Jonathan Clements's Blog, page 253
November 13, 2021
Rethinking My Mix
I tallied everything once or twice a year, and then rebalanced. I���d apply a portion of my winning positions to my less successful asset classes. Rebalancing this way forced me to buy low and sell high. Combined with dollar-cost averaging, it���s an investing approach that���s served me well for more than 20 years.
Each year, I���d also consider how much I wanted to keep in cash investments. Now that I���m semi-retired, I���d been looking to reduce my stock exposure and add to cash. At least that was the plan, until now.
The current ���transitory��� spike in inflation has forced me to me to rethink my entire approach. Here���s why: If the current inflationary bout should persist, my cash assets could lose nearly a quarter of their value over the next five years. This has me looking to trim my cash investments substantially, not add to them.
Next, I���m concerned about what life will be like 20 years from now. The remaining baby boomers will swell the ranks of the over-80 crowd. They���ll be selling investments to pay for health care and many other senior-oriented necessities.
The cost of these services has risen faster than consumer inflation for years. I don���t imagine that trend reversing now. The general investment selloff required to meet these expenses may depress returns for all of us.
This creates a dilemma as I weigh my asset allocation. Higher inflation means low���or negative���real returns on cash and bonds. I may be required to own more stocks just to have a fighting chance against that loss of purchasing power. Of course, that would increase my investment risk during retirement���not the usual approach.
Asset allocation, alas, is no longer a set-it-and-forget-it exercise for me.
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November 12, 2021
Fed Up
On the other hand, if you believe the U.S. economy is weak, why did the Fed just announce the tapering of quantitative easing (QE)? The Fed insists that tapering doesn’t mean a higher fed funds rate is around the corner. Instead, raising short-term interest rates would depend on the economy reaching full employment—whatever that is.
Still, tapering QE can be viewed as a form of monetary tightening. Researchers Jing Wu and Fan Xia modeled the economic effect of QE, which they dub the “shadow” federal funds rate. This shadow rate attempts to translate the effect of QE by estimating the equivalent fed funds rate necessary to have a similar economic impact. According to the Atlanta Federal Reserve, the current shadow federal funds rate is -1.7%.
If the Fed succeeds in tapering QE to zero by June 2022, that might be equivalent to raising interest rates by 1.7% or almost a quarter of a percent per month. Imagine the market’s reaction if the Fed announced a quarter-percent rate hike every month for the next seven months.
Whatever your view of the economy, I would contend that the Fed has already erred or is on the verge of erring. If the economy is strong, its zero interest-rate policy makes little sense. In this scenario, the Fed is behind the curve and should have raised interest rates already.
But if the economy is so weak that it needs the life support of zero rates and QE, then tightening monetary policy by tapering could tip the economy into recession.
Of course, there’s a third possibility. The economy could be lukewarm, neither too hot nor too cold. If this describes the current state, does it really make sense for the Fed to keep interest rates at zero until the economy reaches full employment?
As the purveyor of the price of money—namely interest rates—in the world’s most important economy, the Fed wields enormous influence. But in the end, its hand may be forced by stubbornly high inflation that isn’t as transitory as the Fed once assumed. The risk: The longer the Fed keeps rates at zero, the harder it may eventually be to rein in inflation. It would be especially problematic if inflation expectations were to shift permanently higher.
What does all this mean for how you invest? Not that much, really. More than anything, it’s a reminder of how much uncertainty exists—and how important it is to manage investment risk, particularly those risks that you can control. Given the complexity and vagaries of the economy, I wouldn’t make any major changes to your portfolio’s overall mix of stocks, bonds and cash investments—unless, that is, your allocation has deviated significantly from your target portfolio percentages. In the end, most economic predictions are next to useless from an investment standpoint.
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Wrestling for Money
IN THE FALL OF 1994, when I was 21, I made the trip south from Iowa down I-35 to Texas. I was starting my wrestling training on Commerce Street in downtown Dallas at Doug’s Gym.
What I wasn’t expecting were the financial lessons I picked up from some of the colorful professional wrestlers of that era.
Doug’s Gym wasn’t air-conditioned. It had a classic collection of weights and machines. I felt transported back in time, using the same equipment that Jack LaLanne and Steve Reeves would have used decades before.
Doug Eidd still owned and ran the old-school gym, which he opened in 1962. The building was across the street from the police station where Jack Ruby shot Lee Harvey Oswald days after President Kennedy’s assassination.
I was there to meet Doug’s cousin, Skandor Akbar or, as we called him, Ak. His real name was Jim Wehba, and he was 60. He had the brawn, broken-down knees and walk of a retired professional wrestler.
As I began to train and spend time at Doug’s Gym, we would get visitors. They all came to hear Ak’s stories. It became clear that Ak was good with his money. He was not wealthy. But over the years, he had made a good income working in some of the major wrestling territories.
He’d spent time in New York working for Vince McMahon Sr. He’d made a good living there, despite missing out on the chance to have a Main Event program with the Italian-born strongman and champion Bruno Sammartino. Fellow Texan Stan Hansen broke Sammartino’s neck in Madison Square Garden, costing Ak his big payday.
Instead of New York glory, Ak had extended stays in Georgia, Australia and the Dallas office of a promoter who had wrestled under the name Fritz Von Erich. But his home base became Mid-South Wrestling. Mid-South was a big territory that covered the states of Oklahoma, Louisiana, Mississippi and parts of Texas.
Eventually, in the late 1970s, Ak transitioned out of the ring to become a manager. He participated in a great era of wrestling and made good money until the oil bust of 1987. That’s when Vince McMahon Jr.’s national expansion caused the old territory system to dry up.
Unlike most wrestlers of that era, Ak saved his money. He lived frugally, though he always spent money on quality cars. He explained that he depended on a car’s reliability to get him to his bookings. Besides, he spent so much time driving, he wanted to be comfortable.
A second big expense for Ak was taxes. Many wrestlers of that era failed to pay their quarterly taxes, so they often fell behind. Fines would follow from the IRS, so they would dig themselves into an even deeper hole.
Since Ak paid his Social Security payroll taxes, he received benefits in his golden years. He also made a little cash from small wrestling bookings and the students he trained. Ak lived in a paid-off house, so he was comfortable.
On the wall of Doug’s Gym was a tattered picture of another legendary wrestler, Bruiser Brody. Doug told me on my first day at the gym that he missed his deceased friend Bruiser, whose real name was Frank Goodish. Bruiser was another grappler known for his frugal ways.
Bruiser ate tuna fish right out of the can to provide cheap, quality protein to his massive 6-foot 5-inch, 300-pound frame. If he was paying for a hotel room, Bruiser shared it whenever possible—along with the car rides to the next town.
On the income side, Bruiser insisted on getting his full value when it was time to get paid. He often butted heads with promotors over his demands. He made a fortune for that time, earning more than $15,000 a week during tours of Japan. Tragically, Bruiser was stabbed to death backstage at a wrestling event in Puerto Rico in 1988.
The final Texas wrestler who gave me a lesson in finance was John Layfield. In January 1995, Layfield came into the gym to work out with us. He wanted to keep his cardio in shape for his weekly title matches at The Sportatorium, an old Dallas wrestling venue.
Layfield was flat broke then. He was signed as a free agent with the then-Los Angeles Raiders, but was released before the season. A year of football in the World League hadn’t amounted to much. Independent wrestling in Texas wasn’t paying well at the time. As he approached 30, Layfield was banking on his athletic background—and his 6-foot 6-inch frame—to make it to the big time in professional wrestling.
The transformation he made from that first day in Doug’s Gym was amazing. After that practice session, I saw Layfield climb the ranks to WWE Champion, earning six figures. That was impressive but not surprising, given his talent and drive.
It was his stock-picking abilities and business mind that transformed Layfield into a wealthy man. He’s been a featured financial commentator, first on CNBC and later on Fox Business Network. He began to run in circles that allowed him to meet his current wife, Meredith Whitney, a prominent investment manager.
Those of us who enjoy reading and discussing money can find lessons in frugality and creating wealth everywhere. Even in a dusty old iron dungeon like Doug’s Gym, surrounded by sweaty, professional wrestlers living the circus life.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
Charley Ellis is 100% invested in stocks. His late mother kept 100% of her money in a checking account. "I believe both of us got the decision right," he argues.
"Most people will say that they just want to pay a fair price," writes Mike Flack. "This is an out-and-out lie. Most Americans want to pay less for more. Getting a good deal is the American dream."
Amassing wealth is hard—but staying wealthy can be even harder. Adam Grossman offers strategies that can help retirees and others hang on to the money they've accumulated.
“No one is going to challenge your obituary’s veracity, unless it’s outrageous,” notes Ron Wayne. “Was she really well liked by everyone? Was his spouse the love of his life? Was she a gifted painter?”
How can we put Social Security on a solid financial footing? Check out John Lim’s innovative solution—which would involve affluent parents happily subsidizing the government.
"Next came the tough conversation," recounts John Goodell, "informing him and his family that they wouldn’t be able to get a will because he lacked the necessary mental ability."
Also be sure to check out the past week's blog posts, including Bill Ehart on growth fund winners and sinners, Rick Connor on flexible spending accounts, Mike Zaccardi on the job market, Dick Quinn on becoming a retirement pro, Andrew Forsythe on battling the cable company and Jim Wasserman on holiday shopping.
Juan Fourneau’s goal is to retire at age 55. When he isn’t at his manufacturing job, he enjoys reading about personal finance and investing. Juan, who is married with two children, can still be seen in the ring on the independent professional wrestling circuit. He wrestles as a Mexican
Luchador
under the name
Latin Thunder
. Follow him on Twitter
@LatinThunder1
. Juan's previous articles were Why I Won't Wait and Taking on Tenants.The post Wrestling for Money appeared first on HumbleDollar.
Mixed Bag
MY LAST BLOG POST���about value-oriented Dodge & Cox Stock Fund���got me looking at the long-term returns for some highly touted large- and mid-cap growth and blend funds from 15 years ago. My surprise: Of the 15 funds in my admittedly unscientific sample, six went on to outpace both the S&P 500 and an index fund focused on the same market segment.
The six winners are boldfaced in the accompanying table. Note: For two of the winners, Jensen Quality Growth and Vanguard Primecap, I used the S&P 500 as their style benchmark. The reason: Like the S&P 500, they have a blended investment style, rather than being pure growth funds.
I believe it���s important to judge funds not only against a comparable style index, but also against a broad market index, such as the S&P 500 or Wilshire 5000. Why? An investor needn���t necessarily own, say, growth or value funds, or have extra small- or mid-cap exposure. That decision is on the investor. Think of it this way: When you invest in a style-specific actively managed fund, you���re certainly hoping to beat the broad market over the long haul. Otherwise, what���s the point?
For my 15 celebrated funds from 2006, the range of outcomes has been quite broad. If you���d bought one of the 15, you had a 40% chance of picking a winner���meaning the fund beat both the S&P 500 and a comparable style index���and a 27% chance of ending up with a disappointingly bad loser. (Guess who bit on one of the losers at around that time? Ahem.)
Interestingly, your odds of good results were much better if you stuck with the big, established fund firms. Lesson: The volatile gunslingers who occasionally shoot the lights out, like Ken Heebner who still runs CGM Focus, can be hazardous to your wealth. (Ahem, lesson learned.)
Despite the success of six of the 15 funds, the experiment still illustrates indexing���s appeal. Four of the 15 funds were especially lackluster. One���the Bridgeway fund���was merged into a similar fund that also performed poorly. Others abruptly changed investment strategy, which happened at FPA Perennial, now named the FPA U.S. Core Equity Fund. That change in strategy saddled shareholders with a huge capital gains liability in 2015.
Then there���s the issue of manager tenure. You might find the right manager at the wrong time in their career. Case in point: After a great 28-year run, T. Rowe Price Blue Chip Growth manager Larry Puglia will retire at year-end.
How much longer will Brian Berghuis of T. Rowe Price Mid-Cap Growth (tenure: 29 years), Steven Wymer of Fidelity Growth (25 years) and Fidelity Blue Chip Growth skipper Sonu Kalra (12 years) run their funds? That���s the tough question that both existing and potential investors need to ask themselves.
The post Mixed Bag appeared first on HumbleDollar.
Do It Anyway
For our legal office, my policy was that I���d always be the person to deliver bad news. Every attorney who has practiced estate planning long enough has experienced what I was about to go through. But I���ve come to realize that no one is truly prepared for that first time. I certainly wasn���t.
As I walked in and greeted the client, nothing seemed amiss. He was elderly and genial. When I asked him whether he owned his home and where he lived, reasonable questions to ascertain whether he was mentally competent to execute a will, I realized something was off. We sat awkwardly for a few minutes before the gentleman told me he couldn���t remember.
Next came the tough conversation: informing him and his family, who had driven him to the appointment, that they wouldn���t be able to get a will, health care power of attorney and living will because he lacked the necessary mental ability. I���ll never forget that my first such conversation involved a kind, elderly man who wore a subtle pin on his sport coat that indicated he���d received the Silver Star for heroism in combat. That only made the conversation harder. He had sacrificed so much for the country, and yet the rules of my profession forbade me from helping. Instead, I felt utterly helpless.
This hero left my office confused and sad. I���ve thought of him and our conversation often in the years since. A few weeks ago, I participated in an Army Reserve weekend drill, which included writing wills for retirees. It had been several years since I last drafted a will. But on my first day doing so, I experienced the same thing for a second time: another very hard conversation held too late with an elderly veteran.
Candidly, I had put off writing my own will for far too long, even though I���d thought often about the need to get one. After seeing this second client suffering from dementia, I decided it was time to act. When I left the office, I immediately drafted my own while having lunch. Then, I executed it with our Army Reserve paralegals. Frankly, there was no excuse for me not to have a will, especially now that I have kids and need to address their guardianship.
Not everyone needs a will. It may be unnecessary depending on your state���s intestacy laws and the type of assets you have. Still, many people without a will, health care power of attorney and living will need these crucial documents, and getting them will ease the burden on their families.
I put off getting a will for the same reasons many others do: None of us likes to think about our own mortality. My advice: Do it anyway. You���ll no longer have to expend mental energy worrying about it���and your family will thank you.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.The post Do It Anyway appeared first on HumbleDollar.
November 11, 2021
Who’s a Senior?
We’ve been manipulated into believing that, when we turn 65, we automatically turn old—which isn’t true. It’s a mistake to label people based on their age, because biological age can vary considerably from chronological age. A person’s age is a meaningless number unless we’re dealing with hard-and-fast rules, like when we’re eligible to claim Social Security and Medicare.
I like hanging around retirement rebels—people who are rebelling against outdated beliefs about old people and what it means to be retired. We’ve been brainwashed into believing that people aren’t supposed to celebrate their 100th birthday by skydiving, and that they shouldn’t attempt an Ironman in their 80s, start a new business in their 70s or complete that degree they never finished in their 90s. But “seniors” are doing all these things—and they’re the people having all the fun in retirement.
Retirement rebels remain kids at heart, living on the edge, exploring their potential, travelling to new places, meeting new people, learning new technologies and entering marathons in different countries, and posting about it on social media. Are these people old? I think not.
The post Who’s a Senior? appeared first on HumbleDollar.
Who���s a Senior?
We���ve been manipulated into believing that, when we turn 65, we automatically turn old���which isn���t true. It���s a mistake to label people based on their age, because biological age can vary considerably from chronological age. A person���s age is a meaningless number unless we���re dealing with hard-and-fast rules, like when we���re eligible to claim Social Security and Medicare.
I like hanging around retirement rebels���people who are rebelling against outdated beliefs about old people and what it means to be retired. We���ve been brainwashed into believing that people aren���t supposed to celebrate their 100th birthday by skydiving, and that they shouldn���t attempt an Ironman in their 80s, start a new business in their 70s or complete that degree they never finished in their 90s. But ���seniors��� are doing all these things���and they���re the people having all the fun in retirement.
Retirement rebels remain kids at heart, living on the edge, exploring their potential, travelling to new places, meeting new people, learning new technologies and entering marathons in different countries, and posting about it on social media. Are these people old? I think not.
The post Who���s a Senior? appeared first on HumbleDollar.
Good Enough Tech
When he finished explaining how he resolved the issue, I was happy he could scan again. I was even happier that I had a $250 personal computer. Nothing irks me more than paying a premium���the Mac premium, in his case���and winding up with connectivity issues.
This reminded me of an article from 2014 titled, ���In Praise of Crap Technology.��� The author extolled the virtues of his Coby mp3 player. It was an ancient piece of technology, even then. But it allowed him to listen to music while exercising at a very reasonable price.
Now, when I say crap technology, I���m referring to older technology that still gets the job done. Not crappy technology that never got the job done, like Google Glass.
I like crap technology for several reasons. The first is economics. Until a few years ago, I���d never owned a laptop. I was issued a series of expensive laptops at work. They were high-end because they needed to run company software, like SAP and enormous spreadsheets.
After I retired, I wanted a laptop for myself. My computer needs were small. A little Microsoft Office, some blogging and a lot of internet surfing. Buying a $1,200 Mac just didn't make sense. Besides, I���m a PC guy. I did a little research and settled on a bare-bones HP for $250. It has worked out just fine.
If asked, most people will say that they just want to pay a fair price for a product or service. I believe this is an out-and-out lie. Most Americans want to pay less for more. Getting a good deal is the American dream.
In 2019, I needed to buy a car. I didn���t relish the idea of spending $50,000, even if it came with air-conditioned seats, a smart key, teen-driver technology and a 360-degree camera. After a little research, I decided to buy a 2013 Hyundai Elantra for $9,300.
It came with enough technology to ensure my safety and convenience: anti-lock brakes, electronic stability control, and iPod, aux and USB inputs. It also came with a manual transmission.
That last bit of outdated technology has many advantages. It made the car that much cheaper to buy. It���s better on gas milage. And it provided built-in theft prevention. Nobody knows how to drive one.
Another advantage of crap technology is security. In 2013, I received a promotion that came with a BlackBerry. When it was handed to me, I thought, ���What the hell is that thing?��� But I quickly learned to love it because I had zero concerns about anyone stealing it. Why would they?
It also seemed metaphysically impossible to lose. You only lose costly things, like an iPhone 12 or a Montblanc pen. All this meant that I���d never have to explain to my boss how I lost the company cellphone.
Finally, crap technology can provide peace of mind. My wife just purchased a $170 coffeemaker. In my view, paying more than $30 for a glorified water heater is incomprehensible. What���s worse is this technological wonder is so complex. It requires two different filters, one for fewer than four cups and another for four or more. Its spout is sometimes open and sometimes closed. And the carafe has an interior lip that���s hard to clean. Trust me when I say that paying a premium for inferior technology doesn���t improve my morning coffee.
You technophiles can keep your $999 iPhone 13 or your $2,500 Sennheiser��AMBEO 3D Soundbar. I���ll invest the difference in a low-cost index fund. Or even better, if the alternative is $6,000 HiFiMan SUSVARA Headphones, I���ll take two first-class tickets to Berlin.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post Good Enough Tech appeared first on HumbleDollar.
November 10, 2021
‘Tis the Season
FSAs allow you to deduct pretax dollars from your paycheck for medical, adoption, commuting and dependent-care expenses. There are some new rules for the accounts this year in response to the pandemic.
First, the basics: During open enrollment, you tell your employer how many dollars you want deducted for these accounts over the next year. The contribution limit for a health care FSA is $2,750 in 2021 and $2,850 in 2022. Each spouse in a couple can contribute, for an annual household total of $5,700 in 2022.
Unlike the similar sounding health savings account, money in a health care FSA typically must be spent in the year you save the money or soon thereafter. If you don���t spend the money by the deadline, you can forfeit the unused funds.
That makes the deadline for spending important. The deadline can be year-end, but check with your HR representative to see if your employer offers some flexibility. Typically, employers can either let you roll over up to $550 of unspent funds into next year or, alternatively, give you until mid-March of next year to empty the account. The $550 rises to $570 in 2022.
This year, Washington is offering employers the ability to relax the rules even further, recognizing that many people skipped routine doctor visits during the pandemic. If they choose, employers can allow employees to roll over their entire health care FSA contribution into 2022.
Spending money from a health care FSA is fairly easy, even when you���re up against a deadline. For example, you could run to the drug store to stock up on home COVID-19 testing kits, hand sanitizer and masks���providing they���re in stock. If not, you can go to another aisle and buy over-the-counter drugs, such as pain relievers, cough suppressants and antihistamines. Here���s a full list of eligible medical items.
Meanwhile, a dependent care FSA allows you to save pretax dollars for child care expenses you pay while working, including while working from home. You can also spend the money for the care of qualifying adults, such as adult daycare for a dependent parent.
Normally, you can���t roll over any dependent care FSA money to next year. But as with health care FSAs, there are changes to this year���s dependent care FSA rules. For 2021, employers may provide a 12-month grace period���that is, until Dec. 31, 2022���to empty these accounts. The dependent care contribution limit increased to $10,500 for 2021 only. The limit reverts to the previous annual limit of $5,000 in 2022.
I remember several Decembers when my wife and I sat down and figured out how to spend our remaining FSA dollars. Having an extended grace period can relieve some of the pressure on busy families. Remember, though, that your company must choose to allow the longer grace periods permitted this year. The bottom line: Check with your HR department before you assume you have extra time to spend.
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Coloring the Results
The paper found that, between 2012 and 2020, U.S. green stocks delivered higher returns than environmentally unfriendly ���brown��� companies. But the paper argues this outperformance���which averaged about 0.65% a month���is unlikely to persist.
���Past performance is not a guarantee of future performance, and we think that caveat is especially well heeded in green investing,��� says Robert Stambaugh, finance professor at the University of Pennsylvania���s Wharton School, and one of three principal authors. Their paper won this year���s $10,000 best paper prize from Wharton���s Jacobs Levy Equity Management Center.
In a Zoom conference earlier this month, Stambaugh offered two reasons for green shares��� outperformance. First, green companies profited from unexpectedly high demand for their goods, as consumers reacted to bad news about the environment.
Second, investors pay a premium for green shares. For proof, Stambaugh cited two bonds issued by the German government in 2020. One bond series funded only green projects, the other conventional government projects. Although the two bonds are identical, investors pay more for the green bonds���and accept lower yields as a result.
Therein lies a problem. Investors may bid up green shares so they���re above their intrinsic worth, paying what Stambaugh called a ���greenium.��� If so, green shares could underperform brown going forward, especially if there���s unexpected good news about the environment, he said.
The researchers used MSCI���s environmental rankings to categorize green and brown companies. Those that scored in the top third on environmental measures were categorized as green. Those in the lowest third were deemed brown. The companies were not scored on the social and governance measures typically used by socially conscious funds.
Their green definition also may not fit the conventional mental model of green firms being all about windmills and solar panels. The five greenest industries were asset management, professional services, telecommunication services, consumer finance, and health care equipment and supplies. The five brownest sectors were the usual suspects: commodity chemicals, diversified chemicals, oil and gas exploration and production, steel, and metals and mining.
Investors��� preference for green shares may help unpick another stubborn investing puzzle. ���Green outperformance explains much of the historic underperformance of value stocks over the last decade,��� Stambaugh observes. ���Value stocks tend to be browner, and green tend to be growth.���
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