Jonathan Clements's Blog, page 237
January 11, 2022
Aging in Place
PREPARING FOR infirmity is one of the most important���and least popular���parts of financial planning. A neighbor���s recent stroke provides a stark example of this challenge. He's in his mid-80s and has some underlying health problems.
Our neighbor lives in a second-story condominium, with external stairs as access. The stairs end at a narrow deck, with a right-hand turn into the home. An overhang blocks the screen door from opening fully.
When he had a stroke, the emergency medical technicians (EMTs) had to take off the screen door to get the stretcher out. In addition to the restricted access, his home���s interior is not set up for an infirm octogenarian. The bathrooms are small, and the hallways and doorways are narrow. Someone in a wheelchair, or using a walker, would struggle with basic daily activities.
The vast majority of homes in our town aren���t designed for people with disabilities. My parents lived with us for the last decade of their lives, and we needed to make modifications to our home to accommodate them.
My father had heart and lung diseases, the result of 40 years of smoking. In his last years, he used a walker and was on oxygen. We installed safety bars in the bathrooms, and a stairlift to help him reach the second-floor bedrooms.
My mother experienced a rapid decline due to a brain tumor from B-cell lymphoma. The tumor shut down the left side of her body. She went from walking normally to a walker to a wheelchair in about three months.
Her illness was five years after my father died, and we had removed the stairlift. We quickly had it put back in. We also built a large deck and ramp off the front door, and removed the doors to her bathroom. Eventually, we had a hospital bed installed in her room. For the last few months, she required round-the-clock care.
As challenging as these experiences were, we were lucky. My wife is an excellent nurse���well trained, experienced and the most caring person I know. She took the lead and made sure my parents were well cared for.
We were blessed with lots of help. My brothers and their wives, our children, and our nieces and nephews all helped. My mother-in-law was a retired nurse, and she pitched in, too. My mother had worked in the medical field and had close friends who were nurses. Their willingness to help was amazing and made our lives easier during this period.
Even with all this assistance, caring for a loved one with a serious illness was a big challenge. As we age, it���s important to anticipate our housing needs and desires, and develop a plan that accommodates future infirmities.
A good friend and former colleague set a good example of clear-eyed planning. He���s single and in his mid-70s. In his late 40s, he purchased a carriage home with first-floor living and an easy entrance. Exterior maintenance is taken care of by his homeowners��� association. This house will suit him well unless he can���t take care of himself.
For that possibility, he researched and found a staged senior living facility near his siblings, nieces and nephews. He put down a deposit and is guaranteed a spot within a certain number of months of a request. When he feels he can no longer manage his home or care for himself, he will notify the facility and begin the transition.
Many retirees see retirement as an opportunity to try a new style of living or a new location. My wife and I recently sold our primary home and moved to our beach home. Now, we���re thinking about its design.
It���s the first floor of a two-story condominium building. But ���first floor��� is a bit of a misnomer. To meet flooding concerns, the first floor is eight steps above ground level at the front and six steps up at the side entrance. We couldn���t get a wheelchair into our home, except by carrying it up the stairs.
Several local houses have retrofitted elevators in their homes. A friend���s neighbor installed one to accommodate a child with disabilities. They installed a free-standing tower containing the elevator at the rear of the home, with short bridges to each level.
The interior of our home has two levels. The main living area at the front of the house consists of a living room, dining room and kitchen. The rear half is five steps up and contains the bedrooms and bathrooms.
We are planning to renovate our bathrooms by enlarging the shower, widening the shower entrance and adding grab bars. We need to see if the bathroom can have a wider entrance, too, perhaps by installing a pocket door.
If you choose to age in place, take a realistic look around and decide what needs to change. With minor��modifications, you can often remain at home for many years. Make the modifications as early as you can. You don���t want to wait until the ambulance is on its way to realize the EMTs can���t get into the house.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.
Our neighbor lives in a second-story condominium, with external stairs as access. The stairs end at a narrow deck, with a right-hand turn into the home. An overhang blocks the screen door from opening fully.
When he had a stroke, the emergency medical technicians (EMTs) had to take off the screen door to get the stretcher out. In addition to the restricted access, his home���s interior is not set up for an infirm octogenarian. The bathrooms are small, and the hallways and doorways are narrow. Someone in a wheelchair, or using a walker, would struggle with basic daily activities.
The vast majority of homes in our town aren���t designed for people with disabilities. My parents lived with us for the last decade of their lives, and we needed to make modifications to our home to accommodate them.
My father had heart and lung diseases, the result of 40 years of smoking. In his last years, he used a walker and was on oxygen. We installed safety bars in the bathrooms, and a stairlift to help him reach the second-floor bedrooms.
My mother experienced a rapid decline due to a brain tumor from B-cell lymphoma. The tumor shut down the left side of her body. She went from walking normally to a walker to a wheelchair in about three months.
Her illness was five years after my father died, and we had removed the stairlift. We quickly had it put back in. We also built a large deck and ramp off the front door, and removed the doors to her bathroom. Eventually, we had a hospital bed installed in her room. For the last few months, she required round-the-clock care.
As challenging as these experiences were, we were lucky. My wife is an excellent nurse���well trained, experienced and the most caring person I know. She took the lead and made sure my parents were well cared for.
We were blessed with lots of help. My brothers and their wives, our children, and our nieces and nephews all helped. My mother-in-law was a retired nurse, and she pitched in, too. My mother had worked in the medical field and had close friends who were nurses. Their willingness to help was amazing and made our lives easier during this period.
Even with all this assistance, caring for a loved one with a serious illness was a big challenge. As we age, it���s important to anticipate our housing needs and desires, and develop a plan that accommodates future infirmities.
A good friend and former colleague set a good example of clear-eyed planning. He���s single and in his mid-70s. In his late 40s, he purchased a carriage home with first-floor living and an easy entrance. Exterior maintenance is taken care of by his homeowners��� association. This house will suit him well unless he can���t take care of himself.
For that possibility, he researched and found a staged senior living facility near his siblings, nieces and nephews. He put down a deposit and is guaranteed a spot within a certain number of months of a request. When he feels he can no longer manage his home or care for himself, he will notify the facility and begin the transition.
Many retirees see retirement as an opportunity to try a new style of living or a new location. My wife and I recently sold our primary home and moved to our beach home. Now, we���re thinking about its design.
It���s the first floor of a two-story condominium building. But ���first floor��� is a bit of a misnomer. To meet flooding concerns, the first floor is eight steps above ground level at the front and six steps up at the side entrance. We couldn���t get a wheelchair into our home, except by carrying it up the stairs.
Several local houses have retrofitted elevators in their homes. A friend���s neighbor installed one to accommodate a child with disabilities. They installed a free-standing tower containing the elevator at the rear of the home, with short bridges to each level.
The interior of our home has two levels. The main living area at the front of the house consists of a living room, dining room and kitchen. The rear half is five steps up and contains the bedrooms and bathrooms.
We are planning to renovate our bathrooms by enlarging the shower, widening the shower entrance and adding grab bars. We need to see if the bathroom can have a wider entrance, too, perhaps by installing a pocket door.
If you choose to age in place, take a realistic look around and decide what needs to change. With minor��modifications, you can often remain at home for many years. Make the modifications as early as you can. You don���t want to wait until the ambulance is on its way to realize the EMTs can���t get into the house.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.The post Aging in Place appeared first on HumbleDollar.
January 10, 2022
Resolved: Three Tasks
MY FIRST RESOLUTION for 2022 is to clean up my investment portfolio. While my garage and my closets are in good order, I shudder when I review my brokerage account.
Over the years, I���ve accumulated close to 20 mutual funds and exchange-traded funds. Overall, I���ve done well with these investments���most of which are based on stock market indexes���but it���s an unnecessary hodge-podge. By the end of the year, I plan to sell a majority of these positions and consolidate the proceeds in a target-date fund. I value the simplicity of target funds, with their regularly rebalanced mix of U.S. shares, international stocks and bonds.
My second resolution for 2022 is to update my life-insurance strategy. When my son was born in 2007, I purchased a 15-year term policy. That policy expires in June 2022. First, I need to consider whether I should continue to carry life insurance. Given the increase in our savings over the past 15 years, life insurance may be an unnecessary expense. If I do opt to keep coverage, I���ll weigh whether it���s prudent to continue with term insurance or shift to a whole-life policy. This latter wasn���t on my radar in 2007, but my basic understanding of whole-life insurance tells me it could be worth considering.
My third resolution is to create an investment roadmap for my wife. I periodically update her on the value and composition of our portfolio. Still, she���d be hard-pressed to take over management of our investments. My plan is to create a document that describes our accounts, including our brokerage, retirement, custodial and 529 plan accounts. I���ll also document our passwords���in a secure manner, of course���and provide the numbers for her to call if she needs to talk to someone about the accounts.
A final note: Thank you to those readers who have provided insightful comments on my 2021 articles and blog posts. I���ve learned a lot from you���especially regarding hybrid and electric vehicles���and I look forward to getting more feedback in the year ahead.
Over the years, I���ve accumulated close to 20 mutual funds and exchange-traded funds. Overall, I���ve done well with these investments���most of which are based on stock market indexes���but it���s an unnecessary hodge-podge. By the end of the year, I plan to sell a majority of these positions and consolidate the proceeds in a target-date fund. I value the simplicity of target funds, with their regularly rebalanced mix of U.S. shares, international stocks and bonds.
My second resolution for 2022 is to update my life-insurance strategy. When my son was born in 2007, I purchased a 15-year term policy. That policy expires in June 2022. First, I need to consider whether I should continue to carry life insurance. Given the increase in our savings over the past 15 years, life insurance may be an unnecessary expense. If I do opt to keep coverage, I���ll weigh whether it���s prudent to continue with term insurance or shift to a whole-life policy. This latter wasn���t on my radar in 2007, but my basic understanding of whole-life insurance tells me it could be worth considering.
My third resolution is to create an investment roadmap for my wife. I periodically update her on the value and composition of our portfolio. Still, she���d be hard-pressed to take over management of our investments. My plan is to create a document that describes our accounts, including our brokerage, retirement, custodial and 529 plan accounts. I���ll also document our passwords���in a secure manner, of course���and provide the numbers for her to call if she needs to talk to someone about the accounts.
A final note: Thank you to those readers who have provided insightful comments on my 2021 articles and blog posts. I���ve learned a lot from you���especially regarding hybrid and electric vehicles���and I look forward to getting more feedback in the year ahead.
The post Resolved: Three Tasks appeared first on HumbleDollar.
Wait a Minute
MINUTES FROM the latest Federal Open Market Committee (FOMC) meeting, which were released last Wednesday, roiled financial markets. Stocks fell sharply, with both the Nasdaq Composite and Russell 2000 falling more than 3% that day. On the week, the Nasdaq was down 4.5%, the S&P 500 down 1.9% and the Dow Jones Industrial Average 0.3% lower. What did investors read in the minutes that gave them such pause?
For background, FOMC minutes are released three weeks after the meeting itself. They provide far greater color and nuance on the thought processes of Federal Reserve officials than does the official press release that garners all the media attention. By my count, the December FOMC press release contained 1,024 words, versus 9,457 words for the corresponding minutes.
One word that appeared 28 times in the minutes���but which was completely absent from the press release���was ���balance sheet.��� The Fed���s balance sheet refers to its bond holdings���Treasurys and mortgage-backed securities���now totaling $8.7 trillion. This massive bond portfolio is the result of the Fed���s long-standing quantitative easing program, which has involved buying massive amounts of bonds.
What interested me most from the latest minutes was the discussion surrounding ���policy normalization.��� This is Fed speak for returning to some semblance of normal monetary policy by raising the federal funds rate from zero���what the Fed refers to as ���lift off������and reducing the size of its balance sheet. In particular, there seems to be a growing consensus at the Fed that its bond holdings should be reduced sooner and at a faster pace.
Many market watchers took this to mean that the initial rate hike may occur as early as March, three months sooner than had been expected. The growing narrative is that the Fed may have finally gotten serious about the risk posed by inflation.
Aside from being a transcript of FOMC meetings, Fed minutes also serve as forward guidance. These transcripts are, no doubt, carefully crafted reports that hint at future policy moves months in advance. This enables the Fed to both gauge market reaction to its intentions and to prevent market surprises when the Fed ultimately acts.
But such forward guidance also moves markets. Given the Fed���s enormous firepower, private investors can and do front run the Fed. This appears to be happening now as market participants digest the implications of a more aggressive���or, at least, less dovish���monetary policy.
Witness the rise in long-term Treasury yields, which had already begun their ascent in December. The upward pressure on yields accelerated after the release of Fed minutes Wednesday. Knowing that the Fed would soon turn from a buyer to a seller of Treasurys, bond investors sold in droves. The yield on the 10-year has risen from 1.35% in December to 1.8%. More than half of that increase occurred last week. The 30-year Treasury yield has followed a similar upward trajectory.
Despite the recent moves, the level of interest rates still makes little sense to me in an environment of 7% inflation. Unless inflation makes an about turn in 2022, the move in Treasury yields may be just getting started.
What are the broader implications of higher interest rates for the economy and financial markets? Rates on home mortgages will climb alongside Treasury yields. Coupled with the outsized gains in home prices last year, this means that housing will be even less affordable.
Bond investors will also suffer, at least in the short term, since bond prices fall as yields rise. Last week, I noticed that most of my bond funds had reached 52-week lows. One silver lining for bond investors: Coupons can be reinvested at higher yields, which will partially offset capital losses. That said, investors who have counted on the stabilizing power of the 60% stock-40% bond portfolio may be in for a nasty surprise should bond and stock prices fall simultaneously.
A final knock-on effect of higher rates is the divergence in stock performance between growth and value stocks. This was exemplified last week, with the Dow industrials significantly outperforming the Nasdaq. Many of the frothiest growth names���with little to no current earnings or dividends���have thrived in an ultra-low interest rate environment. Aside from being able to borrow money cheaply, their lofty valuations incorporate heady growth prospects far into the future. But as interest rates rise, the present value of future dividends and earnings become less attractive, leading to lower share prices. On the other hand, value stocks are more attractive as rates rise, at least on a relative basis, as many have generous cash flows and dividends today.
For background, FOMC minutes are released three weeks after the meeting itself. They provide far greater color and nuance on the thought processes of Federal Reserve officials than does the official press release that garners all the media attention. By my count, the December FOMC press release contained 1,024 words, versus 9,457 words for the corresponding minutes.
One word that appeared 28 times in the minutes���but which was completely absent from the press release���was ���balance sheet.��� The Fed���s balance sheet refers to its bond holdings���Treasurys and mortgage-backed securities���now totaling $8.7 trillion. This massive bond portfolio is the result of the Fed���s long-standing quantitative easing program, which has involved buying massive amounts of bonds.
What interested me most from the latest minutes was the discussion surrounding ���policy normalization.��� This is Fed speak for returning to some semblance of normal monetary policy by raising the federal funds rate from zero���what the Fed refers to as ���lift off������and reducing the size of its balance sheet. In particular, there seems to be a growing consensus at the Fed that its bond holdings should be reduced sooner and at a faster pace.
Many market watchers took this to mean that the initial rate hike may occur as early as March, three months sooner than had been expected. The growing narrative is that the Fed may have finally gotten serious about the risk posed by inflation.
Aside from being a transcript of FOMC meetings, Fed minutes also serve as forward guidance. These transcripts are, no doubt, carefully crafted reports that hint at future policy moves months in advance. This enables the Fed to both gauge market reaction to its intentions and to prevent market surprises when the Fed ultimately acts.
But such forward guidance also moves markets. Given the Fed���s enormous firepower, private investors can and do front run the Fed. This appears to be happening now as market participants digest the implications of a more aggressive���or, at least, less dovish���monetary policy.
Witness the rise in long-term Treasury yields, which had already begun their ascent in December. The upward pressure on yields accelerated after the release of Fed minutes Wednesday. Knowing that the Fed would soon turn from a buyer to a seller of Treasurys, bond investors sold in droves. The yield on the 10-year has risen from 1.35% in December to 1.8%. More than half of that increase occurred last week. The 30-year Treasury yield has followed a similar upward trajectory.
Despite the recent moves, the level of interest rates still makes little sense to me in an environment of 7% inflation. Unless inflation makes an about turn in 2022, the move in Treasury yields may be just getting started.
What are the broader implications of higher interest rates for the economy and financial markets? Rates on home mortgages will climb alongside Treasury yields. Coupled with the outsized gains in home prices last year, this means that housing will be even less affordable.
Bond investors will also suffer, at least in the short term, since bond prices fall as yields rise. Last week, I noticed that most of my bond funds had reached 52-week lows. One silver lining for bond investors: Coupons can be reinvested at higher yields, which will partially offset capital losses. That said, investors who have counted on the stabilizing power of the 60% stock-40% bond portfolio may be in for a nasty surprise should bond and stock prices fall simultaneously.
A final knock-on effect of higher rates is the divergence in stock performance between growth and value stocks. This was exemplified last week, with the Dow industrials significantly outperforming the Nasdaq. Many of the frothiest growth names���with little to no current earnings or dividends���have thrived in an ultra-low interest rate environment. Aside from being able to borrow money cheaply, their lofty valuations incorporate heady growth prospects far into the future. But as interest rates rise, the present value of future dividends and earnings become less attractive, leading to lower share prices. On the other hand, value stocks are more attractive as rates rise, at least on a relative basis, as many have generous cash flows and dividends today.
The post Wait a Minute appeared first on HumbleDollar.
New Year New Trends
ARE LONG-SUFFERING value investors and those with a large allocation to foreign stocks finally about to get some relief? The new year has seen significant relative strength by both areas of the market. Meanwhile, after peaking in the first half of 2021, highflying small- and mid-cap growth companies continue to get hammered. Mega-cap tech shares have also lately succumbed to selling pressure.
What���s worked thus far in 2022 are the boring old large-cap blue chip names. The winners during this year's first five trading days include Ford, Bank of America and Exxon Mobil. The trend began in early��December, when large-cap growth stocks started to underperform large-cap value. Overall, Vanguard Value ETF (symbol: VTV) is up an impressive 8.6% since the calendar flipped to December.
Developed market large-cap stocks have also enjoyed a tailwind of late. Vanguard FTSE Developed Markets ETF (VEA) is up a respectable 4.3% since Dec. 1. Meanwhile, Invesco QQQ ETF (QQQ), which tracks 100 large Nasdaq stocks, is down 3.4%.
While large-cap value shares and foreign stocks have recovered, another relative loser from last year has yet to see a bounce: the U.S. extended market. Jack Bogle, the founder of Vanguard Group, created the Extended Market Index Fund in 1987 (VEXAX) to allow investors to inexpensively access U.S. stocks beyond the S&P 500. The extended market is down 3.8% since early December, on par with the tech-heavy Nasdaq 100���s lousy performance.
It���s important to remember that market cycles can run for years. If value and international stocks are indeed making a comeback, the gains could last well beyond January���and, indeed, long beyond 2022.
What���s worked thus far in 2022 are the boring old large-cap blue chip names. The winners during this year's first five trading days include Ford, Bank of America and Exxon Mobil. The trend began in early��December, when large-cap growth stocks started to underperform large-cap value. Overall, Vanguard Value ETF (symbol: VTV) is up an impressive 8.6% since the calendar flipped to December.
Developed market large-cap stocks have also enjoyed a tailwind of late. Vanguard FTSE Developed Markets ETF (VEA) is up a respectable 4.3% since Dec. 1. Meanwhile, Invesco QQQ ETF (QQQ), which tracks 100 large Nasdaq stocks, is down 3.4%.
While large-cap value shares and foreign stocks have recovered, another relative loser from last year has yet to see a bounce: the U.S. extended market. Jack Bogle, the founder of Vanguard Group, created the Extended Market Index Fund in 1987 (VEXAX) to allow investors to inexpensively access U.S. stocks beyond the S&P 500. The extended market is down 3.8% since early December, on par with the tech-heavy Nasdaq 100���s lousy performance.
It���s important to remember that market cycles can run for years. If value and international stocks are indeed making a comeback, the gains could last well beyond January���and, indeed, long beyond 2022.
The post New Year New Trends appeared first on HumbleDollar.
Brotherly Betrayal
I WROTE PREVIOUSLY about my parents being victims of financial abuse by one of my brothers. Recently, I returned to Bangkok, which gave me a chance to discuss this situation at length with the entire family, including my other brothers and my uncle.
When the financial abuse of an elderly person is committed by a stranger, the rest of the family often has no chance to see warning signs. But 90% of abusers are family members or trusted individuals. In these cases, there are often warning signs, but the family may subconsciously not want to acknowledge the problem.
In my brother���s case, my uncle said he���d noticed his free-spending lifestyle. He���d purchased new luxury cars for himself and his wife shortly after gaining control of half my elderly parents��� money through a guardianship. In many ways, however, this financial abuse was part of a pattern that could be seen going back to his youth.
He was the only child, out of four, who���d continued to get substantial support from my parents throughout his life. While the rest of us have been supporting ourselves since we graduated from university, he continued to depend on our parents to make ends meet. It got to the point where he considered their financial assistance to be a normal part of his personal finances.
It���s common for Thai families to have multiple generations living together. What���s uncommon is a son who doesn���t give part of his salary to his parents, or at minimum pay his own expenses, while living with them. My brother not only didn���t pay expenses while living with our parents well into his 40s, but also he lived there with his wife and two children. He relied on my parents to pay most of his family���s living expenses: cars, gas, food, mobile phones and even part of the school tuition for his two daughters.
Six years ago, we were happy when he finally bought a home of his own. But he did so by selling two of my mom���s plots of land and using the proceeds for the down payment. I objected to this, but my mother said the gift would be offset later through my parents��� wills. Since then, she���s backed off that commitment.
Subsequently, my brother borrowed the rest of the money he needed to build his new home from my parents���a loan he never finished paying off. In other words, my parents paid for him to live with them and then paid for him to move out.
My other brothers, uncle and the rest of our family agree that it was partly my parents��� responsibility to stop the support���to say ���no��� to him. But they were always generous with family, having taken in siblings at times when money was tight and they had nowhere to go. Their generosity had never endangered their savings, however, until my brother started taking.
Even worse, my brother began to surreptitiously take without even asking. As our father was dying in the hospital, my brother���supposedly helping to oversee his expenses���maxed out my father���s credit cards for personal use. It was a perfect storm. My parents��� generosity and kindness, and my brother's pilfering, now leave my mother at risk of not having enough to support herself in her widowhood.
I confronted my brother when I was in Bangkok and was shocked by his attitude. He admitted no wrongdoing, although he acknowledged our parents didn���t consent to his spending. He claimed that he just meant to borrow the money temporarily.
My other brothers and I failed to see the warning signs that were there all along. We and my uncle agreed that we should have sensed there was something off. Perhaps my brother���s early habit of living off my parents made his later taking seem normal. It created a blind spot for us���even as he went further than we ever thought he would.
I honestly didn���t think this could happen in a family like ours, one that includes two bankers. Now I regret that I wasn���t more insistent with my parents about my brother���s habit of living off them���and that I didn���t confront him sooner. In the end, my abusive brother took advantage of our parents��� generosity. The responsibility lies on his shoulders, as it does on the thief more than the sleeping security guard.
Not everyone who lives at home, and receives financial support from their parents, are abusers. But when parental support grows from occasional to constant, creating a sense of dependency and entitlement, the groundwork is laid for grotesque abuse. In my brother���s case, he came to see our parents��� money as his own, to be spent as he wished, especially when he had access to half of it.
Even with the clear evidence we���ve discovered of my brother���s theft, my mother still has trouble understanding. Her mental decline, combined with a motherly denial of the idea that her son stole from her, keeps her from taking action. We, the remaining children, now are doing what we can to minimize the financial impact. But we also have to protect our mother from the full reality of what has happened���a reality that might be too much for her.
Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018.��Head to Linktree to learn more about Jiab, and also check out her earlier articles.
When the financial abuse of an elderly person is committed by a stranger, the rest of the family often has no chance to see warning signs. But 90% of abusers are family members or trusted individuals. In these cases, there are often warning signs, but the family may subconsciously not want to acknowledge the problem.
In my brother���s case, my uncle said he���d noticed his free-spending lifestyle. He���d purchased new luxury cars for himself and his wife shortly after gaining control of half my elderly parents��� money through a guardianship. In many ways, however, this financial abuse was part of a pattern that could be seen going back to his youth.
He was the only child, out of four, who���d continued to get substantial support from my parents throughout his life. While the rest of us have been supporting ourselves since we graduated from university, he continued to depend on our parents to make ends meet. It got to the point where he considered their financial assistance to be a normal part of his personal finances.
It���s common for Thai families to have multiple generations living together. What���s uncommon is a son who doesn���t give part of his salary to his parents, or at minimum pay his own expenses, while living with them. My brother not only didn���t pay expenses while living with our parents well into his 40s, but also he lived there with his wife and two children. He relied on my parents to pay most of his family���s living expenses: cars, gas, food, mobile phones and even part of the school tuition for his two daughters.
Six years ago, we were happy when he finally bought a home of his own. But he did so by selling two of my mom���s plots of land and using the proceeds for the down payment. I objected to this, but my mother said the gift would be offset later through my parents��� wills. Since then, she���s backed off that commitment.
Subsequently, my brother borrowed the rest of the money he needed to build his new home from my parents���a loan he never finished paying off. In other words, my parents paid for him to live with them and then paid for him to move out.
My other brothers, uncle and the rest of our family agree that it was partly my parents��� responsibility to stop the support���to say ���no��� to him. But they were always generous with family, having taken in siblings at times when money was tight and they had nowhere to go. Their generosity had never endangered their savings, however, until my brother started taking.
Even worse, my brother began to surreptitiously take without even asking. As our father was dying in the hospital, my brother���supposedly helping to oversee his expenses���maxed out my father���s credit cards for personal use. It was a perfect storm. My parents��� generosity and kindness, and my brother's pilfering, now leave my mother at risk of not having enough to support herself in her widowhood.
I confronted my brother when I was in Bangkok and was shocked by his attitude. He admitted no wrongdoing, although he acknowledged our parents didn���t consent to his spending. He claimed that he just meant to borrow the money temporarily.
My other brothers and I failed to see the warning signs that were there all along. We and my uncle agreed that we should have sensed there was something off. Perhaps my brother���s early habit of living off my parents made his later taking seem normal. It created a blind spot for us���even as he went further than we ever thought he would.
I honestly didn���t think this could happen in a family like ours, one that includes two bankers. Now I regret that I wasn���t more insistent with my parents about my brother���s habit of living off them���and that I didn���t confront him sooner. In the end, my abusive brother took advantage of our parents��� generosity. The responsibility lies on his shoulders, as it does on the thief more than the sleeping security guard.
Not everyone who lives at home, and receives financial support from their parents, are abusers. But when parental support grows from occasional to constant, creating a sense of dependency and entitlement, the groundwork is laid for grotesque abuse. In my brother���s case, he came to see our parents��� money as his own, to be spent as he wished, especially when he had access to half of it.
Even with the clear evidence we���ve discovered of my brother���s theft, my mother still has trouble understanding. Her mental decline, combined with a motherly denial of the idea that her son stole from her, keeps her from taking action. We, the remaining children, now are doing what we can to minimize the financial impact. But we also have to protect our mother from the full reality of what has happened���a reality that might be too much for her.
Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018.��Head to Linktree to learn more about Jiab, and also check out her earlier articles.The post Brotherly Betrayal appeared first on HumbleDollar.
January 9, 2022
Weighty Issue
JUST HOURS INTO the new year, I received an email from a concerned investor. His worry: the state of the market���the S&P 500, in particular. With hundreds of constituent companies, the S&P index has the veneer of broad diversification. But scratch the surface, and it seems to carry more risk than investors might like. The issue: It���s top heavy.
As a group, the top 10 companies in the S&P 500 account for more than 30% of its overall value. Apple alone is nearly 7%. That 30% concentration level has only been eclipsed twice in the past 50 years: during the 1970s Nifty Fifty boom and during the 1990s dot-com runup. Each of those peaks was followed by a period of market malaise, so the concern is understandable.
Further compounding the concern: Seven of the top 10 are technology companies. This makes it awfully easy to compare today���s market to the one we saw in 2000. Experienced investors, in fact, have been sounding this alarm for years. In 2019, Michael Burry, an investor who famously foresaw the 2008 housing meltdown,��spoke out��about the concentration risk in a top-heavy market. ���The theater keeps getting more crowded,��� he said, ���but the exit door is the same as it always was.���
And last year, veteran investor Jeremy Grantham��wrote, ���I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.��� Notably, Grantham wrote those words in early January,��before��the market gained yet another 28% over the course of the year.
As an investor, should you be alarmed at the concentration in the S&P 500? Is this a sign of things to come?
While I acknowledge that the market is high, I don���t see it as a ���full-fledged epic bubble,��� the way Grantham does. There are several lenses, in fact, through which the current concentration level appears justified. Let���s start with corporate profits. Basic finance says that the value of a company should be proportional to the profits it generates. If that���s the case, the value put on these companies actually makes a lot of sense. According to��J.P. Morgan, those top 10 companies, which account for a 30% weight in the S&P 500 index, account for 26% of its profits. In other words, their weight in the index is almost perfectly justified by the profits they���re delivering.
Those profits are immense. In Apple���s most recent fiscal year, it generated $95 billion in profit. To put that in perspective, Apple generated more profit than 481 other companies in the S&P 500 each generated in��total sales.
Another pillar of finance is that a company���s value should be based not just on its current level of profits, but also on its expected future profits. As a result, faster-growing companies deserve higher valuations. The S&P 500���s top 10 have been growing more quickly than many would have thought possible for companies of their size. Again, let���s look at Apple. Over the past 10 years, its profits have increased at an average annual rate of 14%. By contrast, earnings growth among all S&P companies has historically averaged just 6% a year.
Why are these companies so profitable? In large part, it���s due to their strong market positions. Google���s market share among search engines is regularly in the��80% to 90%��range. Apple owns��about half��the domestic smartphone market. In e-commerce, Amazon also owns��about half��the market. That gives them more leeway in pricing.
Have you noticed an increasing number of little recurring charges on your credit card in recent years���things like Apple Music and Amazon Prime? That���s another factor behind technology companies��� rising valuations. Consider Intuit, the company that makes TurboTax and QuickBooks. Ten years ago, the company sold its QuickBooks software the old-fashioned way���in a box for $300 or $400���and hoped customers would upgrade from time to time. Today, by contrast, QuickBooks is sold on a subscription basis for at least $25 per month, or $300��per year. The result: much higher revenue with much greater predictability. Intuit is just an example. Many companies���especially the tech companies in the top 10���have been pursuing the same strategy.
There���s also a COVID component. The top 10, through sheer luck, are mostly in businesses that have been either unaffected or positively affected by the pandemic. There are no hotels, restaurants or movie theaters in the top 10. This has also helped them pull away from the pack.
In short, these companies have, to a great extent, earned their strong valuations. Because of that, I���m not overly worried about the resulting concentration in the index. This isn't��Pets.com, and I doubt any of them will turn into��Tyco��or��Enron.
But those, I don���t think, are the only points of reference. Another scenario is that earnings growth at these top 10 companies might simply slow down. If those top 10 stocks stagnated the way Microsoft shares did for��, between 2000 and 2015, the result would be a massive drag for investors. This is a real risk. Recall that companies like General Electric and IBM were among the largest companies 20 years ago. But today, each is worth far less than it was then. IBM has lost about half its value over 20 years and GE has lost three-quarters.
In looking at companies like Apple or Amazon today, it seems unthinkable that they might lose their edge. Maybe they will indeed remain dominant long into the future. But history suggests that this is far from guaranteed.
Another concern: Corporate profits are highly correlated with stock prices but still are just one component. The other aspect, which is harder to predict, is investor sentiment. What if investors decided that they wanted to pay 25 times earnings for Microsoft instead of 30? A multiple of 25 would still be way above average, but the stock would nonetheless drop more than 16%.
The fact that seven of the 10 are in the same industry poses a further risk. That���s because stocks in the same industry tend to move together. If investor sentiment at some point sours on tech stocks, it���s possible that all seven could experience a downturn at the same time. That represents another risk below the surface.
Will 2022 be another year in which the S&P 500 trounces every other investment? It���s entirely possible. That���s why it���s at times like this that diversification may feel most difficult. It would be much easier to go all in on the S&P 500, an investment that seems tried and true, to the exclusion of anything else. But because nothing is guaranteed, that���s also why diversification may now be more important than ever.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.
As a group, the top 10 companies in the S&P 500 account for more than 30% of its overall value. Apple alone is nearly 7%. That 30% concentration level has only been eclipsed twice in the past 50 years: during the 1970s Nifty Fifty boom and during the 1990s dot-com runup. Each of those peaks was followed by a period of market malaise, so the concern is understandable.
Further compounding the concern: Seven of the top 10 are technology companies. This makes it awfully easy to compare today���s market to the one we saw in 2000. Experienced investors, in fact, have been sounding this alarm for years. In 2019, Michael Burry, an investor who famously foresaw the 2008 housing meltdown,��spoke out��about the concentration risk in a top-heavy market. ���The theater keeps getting more crowded,��� he said, ���but the exit door is the same as it always was.���
And last year, veteran investor Jeremy Grantham��wrote, ���I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.��� Notably, Grantham wrote those words in early January,��before��the market gained yet another 28% over the course of the year.
As an investor, should you be alarmed at the concentration in the S&P 500? Is this a sign of things to come?
While I acknowledge that the market is high, I don���t see it as a ���full-fledged epic bubble,��� the way Grantham does. There are several lenses, in fact, through which the current concentration level appears justified. Let���s start with corporate profits. Basic finance says that the value of a company should be proportional to the profits it generates. If that���s the case, the value put on these companies actually makes a lot of sense. According to��J.P. Morgan, those top 10 companies, which account for a 30% weight in the S&P 500 index, account for 26% of its profits. In other words, their weight in the index is almost perfectly justified by the profits they���re delivering.
Those profits are immense. In Apple���s most recent fiscal year, it generated $95 billion in profit. To put that in perspective, Apple generated more profit than 481 other companies in the S&P 500 each generated in��total sales.
Another pillar of finance is that a company���s value should be based not just on its current level of profits, but also on its expected future profits. As a result, faster-growing companies deserve higher valuations. The S&P 500���s top 10 have been growing more quickly than many would have thought possible for companies of their size. Again, let���s look at Apple. Over the past 10 years, its profits have increased at an average annual rate of 14%. By contrast, earnings growth among all S&P companies has historically averaged just 6% a year.
Why are these companies so profitable? In large part, it���s due to their strong market positions. Google���s market share among search engines is regularly in the��80% to 90%��range. Apple owns��about half��the domestic smartphone market. In e-commerce, Amazon also owns��about half��the market. That gives them more leeway in pricing.
Have you noticed an increasing number of little recurring charges on your credit card in recent years���things like Apple Music and Amazon Prime? That���s another factor behind technology companies��� rising valuations. Consider Intuit, the company that makes TurboTax and QuickBooks. Ten years ago, the company sold its QuickBooks software the old-fashioned way���in a box for $300 or $400���and hoped customers would upgrade from time to time. Today, by contrast, QuickBooks is sold on a subscription basis for at least $25 per month, or $300��per year. The result: much higher revenue with much greater predictability. Intuit is just an example. Many companies���especially the tech companies in the top 10���have been pursuing the same strategy.
There���s also a COVID component. The top 10, through sheer luck, are mostly in businesses that have been either unaffected or positively affected by the pandemic. There are no hotels, restaurants or movie theaters in the top 10. This has also helped them pull away from the pack.
In short, these companies have, to a great extent, earned their strong valuations. Because of that, I���m not overly worried about the resulting concentration in the index. This isn't��Pets.com, and I doubt any of them will turn into��Tyco��or��Enron.
But those, I don���t think, are the only points of reference. Another scenario is that earnings growth at these top 10 companies might simply slow down. If those top 10 stocks stagnated the way Microsoft shares did for��, between 2000 and 2015, the result would be a massive drag for investors. This is a real risk. Recall that companies like General Electric and IBM were among the largest companies 20 years ago. But today, each is worth far less than it was then. IBM has lost about half its value over 20 years and GE has lost three-quarters.
In looking at companies like Apple or Amazon today, it seems unthinkable that they might lose their edge. Maybe they will indeed remain dominant long into the future. But history suggests that this is far from guaranteed.
Another concern: Corporate profits are highly correlated with stock prices but still are just one component. The other aspect, which is harder to predict, is investor sentiment. What if investors decided that they wanted to pay 25 times earnings for Microsoft instead of 30? A multiple of 25 would still be way above average, but the stock would nonetheless drop more than 16%.
The fact that seven of the 10 are in the same industry poses a further risk. That���s because stocks in the same industry tend to move together. If investor sentiment at some point sours on tech stocks, it���s possible that all seven could experience a downturn at the same time. That represents another risk below the surface.
Will 2022 be another year in which the S&P 500 trounces every other investment? It���s entirely possible. That���s why it���s at times like this that diversification may feel most difficult. It would be much easier to go all in on the S&P 500, an investment that seems tried and true, to the exclusion of anything else. But because nothing is guaranteed, that���s also why diversification may now be more important than ever.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post Weighty Issue appeared first on HumbleDollar.
January 8, 2022
Resolved: Look Less
TOO MUCH FREE TIME, coupled with easy access to the internet, create a problem for this retiree. I obsessively check my IRA at least once���and often several times���each day.
I retired two years early with an above-average Social Security payment and a decent state pension, but not a whole lot in my IRA, which is my only retirement savings. Experts say I need much more, but a job loss in my late 50s, and the inability to find an equivalent position in my field and at the same pay level, have left me far behind where I���d hoped to be.
My account is like my baby. I want to make sure it stays healthy and grows. But there���s not much I can do most days, as the markets gyrate up and down.
I don���t actually make frequent changes. I know investing is for the long haul, but when you���re age 65, the road might be short. I look at the many mutual funds and individual stocks, and ponder my choices. Here���s what the software tells me:
My stock holdings have drifted higher than my target allocation.
The "style" of my stock holdings looks pretty similar to a benchmark that follows the U.S. stock market.
The "style" of my bond holdings appears pretty similar to a benchmark that follows the U.S. investment-grade bond market.
The portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company.
I need to learn to trust my decisions and let go of this IRA babysitting. It���s my New Year���s resolution to end this obsession and check the account no more than once a day, if that.
It has become almost a hobby to find and research investments. Admittedly, that can be enjoyable. But it���s time for a new hobby���one that���s less stressful.
I retired two years early with an above-average Social Security payment and a decent state pension, but not a whole lot in my IRA, which is my only retirement savings. Experts say I need much more, but a job loss in my late 50s, and the inability to find an equivalent position in my field and at the same pay level, have left me far behind where I���d hoped to be.
My account is like my baby. I want to make sure it stays healthy and grows. But there���s not much I can do most days, as the markets gyrate up and down.
I don���t actually make frequent changes. I know investing is for the long haul, but when you���re age 65, the road might be short. I look at the many mutual funds and individual stocks, and ponder my choices. Here���s what the software tells me:
My stock holdings have drifted higher than my target allocation.
The "style" of my stock holdings looks pretty similar to a benchmark that follows the U.S. stock market.
The "style" of my bond holdings appears pretty similar to a benchmark that follows the U.S. investment-grade bond market.
The portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company.
I need to learn to trust my decisions and let go of this IRA babysitting. It���s my New Year���s resolution to end this obsession and check the account no more than once a day, if that.
It has become almost a hobby to find and research investments. Admittedly, that can be enjoyable. But it���s time for a new hobby���one that���s less stressful.
The post Resolved: Look Less appeared first on HumbleDollar.
January 7, 2022
Resolved: Automate
WHEN I WAS WORKING fulltime, my 401(k) and health savings account contributions were automatically pulled from my biweekly paycheck and dumped into the respective accounts. But when I left the nine-to-five world a year ago, the onus fell on me to invest the profits from my small business. I sent off money to some low-cost funds a few times during 2021, but it wasn���t as regular as it should have been.
My resolution: Make my taxable account investing more automated this year. I know I���m a poor market-timer, so I don���t want to even think about buying the dips or jumping on a momentum trade. I���d rather just spread out my contributions over the course of the year.
I suspect many other folks could also benefit from putting their investment plan on autopilot. For retirees, automating distributions can take the mental anxiety out of the sell decision. Meanwhile, those in the workforce might automate their IRA contributions. It���s a whole lot easier to hit the $6,000 maximum contribution if you do it in automatic $500 monthly increments. For those age 50 and older, the 2022 max is $7,000, or just over $580 a month.
In 2021, I didn���t have the tax losses needed to max out the $3,000 offset against ordinary income. If I���d put money to work each month last year, surely there would have been at least a couple of lousy taxable-account purchases on which I could have booked losses and thereby captured that $3,000 tax benefit. Another of my 2022 resolutions: Harvest tax losses during this year���s market pullbacks.
My resolution: Make my taxable account investing more automated this year. I know I���m a poor market-timer, so I don���t want to even think about buying the dips or jumping on a momentum trade. I���d rather just spread out my contributions over the course of the year.
I suspect many other folks could also benefit from putting their investment plan on autopilot. For retirees, automating distributions can take the mental anxiety out of the sell decision. Meanwhile, those in the workforce might automate their IRA contributions. It���s a whole lot easier to hit the $6,000 maximum contribution if you do it in automatic $500 monthly increments. For those age 50 and older, the 2022 max is $7,000, or just over $580 a month.
In 2021, I didn���t have the tax losses needed to max out the $3,000 offset against ordinary income. If I���d put money to work each month last year, surely there would have been at least a couple of lousy taxable-account purchases on which I could have booked losses and thereby captured that $3,000 tax benefit. Another of my 2022 resolutions: Harvest tax losses during this year���s market pullbacks.
The post Resolved: Automate appeared first on HumbleDollar.
Road to Retirement
WHEN I WAS IN MY early 20s, many of my friends wanted to buy expensive new cars. But I wanted to save money. In fact, I was probably too thrifty. Some people wear their frugalness as a badge of honor. But I was sometimes embarrassed by my spartan lifestyle.
I was a college graduate with a history degree. There weren���t too many jobs for someone like me. That could be the reason I was squirreling away so much money. Later, I did get an MBA, but that insecure feeling never went away.
Most of the homes I lived in were small apartments without the standard conveniences you would expect when renting or buying a home. Some of my apartments were so terrible I was embarrassed to invite friends over. In 1980, I was looking for an apartment to rent. I walked by an older building that had two vacancies.
One was a studio apartment located on an alley above a garage. The rent was $300. The other apartment was a one-bedroom with a long and narrow floor plan facing the street. It reminded me of a bowling alley lane. The rent was $500. I chose the studio apartment because it was cheaper and I could save more money. I was making decent money at the time, working as a production control planner, but I was determined to live well below my means.
It wasn���t the safest place to live. A drug dealer lived in the apartment next to me. My car was broken into more than once. One day, someone stole my clothes from the laundry room. But none of that fazed me���until the new owner raised my rent to $390. At that moment, I realized I needed my housing costs to be more stable and predictable if I was ever to reach financial freedom. I knew if I kept renting, my landlord could increase my rent at any time. I'd have no control over one of my biggest expenses���my home.
My first big investment. In 1985, I found a small 789-square-foot, one-bedroom condominium for sale in Long Beach, California. It was on the top floor of a nice-looking, secure, three-story building and overlooked the street. It felt like you were in a treehouse because the top of a big tree was hanging over the front of the unit. It was within walking distance of the beach and plenty of good restaurants. It seemed like the ideal place to settle down. The owner was asking $102,000, but I was able to negotiate the price down to $91,000.
The next morning, I woke up with buyer���s remorse. I felt anxious about being a first-time homeowner. I���d never purchased anything that expensive before. The only other thing I���d bought of any real value was a new 1976 Mercury Capri, and that cost just $4,500. I went to work that day thinking about all the things that could go wrong with owning that condo: What happens if I lose my job? What happens if I can���t get a home loan? Is that big tree out front going to be a problem? Is it going to be too noisy facing the street?
I was sitting in my boss's office at Hughes Electronics discussing some manufacturing issue, when he asked, ���Is there something bothering you?��� I guess my demeanor revealed the uncertainty I felt about the purchase.
I told him I���d put a deposit down on a condo, but I was thinking about canceling the transaction. I said, ���I don���t know if it���s a good deal for me.��� Cliff reassured me. He pointed out the upside of being a homeowner. It could increase my net worth because I would build equity if the condominium rose in value. I could also deduct the interest on the home loan and the property taxes on my tax return. It started to sound like a pretty good deal, after all. It was what I needed to hear.
The condo was one of the best investments I ever made. My mortgage payment was only about $150 a month more than the rent I���d paid for that crummy studio apartment. Later, I refinanced at a lower interest rate and my mortgage payment was even less. I eventually paid off the mortgage in 14 years.
The condo purchase put me on the road to financial security. Because of my low and stable housing costs, I was able to save a lot of money during the 35 years I lived there. I maxed out my 401(k) plan contributions. When I reached age 50, I added regular catchup contributions to the plan. Any other extra money I had left over I invested in a taxable account at Vanguard Group. My salary kept going up and my housing costs were going down. It was a perfect scenario for someone who���s an avid saver. I thought I���d reached nirvana.
When I sold my condo in 2020 for $380,000, my old studio apartment on the alley above the garage was renting for $1,564. If I���d stayed there, or rented another apartment, I never could have saved the amount of money I did. At the time I sold the condo, my housing costs were approximately $600 a month. That included homeowners��� association fees, property taxes, insurance and utilities. I rarely had any out-of-pocket expenses for repairs.
A mistake pays dividends. While I was doing a good job saving money, I wasn���t doing a very good job at investing it. I was constantly jumping in and out of different mutual funds and stocks, trying to find the right investment���until the day I got some fatherly advice.
I used to call my mother every day just before I left work. If I didn���t call her, she would think something was wrong. One day, I called and my father picked up the phone. He started talking about this guy on the radio who was giving out investment advice. He encouraged me to listen to his show at the weekend. I was skeptical, but I gave it a try.
It was the early 1990s. The host started talking about something called Spiders���otherwise known as Standard & Poor���s Depository Receipts���and about a Vanguard 500 index fund. At first, I had no clue what the guy was talking about. I didn���t know you could buy a mutual fund or an exchange-traded fund that tries to match the performance of an index, such as the Standard & Poor���s 500. But the more I heard him talk about how these types of investments cost less, generated less taxable income and were highly diversified, the more I liked what I heard.
The one thing he said that really caught my attention was this: If you invest in an index fund, you take away one of the biggest risks in investing���underperforming the stock market. After all the years of unsuccessfully trying to beat the market by investing in actively managed funds and individual stocks, this statement rang true. I began to make low-cost, broad-based index funds the core holdings in my investment portfolio.
Unfortunately, I also listened to something else the radio show host said���and that advice cost me money and sleep. He was a market-timer. He issued a major buy signal for the Nasdaq Composite index and suggested buying an exchange-traded index fund that���s now known as Invesco QQQ Trust. I bought QQQ at $70 a share and watched it fall to $20. I found myself invested in the most volatile part of the stock market during a savage bear market. As the share price plunged, I felt like I had jumped out of an airplane without a parachute. And I wasn���t the only one. I had talked my sister into it. Then my dad jumped in. He didn���t want to miss out on the opportunity. I felt terrible for sucking them into this mess.
It took many years before QQQ reached my breakeven share price. I learned an important lesson about trying to time the market: It���s extremely difficult to predict what the stock market is going to do in the short run. After that financial fiasco, I decided to keep it simple and become a long-term investor. When I retired, almost all my money was in just three funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Index Fund and Vanguard Total Bond Market Fund. I���d learned the hard way that these three funds were all I needed to help me reach my financial goals.
A lesson from my father. Although I had a fairly sizable investment portfolio when I retired, I still didn���t feel financially secure, in part because of a conversation I had with my father. I received a phone call one evening from my dad. He asked if I could come over right away. I knew it must be important because I lived about 25 miles away, and the rush hour traffic at that time was terrible.
When I got there, we went upstairs to a small room that my parents had made into a study. He handed me a tablet and pen, and started telling me where all their money was. I knew right away what my father was doing. He was getting his affairs in order.
My father had been battling cancer for two years. He went through many rounds of chemotherapy and radiation treatment. He���d even tried experimental treatments to combat the disease. He���d finally realized he wasn���t going to make it. My dad wanted to make sure I knew where every nickel and dime was located, so I could help my mother when he was gone. Most of the money was at Vanguard, but there was also money at a few banks and a brokerage house.
As I listened to my father, I realized how important it is to have sufficient guaranteed income for life. He knew it would be difficult to survive on just his Social Security benefit and their modest retirement savings. My dad had taken his Social Security at age 65. My mother also had a small pension of $495 a month from her days as a switchboard operator at a department store. They had declined the survivor���s benefit option on my mother���s pension, which meant my father wouldn���t have received anything if she died first. They thought her pension was so small it didn���t make sense to take the survivor option and get an even smaller payout, plus a woman's life expectancy is longer than a man���s. It turned out to be the right decision. My mother lived until age 96, passing away seven years after my father.
When I left my parents��� house that night, I knew it would be wise to delay my own Social Security benefit until age 70. I saw the worried look on my father���s face, knowing that my mother���s savings might run out, and that his Social Security and her small pension might not be enough for her to live on. Still, waiting until 70 to take Social Security wasn���t easy. It was difficult to withdraw money from savings to cover all of our living expenses, especially after drawing a paycheck for 40 years. Knowing that all my friends and acquaintances weren���t waiting until 70 also didn���t help. But I kept thinking about my mother, and how a larger check would have made her life more financially secure. I wanted that for my wife.
There was another reason to delay my benefits. It lowered my taxable income. While I waited to claim Social Security, I was able to make larger Roth conversions. That means I���ll have smaller required minimum distributions starting at age 72.
The wait for a larger check was well worth it. My Social Security today is over $40,000 a year. If I ever have to have a conversation with my stepson about our money, I���ll be able to tell him that my larger check should be more than enough to cover our basic living expenses for as long as we live. Meanwhile, we���re enjoying ourselves. We can spend more freely knowing we have a financial backstop. The experts might be right when they say retirees who have predictable income are happier. When you add together my wife���s Social Security benefits and mine, they���re large enough to support us during periods of market turmoil. That means we can give our portfolio time to rebound from any market hit. Maybe most important, the larger check gives us peace of mind.
When I look back, I was obsessed with the idea of saving enough money so I could retire early. I did retire early, at age 58. Even so, I still felt financially insecure���until I started receiving my Social Security benefit.
Tomorrow is here. Although I now have a financially comfortable retirement, I also have regrets. I wish I had traveled more earlier in life rather than waiting to do most of it when I retired. Instead of accumulating more wealth than I needed, I should���ve invested some of that money in a trip to Europe, Asia or even Australia. It doesn���t seem right that a 70-year-old man, who loves to travel, has been out of the country just twice���to Canada and Mexico, and that���s if you count Tijuana.
I waited until retirement to do some of the things I���ve always wanted to do, and that might have been a mistake. Almost immediately after retiring, I had caregiving responsibilities for my parents and now, of course, we have this pandemic. Together, they���ve kept me from doing the things I���d planned to do in retirement. It���s been 12 years and counting since I quit work, and I���m still waiting to fully experience what retirement life is supposedly all about.
I feel a sense of urgency to get on with my retirement. I don���t feel like I���ve lived a full life yet. It���s a painful feeling that no amount of money can cure. The only way to make that feeling go away is to experience life. That���s what I plan to do with my remaining time.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
With bond yields so low, does owning a classic 60% stock-40% bond balanced portfolio still make sense? John Lim looks at some alternatives.
"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."
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.
Many investors voice strong opinions and make outsized investment bets. Adam Grossman suggests a radical alternative for 2022: moderation.
How many ways can we mess up financially? Greg Spears offers a guided tour of 17 finance biases.
"While baby boomers control the majority of the wealth, it���s the younger generations who are creating the investment opportunities of the future," notes Jim Kerr. "Best listen to what they���re telling us."
While you're at it, be sure to peruse the past week's��blog posts, including Kyle McIntosh on real estate agents, Mike Zaccardi on target-date��funds and Dick Quinn on his good fortune. Also check out the blog posts devoted to New Year's resolutions, including John Lim on sleeping more, Kristine Hayes on worrying less, Jim Wasserman on going back to school, Dennis Friedman on being patient, Rick Connor on getting healthy and Mike Zaccardi on automating his finances.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.
I was a college graduate with a history degree. There weren���t too many jobs for someone like me. That could be the reason I was squirreling away so much money. Later, I did get an MBA, but that insecure feeling never went away.
Most of the homes I lived in were small apartments without the standard conveniences you would expect when renting or buying a home. Some of my apartments were so terrible I was embarrassed to invite friends over. In 1980, I was looking for an apartment to rent. I walked by an older building that had two vacancies.
One was a studio apartment located on an alley above a garage. The rent was $300. The other apartment was a one-bedroom with a long and narrow floor plan facing the street. It reminded me of a bowling alley lane. The rent was $500. I chose the studio apartment because it was cheaper and I could save more money. I was making decent money at the time, working as a production control planner, but I was determined to live well below my means.It wasn���t the safest place to live. A drug dealer lived in the apartment next to me. My car was broken into more than once. One day, someone stole my clothes from the laundry room. But none of that fazed me���until the new owner raised my rent to $390. At that moment, I realized I needed my housing costs to be more stable and predictable if I was ever to reach financial freedom. I knew if I kept renting, my landlord could increase my rent at any time. I'd have no control over one of my biggest expenses���my home.
My first big investment. In 1985, I found a small 789-square-foot, one-bedroom condominium for sale in Long Beach, California. It was on the top floor of a nice-looking, secure, three-story building and overlooked the street. It felt like you were in a treehouse because the top of a big tree was hanging over the front of the unit. It was within walking distance of the beach and plenty of good restaurants. It seemed like the ideal place to settle down. The owner was asking $102,000, but I was able to negotiate the price down to $91,000.
The next morning, I woke up with buyer���s remorse. I felt anxious about being a first-time homeowner. I���d never purchased anything that expensive before. The only other thing I���d bought of any real value was a new 1976 Mercury Capri, and that cost just $4,500. I went to work that day thinking about all the things that could go wrong with owning that condo: What happens if I lose my job? What happens if I can���t get a home loan? Is that big tree out front going to be a problem? Is it going to be too noisy facing the street?
I was sitting in my boss's office at Hughes Electronics discussing some manufacturing issue, when he asked, ���Is there something bothering you?��� I guess my demeanor revealed the uncertainty I felt about the purchase.
I told him I���d put a deposit down on a condo, but I was thinking about canceling the transaction. I said, ���I don���t know if it���s a good deal for me.��� Cliff reassured me. He pointed out the upside of being a homeowner. It could increase my net worth because I would build equity if the condominium rose in value. I could also deduct the interest on the home loan and the property taxes on my tax return. It started to sound like a pretty good deal, after all. It was what I needed to hear.
The condo was one of the best investments I ever made. My mortgage payment was only about $150 a month more than the rent I���d paid for that crummy studio apartment. Later, I refinanced at a lower interest rate and my mortgage payment was even less. I eventually paid off the mortgage in 14 years.
The condo purchase put me on the road to financial security. Because of my low and stable housing costs, I was able to save a lot of money during the 35 years I lived there. I maxed out my 401(k) plan contributions. When I reached age 50, I added regular catchup contributions to the plan. Any other extra money I had left over I invested in a taxable account at Vanguard Group. My salary kept going up and my housing costs were going down. It was a perfect scenario for someone who���s an avid saver. I thought I���d reached nirvana.
When I sold my condo in 2020 for $380,000, my old studio apartment on the alley above the garage was renting for $1,564. If I���d stayed there, or rented another apartment, I never could have saved the amount of money I did. At the time I sold the condo, my housing costs were approximately $600 a month. That included homeowners��� association fees, property taxes, insurance and utilities. I rarely had any out-of-pocket expenses for repairs.
A mistake pays dividends. While I was doing a good job saving money, I wasn���t doing a very good job at investing it. I was constantly jumping in and out of different mutual funds and stocks, trying to find the right investment���until the day I got some fatherly advice.
I used to call my mother every day just before I left work. If I didn���t call her, she would think something was wrong. One day, I called and my father picked up the phone. He started talking about this guy on the radio who was giving out investment advice. He encouraged me to listen to his show at the weekend. I was skeptical, but I gave it a try.
It was the early 1990s. The host started talking about something called Spiders���otherwise known as Standard & Poor���s Depository Receipts���and about a Vanguard 500 index fund. At first, I had no clue what the guy was talking about. I didn���t know you could buy a mutual fund or an exchange-traded fund that tries to match the performance of an index, such as the Standard & Poor���s 500. But the more I heard him talk about how these types of investments cost less, generated less taxable income and were highly diversified, the more I liked what I heard.
The one thing he said that really caught my attention was this: If you invest in an index fund, you take away one of the biggest risks in investing���underperforming the stock market. After all the years of unsuccessfully trying to beat the market by investing in actively managed funds and individual stocks, this statement rang true. I began to make low-cost, broad-based index funds the core holdings in my investment portfolio.
Unfortunately, I also listened to something else the radio show host said���and that advice cost me money and sleep. He was a market-timer. He issued a major buy signal for the Nasdaq Composite index and suggested buying an exchange-traded index fund that���s now known as Invesco QQQ Trust. I bought QQQ at $70 a share and watched it fall to $20. I found myself invested in the most volatile part of the stock market during a savage bear market. As the share price plunged, I felt like I had jumped out of an airplane without a parachute. And I wasn���t the only one. I had talked my sister into it. Then my dad jumped in. He didn���t want to miss out on the opportunity. I felt terrible for sucking them into this mess.
It took many years before QQQ reached my breakeven share price. I learned an important lesson about trying to time the market: It���s extremely difficult to predict what the stock market is going to do in the short run. After that financial fiasco, I decided to keep it simple and become a long-term investor. When I retired, almost all my money was in just three funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Index Fund and Vanguard Total Bond Market Fund. I���d learned the hard way that these three funds were all I needed to help me reach my financial goals.
A lesson from my father. Although I had a fairly sizable investment portfolio when I retired, I still didn���t feel financially secure, in part because of a conversation I had with my father. I received a phone call one evening from my dad. He asked if I could come over right away. I knew it must be important because I lived about 25 miles away, and the rush hour traffic at that time was terrible.
When I got there, we went upstairs to a small room that my parents had made into a study. He handed me a tablet and pen, and started telling me where all their money was. I knew right away what my father was doing. He was getting his affairs in order.
My father had been battling cancer for two years. He went through many rounds of chemotherapy and radiation treatment. He���d even tried experimental treatments to combat the disease. He���d finally realized he wasn���t going to make it. My dad wanted to make sure I knew where every nickel and dime was located, so I could help my mother when he was gone. Most of the money was at Vanguard, but there was also money at a few banks and a brokerage house.
As I listened to my father, I realized how important it is to have sufficient guaranteed income for life. He knew it would be difficult to survive on just his Social Security benefit and their modest retirement savings. My dad had taken his Social Security at age 65. My mother also had a small pension of $495 a month from her days as a switchboard operator at a department store. They had declined the survivor���s benefit option on my mother���s pension, which meant my father wouldn���t have received anything if she died first. They thought her pension was so small it didn���t make sense to take the survivor option and get an even smaller payout, plus a woman's life expectancy is longer than a man���s. It turned out to be the right decision. My mother lived until age 96, passing away seven years after my father.
When I left my parents��� house that night, I knew it would be wise to delay my own Social Security benefit until age 70. I saw the worried look on my father���s face, knowing that my mother���s savings might run out, and that his Social Security and her small pension might not be enough for her to live on. Still, waiting until 70 to take Social Security wasn���t easy. It was difficult to withdraw money from savings to cover all of our living expenses, especially after drawing a paycheck for 40 years. Knowing that all my friends and acquaintances weren���t waiting until 70 also didn���t help. But I kept thinking about my mother, and how a larger check would have made her life more financially secure. I wanted that for my wife.
There was another reason to delay my benefits. It lowered my taxable income. While I waited to claim Social Security, I was able to make larger Roth conversions. That means I���ll have smaller required minimum distributions starting at age 72.
The wait for a larger check was well worth it. My Social Security today is over $40,000 a year. If I ever have to have a conversation with my stepson about our money, I���ll be able to tell him that my larger check should be more than enough to cover our basic living expenses for as long as we live. Meanwhile, we���re enjoying ourselves. We can spend more freely knowing we have a financial backstop. The experts might be right when they say retirees who have predictable income are happier. When you add together my wife���s Social Security benefits and mine, they���re large enough to support us during periods of market turmoil. That means we can give our portfolio time to rebound from any market hit. Maybe most important, the larger check gives us peace of mind.
When I look back, I was obsessed with the idea of saving enough money so I could retire early. I did retire early, at age 58. Even so, I still felt financially insecure���until I started receiving my Social Security benefit.
Tomorrow is here. Although I now have a financially comfortable retirement, I also have regrets. I wish I had traveled more earlier in life rather than waiting to do most of it when I retired. Instead of accumulating more wealth than I needed, I should���ve invested some of that money in a trip to Europe, Asia or even Australia. It doesn���t seem right that a 70-year-old man, who loves to travel, has been out of the country just twice���to Canada and Mexico, and that���s if you count Tijuana.
I waited until retirement to do some of the things I���ve always wanted to do, and that might have been a mistake. Almost immediately after retiring, I had caregiving responsibilities for my parents and now, of course, we have this pandemic. Together, they���ve kept me from doing the things I���d planned to do in retirement. It���s been 12 years and counting since I quit work, and I���m still waiting to fully experience what retirement life is supposedly all about.
I feel a sense of urgency to get on with my retirement. I don���t feel like I���ve lived a full life yet. It���s a painful feeling that no amount of money can cure. The only way to make that feeling go away is to experience life. That���s what I plan to do with my remaining time.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
With bond yields so low, does owning a classic 60% stock-40% bond balanced portfolio still make sense? John Lim looks at some alternatives.
"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."
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.
Many investors voice strong opinions and make outsized investment bets. Adam Grossman suggests a radical alternative for 2022: moderation.
How many ways can we mess up financially? Greg Spears offers a guided tour of 17 finance biases.
"While baby boomers control the majority of the wealth, it���s the younger generations who are creating the investment opportunities of the future," notes Jim Kerr. "Best listen to what they���re telling us."
While you're at it, be sure to peruse the past week's��blog posts, including Kyle McIntosh on real estate agents, Mike Zaccardi on target-date��funds and Dick Quinn on his good fortune. Also check out the blog posts devoted to New Year's resolutions, including John Lim on sleeping more, Kristine Hayes on worrying less, Jim Wasserman on going back to school, Dennis Friedman on being patient, Rick Connor on getting healthy and Mike Zaccardi on automating his finances.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.The post Road to Retirement appeared first on HumbleDollar.
Listen to the Kids
ONE OF THE GREAT pleasures of having grown children is seeing them do things better than you ever did.
My son, who���s in his mid-20s, is already well beyond me in terms of investments. When I was his age, I was still bouncing around in grad school, living off teaching stipends and dreaming of one day being a novelist. I had no concept of what a mutual fund was, how to trade stocks and bonds, or even what a stock or bond was.
While I���ve always been good at managing and saving money, when I was younger, I generally avoided anything having to do with personal finance and investments. I admit to even having a bit of a mental block about money at that age, seeing it as a necessary evil to ���purer��� pursuits, such as writing and literature.
Yes, I had sugar-plum visions of having $1 million in the bank that I could live off. Who doesn���t? But I had no idea how to accumulate it. That came later, in my 30s and 40s, when I started working in the corporate world.
My son has none of that baggage. He���s been interested in investments since he got out of college four years ago. He discovered the FIRE (financial independence-retire early) movement early on, and has set a goal of being financially independent when he���s in his late 40s.
I have no doubt that he���ll achieve that goal. He lives frugally and is investing a big chunk of his salary in a well-diversified basket of exchange-traded index funds and mutual funds. He complements that core nest egg with some ���fun money��� that he invests in a handful of big-bet individual stocks that he���s passionate about.
The idea, he tells me, is that if he���s right about those big bets, he���ll be able to get to his FIRE goal a little early. If not, he���ll still be on track for his investment goals, while having a little fun along the way.
Research is an essential part of my son���s investment approach. He regularly reads The Economist, The Wall Street Journal, Reuters and other sophisticated financial outlets to get ideas on business and economic trends that might translate into investment opportunities. Then he researches the companies that are playing those trends and finds a way to invest in them.
Every couple of weeks, he and I get on the phone and share investment ideas���or, rather, he shares ideas and I listen. It was two years ago this month that he told me of an article he���d read in The Economist��about the rapid advances being made by innovative startup companies in the area of biotechnology and messenger RNA (mRNA) technology. These novel ways of delivering therapies and vaccines were going to transform the pharmaceutical industry, he said. Then he gave me the names of two mRNA pioneers he was investing in.
���You should invest some money in these companies, Dad,��� he said. ���I think they���re going to be big.���
The companies��� names? You guessed it: Moderna and BioNTech.
Two months later, the global pandemic hit. Moderna and BioNTech were suddenly household names. Their stocks rocketed to the stratosphere. My son was able to pay off his car with his profits. I, being a fool, hadn���t listened to his advice and missed out.
Now, he readily admits to having been incredibly lucky with his timing in buying Moderna and BioNTech two months before a once-in-a-generation pandemic changed the world. Not all of his investment picks have worked out as well as those two. Overall, I suspect he���s probably doing just a little better than average, even with those two blockbuster picks.
Still, I find that his investment theses invariably make a lot of sense and are well researched. He always brings a fresh perspective to things that I haven���t thought of, and he���s not afraid to challenge my thinking when I���m being stubborn, which happens from time to time.
I, for my part, can add a good real-world perspective on investment ideas, pulling from my background in corporate marketing and investor relations. It makes for a good combination.
Lately, we���ve been talking about special purpose acquisition companies (SPACs) and the use of options to protect investment gains. I���m not sure I���ll jump into either one, but I always learn from the things my son brings to our phone conversations. That���s really the point���to keep learning. I also find these conversations help me stay on top of what���s going on in the workplace, which is important now that I���m no longer there.
Let���s face it: While baby boomers control the vast majority of the wealth in our investment accounts, it���s the younger generations���the millennials, Gen Xers and Gen Yers���who are creating the investment opportunities of the future through their work and day-to-day buying decisions. Best listen to what they���re telling us.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books.��Check out his blog at
PeaceableMan.com
. His previous articles were Fit to Retire,��Challenging Myself and��Reclaiming My Life.
My son, who���s in his mid-20s, is already well beyond me in terms of investments. When I was his age, I was still bouncing around in grad school, living off teaching stipends and dreaming of one day being a novelist. I had no concept of what a mutual fund was, how to trade stocks and bonds, or even what a stock or bond was.
While I���ve always been good at managing and saving money, when I was younger, I generally avoided anything having to do with personal finance and investments. I admit to even having a bit of a mental block about money at that age, seeing it as a necessary evil to ���purer��� pursuits, such as writing and literature.
Yes, I had sugar-plum visions of having $1 million in the bank that I could live off. Who doesn���t? But I had no idea how to accumulate it. That came later, in my 30s and 40s, when I started working in the corporate world.
My son has none of that baggage. He���s been interested in investments since he got out of college four years ago. He discovered the FIRE (financial independence-retire early) movement early on, and has set a goal of being financially independent when he���s in his late 40s.
I have no doubt that he���ll achieve that goal. He lives frugally and is investing a big chunk of his salary in a well-diversified basket of exchange-traded index funds and mutual funds. He complements that core nest egg with some ���fun money��� that he invests in a handful of big-bet individual stocks that he���s passionate about.
The idea, he tells me, is that if he���s right about those big bets, he���ll be able to get to his FIRE goal a little early. If not, he���ll still be on track for his investment goals, while having a little fun along the way.
Research is an essential part of my son���s investment approach. He regularly reads The Economist, The Wall Street Journal, Reuters and other sophisticated financial outlets to get ideas on business and economic trends that might translate into investment opportunities. Then he researches the companies that are playing those trends and finds a way to invest in them.
Every couple of weeks, he and I get on the phone and share investment ideas���or, rather, he shares ideas and I listen. It was two years ago this month that he told me of an article he���d read in The Economist��about the rapid advances being made by innovative startup companies in the area of biotechnology and messenger RNA (mRNA) technology. These novel ways of delivering therapies and vaccines were going to transform the pharmaceutical industry, he said. Then he gave me the names of two mRNA pioneers he was investing in.
���You should invest some money in these companies, Dad,��� he said. ���I think they���re going to be big.���
The companies��� names? You guessed it: Moderna and BioNTech.
Two months later, the global pandemic hit. Moderna and BioNTech were suddenly household names. Their stocks rocketed to the stratosphere. My son was able to pay off his car with his profits. I, being a fool, hadn���t listened to his advice and missed out.
Now, he readily admits to having been incredibly lucky with his timing in buying Moderna and BioNTech two months before a once-in-a-generation pandemic changed the world. Not all of his investment picks have worked out as well as those two. Overall, I suspect he���s probably doing just a little better than average, even with those two blockbuster picks.
Still, I find that his investment theses invariably make a lot of sense and are well researched. He always brings a fresh perspective to things that I haven���t thought of, and he���s not afraid to challenge my thinking when I���m being stubborn, which happens from time to time.
I, for my part, can add a good real-world perspective on investment ideas, pulling from my background in corporate marketing and investor relations. It makes for a good combination.
Lately, we���ve been talking about special purpose acquisition companies (SPACs) and the use of options to protect investment gains. I���m not sure I���ll jump into either one, but I always learn from the things my son brings to our phone conversations. That���s really the point���to keep learning. I also find these conversations help me stay on top of what���s going on in the workplace, which is important now that I���m no longer there.
Let���s face it: While baby boomers control the vast majority of the wealth in our investment accounts, it���s the younger generations���the millennials, Gen Xers and Gen Yers���who are creating the investment opportunities of the future through their work and day-to-day buying decisions. Best listen to what they���re telling us.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books.��Check out his blog at
PeaceableMan.com
. His previous articles were Fit to Retire,��Challenging Myself and��Reclaiming My Life.The post Listen to the Kids appeared first on HumbleDollar.
