You were treated as a loyal customer. Polite employees served you as you traveled on their airline. It morphed into a commodity business by the time I retired. The commodity is the seat you buy. The service aspect is not so common today.
Getting you there on time is about the best you can hope for. The on-time performance is dependent on the way the carriers run their schedules, which is a major reason for cheap tickets. It���s called hub-and-spoke. Fly everyone to a central hub, then spoke them out to their destinations.
Federal Express pioneered the hub-and-spoke concept with packages in 1973. I actually flew for them from 1976 to 1977 and saw it firsthand. It worked spectacularly well. With deregulation, the airlines figured out they could do the same thing with people. Unlike going solely back and forth between two airports, hub-and-spoke keeps airplanes flying and making money pretty much all day and night.
Costs came down, and some of those savings showed up as cheap tickets. Thanks to the cheaper fares, people didn���t mind being treated as packages. Still, with hub-and-spoke, the occasional snafu can make your travel experience very frustrating.
Let���s say you want to go from Savannah to Des Moines to see the kids. You book a 1 p.m. flight that will get you to Des Moines at 6 p.m. Neither of the two airports is a hub. Both are spokes. That means you have to fly to a hub airport from SAV, so you can travel on to DSM.
At the hub airport, likely Charlotte, you���ll change planes to go on to DSM. You���ll have an hour or less to connect to your flight in CLT. Normally, that isn���t a problem.
But wait, there���s a problem. The flight from SAV is on an airplane that started its day in Miami at 8 a.m. and has to go to CLT first to drop off its MIA passengers. Then it loads up with some passengers and takes them to SAV, where it becomes your flight to CLT. But there was a delay this morning in MIA due to a brake problem on the airplane.
That fix delayed the flight to CLT. It was just 30 minutes late. But by the time it got turned around to SAV, that delay was now 40 minutes. You depart SAV 50 minutes late. These delays put you into CLT with just 10 minutes to get to your DSM flight. Uh-oh. You just missed it because it���s 20 gates from your incoming flight.
No problem���you���ll get the next one. But the next one is full, so the airline rebooks you on the one after that. After four hours enjoying your time in CLT, your rebooked DSM flight is now ready.
Except that airplane has amassed a two-hour compounded delay for similar maintenance and weather issues. Eventually, you get to DSM. Instead of 6 p.m., you land in Des Moines at midnight. That can be frustrating.
In a nutshell, this is one of the major problems with airline travel. Normally, everything runs pretty well. But when the weather gets bad or the airplane needs fixing, the delays compound. An easy day on paper turns into one that���s very long and sometimes stressful.
There are many other issues that can delay or cancel originating or connecting flights. Recently, we���ve seen a lack of flight crews due to COVID virus issues. Mostly, though, the weather plays the biggest role in delays.
The system is very busy on a daily basis. The domino effect of bad weather 10 states away can sometimes wreak havoc on the entire system. Although we are mostly at the mercy of the airlines��� systems and Mother Nature, I can give you one very big tip to make things go easier: If you���re thinking of moving or downsizing for retirement, consider being near a hub airport city.
We live near Charlotte. We can pretty much go wherever we want to go nonstop. That���s a big deal. We���ve been able to fly directly to some towns that didn���t have air service before deregulation. This was another benefit of the law that changed everything in 1978.
Hub cities such as Denver, Chicago, Dallas, Houston, Miami, Phoenix and Minneapolis are solid choices. All those cities can offer a lot of amenities, in addition to nonstop flights to pretty much anywhere. It���s something to consider.
Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Faced with this upheaval, he also had a side business as a homebuilder. Today, Tom and his wife still travel extensively.��Three children and seven grandchildren keep them on the go. Tom's previous article was The Unfriendly Skies.The post Why Am I Late? appeared first on HumbleDollar.
End of the Ride
BACK IN NOVEMBER, I wrote about using options to bet that shares of Peloton Interactive would decline. This was my first options trade. I purchased the put option when Peloton was trading in the low $50s. The option cost me $200, and it gave me the right to sell 100 shares at $35 per share in March 2022.
Since then, Peloton���s shares have indeed tumbled. It was recently announced that the stock will be booted from the Nasdaq-100 index, the company has continued to struggle with public relations blunders and this morning its shares plunged below $30 (symbol:��PTON). While I���m still bearish on the stock, I decided to sell my put last week for $600, giving me a profit of $400 or 200%.
Why? I never thought I���d see much of a gain on the trade. I understood the risk that I could lose the entire $200 premium if Peloton shares finished above $35. And I would have been okay with that loss because I made the trade, in part, to gain first-hand experience.
While I understood the downside, I was less prepared to make a profit. When Peloton shares traded lower after I bought the option, the value of my position quickly doubled to $400. With the continued selloff in January, my position tripled to $600. I felt greedy not accepting a 200% gain.
Another reason for selling last week: I knew the position would likely lose value as the option���s expiration date approached. At this point, the range of possible outcomes remains relatively large, and that bolsters the option���s value.
The final reason I sold: I don���t like rooting for a stock to tank. It felt as if I was hoping for a gymnast to slip off the balance beam. Still, all in all, it was a good���and lucrative���learning experience. But it���s back to indexing for me.
Since then, Peloton���s shares have indeed tumbled. It was recently announced that the stock will be booted from the Nasdaq-100 index, the company has continued to struggle with public relations blunders and this morning its shares plunged below $30 (symbol:��PTON). While I���m still bearish on the stock, I decided to sell my put last week for $600, giving me a profit of $400 or 200%.
Why? I never thought I���d see much of a gain on the trade. I understood the risk that I could lose the entire $200 premium if Peloton shares finished above $35. And I would have been okay with that loss because I made the trade, in part, to gain first-hand experience.
While I understood the downside, I was less prepared to make a profit. When Peloton shares traded lower after I bought the option, the value of my position quickly doubled to $400. With the continued selloff in January, my position tripled to $600. I felt greedy not accepting a 200% gain.
Another reason for selling last week: I knew the position would likely lose value as the option���s expiration date approached. At this point, the range of possible outcomes remains relatively large, and that bolsters the option���s value.
The final reason I sold: I don���t like rooting for a stock to tank. It felt as if I was hoping for a gymnast to slip off the balance beam. Still, all in all, it was a good���and lucrative���learning experience. But it���s back to indexing for me.
The post End of the Ride appeared first on HumbleDollar.
A 529 for Sophia
OVER CHRISTMAS, I got the sort of question I love to answer. My daughter���s thoughtful boyfriend had set aside some money for his niece���s college education. What was the best way to invest it?
I said that we���d paid for much of our children���s education with money invested in 529 college savings plans. The investment gains went untaxed because we���d spent the money on tuition, room and board. On top of that, our 529 contributions were deductible against our state-income tax in Pennsylvania, where we live.
Our daughter���s boyfriend lives in Boston. A quick search revealed that he would need to contribute to a Massachusetts 529 plan to gain a similar state tax deduction.�� We saw that Fidelity Investments offered a low-cost 529 plan with target-date index funds. The only slight hitch in opening the account was securing his niece���s Social Security number, which he quickly obtained with a call to his brother.
Sophia is a cute three-year-old with blonde ringlets, so it���s going to be a while before she reaches college age. One of the best things about opening a 529 plan this early is the potential for compound investment returns. There���s another important advantage, however, to opening a 529 account for one so young.
A child with a college savings account in her name is three times more likely to attend college than one without such a fund, according to one study. Interestingly, it doesn���t seem to matter how much money is in the account. The expectation of college attendance is set even if the amount saved is just $50. The next step, then, is to tell Sophia about her 529���and her big plans for the future.
I said that we���d paid for much of our children���s education with money invested in 529 college savings plans. The investment gains went untaxed because we���d spent the money on tuition, room and board. On top of that, our 529 contributions were deductible against our state-income tax in Pennsylvania, where we live.
Our daughter���s boyfriend lives in Boston. A quick search revealed that he would need to contribute to a Massachusetts 529 plan to gain a similar state tax deduction.�� We saw that Fidelity Investments offered a low-cost 529 plan with target-date index funds. The only slight hitch in opening the account was securing his niece���s Social Security number, which he quickly obtained with a call to his brother.
Sophia is a cute three-year-old with blonde ringlets, so it���s going to be a while before she reaches college age. One of the best things about opening a 529 plan this early is the potential for compound investment returns. There���s another important advantage, however, to opening a 529 account for one so young.
A child with a college savings account in her name is three times more likely to attend college than one without such a fund, according to one study. Interestingly, it doesn���t seem to matter how much money is in the account. The expectation of college attendance is set even if the amount saved is just $50. The next step, then, is to tell Sophia about her 529���and her big plans for the future.
The post A 529 for Sophia appeared first on HumbleDollar.
Year-Round Planning
MANY FOLKS SPEND December frantically hunting for ways to cut their taxes, whether it���s realizing losses in their taxable investment accounts, making charitable donations or raising their 401(k) contributions for the year���s final few paychecks.
A better strategy: Manage your taxes year-round rather than just at year-end. Filing a tax return is a reactive process���a record of income and deductions that have already occurred. It takes foresight and action to shape what those lines will look like on next year���s tax return.
The process of tax management starts with evaluating your situation. I suggest running a tax projection or reviewing your prior year���s tax return if you expect a similar financial year. We���ve all heard the basics, such as giving more money to charity, bunching deductions in high-income years and making Roth conversions in low-income years.
This is sage advice that can help you manage your tax bracket or help you stay within the tax code���s phaseouts for various tax breaks. But there are some additional strategies and actions you can take nearer the start of the year to gain more control over your taxes.
Portfolio construction. Asset allocation is a key pillar of portfolio construction. But have you also considered your asset location? Ideally, you���d hold tax-inefficient investments���those that kick off large amounts of ordinary income���in a tax-deferred account. That way, those gains go untaxed until you withdraw them. Meanwhile, you���d want to hold tax-efficient investments���those that generate long-term capital gains���in taxable accounts.
Investment structure. Mutual funds are often less tax-efficient than exchange-traded funds (ETFs). This may not matter if you���re an index investor, because turnover is low in either structure. An actively managed mutual fund, however, will likely have greater turnover and larger taxable distributions than an ETF.
Contribution limits. Make the most of tax-advantaged accounts. In 2022, the contribution limit for 401(k)s and 403(b) plans is $1,000 higher, with the max now set at $20,500 for those under age 50 and $27,000 for older workers. If you can afford it, adjust your payroll withholding to max out by year-end. The maximum contribution to health savings accounts has also increased a bit, to $3,650 for an individual and $7,300 for a family in 2022.
Tax diversification. Yes, the immediate tax savings from funding tax-deductible retirement accounts are enticing. But also give some thought to your tax bills during your retirement years. It might make sense to fund Roth accounts instead. If you don���t know which is best, diversify across taxable, tax-deductible and Roth accounts.
Withholding strategy. None of us wants to pay more than necessary to the IRS or our state government. To that end, have a plan to pay taxes throughout the year to avoid any interest or penalties for late payments. The IRS and state agencies expect you to pay along the way, not just at the end when it comes time to file your return.
To avoid penalties, you can increase withholding on your W-4 form if you���re employed or on a W-4V for your Social Security income. Another option is to make quarterly tax payments by check and voucher or by enrolling in the IRS���s Electronic Federal Tax Payment��System.
Children. Gifting money from your estate will have no immediate tax benefit. But it can shift the tax burden of future asset growth to your children, who may be taxed at a lower rate.
Another common strategy is to contribute to a 529 college savings plan on a child���s or grandchild���s behalf. Contributions grow tax-deferred and distributions are tax-free if spent on qualified education expenses. Some states also allow a limited amount of 529 contributions to be deducted from state income taxes.
Have your own business? Consider hiring your child. You get a payroll deduction and your child can use the earned income to make Roth IRA contributions.
Bonus round. Now that we���re just past year-end, it can make sense to build on the tax planning you did late last year. Here are some items that come to mind.
First, if you harvested��tax losses at the end of 2021, consider buying back into the original position 31 days after the trade, providing it makes sense for your taxes and your portfolio. Going forward, look for tax-loss opportunities throughout the year, not just at year-end. Similarly, if you sold a mutual fund to avoid a capital gains distribution in 2021, consider getting back into that same fund if it makes sense.
Finally, buy Series I��savings bonds. With the new year, your $10,000 annual limit has reset, so you can take advantage of the current 7.12% annual yield. No federal taxes are due on your interest earnings until redemption, plus savings bonds avoid state income taxes.
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 article was COBRA Call Option.
A better strategy: Manage your taxes year-round rather than just at year-end. Filing a tax return is a reactive process���a record of income and deductions that have already occurred. It takes foresight and action to shape what those lines will look like on next year���s tax return.
The process of tax management starts with evaluating your situation. I suggest running a tax projection or reviewing your prior year���s tax return if you expect a similar financial year. We���ve all heard the basics, such as giving more money to charity, bunching deductions in high-income years and making Roth conversions in low-income years.
This is sage advice that can help you manage your tax bracket or help you stay within the tax code���s phaseouts for various tax breaks. But there are some additional strategies and actions you can take nearer the start of the year to gain more control over your taxes.
Portfolio construction. Asset allocation is a key pillar of portfolio construction. But have you also considered your asset location? Ideally, you���d hold tax-inefficient investments���those that kick off large amounts of ordinary income���in a tax-deferred account. That way, those gains go untaxed until you withdraw them. Meanwhile, you���d want to hold tax-efficient investments���those that generate long-term capital gains���in taxable accounts.
Investment structure. Mutual funds are often less tax-efficient than exchange-traded funds (ETFs). This may not matter if you���re an index investor, because turnover is low in either structure. An actively managed mutual fund, however, will likely have greater turnover and larger taxable distributions than an ETF.
Contribution limits. Make the most of tax-advantaged accounts. In 2022, the contribution limit for 401(k)s and 403(b) plans is $1,000 higher, with the max now set at $20,500 for those under age 50 and $27,000 for older workers. If you can afford it, adjust your payroll withholding to max out by year-end. The maximum contribution to health savings accounts has also increased a bit, to $3,650 for an individual and $7,300 for a family in 2022.
Tax diversification. Yes, the immediate tax savings from funding tax-deductible retirement accounts are enticing. But also give some thought to your tax bills during your retirement years. It might make sense to fund Roth accounts instead. If you don���t know which is best, diversify across taxable, tax-deductible and Roth accounts.
Withholding strategy. None of us wants to pay more than necessary to the IRS or our state government. To that end, have a plan to pay taxes throughout the year to avoid any interest or penalties for late payments. The IRS and state agencies expect you to pay along the way, not just at the end when it comes time to file your return.
To avoid penalties, you can increase withholding on your W-4 form if you���re employed or on a W-4V for your Social Security income. Another option is to make quarterly tax payments by check and voucher or by enrolling in the IRS���s Electronic Federal Tax Payment��System.
Children. Gifting money from your estate will have no immediate tax benefit. But it can shift the tax burden of future asset growth to your children, who may be taxed at a lower rate.
Another common strategy is to contribute to a 529 college savings plan on a child���s or grandchild���s behalf. Contributions grow tax-deferred and distributions are tax-free if spent on qualified education expenses. Some states also allow a limited amount of 529 contributions to be deducted from state income taxes.
Have your own business? Consider hiring your child. You get a payroll deduction and your child can use the earned income to make Roth IRA contributions.
Bonus round. Now that we���re just past year-end, it can make sense to build on the tax planning you did late last year. Here are some items that come to mind.
First, if you harvested��tax losses at the end of 2021, consider buying back into the original position 31 days after the trade, providing it makes sense for your taxes and your portfolio. Going forward, look for tax-loss opportunities throughout the year, not just at year-end. Similarly, if you sold a mutual fund to avoid a capital gains distribution in 2021, consider getting back into that same fund if it makes sense.
Finally, buy Series I��savings bonds. With the new year, your $10,000 annual limit has reset, so you can take advantage of the current 7.12% annual yield. No federal taxes are due on your interest earnings until redemption, plus savings bonds avoid state income taxes.
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 article was COBRA Call Option.The post Year-Round Planning appeared first on HumbleDollar.
January 17, 2022
Driving Lessons
THIS PAST YEAR marked my 50th anniversary of driving. Over that time, our family has owned 19 cars and driven them roughly 1.9 million miles. While latte purchases frequently evoke financial debate, cars seem less discussed, despite being Americans��� second-largest expenditure after housing. The purchase, ownership, maintenance and sale of cars can all get pretty complicated.
Cars are considered a depreciating asset, but not always. My first car was a 1967 Mercury Comet, which I bought for $400 in 1973. I sold it two years���and 15,000 miles���later for $400. While reliable, the car had a dodgy transmission. I said a silent ���thanks��� for every successful gear shift.
My second car was a hot, three-speed 1971 AMC Javelin, which I bought for $1,200 in 1975. It had a whopping 145 horsepower, which is less than today���s base model Honda Civic. I had to MacGyver a coat hanger to tether the exhaust pipe, use hose clamps and a split Coke can to patch holes in the exhaust, and spray starter-fluid in cold weather. As a student, I just couldn���t afford the $200 to repair the exhaust or $40 for the carburetor.
I owned that Javelin for 11 years and about 130,000 miles. Once I got a job after college, I fixed the exhaust system and carburetor. This car taught me the benefits of a buy-and-hold approach to car ownership, which we���ve refined over the subsequent 45 years.
In midlife, two events abruptly cut short our normal habit of owning cars for lengthy periods. In 1988, our house burned down and took with it two station wagons���a 1981 Pontiac and 1985 Ford. Then, in 2001, we were transferred overseas and had to quickly unload our three station wagons���a 1988 Volvo, 1992 BMW and 1997 Volvo.
Having three cars for two drivers may sound excessive. Our work commutes totaled 190 miles per day, however, so we were racking up nearly 80,000 miles a year. These three cars eventually accumulated more than 400,000 miles between them.
Having a spare vehicle bailed us out of a jam many times. Remember, these were the days when there was no working from home. Employees were required to show up every day on time, snowstorm or not. Our ownership philosophy evolved to owning three high-mileage, highly depreciated beaters to ensure that we always had two running cars. We still use this approach.
Since returning from overseas, we���ve owned 10 cars over 16 years, including two for the kids. Nine of these cars were bought used, typically at the three-year mark with 35,000 miles. We paid 30% to 70% of the car���s original price, thanks to the steep depreciation on new cars. Fortunately, there hasn���t been a lemon in the bunch.
We���ve turned over four of these nine cars, after averaging about 135,000 miles and eight years of ownership for each. We still own three of the nine cars, and gave two to the kids. On average, our cars are 11 years old and have 70,000 miles on them. These mileages are on the low side for us, as we���ve been driving far less in retirement. For six months, we were down to just two cars, but then our mechanic offered his older car at a bargain price that I just couldn���t pass up.
Our children still have their two cars. They average six years old with 100,000 miles. Our habit of holding onto cars may have rubbed off on the next generation.
One of our few new car purchases occurred when my wife returned to the U.S. several months before me. She had to promptly buy a family vehicle for herself and the kids. A new Honda minivan seemed an expedient option, as tire-kicking was out of the question. It became the family vehicle of choice for the next 12 years and 190,000 miles.
A 1988 Mazda 626 was the all-time mileage winner, with 303,000 miles clocked over eight years. We bought it new after our fire, and it required only two significant repairs. A 2006 Jeep Liberty was the cost-efficient champion. We paid $9,000 for it in 2010 and sold it for $3,000 in 2020, after driving it 120,000 miles. It never needed a major repair.
Over the years, I���ve learned some key lessons from our buy-cheap-and-hold car ownership strategy, including these seven:
Our car purchase sweet spot has been about three years old with 20,000 to 50,000 miles on the odometer. We do give up that new car smell.
We���ve had 100% success in keeping modern cars for a long time���a minimum of 11 years and 150,000 miles. This is despite the constant reminders that our ���car warranty has expired.���
Our longtime repair shop suggests budgeting $200 to $250 per month to maintain older cars. Half goes toward routine maintenance, and half is required for repairs. AAA suggests budgeting maintenance costs for a new car at nine cents per mile, which it translates to $75 to $150 a month.
Buying used has allowed us to drive good-handling, higher-end models that we otherwise couldn���t have afforded. We have owned four BMW station wagons, which seemed particularly reasonable on the resale market. We paid around 50% of the original price for the first one, and 40% or less for the subsequent three. We kept each of the first three for 190,000 miles or more, and number four is still going strong.
Locating your well-priced, well-maintained car of choice takes time���perhaps three to five months. Buying them from the owner saves on dealer costs, and the owner may honorably attest to a lack of mechanical problems. Alternatively, dealers usually provide refreshed tires, brakes, oil change, wipers and more on a used car. That can be worth $1,000 or more to the buyer.
When a car approaches our end-of-life tolerance for upkeep, we buy its replacement before that car dies. Having a spare is far cheaper than being forced into quickly buying a car when the old one dies. Also, a running car still has residual resale value once you���ve replaced it. Autotrader.com, Cars.com, KBB.com and Craigslist are our shopping friends.
Finding a competent and fair repair shop may be the key to cost-effectively sustaining older, high-mileage cars. We have two local repair shops that we trust. We���ve had limited success with auto-dealer repair shops.
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.
Cars are considered a depreciating asset, but not always. My first car was a 1967 Mercury Comet, which I bought for $400 in 1973. I sold it two years���and 15,000 miles���later for $400. While reliable, the car had a dodgy transmission. I said a silent ���thanks��� for every successful gear shift.
My second car was a hot, three-speed 1971 AMC Javelin, which I bought for $1,200 in 1975. It had a whopping 145 horsepower, which is less than today���s base model Honda Civic. I had to MacGyver a coat hanger to tether the exhaust pipe, use hose clamps and a split Coke can to patch holes in the exhaust, and spray starter-fluid in cold weather. As a student, I just couldn���t afford the $200 to repair the exhaust or $40 for the carburetor.
I owned that Javelin for 11 years and about 130,000 miles. Once I got a job after college, I fixed the exhaust system and carburetor. This car taught me the benefits of a buy-and-hold approach to car ownership, which we���ve refined over the subsequent 45 years.
In midlife, two events abruptly cut short our normal habit of owning cars for lengthy periods. In 1988, our house burned down and took with it two station wagons���a 1981 Pontiac and 1985 Ford. Then, in 2001, we were transferred overseas and had to quickly unload our three station wagons���a 1988 Volvo, 1992 BMW and 1997 Volvo.
Having three cars for two drivers may sound excessive. Our work commutes totaled 190 miles per day, however, so we were racking up nearly 80,000 miles a year. These three cars eventually accumulated more than 400,000 miles between them.
Having a spare vehicle bailed us out of a jam many times. Remember, these were the days when there was no working from home. Employees were required to show up every day on time, snowstorm or not. Our ownership philosophy evolved to owning three high-mileage, highly depreciated beaters to ensure that we always had two running cars. We still use this approach.
Since returning from overseas, we���ve owned 10 cars over 16 years, including two for the kids. Nine of these cars were bought used, typically at the three-year mark with 35,000 miles. We paid 30% to 70% of the car���s original price, thanks to the steep depreciation on new cars. Fortunately, there hasn���t been a lemon in the bunch.
We���ve turned over four of these nine cars, after averaging about 135,000 miles and eight years of ownership for each. We still own three of the nine cars, and gave two to the kids. On average, our cars are 11 years old and have 70,000 miles on them. These mileages are on the low side for us, as we���ve been driving far less in retirement. For six months, we were down to just two cars, but then our mechanic offered his older car at a bargain price that I just couldn���t pass up.
Our children still have their two cars. They average six years old with 100,000 miles. Our habit of holding onto cars may have rubbed off on the next generation.
One of our few new car purchases occurred when my wife returned to the U.S. several months before me. She had to promptly buy a family vehicle for herself and the kids. A new Honda minivan seemed an expedient option, as tire-kicking was out of the question. It became the family vehicle of choice for the next 12 years and 190,000 miles.
A 1988 Mazda 626 was the all-time mileage winner, with 303,000 miles clocked over eight years. We bought it new after our fire, and it required only two significant repairs. A 2006 Jeep Liberty was the cost-efficient champion. We paid $9,000 for it in 2010 and sold it for $3,000 in 2020, after driving it 120,000 miles. It never needed a major repair.
Over the years, I���ve learned some key lessons from our buy-cheap-and-hold car ownership strategy, including these seven:
Our car purchase sweet spot has been about three years old with 20,000 to 50,000 miles on the odometer. We do give up that new car smell.
We���ve had 100% success in keeping modern cars for a long time���a minimum of 11 years and 150,000 miles. This is despite the constant reminders that our ���car warranty has expired.���
Our longtime repair shop suggests budgeting $200 to $250 per month to maintain older cars. Half goes toward routine maintenance, and half is required for repairs. AAA suggests budgeting maintenance costs for a new car at nine cents per mile, which it translates to $75 to $150 a month.
Buying used has allowed us to drive good-handling, higher-end models that we otherwise couldn���t have afforded. We have owned four BMW station wagons, which seemed particularly reasonable on the resale market. We paid around 50% of the original price for the first one, and 40% or less for the subsequent three. We kept each of the first three for 190,000 miles or more, and number four is still going strong.
Locating your well-priced, well-maintained car of choice takes time���perhaps three to five months. Buying them from the owner saves on dealer costs, and the owner may honorably attest to a lack of mechanical problems. Alternatively, dealers usually provide refreshed tires, brakes, oil change, wipers and more on a used car. That can be worth $1,000 or more to the buyer.
When a car approaches our end-of-life tolerance for upkeep, we buy its replacement before that car dies. Having a spare is far cheaper than being forced into quickly buying a car when the old one dies. Also, a running car still has residual resale value once you���ve replaced it. Autotrader.com, Cars.com, KBB.com and Craigslist are our shopping friends.
Finding a competent and fair repair shop may be the key to cost-effectively sustaining older, high-mileage cars. We have two local repair shops that we trust. We���ve had limited success with auto-dealer repair shops.
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 Driving Lessons appeared first on HumbleDollar.
January 16, 2022
Winners and Sinners
LAST WEEK BROUGHT��additional��gains for value stocks, while shares of once highflying growth companies continued to struggle. Meanwhile, foreign markets again rallied. Vanguard FTSE All-World ex-U.S. ETF (symbol: VEU) rose more than 1% last week, even as Vanguard Total Stock Market ETF (VTI) slipped 0.5%.
Let���s further unpack these trends.
The Nasdaq Composite has endured its worst start to a year since 2009. At the same time, blue chip stocks and some of last year���s losers are suddenly in favor. U.S. high-dividend companies, such as those owned by Vanguard High Dividend Yield ETF (VYM), are up big. Venture overseas for yield, and you���ll see even larger gains. Vanguard International High Dividend Yield ETF (VYMI) is up almost 5% in 2022.
A heat map illustrates the story. Shares of some emerging market companies���such as Alibaba and Taiwan Semiconductor���are red hot, higher by more than 10% in the past two weeks. Meanwhile, energy stocks are in the black on the heels of rebounding oil prices. Brazil���s Petroleo Brasileiro, China���s PetroChina and France���s TotalEnergies are green across the board���each up by about 15% this year.
On Friday morning, the market digested the monthly University of Michigan Consumer Sentiment survey. That report showed buying conditions for vehicles were at their poorest level in the survey���s history. New and used car prices are through the roof. A key reason: Semiconductor chips are extremely hard to come by, thanks to the pandemic.
Moreover, last Wednesday���s Consumer Price Index report showed used car prices up a whopping 37% from a year ago, while the sticker price on the average new vehicle is 12% higher. How are large-cap value stocks like Ford and Toyota doing amid this car crisis? Ford���s shares are up 21% in 2022, while Toyota has climbed 14%.
As value-oriented international markets, stable dividend stocks, oil and gas companies, and traditional automakers rally, shares of innovative tech companies are down big. Zoom, Teladoc and Robinhood are all more than 70% below their pandemic peaks. It���s almost like the 2000-02 dot-com crash all over again.
Let���s further unpack these trends.
The Nasdaq Composite has endured its worst start to a year since 2009. At the same time, blue chip stocks and some of last year���s losers are suddenly in favor. U.S. high-dividend companies, such as those owned by Vanguard High Dividend Yield ETF (VYM), are up big. Venture overseas for yield, and you���ll see even larger gains. Vanguard International High Dividend Yield ETF (VYMI) is up almost 5% in 2022.
A heat map illustrates the story. Shares of some emerging market companies���such as Alibaba and Taiwan Semiconductor���are red hot, higher by more than 10% in the past two weeks. Meanwhile, energy stocks are in the black on the heels of rebounding oil prices. Brazil���s Petroleo Brasileiro, China���s PetroChina and France���s TotalEnergies are green across the board���each up by about 15% this year.
On Friday morning, the market digested the monthly University of Michigan Consumer Sentiment survey. That report showed buying conditions for vehicles were at their poorest level in the survey���s history. New and used car prices are through the roof. A key reason: Semiconductor chips are extremely hard to come by, thanks to the pandemic.
Moreover, last Wednesday���s Consumer Price Index report showed used car prices up a whopping 37% from a year ago, while the sticker price on the average new vehicle is 12% higher. How are large-cap value stocks like Ford and Toyota doing amid this car crisis? Ford���s shares are up 21% in 2022, while Toyota has climbed 14%.
As value-oriented international markets, stable dividend stocks, oil and gas companies, and traditional automakers rally, shares of innovative tech companies are down big. Zoom, Teladoc and Robinhood are all more than 70% below their pandemic peaks. It���s almost like the 2000-02 dot-com crash all over again.
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