Jonathan Clements's Blog, page 259
October 24, 2021
Pizza Inflation
WE ALL HAVE OUR OWN indicators for where the cost of living is headed. These are the kinds of things that hit us viscerally. Last weekend, we had family visiting, and we decided to order pizza and wings. Two large pizzas, two dozen wings and an order of chicken tenders for our grandsons cost $103. A large pepperoni pizza alone was $26.
On Sunday morning, my wife and I took our two older grandsons out to breakfast. Two short stacks of buttermilk pancakes with bacon, an acai bowl, and one order of bacon, eggs and toast came to $74. Two coffees and two orange juices were almost $20 of the bill.
Neither of these meals included cocktails, beer or wine. Alcohol prices seem to be particularly high at restaurants in a resort town like ours. I���m a wine fan and enjoy looking for great bottles at bargain prices. It���s common to see wines priced at three times the retail price.
A recent article in USA Today supports my sense that food prices have climbed sharply. The article quoted recent data from the Bureau of Labor Statistics. Food prices overall are up 4.6% since September 2020. But meats, poultry, fish and eggs have jumped 10.5%. Compare this to the change in the Consumer Price Index (CPI), which measures the average change in the price of goods and services. CPI has increased 5.4% since September 2020.
Several years ago, I did a thorough review of our spending. We were using a rewards credit card for as much of our spending as possible, making sure to pay it off in full each month. This gave us a good database to gauge how much we were spending on things like groceries, dining out, gifts, gas and so on. I used the data to project our retirement budget.
How does our spending today compare to those estimates? I took a quick look at 2021���s spending, and I���m pretty sure we���ll exceed the ���dining out��� budget. Food inflation is part of the reason, but lately we���ve also been eating out more than we expected. Living in a beach town, with lots of transient and part-time residents, can make every day seem a bit like ���vacation.��� And when friends and family visit, they are indeed on vacation, and their desire to go out is greater.
I���m not worried about the cost, but it���s something to keep an eye on. In addition to being expensive, dining out isn���t always the healthiest choice. Inviting friends and family to dinner at our home is just as much fun, even if we���re ordering in expensive pizza. And it gives me a chance to share one of my bargain wine discoveries.
On Sunday morning, my wife and I took our two older grandsons out to breakfast. Two short stacks of buttermilk pancakes with bacon, an acai bowl, and one order of bacon, eggs and toast came to $74. Two coffees and two orange juices were almost $20 of the bill.
Neither of these meals included cocktails, beer or wine. Alcohol prices seem to be particularly high at restaurants in a resort town like ours. I���m a wine fan and enjoy looking for great bottles at bargain prices. It���s common to see wines priced at three times the retail price.
A recent article in USA Today supports my sense that food prices have climbed sharply. The article quoted recent data from the Bureau of Labor Statistics. Food prices overall are up 4.6% since September 2020. But meats, poultry, fish and eggs have jumped 10.5%. Compare this to the change in the Consumer Price Index (CPI), which measures the average change in the price of goods and services. CPI has increased 5.4% since September 2020.
Several years ago, I did a thorough review of our spending. We were using a rewards credit card for as much of our spending as possible, making sure to pay it off in full each month. This gave us a good database to gauge how much we were spending on things like groceries, dining out, gifts, gas and so on. I used the data to project our retirement budget.
How does our spending today compare to those estimates? I took a quick look at 2021���s spending, and I���m pretty sure we���ll exceed the ���dining out��� budget. Food inflation is part of the reason, but lately we���ve also been eating out more than we expected. Living in a beach town, with lots of transient and part-time residents, can make every day seem a bit like ���vacation.��� And when friends and family visit, they are indeed on vacation, and their desire to go out is greater.
I���m not worried about the cost, but it���s something to keep an eye on. In addition to being expensive, dining out isn���t always the healthiest choice. Inviting friends and family to dinner at our home is just as much fun, even if we���re ordering in expensive pizza. And it gives me a chance to share one of my bargain wine discoveries.
The post Pizza Inflation appeared first on HumbleDollar.
Beyond the Numbers
BACK IN THE 1950s, economists Franco Modigliani and Merton Miller developed a theory that, even today, is taught in virtually every finance class.
To understand the theory, suppose you���re running a company and want to build a new factory. To raise money for the project, you generally have two options: You can sell shares to investors or you can borrow money. No one disputes that basic framework, but Modigliani and Miller added a twist: They argued that, whether the company issues shares or it takes on debt, investors shouldn���t value the company any differently.
That���s the theory. In reality, most people raise an eyebrow when they hear this. That���s because debt always carries risks. Should something go wrong, an unhappy lender can, at the extreme, force a company into bankruptcy. These risks might not be quantifiable, but they���re real nonetheless. This sort of thing occurs frequently in economics���where the formula says one thing, but the reality is more nuanced.
It���s the same in personal finance. I often say that there are two answers to every financial question: What the numbers say and how you feel about it. That, in fact, is a big part of what makes personal finance so tricky. Few questions are purely mathematical. Many���maybe even most���lie at the intersection of factors that can be quantified and those that can���t. Here are five examples:
1. Spending.��This is a tradeoff between enjoyment today���something that���s real but hard to quantify���and financial security tomorrow, which is much easier to quantify. We all intuitively understand this and try to strike the right balance. But it isn���t always easy. According to the book�� Happy Money , there are more than 17,000 academic articles that examine the relationship between happiness and money.
The��Happy Money��authors identify certain rules of thumb that can help. Among the best known: Buy experiences rather than things. Use your money to buy more time for yourself by, say, paying others to do tasks you dislike.
But at the end of the day, even these rules are subject to interpretation. If you buy a convertible or a vacation home, do those count as things or as experiences? I���d argue they count as experiences���and thus are money well spent. But others might see them as frivolous. My advice: The best thing we can do when making spending decisions is to be intentional about them.
Most of us are busy, so our financial lives run on autopilot. But with many companies quietly billing our credit cards each month, it���s more important than ever to be intentional about spending. An approach I recommend: Hold an annual financial review. Some people do this each Jan. 1 so they don���t forget. However you structure it, the key is to review your spending and to ask a basic question about each significant line item: Even if we can afford it, do we need this item? Will it make us happier���or our lives easier���or would we instead be happier having those dollars in the bank?
2. Charitable giving.��Like spending, charitable contributions involve a tradeoff between giving today and perhaps saving the money for tomorrow. But it involves two additional dimensions, one quantifiable, the other not. The quantifiable dimension is, of course, the tax benefit. The unquantifiable dimension is the satisfaction that giving can provide.
How can you balance all these factors? As I��described��a few weeks back, the first step in making a giving plan is to understand your ���why��� and the goals you���re trying to accomplish. This question is itself multidimensional. But just like day-to-day spending, I think it���s important to be intentional about it.
3. Investments.��How should you invest your savings? This question gets a lot of attention, but it's mostly focused on the numbers: risk, return, liquidity, expenses and so forth. To be sure, those are important. But there are additional dimensions to the investment choices we make.
For starters, it���s important to be clear about your objective. As one client put it, know your definition of "winning." Is there some number that you define as enough? Or are you trying to grow your investments to as large a number as possible?
Beyond that, do you view investments simply as a vehicle to support your goals? Or do you derive enjoyment from the investment process itself���whether it���s reading through the literature, picking stocks or making angel investments? The reality is that there are many ways to manage money successfully. You shouldn���t let anyone else tell you what���s right or wrong. It���s important, though, to be clear in your own mind about your objectives.
4. Tuition.��College tuition is a component of spending. But it���s significant enough to warrant its own category. Suppose your child gets into Harvard, Yale or another school with a similarly sky-high price tag. If you don���t qualify for financial aid, it���s going to cost a��bundle. On the surface, you might immediately rule out such a luxury. But it's tricky.
In one respect, tuition is a spending decision. But it���s also an investment decision���because a college education should deliver a positive return on investment. The challenge for many families: This investment in their children comes at the expense of their own financial security. Compounding this challenge: Ideally, college also delivers unquantifiable benefits outside the classroom. It's nearly impossible to know how to factor these benefits, which are potentially significant but totally intangible, into a financial decision.
How should you approach this decision? Step one is to recognize that��U.S. News & World Report��is not the only judge of school quality. There are other measures, including��Money���s��rankings, which evaluate schools along many more dimensions than��U.S. News. As a result, the��Money��rankings highlight a much more diverse list of schools.
5. Housing.��In many ways, housing decisions are like tuition decisions. Both carry enormous price tags. And like college, housing is partly an expense and partly an investment, and it has other dimensions as well. For instance, for many folks, it crosses over into the ���experience��� category.
Housing, however, does differ from tuition in one crucial respect: If a house ends up being too much of a burden, you can almost always sell it. By contrast, there���s no way to get a refund for a poor college education. For that reason, I'd worry less about housing decisions than about college choices.
These are just a few examples. Other topics that lie at the intersection of quantifiable and unquantifiable include Social Security, life insurance and estate planning. There���s no magic bullet for addressing any of these topics. Still, a useful starting point in decision-making is to simply recognize that these intersections exist.
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.
To understand the theory, suppose you���re running a company and want to build a new factory. To raise money for the project, you generally have two options: You can sell shares to investors or you can borrow money. No one disputes that basic framework, but Modigliani and Miller added a twist: They argued that, whether the company issues shares or it takes on debt, investors shouldn���t value the company any differently.
That���s the theory. In reality, most people raise an eyebrow when they hear this. That���s because debt always carries risks. Should something go wrong, an unhappy lender can, at the extreme, force a company into bankruptcy. These risks might not be quantifiable, but they���re real nonetheless. This sort of thing occurs frequently in economics���where the formula says one thing, but the reality is more nuanced.
It���s the same in personal finance. I often say that there are two answers to every financial question: What the numbers say and how you feel about it. That, in fact, is a big part of what makes personal finance so tricky. Few questions are purely mathematical. Many���maybe even most���lie at the intersection of factors that can be quantified and those that can���t. Here are five examples:
1. Spending.��This is a tradeoff between enjoyment today���something that���s real but hard to quantify���and financial security tomorrow, which is much easier to quantify. We all intuitively understand this and try to strike the right balance. But it isn���t always easy. According to the book�� Happy Money , there are more than 17,000 academic articles that examine the relationship between happiness and money.
The��Happy Money��authors identify certain rules of thumb that can help. Among the best known: Buy experiences rather than things. Use your money to buy more time for yourself by, say, paying others to do tasks you dislike.
But at the end of the day, even these rules are subject to interpretation. If you buy a convertible or a vacation home, do those count as things or as experiences? I���d argue they count as experiences���and thus are money well spent. But others might see them as frivolous. My advice: The best thing we can do when making spending decisions is to be intentional about them.
Most of us are busy, so our financial lives run on autopilot. But with many companies quietly billing our credit cards each month, it���s more important than ever to be intentional about spending. An approach I recommend: Hold an annual financial review. Some people do this each Jan. 1 so they don���t forget. However you structure it, the key is to review your spending and to ask a basic question about each significant line item: Even if we can afford it, do we need this item? Will it make us happier���or our lives easier���or would we instead be happier having those dollars in the bank?
2. Charitable giving.��Like spending, charitable contributions involve a tradeoff between giving today and perhaps saving the money for tomorrow. But it involves two additional dimensions, one quantifiable, the other not. The quantifiable dimension is, of course, the tax benefit. The unquantifiable dimension is the satisfaction that giving can provide.
How can you balance all these factors? As I��described��a few weeks back, the first step in making a giving plan is to understand your ���why��� and the goals you���re trying to accomplish. This question is itself multidimensional. But just like day-to-day spending, I think it���s important to be intentional about it.
3. Investments.��How should you invest your savings? This question gets a lot of attention, but it's mostly focused on the numbers: risk, return, liquidity, expenses and so forth. To be sure, those are important. But there are additional dimensions to the investment choices we make.
For starters, it���s important to be clear about your objective. As one client put it, know your definition of "winning." Is there some number that you define as enough? Or are you trying to grow your investments to as large a number as possible?
Beyond that, do you view investments simply as a vehicle to support your goals? Or do you derive enjoyment from the investment process itself���whether it���s reading through the literature, picking stocks or making angel investments? The reality is that there are many ways to manage money successfully. You shouldn���t let anyone else tell you what���s right or wrong. It���s important, though, to be clear in your own mind about your objectives.
4. Tuition.��College tuition is a component of spending. But it���s significant enough to warrant its own category. Suppose your child gets into Harvard, Yale or another school with a similarly sky-high price tag. If you don���t qualify for financial aid, it���s going to cost a��bundle. On the surface, you might immediately rule out such a luxury. But it's tricky.
In one respect, tuition is a spending decision. But it���s also an investment decision���because a college education should deliver a positive return on investment. The challenge for many families: This investment in their children comes at the expense of their own financial security. Compounding this challenge: Ideally, college also delivers unquantifiable benefits outside the classroom. It's nearly impossible to know how to factor these benefits, which are potentially significant but totally intangible, into a financial decision.
How should you approach this decision? Step one is to recognize that��U.S. News & World Report��is not the only judge of school quality. There are other measures, including��Money���s��rankings, which evaluate schools along many more dimensions than��U.S. News. As a result, the��Money��rankings highlight a much more diverse list of schools.
5. Housing.��In many ways, housing decisions are like tuition decisions. Both carry enormous price tags. And like college, housing is partly an expense and partly an investment, and it has other dimensions as well. For instance, for many folks, it crosses over into the ���experience��� category.
Housing, however, does differ from tuition in one crucial respect: If a house ends up being too much of a burden, you can almost always sell it. By contrast, there���s no way to get a refund for a poor college education. For that reason, I'd worry less about housing decisions than about college choices.
These are just a few examples. Other topics that lie at the intersection of quantifiable and unquantifiable include Social Security, life insurance and estate planning. There���s no magic bullet for addressing any of these topics. Still, a useful starting point in decision-making is to simply recognize that these intersections exist.
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 Beyond the Numbers appeared first on HumbleDollar.
October 23, 2021
Bill Him Not Me
NOBODY, INCLUDING ME, wants to spend their hard-earned money on health care. That, of course, is illogical if you���re being treated for an illness or relieved of discomfort. Nevertheless, we don���t want to use our own money. That���s why we have health insurance���to cover everything. Or at least that���s our expectation.
When I ran employee benefits, I had many debates with workers about their health care bills. When a doctor charged significantly above the reasonable and customary fee, the plan always paid too little, or so employees felt. They might accept that the doctor deserved more, just not from their pocket. A woman learned our plan didn���t cover a vaccine she deemed essential for her children. She asked if I expected her to pay the $60 fee out of her own pocket.
Many times, when the plan limit on a service was reached, patients would cease care rather than pay themselves. Suddenly, a medical necessity wasn���t. Even senior executives called me wanting to know why the plan didn���t pay 100% of their charges.
Out-of-pocket health care costs are not a line item on the typical family budget. We���ve been conditioned to see the expenses associated with health care differently from any other spending. That���s why surveys find that health care is almost always deemed unaffordable. But we never get that feeling from money spent on other things. Take the family out to eat for $75���it���s no big deal. Pick up a prescription with a $75 copay, and it���s unaffordable. But $75 is $75, right? Actually, when it comes to health care spending, that���s never the case.
Nothing associated with health care is viewed as an obligation to spend our own money. That���s why it���s so easy to vilify insurance companies if a claim is denied or a copay required. It���s also why, despite the rhetoric, you can���t find a definition of what constitutes ���affordable��� health care.
I have an ongoing debate with a friend in England. His perception is his health care is free. As a retired senior, he pays no premium, no out-of-pocket costs and no tax that���s solely designated for health care.
Eventually, the U.S. will have a health care system with no premiums and little or no out-of-pocket costs. The cost of the system will be paid invisibly from general tax revenue, and thus our health care will also be ���free.���
The post Bill Him Not Me appeared first on HumbleDollar.
October 22, 2021
Calculated Courage
THE S&P 500 STOCKS are up roughly 100% since March 2020���s market low. I���m 100% clueless about how much longer this remarkable run will last. But I���m 100% confident that, when the next downturn comes, many investors will rush for the exit, fearful that their stock holdings will soon be worth little or nothing.
Which brings me to one of the most important investment concepts: intrinsic value.
No, intrinsic value isn���t a simple notion and, no, it can���t be calculated with any precision. Still, if we want to be more tenacious investors, I believe we should keep the idea front and center in our investment thinking.
Count the cash. How do we calculate intrinsic value? Perhaps the most widely used technique is the dividend discount model. The idea is to figure out how much cash companies will return to shareholders in the years ahead through dividends and stock buybacks, and then calculate the value of that cash in today���s dollars. What about share price gains? Those are effectively captured by the calculation: When we sell a stock, we get the current share price, but we give up any further claim on cash paid out by the company.
It might seem quaint to focus on cashflow to shareholders in an era when the S&P 500���s dividend yield is a tiny 1.3%. But the dividend discount model carries with it an important reminder: Almost all companies eventually disappear and, if history is any guide, a��majority��will deliver negative returns during their lifetime. The implication: Shareholders of many companies will collectively suffer share-price losses, but those losses can be partly or entirely offset���if these companies return cash to their investors before they shuffle off their mortal coil.
The fleeting existence of most companies has been discussed by no less than Jeff Bezos, founder of highflying Amazon. ���I predict one day Amazon will fail,��� he told employees in 2018. ���Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.���
To be sure, Amazon doesn���t currently pay a dividend, and nor do many other fast-growing companies, including Alphabet, Facebook, Moderna, Peloton Interactive, Tesla and Zoom Video Communications. For now, investors are fine with that because they want these companies to use their cash to finance their fast growth. But that rapid growth won���t last forever. The expectation is that someday these companies will indeed return great gobs of cash to their shareholders, and that���s the basis for their intrinsic value.
Dollars now are better than dollars later. How much is this stream of future cash worth? Enter the so-called discount rate. The dividends that a company will pay over the next 12 months are more highly prized than those that it might pay, say, 10 years from now. After all, we get to spend or invest today���s dividends immediately, plus who knows whether the company will be around 10 years from now?
To reflect this, investors discount those future dividends. What discount rate do they use? Nobody knows for sure, but it might be around 8% a year. In other words, investors might value a $100 dividend that they���ll potentially receive 10 years from now at just $40 to $50.
If investors are discounting future dividends at 8% a year, they���re effectively demanding that sort of annual gain as compensation for risking their money in the stock market. In other words, if we could figure out what the discount rate is, we���d have a handle on the return that stock market investors are collectively expecting.
We can only estimate intrinsic value. When we buy stocks, the hope is that earnings will grow, allowing companies to pay ever-larger dividends and buy back lots of their own stock, thus returning heaps of cash to investors. But we can���t be sure how fast earnings will grow, nor what the discount rate is or will be.
On top of that, stock buybacks are an iffy proposition. Many companies trim their buyback programs during rough economic times, such as early 2020, when stocks are on sale and investors should want companies to aggressively buy back their own shares. In addition, companies often finance large buyback programs by taking on debt���and that debt could put them in financial peril.
Currently, the S&P 500���s so-called buyback yield, which combines dividends with corporate spending on buybacks, is around 3%. If the amount of cash returned to shareholders grows at 5% a year and we apply a discount rate of 8%, we get an intrinsic value for the S&P 500 that���s fairly close to the index���s current level. What if the discount rate is higher or we lower the assumed yield to reflect the uncertainty surrounding buybacks? Today���s market would appear overvalued. On the other hand, perhaps the pandemic has temporarily depressed dividends and buybacks���and the buyback yield will jump sharply in the year ahead, making stocks seem relatively cheap.
Share prices fluctuate far more than intrinsic value. If intrinsic value can���t be calculated precisely, why waste time discussing it? Fear not: There is a point to all this.
I believe the stock market is fairly efficient, meaning that most of the time share prices are a reasonable reflection of underlying value. For proof, look no further than the dismal record of most professional money managers. Clearly, finding mispriced stocks isn���t easy.
That said, the stock market isn���t always rational. Suppose an economic catastrophe forced companies to nix all dividends and stock buybacks for three years. That would be an extraordinary development, one that might result in roughly an 8% drop in intrinsic value. Yet last year, during the early days of the pandemic, the S&P 500 plunged 34%. That didn���t make any rational sense, as HumbleDollar contributors Adam Grossman and John Lim have both pointed out.
The crucial lesson here: We may not be able to calculate intrinsic value precisely, but we should never forget that intrinsic value changes far more slowly than share prices. What if stocks plunge 30% or 40%? There���s a good chance that a slew of shareholders are having a brief moment of collective insanity���and offering more courageous investors a chance to buy at bargain prices.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
What triggers higher Medicare premiums and how can you avoid them? Rick Connor spends time with IRMAA, those much-loathed income-related monthly adjustment amounts.
"I was born to be wealthy," writes Ben Rodriguez. "But by some galactic mistake, my family had little money." Luckily, Ben found a good investment mentor���his father-in-law.
What has Adam Grossman learned from his wealth-management clients over the years? Adam lists eight key financial topics���and discusses how client conversations have shaped his views.
Credit scores are proliferating. Still, says Phil Kernen, "The rules haven���t changed: Higher scores are better. Using credit responsibly will lead to higher scores. Getting rid of errors can also raise scores."
Sonja Haggert bought AT&T for its generous and rising dividend. But now the dividend is getting cut and she's in a quandary: Should she stay or should she go?
"I occasionally had to look at the usual used-car dealers," recounts Ron Wayne. "I found even more arrogance than usual because they���re in the driver���s seat, so to speak."
Also be sure to check out the past week's��blog posts, including Mike Drak on happiness, Dennis Friedman on relative wealth, Mike Zaccardi on Social Security, Dick Quinn on retirement��withdrawals, Kyle McIntosh on credit-card fraud and Jim Wasserman on influencers.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
Which brings me to one of the most important investment concepts: intrinsic value.
No, intrinsic value isn���t a simple notion and, no, it can���t be calculated with any precision. Still, if we want to be more tenacious investors, I believe we should keep the idea front and center in our investment thinking.
Count the cash. How do we calculate intrinsic value? Perhaps the most widely used technique is the dividend discount model. The idea is to figure out how much cash companies will return to shareholders in the years ahead through dividends and stock buybacks, and then calculate the value of that cash in today���s dollars. What about share price gains? Those are effectively captured by the calculation: When we sell a stock, we get the current share price, but we give up any further claim on cash paid out by the company.
It might seem quaint to focus on cashflow to shareholders in an era when the S&P 500���s dividend yield is a tiny 1.3%. But the dividend discount model carries with it an important reminder: Almost all companies eventually disappear and, if history is any guide, a��majority��will deliver negative returns during their lifetime. The implication: Shareholders of many companies will collectively suffer share-price losses, but those losses can be partly or entirely offset���if these companies return cash to their investors before they shuffle off their mortal coil.
The fleeting existence of most companies has been discussed by no less than Jeff Bezos, founder of highflying Amazon. ���I predict one day Amazon will fail,��� he told employees in 2018. ���Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.���
To be sure, Amazon doesn���t currently pay a dividend, and nor do many other fast-growing companies, including Alphabet, Facebook, Moderna, Peloton Interactive, Tesla and Zoom Video Communications. For now, investors are fine with that because they want these companies to use their cash to finance their fast growth. But that rapid growth won���t last forever. The expectation is that someday these companies will indeed return great gobs of cash to their shareholders, and that���s the basis for their intrinsic value.
Dollars now are better than dollars later. How much is this stream of future cash worth? Enter the so-called discount rate. The dividends that a company will pay over the next 12 months are more highly prized than those that it might pay, say, 10 years from now. After all, we get to spend or invest today���s dividends immediately, plus who knows whether the company will be around 10 years from now?
To reflect this, investors discount those future dividends. What discount rate do they use? Nobody knows for sure, but it might be around 8% a year. In other words, investors might value a $100 dividend that they���ll potentially receive 10 years from now at just $40 to $50.
If investors are discounting future dividends at 8% a year, they���re effectively demanding that sort of annual gain as compensation for risking their money in the stock market. In other words, if we could figure out what the discount rate is, we���d have a handle on the return that stock market investors are collectively expecting.
We can only estimate intrinsic value. When we buy stocks, the hope is that earnings will grow, allowing companies to pay ever-larger dividends and buy back lots of their own stock, thus returning heaps of cash to investors. But we can���t be sure how fast earnings will grow, nor what the discount rate is or will be.
On top of that, stock buybacks are an iffy proposition. Many companies trim their buyback programs during rough economic times, such as early 2020, when stocks are on sale and investors should want companies to aggressively buy back their own shares. In addition, companies often finance large buyback programs by taking on debt���and that debt could put them in financial peril.
Currently, the S&P 500���s so-called buyback yield, which combines dividends with corporate spending on buybacks, is around 3%. If the amount of cash returned to shareholders grows at 5% a year and we apply a discount rate of 8%, we get an intrinsic value for the S&P 500 that���s fairly close to the index���s current level. What if the discount rate is higher or we lower the assumed yield to reflect the uncertainty surrounding buybacks? Today���s market would appear overvalued. On the other hand, perhaps the pandemic has temporarily depressed dividends and buybacks���and the buyback yield will jump sharply in the year ahead, making stocks seem relatively cheap.
Share prices fluctuate far more than intrinsic value. If intrinsic value can���t be calculated precisely, why waste time discussing it? Fear not: There is a point to all this.
I believe the stock market is fairly efficient, meaning that most of the time share prices are a reasonable reflection of underlying value. For proof, look no further than the dismal record of most professional money managers. Clearly, finding mispriced stocks isn���t easy.
That said, the stock market isn���t always rational. Suppose an economic catastrophe forced companies to nix all dividends and stock buybacks for three years. That would be an extraordinary development, one that might result in roughly an 8% drop in intrinsic value. Yet last year, during the early days of the pandemic, the S&P 500 plunged 34%. That didn���t make any rational sense, as HumbleDollar contributors Adam Grossman and John Lim have both pointed out.
The crucial lesson here: We may not be able to calculate intrinsic value precisely, but we should never forget that intrinsic value changes far more slowly than share prices. What if stocks plunge 30% or 40%? There���s a good chance that a slew of shareholders are having a brief moment of collective insanity���and offering more courageous investors a chance to buy at bargain prices.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
What triggers higher Medicare premiums and how can you avoid them? Rick Connor spends time with IRMAA, those much-loathed income-related monthly adjustment amounts.
"I was born to be wealthy," writes Ben Rodriguez. "But by some galactic mistake, my family had little money." Luckily, Ben found a good investment mentor���his father-in-law.
What has Adam Grossman learned from his wealth-management clients over the years? Adam lists eight key financial topics���and discusses how client conversations have shaped his views.
Credit scores are proliferating. Still, says Phil Kernen, "The rules haven���t changed: Higher scores are better. Using credit responsibly will lead to higher scores. Getting rid of errors can also raise scores."
Sonja Haggert bought AT&T for its generous and rising dividend. But now the dividend is getting cut and she's in a quandary: Should she stay or should she go?
"I occasionally had to look at the usual used-car dealers," recounts Ron Wayne. "I found even more arrogance than usual because they���re in the driver���s seat, so to speak."
Also be sure to check out the past week's��blog posts, including Mike Drak on happiness, Dennis Friedman on relative wealth, Mike Zaccardi on Social Security, Dick Quinn on retirement��withdrawals, Kyle McIntosh on credit-card fraud and Jim Wasserman on influencers.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post Calculated Courage appeared first on HumbleDollar.
Pursuit of Happiness
NOW THAT I���M RETIRED, I use two metrics whenever I���m faced with opportunities that require an investment of time or money.
First, there���s ROTI, or return on time invested. I use this metric to determine if something is worth my time. I want to invest the bulk of my time in things that���ll make me happy. Some examples of high-return time investments are:
Seeing family and friends
Going on new adventures
Making new friends
Starting a business
Learning something new
Going fishing
Recently, I had to decide whether to go back to school to finish that degree I never completed or train for Ironman Cozumel, which would help ensure I got my health back. They both required a lot of time, but the payback on the latter was much higher in terms of happiness.
Next up: ROMI, or return on money invested. Similar to ROTI, it all comes down to where I can get the highest happiness in return for the money invested. Some examples of high-return money investments are:
Going to a concert
Buying a good book
Going on an adventure
Buying a new fishing rod
Yes, there is���unsurprisingly���overlap between my ROTI and ROMI lists.
A recent use of ROMI: My wife wanted us to purchase an expensive couch for the living room���a place we rarely spend any time. I tried to convince her it would be far better to invest the money in a trip to Hawaii, something I promised her when we were married. It was easy for me to see which investment would make me happier. I���m still not sure my wife feels the same way.
First, there���s ROTI, or return on time invested. I use this metric to determine if something is worth my time. I want to invest the bulk of my time in things that���ll make me happy. Some examples of high-return time investments are:
Seeing family and friends
Going on new adventures
Making new friends
Starting a business
Learning something new
Going fishing
Recently, I had to decide whether to go back to school to finish that degree I never completed or train for Ironman Cozumel, which would help ensure I got my health back. They both required a lot of time, but the payback on the latter was much higher in terms of happiness.
Next up: ROMI, or return on money invested. Similar to ROTI, it all comes down to where I can get the highest happiness in return for the money invested. Some examples of high-return money investments are:
Going to a concert
Buying a good book
Going on an adventure
Buying a new fishing rod
Yes, there is���unsurprisingly���overlap between my ROTI and ROMI lists.
A recent use of ROMI: My wife wanted us to purchase an expensive couch for the living room���a place we rarely spend any time. I tried to convince her it would be far better to invest the money in a trip to Hawaii, something I promised her when we were married. It was easy for me to see which investment would make me happier. I���m still not sure my wife feels the same way.
The post Pursuit of Happiness appeared first on HumbleDollar.
The Call on AT&T
HAVE YOU EVER HELD a stock for years and grown to love it? What if your research now says it might be time to break up?
Many years ago, I bought AT&T. It was the perfect stock for a dividend investor like me. It was a dividend aristocrat, meaning it had increased its dividend for at least 25 years. In fact, AT&T had been increasing its dividend for more than three decades.
But while the dividend was always generous, the stock price has long been stagnant. I didn���t care because I was reinvesting my dividends. The dividends bought more shares, thanks to the lower stock price. Those additional shares, in turn, generated more dividend income. It was a virtuous circle.
But today, a great deal has changed in AT&T���s story.
There���s new management. John Stankey, the new CEO, has made some significant moves. He���s turned his back on costly acquisitions like Warner Media and DirectTV. Those deals didn���t pan out and may have cost AT&T more than $50 billion, according to some estimates.
AT&T still has more than $150 billion in debt left from its buying spree. That has Wall Street worried, so Stankey is reversing course, selling portions of the acquired businesses to pay down debt. The expected infusion of roughly $50 billion will take a big chunk out of AT&T���s liabilities.
After the dust settles, current AT&T will be broken into three companies:
AT&T. The parent company will be refocused on its core telecom business.
DirectTV. Now a separate company, this will be co-owned by AT&T and private equity firm TPG Capital, which holds a 30% stake.
Warner Bros. Discovery. AT&T will spin off Warner Media, which will be combined with Discovery to form a new company. The merger is expected to close in mid-2022.
AT&T has indicated that it���ll no longer be increasing its dividend. In fact, a big cut is coming. AT&T plans to devote 40% to 43% of the company���s free cash flow to dividend payments. At that rate, analysts expect the dividend could be cut 44% from current levels.
On the plus side, AT&T shareholders will receive shares giving them 71% ownership of the new Warner Bros. Discovery. It���ll be run by David Zaslav, a knowledgeable media insider who���s been CEO of Discovery since 2007. He was previously involved with the launch of CNBC and MSNBC, so he brings a wealth of experience to the newly formed enterprise.
The new spinoff company looks to be strong. Warner Bros. Discovery will be the second-largest media firm by revenue, in the same league as industry giants Netflix and Disney. It could have a market cap above $60 billion, according to one estimate.
To cover all the bases, I decided to research analysts��� estimates. They were all positive for the future growth of the spinoff. This is has led to my current quandary: Should I stay or should I go?
Even though AT&T���s dividend yield will be reduced, the payout will still be healthy. Now that I���m retired, those dividends will provide me with income.��What are my options? I see three choices:
Wait and see. I could give AT&T���s restructuring time to shake out, while continuing to read evaluations.
Sell some and keep some. This limits my downside, plus some of Ma Bell���s spinoffs have done quite well in the past.
Sell it all and use my loss to offset capital gains. The stock is now below my purchase price.
I���ll consider these options and do what I always do: Draw up a list of advantages and disadvantages, and then take it from there.
Sonja Haggert is��the author of Invest, Reinvest, Rest. You can learn more at SonjaHaggert.com. Follow her on Twitter @SonjaHaggert��and��check out her earlier articles.
Many years ago, I bought AT&T. It was the perfect stock for a dividend investor like me. It was a dividend aristocrat, meaning it had increased its dividend for at least 25 years. In fact, AT&T had been increasing its dividend for more than three decades.
But while the dividend was always generous, the stock price has long been stagnant. I didn���t care because I was reinvesting my dividends. The dividends bought more shares, thanks to the lower stock price. Those additional shares, in turn, generated more dividend income. It was a virtuous circle.
But today, a great deal has changed in AT&T���s story.
There���s new management. John Stankey, the new CEO, has made some significant moves. He���s turned his back on costly acquisitions like Warner Media and DirectTV. Those deals didn���t pan out and may have cost AT&T more than $50 billion, according to some estimates.
AT&T still has more than $150 billion in debt left from its buying spree. That has Wall Street worried, so Stankey is reversing course, selling portions of the acquired businesses to pay down debt. The expected infusion of roughly $50 billion will take a big chunk out of AT&T���s liabilities.
After the dust settles, current AT&T will be broken into three companies:
AT&T. The parent company will be refocused on its core telecom business.
DirectTV. Now a separate company, this will be co-owned by AT&T and private equity firm TPG Capital, which holds a 30% stake.
Warner Bros. Discovery. AT&T will spin off Warner Media, which will be combined with Discovery to form a new company. The merger is expected to close in mid-2022.
AT&T has indicated that it���ll no longer be increasing its dividend. In fact, a big cut is coming. AT&T plans to devote 40% to 43% of the company���s free cash flow to dividend payments. At that rate, analysts expect the dividend could be cut 44% from current levels.
On the plus side, AT&T shareholders will receive shares giving them 71% ownership of the new Warner Bros. Discovery. It���ll be run by David Zaslav, a knowledgeable media insider who���s been CEO of Discovery since 2007. He was previously involved with the launch of CNBC and MSNBC, so he brings a wealth of experience to the newly formed enterprise.
The new spinoff company looks to be strong. Warner Bros. Discovery will be the second-largest media firm by revenue, in the same league as industry giants Netflix and Disney. It could have a market cap above $60 billion, according to one estimate.
To cover all the bases, I decided to research analysts��� estimates. They were all positive for the future growth of the spinoff. This is has led to my current quandary: Should I stay or should I go?
Even though AT&T���s dividend yield will be reduced, the payout will still be healthy. Now that I���m retired, those dividends will provide me with income.��What are my options? I see three choices:
Wait and see. I could give AT&T���s restructuring time to shake out, while continuing to read evaluations.
Sell some and keep some. This limits my downside, plus some of Ma Bell���s spinoffs have done quite well in the past.
Sell it all and use my loss to offset capital gains. The stock is now below my purchase price.
I���ll consider these options and do what I always do: Draw up a list of advantages and disadvantages, and then take it from there.
Sonja Haggert is��the author of Invest, Reinvest, Rest. You can learn more at SonjaHaggert.com. Follow her on Twitter @SonjaHaggert��and��check out her earlier articles.The post The Call on AT&T appeared first on HumbleDollar.
October 21, 2021
Time Heals Wounds
I RECENTLY WROTE about the fallacy of time diversification. Time diversification is the widely held belief that market risk declines as our holding period lengthens. It���s one of the cornerstones of many investors��� approach to asset allocation and risk management.
Financial theory, however, refutes time diversification because market risk���as measured by standard deviation���actually increases with longer holding periods. The math tells us that the dispersion of potential results widens with longer time horizons. This counterintuitive insight rests on the assumption that total returns have a normal, bell-shaped distribution and that year-to-year returns are uncorrelated.
As an example, if stocks have an average historical return of 5% with a standard deviation of 30% and you hold for 30 years, the worst 1% of possible outcomes is a cumulative 90% loss. History teaches us that losses of this magnitude are within the realm of possibility. During the Great Depression, the Dow plunged 89% from its 1929 peak. It didn���t reach new highs, at least in nominal terms, until 1954���or 25 years later. Similarly, in 2002, the Nasdaq Composite index closed 78% lower than the peak it reached in 2000. It would take 15 years for the Nasdaq to return to its prior 2000 high.
But there���s a major weakness in the argument against time diversification. Recall that it assumes that annual returns are uncorrelated. In other words, stock returns are assumed to take a random walk around their mean. While this assumption may be reasonable most of the time, it falls apart over longer time horizons and at market extremes.
Consider what happens after the stock market experiences a major decline. First, dividend yields climb. It���s estimated, for example, that the dividend yield of the overall stock market was close to 14% in July 1932, when the Dow reached its Great Depression low.
As share prices decline, the expected return from stocks rises. The Gordon equation states that the return we can expect from stocks are a function of dividends and the growth in dividends. By raising the dividend yield, tumbling stock prices sow the seeds for higher future returns.
Result? A lost decade for stocks would set the stage for higher expected returns in the decade that followed. In other words, returns over long time periods aren���t random, but rather negatively correlated. What I���m describing, of course, is reversion��to the mean. It���s the countervailing force that lowers the probability of long market streaks���both positive and negative. This doesn���t mean that a 30-year bear market could never happen. It���s just far less likely than standard statistical theory would predict.
The other major argument in favor of time diversification: Most people save and invest over many decades. Such dollar-cost averaging substantially lowers the risk of stock investing during our working years, because we���re buying over time, rather than at a single price that could prove to be a market peak.
Financial theory, however, refutes time diversification because market risk���as measured by standard deviation���actually increases with longer holding periods. The math tells us that the dispersion of potential results widens with longer time horizons. This counterintuitive insight rests on the assumption that total returns have a normal, bell-shaped distribution and that year-to-year returns are uncorrelated.
As an example, if stocks have an average historical return of 5% with a standard deviation of 30% and you hold for 30 years, the worst 1% of possible outcomes is a cumulative 90% loss. History teaches us that losses of this magnitude are within the realm of possibility. During the Great Depression, the Dow plunged 89% from its 1929 peak. It didn���t reach new highs, at least in nominal terms, until 1954���or 25 years later. Similarly, in 2002, the Nasdaq Composite index closed 78% lower than the peak it reached in 2000. It would take 15 years for the Nasdaq to return to its prior 2000 high.
But there���s a major weakness in the argument against time diversification. Recall that it assumes that annual returns are uncorrelated. In other words, stock returns are assumed to take a random walk around their mean. While this assumption may be reasonable most of the time, it falls apart over longer time horizons and at market extremes.
Consider what happens after the stock market experiences a major decline. First, dividend yields climb. It���s estimated, for example, that the dividend yield of the overall stock market was close to 14% in July 1932, when the Dow reached its Great Depression low.
As share prices decline, the expected return from stocks rises. The Gordon equation states that the return we can expect from stocks are a function of dividends and the growth in dividends. By raising the dividend yield, tumbling stock prices sow the seeds for higher future returns.
Result? A lost decade for stocks would set the stage for higher expected returns in the decade that followed. In other words, returns over long time periods aren���t random, but rather negatively correlated. What I���m describing, of course, is reversion��to the mean. It���s the countervailing force that lowers the probability of long market streaks���both positive and negative. This doesn���t mean that a 30-year bear market could never happen. It���s just far less likely than standard statistical theory would predict.
The other major argument in favor of time diversification: Most people save and invest over many decades. Such dollar-cost averaging substantially lowers the risk of stock investing during our working years, because we���re buying over time, rather than at a single price that could prove to be a market peak.
The post Time Heals Wounds appeared first on HumbleDollar.
Worth the Cost
MY MOM JUST SOLD her house. A few months ago, she interviewed three real estate agents. Each offered her a different opinion of how much her home was worth. All three also charged different commissions.
In the end, she selected the agent with the highest fee. I was skeptical when she told me her 1,100-square-foot home would be listed for $500,000. My mom���s house and mine are nearly identical in size, age, location and condition. They would easily be classified as comparable for appraisal purposes. Given that I���d purchased my home three years ago for $375,000, I found it unimaginable that values could have increased so much in such a short period of time.
I was also leery when my mom agreed to have her home professionally cleaned and staged. She spent nearly $3,000 preparing her home for sale before it had even spent a single day on the market. In my mind, I wondered if my mom was being overcharged for services that weren���t necessary and if her home would linger���unsold���for several weeks.
Those doubts were dealt with quickly. Within three days of being listed, my mom had five offers to sort through. They ranged from $500,000 to $580,000. She ultimately settled on an offer of $563,000 that included a stipulation that the buyer would pay for any lender-required repairs. The inspection, appraisal and closing all took place quickly and efficiently. My mom raved about the service she received from her real estate agent.
I���d always assumed that, when it came time for me to sell my home, I���d opt for the agent with the lowest fees. I also planned on staging the house myself, using a few pieces of my own furniture. But I���ve changed my mind. It���s now clear to me that the right agent can easily be worth the cost.
In the end, she selected the agent with the highest fee. I was skeptical when she told me her 1,100-square-foot home would be listed for $500,000. My mom���s house and mine are nearly identical in size, age, location and condition. They would easily be classified as comparable for appraisal purposes. Given that I���d purchased my home three years ago for $375,000, I found it unimaginable that values could have increased so much in such a short period of time.
I was also leery when my mom agreed to have her home professionally cleaned and staged. She spent nearly $3,000 preparing her home for sale before it had even spent a single day on the market. In my mind, I wondered if my mom was being overcharged for services that weren���t necessary and if her home would linger���unsold���for several weeks.
Those doubts were dealt with quickly. Within three days of being listed, my mom had five offers to sort through. They ranged from $500,000 to $580,000. She ultimately settled on an offer of $563,000 that included a stipulation that the buyer would pay for any lender-required repairs. The inspection, appraisal and closing all took place quickly and efficiently. My mom raved about the service she received from her real estate agent.
I���d always assumed that, when it came time for me to sell my home, I���d opt for the agent with the lowest fees. I also planned on staging the house myself, using a few pieces of my own furniture. But I���ve changed my mind. It���s now clear to me that the right agent can easily be worth the cost.
The post Worth the Cost appeared first on HumbleDollar.
Fit to Be Bought
I ALMOST NEVER MAKE fast decisions. But I bought a used car in August immediately after seeing it. If I hadn���t, I might still be looking.
Inventories for new cars are at record lows. Prices for used vehicles are at record highs. This was not the year to buy another car, but I wanted to replace my 14-year-old Mazda sedan with a more reliable vehicle for long trips to see my children. I was tired of months isolated at home, missing my family. But I never anticipated the frustration ahead.
By now, most people have heard about the chip shortage that has hampered production of new vehicles. Fewer sales of new cars resulted in fewer trade-ins. That left me, an early retiree with a modest income, looking at used vehicles that cost 30% more than last year���assuming I could even find one I liked.
I���ve been buying used vehicles, instead of new, for decades. I let the original owners lose the value that comes with the initial quick depreciation. But today, people are selling their newer used cars at a profit or getting historically high trade-in prices.
I spent three months researching and looking. The offerings were paltry. I also don���t like buying from traditional dealers. I don���t want to deal with their hard-sell tactics and add-on extras. I tried to limit my shopping to Carmax, Carvana and two local dealers that offer no-haggle pricing and no dealer fees. Unfortunately, in this sellers��� market, I occasionally had to look at the usual used-car dealers, where I found even more arrogance than usual because they���re in the driver���s seat, so to speak.
I had thought about sinking the $1,500 in needed repairs into my old Mazda, but I���d already spent $850 on the car at the start of the year. I considered going without a car. I live in a walkable neighborhood and in a city with good mass transit. I thought I could use Uber and get groceries delivered. I could rent a car for trips to see my children in Atlanta and Orlando. I���ve had my own vehicle since I was 18, however. It was hard to imagine life without that sense of freedom, especially in retirement.
Each day, I scoured online lists with dwindling inventories. It didn���t help that I have a strong preference for Japanese cars, though I did consider other brands in desperation. The Hondas, Mazdas and Toyotas would often sell before I even had a chance to test drive them.
I also prefer to keep my financing separate from the purchase, so I obtained a draft check from my credit union. To get the credit union���s best interest rate, I needed to buy a fairly new model within mileage limits. I was boxed in further.
Finally, I have been a longtime believer in Consumer Reports. I always consider what other subscribers say about their vehicles.
One Friday morning, I checked the inventory of a local no-haggle dealer and saw a new listing for a 2020 Honda Fit LX with just 8,900 miles. A photo had yet to be posted, but the color was listed as ���orange fury.��� I decided to check it out.
It didn���t have the bells and whistles of higher trim levels. No Apple CarPlay. No lane-assist warnings or newer safety features. And, as someone who almost always has had gray, white or black vehicles, the orange would be a big departure from my normally staid tastes, plus the list price was more than the manufacturer���s original suggested retail price.
I knew, however, that as soon as more people saw the online ad, they���d be there on the weekend checking it out. I bought it that day in the fastest big-money decision of my life. I paid $19,985 and now have a car payment for the first time in eight years.
Two months later, I see the same model and year with similar mileage selling for $20,990, $21,990 and $22,000 at traditional dealers. That���s not including the add-on fees they���ll try to force on buyers.
Used cars appreciating in value right after you buy them? We���re truly living in an upside-down world.
Ron Wayne spent 26 years working for newspapers in Pennsylvania and Georgia before becoming the editor in the University of Florida���s main news office. During his 10 years working there, he earned his master���s degree in mass communication and taught as an adjunct in the College of Journalism and Communications. Since retiring last fall, he���s enjoyed a simple life, including reflecting on his experiences on
Medium.com
. His previous articles were Medicare and Me and��Losing at Cards.
Inventories for new cars are at record lows. Prices for used vehicles are at record highs. This was not the year to buy another car, but I wanted to replace my 14-year-old Mazda sedan with a more reliable vehicle for long trips to see my children. I was tired of months isolated at home, missing my family. But I never anticipated the frustration ahead.
By now, most people have heard about the chip shortage that has hampered production of new vehicles. Fewer sales of new cars resulted in fewer trade-ins. That left me, an early retiree with a modest income, looking at used vehicles that cost 30% more than last year���assuming I could even find one I liked.
I���ve been buying used vehicles, instead of new, for decades. I let the original owners lose the value that comes with the initial quick depreciation. But today, people are selling their newer used cars at a profit or getting historically high trade-in prices.
I spent three months researching and looking. The offerings were paltry. I also don���t like buying from traditional dealers. I don���t want to deal with their hard-sell tactics and add-on extras. I tried to limit my shopping to Carmax, Carvana and two local dealers that offer no-haggle pricing and no dealer fees. Unfortunately, in this sellers��� market, I occasionally had to look at the usual used-car dealers, where I found even more arrogance than usual because they���re in the driver���s seat, so to speak.
I had thought about sinking the $1,500 in needed repairs into my old Mazda, but I���d already spent $850 on the car at the start of the year. I considered going without a car. I live in a walkable neighborhood and in a city with good mass transit. I thought I could use Uber and get groceries delivered. I could rent a car for trips to see my children in Atlanta and Orlando. I���ve had my own vehicle since I was 18, however. It was hard to imagine life without that sense of freedom, especially in retirement.
Each day, I scoured online lists with dwindling inventories. It didn���t help that I have a strong preference for Japanese cars, though I did consider other brands in desperation. The Hondas, Mazdas and Toyotas would often sell before I even had a chance to test drive them.
I also prefer to keep my financing separate from the purchase, so I obtained a draft check from my credit union. To get the credit union���s best interest rate, I needed to buy a fairly new model within mileage limits. I was boxed in further.
Finally, I have been a longtime believer in Consumer Reports. I always consider what other subscribers say about their vehicles.
One Friday morning, I checked the inventory of a local no-haggle dealer and saw a new listing for a 2020 Honda Fit LX with just 8,900 miles. A photo had yet to be posted, but the color was listed as ���orange fury.��� I decided to check it out.It didn���t have the bells and whistles of higher trim levels. No Apple CarPlay. No lane-assist warnings or newer safety features. And, as someone who almost always has had gray, white or black vehicles, the orange would be a big departure from my normally staid tastes, plus the list price was more than the manufacturer���s original suggested retail price.
I knew, however, that as soon as more people saw the online ad, they���d be there on the weekend checking it out. I bought it that day in the fastest big-money decision of my life. I paid $19,985 and now have a car payment for the first time in eight years.
Two months later, I see the same model and year with similar mileage selling for $20,990, $21,990 and $22,000 at traditional dealers. That���s not including the add-on fees they���ll try to force on buyers.
Used cars appreciating in value right after you buy them? We���re truly living in an upside-down world.
Ron Wayne spent 26 years working for newspapers in Pennsylvania and Georgia before becoming the editor in the University of Florida���s main news office. During his 10 years working there, he earned his master���s degree in mass communication and taught as an adjunct in the College of Journalism and Communications. Since retiring last fall, he���s enjoyed a simple life, including reflecting on his experiences on
Medium.com
. His previous articles were Medicare and Me and��Losing at Cards.The post Fit to Be Bought appeared first on HumbleDollar.
October 20, 2021
Getting Heated
REMEMBER JULY 2008? The financial system was faltering following Bear Stearns���s March 2008 forced merger with J.P. Morgan Chase. That summer, Fannie Mae and Freddie Mac needed special assistance. The Global Financial Crisis was almost upon us.
But many folks forget that, at that time, another crisis was coming to a head���a global energy squeeze.
In 2008, I was a busy 20-year-old driving my 1998 Toyota Camry around Jacksonville, Florida, taking summer classes and working a part-time job. Filling up my 15-gallon tank every two weeks cost many hours of work at the local grocery store.
Back then, as the cost of oil soared to near $150 a barrel, retail pump prices averaged more than $4 a gallon. Those were truly tough times for countless families across the country. Today���s average gas price of $3.25 might feel pricey. But it pales in comparison to the $4.11 top in 2008. Adjusted for inflation, that���s equal to a whopping $5.24 today.
Gassing up your car isn���t the only energy-related issue right now. Heating your home could put a bigger dent in your budget this winter. U.S. natural gas, which powers roughly 40% of the country during the winter, has more than doubled in price over the past 12 months. Sure, utility companies hedge some of their costs. But residents and businesses will eat a substantial part of the increase.
The data suggest U.S. consumers are well-positioned to weather the coming energy storm. In aggregate, we have plenty of cash in our coffers, thanks to increased savings rates over the past year and a half. Still, we should be prudent and revert to those trusty old energy-saving strategies, such as combining multiple errands in each driving trip, turning down the heat and turning off lights when we leave a room.
We should also be grateful. Energy woes in Europe and Asia are far worse���and the situation overseas will almost certainly turn dire this winter. Rolling blackouts and sky-high electricity prices will be realities for millions of people around the world.
But many folks forget that, at that time, another crisis was coming to a head���a global energy squeeze.
In 2008, I was a busy 20-year-old driving my 1998 Toyota Camry around Jacksonville, Florida, taking summer classes and working a part-time job. Filling up my 15-gallon tank every two weeks cost many hours of work at the local grocery store.
Back then, as the cost of oil soared to near $150 a barrel, retail pump prices averaged more than $4 a gallon. Those were truly tough times for countless families across the country. Today���s average gas price of $3.25 might feel pricey. But it pales in comparison to the $4.11 top in 2008. Adjusted for inflation, that���s equal to a whopping $5.24 today.
Gassing up your car isn���t the only energy-related issue right now. Heating your home could put a bigger dent in your budget this winter. U.S. natural gas, which powers roughly 40% of the country during the winter, has more than doubled in price over the past 12 months. Sure, utility companies hedge some of their costs. But residents and businesses will eat a substantial part of the increase.
The data suggest U.S. consumers are well-positioned to weather the coming energy storm. In aggregate, we have plenty of cash in our coffers, thanks to increased savings rates over the past year and a half. Still, we should be prudent and revert to those trusty old energy-saving strategies, such as combining multiple errands in each driving trip, turning down the heat and turning off lights when we leave a room.
We should also be grateful. Energy woes in Europe and Asia are far worse���and the situation overseas will almost certainly turn dire this winter. Rolling blackouts and sky-high electricity prices will be realities for millions of people around the world.
The post Getting Heated appeared first on HumbleDollar.
