Jonathan Clements's Blog, page 265
September 14, 2021
Be Prepared
I���M WRITING THIS a few days after Hurricane Ida ravaged parts of our country. We were lucky. Our home here on the South Jersey coast was spared from all but minor rainfall. Much of Pennsylvania and North Jersey saw enormous amounts of rain, flooding and tornadoes. In my 64 years living in this region, I don���t recall there ever being this much severe weather, especially the number of tornadoes.
Prior to the hurricane landing in Louisiana, I read a Twitter thread by New Orleans resident and financial planner Jude Boudreaux. His Twitter thread talked about what it was like to live in a region about to be hit by a major hurricane, what to do and what goes through your mind. It���s a sobering read. He said that Hurricane Katrina changed many local people���s thinking about the seriousness of major storms and how best to prepare. Hurricane Sandy did that in my area of the country. Ida will reinforce this in both regions.
Now that I live at the beach, this event made me realize that we need a preparedness plan. One of the first things you want to do is assess the types of emergency you might experience. Do you live in an area prone to, say, hurricanes, tornadoes, wildfires or frequent power outages? Research what the experts recommend.
The federal government���s Ready.gov has good information to help you prepare for a wide variety of emergencies. The National Weather Service has advice on hurricane preparedness. At a minimum, here are some things you should be able to locate and pull together at short notice:
Important papers, including passports, birth certificates, wills, powers of attorney, financial account information and Social Security cards.
Personal IDs such as your driver���s license and health insurance cards.
Cash. With large scale power outages, ATMs may not function for many days.
Credit cards. You probably want at least two, just in case there���s an issue with one of them.
Medications. Try to have a few weeks��� worth on hand. Understand how to renew prescriptions if you can���t use your local pharmacy.
Irreplaceable items. Try to keep these to a minimum.
Electronics, including chargers and extra batteries. Also make sure your cell phone is fully charged.
In case you need to leave your home, give some thought to an evacuation plan. Do you have family or friends with whom you could stay for an extended period? When we owned a primary home and a beach house, this never concerned me. I was pretty sure one would always be available. Now that we have just one home, we need a plan.
Also take time to review your insurance policies. Do you have flood insurance on your home? If your car is damaged in a flood, are you covered? My town saw a lot of damage from Hurricane Sandy. We had friends who were faced with more than $100,000 in repair costs.
Prior to the hurricane landing in Louisiana, I read a Twitter thread by New Orleans resident and financial planner Jude Boudreaux. His Twitter thread talked about what it was like to live in a region about to be hit by a major hurricane, what to do and what goes through your mind. It���s a sobering read. He said that Hurricane Katrina changed many local people���s thinking about the seriousness of major storms and how best to prepare. Hurricane Sandy did that in my area of the country. Ida will reinforce this in both regions.
Now that I live at the beach, this event made me realize that we need a preparedness plan. One of the first things you want to do is assess the types of emergency you might experience. Do you live in an area prone to, say, hurricanes, tornadoes, wildfires or frequent power outages? Research what the experts recommend.
The federal government���s Ready.gov has good information to help you prepare for a wide variety of emergencies. The National Weather Service has advice on hurricane preparedness. At a minimum, here are some things you should be able to locate and pull together at short notice:
Important papers, including passports, birth certificates, wills, powers of attorney, financial account information and Social Security cards.
Personal IDs such as your driver���s license and health insurance cards.
Cash. With large scale power outages, ATMs may not function for many days.
Credit cards. You probably want at least two, just in case there���s an issue with one of them.
Medications. Try to have a few weeks��� worth on hand. Understand how to renew prescriptions if you can���t use your local pharmacy.
Irreplaceable items. Try to keep these to a minimum.
Electronics, including chargers and extra batteries. Also make sure your cell phone is fully charged.
In case you need to leave your home, give some thought to an evacuation plan. Do you have family or friends with whom you could stay for an extended period? When we owned a primary home and a beach house, this never concerned me. I was pretty sure one would always be available. Now that we have just one home, we need a plan.
Also take time to review your insurance policies. Do you have flood insurance on your home? If your car is damaged in a flood, are you covered? My town saw a lot of damage from Hurricane Sandy. We had friends who were faced with more than $100,000 in repair costs.
The post Be Prepared appeared first on HumbleDollar.
Be Prepared
I���M WRITING THIS a few days after Hurricane Ida ravaged parts of our country. We were lucky. Our home here on the South Jersey coast was spared from all but minor rainfall. Much of Pennsylvania and North Jersey saw enormous amounts of rain, flooding and tornadoes. In my 64 years living in this region, I don���t recall there ever being this much severe weather, especially the number of tornadoes.
Prior to the hurricane landing in Louisiana, I read a Twitter thread by New Orleans resident and financial planner Jude Boudreaux. His Twitter thread talked about what it was like to live in a region about to be hit by a major hurricane, what to do and what goes through your mind. It���s a sobering read. He said that Hurricane Katrina changed many local people���s thinking about the seriousness of major storms and how best to prepare. Hurricane Sandy did that in my area of the country. Ida will reinforce this in both regions.
Now that I live at the beach, this event made me realize that we need a preparedness plan. One of the first things you want to do is assess the types of emergency you might experience. Do you live in an area prone to, say, hurricanes, tornadoes, wildfires or frequent power outages? Research what the experts recommend.
The federal government���s Ready.gov has good information to help you prepare for a wide variety of emergencies. The National Weather Service has advice on hurricane preparedness. At a minimum, here are some things you should be able to locate and pull together at short notice:
Important papers, including passports, birth certificates, wills, powers of attorney, financial account information and Social Security cards.
Personal IDs such as your driver���s license and health insurance cards.
Cash. With large scale power outages, ATMs may not function for many days.
Credit cards. You probably want at least two, just in case there���s an issue with one of them.
Medications. Try to have a few weeks��� worth on hand. Understand how to renew prescriptions if you can���t use your local pharmacy.
Irreplaceable items. Try to keep these to a minimum.
Electronics, including chargers and extra batteries. Also make sure your cell phone is fully charged.
In case you need to leave your home, give some thought to an evacuation plan. Do you have family or friends with whom you could stay for an extended period? When we owned a primary home and a beach house, this never concerned me. I was pretty sure one would always be available. Now that we have just one home, we need a plan.
Also take time to review your insurance policies. Do you have flood insurance on your home? If your car is damaged in a flood, are you covered? My town saw a lot of damage from Hurricane Sandy. We had friends who were faced with more than $100,000 in repair costs.
Prior to the hurricane landing in Louisiana, I read a Twitter thread by New Orleans resident and financial planner Jude Boudreaux. His Twitter thread talked about what it was like to live in a region about to be hit by a major hurricane, what to do and what goes through your mind. It���s a sobering read. He said that Hurricane Katrina changed many local people���s thinking about the seriousness of major storms and how best to prepare. Hurricane Sandy did that in my area of the country. Ida will reinforce this in both regions.
Now that I live at the beach, this event made me realize that we need a preparedness plan. One of the first things you want to do is assess the types of emergency you might experience. Do you live in an area prone to, say, hurricanes, tornadoes, wildfires or frequent power outages? Research what the experts recommend.
The federal government���s Ready.gov has good information to help you prepare for a wide variety of emergencies. The National Weather Service has advice on hurricane preparedness. At a minimum, here are some things you should be able to locate and pull together at short notice:
Important papers, including passports, birth certificates, wills, powers of attorney, financial account information and Social Security cards.
Personal IDs such as your driver���s license and health insurance cards.
Cash. With large scale power outages, ATMs may not function for many days.
Credit cards. You probably want at least two, just in case there���s an issue with one of them.
Medications. Try to have a few weeks��� worth on hand. Understand how to renew prescriptions if you can���t use your local pharmacy.
Irreplaceable items. Try to keep these to a minimum.
Electronics, including chargers and extra batteries. Also make sure your cell phone is fully charged.
In case you need to leave your home, give some thought to an evacuation plan. Do you have family or friends with whom you could stay for an extended period? When we owned a primary home and a beach house, this never concerned me. I was pretty sure one would always be available. Now that we have just one home, we need a plan.
Also take time to review your insurance policies. Do you have flood insurance on your home? If your car is damaged in a flood, are you covered? My town saw a lot of damage from Hurricane Sandy. We had friends who were faced with more than $100,000 in repair costs.
The post Be Prepared appeared first on HumbleDollar.
The Snag
I PARTICIPATE IN Facebook groups for retirees from my old employer. Having worked in employee benefits for decades, I know or at least recognize the names of many of the people.
Frequently, someone posts an obituary. It used to be that they were much older than me. No longer. Now they���re near my age���or younger. It���s all a bit unsettling. Often, a picture is posted of the deceased. I think to myself, ���What happened to Joe?��� Then I avoid looking in a mirror for a few days.
I recall during my working days when a new widow would call me. She would ask about her survivor annuity, and there would be none. Or she would ask about life insurance, and she wasn���t named as beneficiary. People who don���t plan for their demise���and don���t consider their family���don���t realize the hardship they leave behind.
That got me thinking about my own estate plan. I want to leave a legacy to help my children with their retirement. There���s just one snag. My oldest son is age 51 and my youngest child is 46. To make my estate plan work, my wife and I can���t be here when they retire, which may be in just 10 years or so.
Here���s the thing: My personal target date is July 4, 2040. That would put me at 97, the age at which my great, great grandfather died. July 4th is also the anniversary of the death of two presidents, Thomas Jefferson and John Adams. Okay, a little weird, but I like having goals.
By at that point, my oldest would be 70 and probably retired several years. To make things more challenging, when he���s 60, his oldest child will be a sophomore in college. And his two younger children will be right behind, still in high school. Another of my children will likely face college bills later in life, too, which isn���t unusual these days.
There appear to be only two solutions to this problem. One, we can start gifting money to our children during our lifetimes. But that means I must violate my lifelong "what if" strategy. I want to be prepared for any event, particularly living a surprisingly long life and the possibility of requiring long-term care.
Meanwhile, I���ll pass on the second solution: a premature Facebook appearance.
The post The Snag appeared first on HumbleDollar.
What’s Your History?
WE ALL LIVE IN the same economy, but we experience it differently. How we react to today���s economic developments is heavily influenced by our upbringing and world events at that time. This is a key insight from the first chapter of Morgan Housel���s wonderful book The Psychology of Money.
I can think of three things that have shaped my outlook���and lead me to a very different outlook from my children. First, my father grew up on a farm during the Great Depression. He never spoke about how hard it was. But one of my father's favorite evening snacks was a bowl of popcorn with milk on it. While I thought that was peculiar���nobody else I knew had that for a snack���I learned from my mother that one winter that was all my father���s family had for supper every evening. They had a cow for milk and excess popcorn they hadn���t sold.
One result of this story: During my working years, I saved a healthy portion of my income to make sure that my children always had enough food, and we would never have to eat popcorn with milk for dinner.
Second, I went to high school in the 1970s. That had a dual impact. Although my father kept his job, the news was filled with accounts of 50-year-old men getting laid off because, during that time, it seemed all the jobs were moving to Japan. I grew up knowing that no job is forever, and you may not have a chance to decide when you retire. This further reinforced my tendency toward thrift.
The other big economic development in the 1970s was inflation. I���ve written about how I invest in Series I savings bonds, and it���s because I remember what double-digit inflation can do to the cost of living.
The third big influence on my thinking: I had a good friend in high school whose parents had been held at Auschwitz. Every time I would shake her father���s hand, I would see the serial number tattooed on his forearm.
I���m extremely fortunate to live in America and have no plans to leave. But I do have a few gold coins in our safe-deposit box. If I had to flee, gold is likely to be a better bribe to border guards than greenbacks or bitcoins.
My sons, on the other hand, know their parents grew up with no lack of food or shelter, have never experienced double-digit inflation and have seen people make multiple career changes in their 50s. Why would they view financial matters the same way I do? We see it differently because we���ve had different experiences. The tragic consequence we need to avoid: letting our experiences completely dictate our view of the economy.
While I lived through the highest inflationary period the U.S. has ever suffered, it was really only about 15 years out of our two-century history. Many people faced profound poverty during the Great Depression���but it was called "great" because it was far worse than any other depression we���ve faced and is in no way the norm. While immigrants still come to America because of oppressive governments, not all countries are oppressive.
My portfolio will not be identical to those who didn���t live through high inflation, didn���t have parents who lost everything during the Depression and didn���t personally know a survivor of an oppressive government. By studying history���and realizing that my life experiences are unique to a time and place���I can avoid putting all my money in gold or Series I bonds. For those who study history, perhaps 85% or 90% of their investment portfolios will reflect the same core holdings. What about the other 10% or 15%? That���s driven by our own personal history.
Kenyon Sayler is a mechanical engineer at an international industrial firm. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. His previous articles were Any Interest and��Home Free.
I can think of three things that have shaped my outlook���and lead me to a very different outlook from my children. First, my father grew up on a farm during the Great Depression. He never spoke about how hard it was. But one of my father's favorite evening snacks was a bowl of popcorn with milk on it. While I thought that was peculiar���nobody else I knew had that for a snack���I learned from my mother that one winter that was all my father���s family had for supper every evening. They had a cow for milk and excess popcorn they hadn���t sold.
One result of this story: During my working years, I saved a healthy portion of my income to make sure that my children always had enough food, and we would never have to eat popcorn with milk for dinner.
Second, I went to high school in the 1970s. That had a dual impact. Although my father kept his job, the news was filled with accounts of 50-year-old men getting laid off because, during that time, it seemed all the jobs were moving to Japan. I grew up knowing that no job is forever, and you may not have a chance to decide when you retire. This further reinforced my tendency toward thrift.
The other big economic development in the 1970s was inflation. I���ve written about how I invest in Series I savings bonds, and it���s because I remember what double-digit inflation can do to the cost of living.
The third big influence on my thinking: I had a good friend in high school whose parents had been held at Auschwitz. Every time I would shake her father���s hand, I would see the serial number tattooed on his forearm.
I���m extremely fortunate to live in America and have no plans to leave. But I do have a few gold coins in our safe-deposit box. If I had to flee, gold is likely to be a better bribe to border guards than greenbacks or bitcoins.
My sons, on the other hand, know their parents grew up with no lack of food or shelter, have never experienced double-digit inflation and have seen people make multiple career changes in their 50s. Why would they view financial matters the same way I do? We see it differently because we���ve had different experiences. The tragic consequence we need to avoid: letting our experiences completely dictate our view of the economy.
While I lived through the highest inflationary period the U.S. has ever suffered, it was really only about 15 years out of our two-century history. Many people faced profound poverty during the Great Depression���but it was called "great" because it was far worse than any other depression we���ve faced and is in no way the norm. While immigrants still come to America because of oppressive governments, not all countries are oppressive.
My portfolio will not be identical to those who didn���t live through high inflation, didn���t have parents who lost everything during the Depression and didn���t personally know a survivor of an oppressive government. By studying history���and realizing that my life experiences are unique to a time and place���I can avoid putting all my money in gold or Series I bonds. For those who study history, perhaps 85% or 90% of their investment portfolios will reflect the same core holdings. What about the other 10% or 15%? That���s driven by our own personal history.
Kenyon Sayler is a mechanical engineer at an international industrial firm. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. His previous articles were Any Interest and��Home Free.The post What’s Your History? appeared first on HumbleDollar.
September 13, 2021
Dollars and Sense
OUR MONEY DECISIONS usually aren���t driven by rational thinking and financial math. That���s one of Morgan Housel���s key messages in his recent book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. He uses history and personal tales to highlight a crucial insight into our relationship with money���that we often feel as though we���ll never have enough.
The book contains no formulas for success, no get-rich-quick stock tips. Housel states the premise this way: ���Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.���
It didn���t take long for me to become engrossed in his theories about investment behavior. I guess we all like to read about what makes us tick. There���s plenty of that in this book. But there���s also a lot about why we make bad money decisions���even when we ought to know better.
What makes this book readable are the stories and interesting tidbits that Housel uses to support his observations. For example, there���s a comparison between Bill Gates and his close friend, someone we haven���t heard of before. Why did Gates become incredibly successful and his close friend didn���t? It isn���t for reasons that might jump to mind: genius, ambition, confidence, hard work. No, Housel attributes the difference to luck or, in this case, bad luck. And not on Gates���s part.
Ultimately, the author feels the reward for financial success is freedom. ���The highest form of wealth is the ability to wake up every morning and say, ���I can do whatever I want today���,��� writes Housel. ���The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.���
The book contains no formulas for success, no get-rich-quick stock tips. Housel states the premise this way: ���Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.���
It didn���t take long for me to become engrossed in his theories about investment behavior. I guess we all like to read about what makes us tick. There���s plenty of that in this book. But there���s also a lot about why we make bad money decisions���even when we ought to know better.
What makes this book readable are the stories and interesting tidbits that Housel uses to support his observations. For example, there���s a comparison between Bill Gates and his close friend, someone we haven���t heard of before. Why did Gates become incredibly successful and his close friend didn���t? It isn���t for reasons that might jump to mind: genius, ambition, confidence, hard work. No, Housel attributes the difference to luck or, in this case, bad luck. And not on Gates���s part.
Ultimately, the author feels the reward for financial success is freedom. ���The highest form of wealth is the ability to wake up every morning and say, ���I can do whatever I want today���,��� writes Housel. ���The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.���
The post Dollars and Sense appeared first on HumbleDollar.
Promising Places?
MY WIFE RAN INTO an old acquaintance at our local grocery store. I asked my wife if she was surprised to see her. ���No, but she said she was surprised to see me. I asked why. She said she didn���t think I could afford to live here.���
Maybe that���s what most people would have thought, especially if they saw my wife in the neighborhood parking lot getting out of our 2007 Honda Fit.
It���s become extremely difficult for a middle-class family to own a house in California. The median price for a home in Los Angeles was $898,692 as of July 31. Where we live, it���s even higher. In addition, we have the nation's highest state��sales tax and gasoline tax, which makes life even more expensive.
We have no plans to move. But if I were 50 years younger and starting a new life, I���d move to another part of the country, where things were more affordable. Where to? A place that has many of the attributes that my younger self would have looked for:
Plenty of jobs for people from all walks of life.
Affordable housing���meaning a place where a machinist and manufacturing supervisor could own a home without having to commute two hours to work.
Affordable colleges. In 1978, you could work a minimum wage job and afford full-year tuition at a state university.
Maybe there���s no such place today. But it sure reminds me of the California I knew when I graduated college in the 1970s.
Maybe that���s what most people would have thought, especially if they saw my wife in the neighborhood parking lot getting out of our 2007 Honda Fit.
It���s become extremely difficult for a middle-class family to own a house in California. The median price for a home in Los Angeles was $898,692 as of July 31. Where we live, it���s even higher. In addition, we have the nation's highest state��sales tax and gasoline tax, which makes life even more expensive.
We have no plans to move. But if I were 50 years younger and starting a new life, I���d move to another part of the country, where things were more affordable. Where to? A place that has many of the attributes that my younger self would have looked for:
Plenty of jobs for people from all walks of life.
Affordable housing���meaning a place where a machinist and manufacturing supervisor could own a home without having to commute two hours to work.
Affordable colleges. In 1978, you could work a minimum wage job and afford full-year tuition at a state university.
Maybe there���s no such place today. But it sure reminds me of the California I knew when I graduated college in the 1970s.
The post Promising Places? appeared first on HumbleDollar.
On the Fringe
STEPPING INTO the HumbleDollar confessional, I admit to dabbling in a few high-fee, low-liquidity investments. It goes against much of what I stand for. But on occasion, I, too, reach for yield and the promise of returns uncorrelated with stocks. Before the chastising begins, please know that these speculative stakes total less than 3% of my portfolio. The rest is invested mainly in funds with expense ratios under 0.15%���and some have zero costs. I also have ample emergency��money.
Still, I���m intrigued by the new investment products made possible by advances in financial technology. In fact, my first foray into this space was about a decade ago, when I invested in peer-to-peer lending notes. How has that turned out? Not bad. I���ve averaged a 7% annual return after fees through a Roth IRA at LendingClub. Yes, I recognize I���d have done better with an inexpensive global stock fund. But my 7% compound annual growth rate beat U.S. high-yield bonds over the past 10 years, which is arguably a fairer comparison.
Maybe you���ve heard about the latest alternative investments that are just a few computer clicks away. They promise high returns in an investing world of rich stock market valuations and minuscule bond yields. Here are four I���ve researched���three of which I���ve invested in:
Masterworks. This site allows retail investors to purchase fractional ownership of individual paintings by renowned artists. Art is a $1.7 trillion market that has outperformed the S&P 500 since 1995, or so says the��Masterworks��website. (For context, the global stock market is about $106 trillion, while the bond market is $124 trillion.) Masterworks���s fees are comparable to a hedge fund, with a 1.5% annual management charge, plus 20% of future profits. There���s a soft $10,000 minimum price per piece of art, but I was able to invest less than that after speaking with a rep.
Vinovest. It���s estimated that the global wine market is worth roughly $450 billion. Vinovest's site allows everyday investors to link their bank account and then put cash to work in bottles of fine wine. I let the professionals at the site pick my bottles. Like Masterworks, the site shows wine prices beating U.S. stocks over the past 20 years, with performance uncorrelated with stock returns. The annual management fee of 2.25% to 2.85% covers storage and insurance costs for the physical bottles of wine. There���s a $1,000 investment minimum and only a taxable (non-IRA) account type is offered. Keep in mind that the tax rules that apply to collectibles are different from those for stocks.
Fundrise. This is my third off-the-wall investment. It���s a crowdfunding platform that lets everyday investors tap into real estate deals. You might scoff at this one and suggest I simply put my money in an inexpensive real estate investment trust (REIT) fund. But Fundrise gives me access to private real estate deals that are typically only available to wealthier individuals. Fees total 1% per year and an IRA option is available. There are three types of managed accounts you can choose from, all with modest minimums. I went big and chose the high-growth option. For context, I���m a renter, so I arguably need real estate exposure. I���m also exposed to real estate through��Vanguard REIT ETF and various stock mutual funds.
Edly. Heard of income share agreements (ISAs)? That���s what Edly offers. You can invest in students and earn a share of their future income. I tried to open and fund an account, but never heard back from the company on some due diligence questions I had, which is either a red flag or a sign of bad customer service. Edly has a $10,000 minimum and, to me, fees that are more complex than necessary. There���s a 1% annual charge for the first two years, plus a 4% fee on ISA cash flows. In addition, there���s a squishy catch-all fee of up to 1% on cash returned to investors. Still, I���m intrigued by ISAs and plan to investigate them further.
The above four investment platforms are among dozens of similar alternative investment websites. Touted potential returns are generally in the 8% to 12% range, after fees. Of course, taxes will take a bite out of that, plus self-directed IRA fees will reduce a retirement account���s net return. My expectations are lower���similar to the 7% I earned at LendingClub. At a minimum, with my three stakes, I���m fairly confident I���ll beat the 0.5% on my high-yield savings account.
That said, these speculative investments aren���t for the faint of heart or those looking for a quick buck. Patience is needed. I have enough cash on hand and income coming in, so tying up a small piece of my portfolio for five to 10 years with the goal of capturing an illiquidity premium is okay by me. On my personal balance sheet, I carry these positions at cost and update their value just once a year.
My suggestion: Only consider these sorts of illiquid, high-fee alternative investments if you���ve already built a low-cost portfolio of stock and bond funds. Don���t lock up cash you may need in the near future. Check all those boxes? Consider these investments part of your play money���and have some fun.
Mike Zaccardi is a freelance writer for financial advisors and investment firms. He's a CFA�� charterholder and Chartered Market Technician��, and has passed the coursework for the Certified Financial Planner program. Mike is also a finance instructor at the University of North Florida. Follow him on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com��and check out his earlier articles.
Still, I���m intrigued by the new investment products made possible by advances in financial technology. In fact, my first foray into this space was about a decade ago, when I invested in peer-to-peer lending notes. How has that turned out? Not bad. I���ve averaged a 7% annual return after fees through a Roth IRA at LendingClub. Yes, I recognize I���d have done better with an inexpensive global stock fund. But my 7% compound annual growth rate beat U.S. high-yield bonds over the past 10 years, which is arguably a fairer comparison.
Maybe you���ve heard about the latest alternative investments that are just a few computer clicks away. They promise high returns in an investing world of rich stock market valuations and minuscule bond yields. Here are four I���ve researched���three of which I���ve invested in:
Masterworks. This site allows retail investors to purchase fractional ownership of individual paintings by renowned artists. Art is a $1.7 trillion market that has outperformed the S&P 500 since 1995, or so says the��Masterworks��website. (For context, the global stock market is about $106 trillion, while the bond market is $124 trillion.) Masterworks���s fees are comparable to a hedge fund, with a 1.5% annual management charge, plus 20% of future profits. There���s a soft $10,000 minimum price per piece of art, but I was able to invest less than that after speaking with a rep.
Vinovest. It���s estimated that the global wine market is worth roughly $450 billion. Vinovest's site allows everyday investors to link their bank account and then put cash to work in bottles of fine wine. I let the professionals at the site pick my bottles. Like Masterworks, the site shows wine prices beating U.S. stocks over the past 20 years, with performance uncorrelated with stock returns. The annual management fee of 2.25% to 2.85% covers storage and insurance costs for the physical bottles of wine. There���s a $1,000 investment minimum and only a taxable (non-IRA) account type is offered. Keep in mind that the tax rules that apply to collectibles are different from those for stocks.
Fundrise. This is my third off-the-wall investment. It���s a crowdfunding platform that lets everyday investors tap into real estate deals. You might scoff at this one and suggest I simply put my money in an inexpensive real estate investment trust (REIT) fund. But Fundrise gives me access to private real estate deals that are typically only available to wealthier individuals. Fees total 1% per year and an IRA option is available. There are three types of managed accounts you can choose from, all with modest minimums. I went big and chose the high-growth option. For context, I���m a renter, so I arguably need real estate exposure. I���m also exposed to real estate through��Vanguard REIT ETF and various stock mutual funds.
Edly. Heard of income share agreements (ISAs)? That���s what Edly offers. You can invest in students and earn a share of their future income. I tried to open and fund an account, but never heard back from the company on some due diligence questions I had, which is either a red flag or a sign of bad customer service. Edly has a $10,000 minimum and, to me, fees that are more complex than necessary. There���s a 1% annual charge for the first two years, plus a 4% fee on ISA cash flows. In addition, there���s a squishy catch-all fee of up to 1% on cash returned to investors. Still, I���m intrigued by ISAs and plan to investigate them further.
The above four investment platforms are among dozens of similar alternative investment websites. Touted potential returns are generally in the 8% to 12% range, after fees. Of course, taxes will take a bite out of that, plus self-directed IRA fees will reduce a retirement account���s net return. My expectations are lower���similar to the 7% I earned at LendingClub. At a minimum, with my three stakes, I���m fairly confident I���ll beat the 0.5% on my high-yield savings account.
That said, these speculative investments aren���t for the faint of heart or those looking for a quick buck. Patience is needed. I have enough cash on hand and income coming in, so tying up a small piece of my portfolio for five to 10 years with the goal of capturing an illiquidity premium is okay by me. On my personal balance sheet, I carry these positions at cost and update their value just once a year.
My suggestion: Only consider these sorts of illiquid, high-fee alternative investments if you���ve already built a low-cost portfolio of stock and bond funds. Don���t lock up cash you may need in the near future. Check all those boxes? Consider these investments part of your play money���and have some fun.
Mike Zaccardi is a freelance writer for financial advisors and investment firms. He's a CFA�� charterholder and Chartered Market Technician��, and has passed the coursework for the Certified Financial Planner program. Mike is also a finance instructor at the University of North Florida. Follow him on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com��and check out his earlier articles.
The post On the Fringe appeared first on HumbleDollar.
September 12, 2021
All Aboard
AT THE CRACK OF DAWN each day, I grab a cup of coffee, and then dig into the latest investment articles and research reports. Last week���s most intriguing insight: According to data from Emerging Portfolio Fund Research, investment flows into global stocks are on pace to hit $1.048 trillion this year.
To appreciate the magnitude of this year���s inflows, consider that 2017 ranks as the next strongest year���at a relatively paltry $300 billion. Other years, such as 2008, 2016 and 2019, featured significant outflows. But in 2021, it���s all aboard the stock market train.
In fact, investors have been pouring so much cash into the stock market that this year���s total could eclipse cumulative flows for the prior 20 years. Given this buying frenzy, it���s not surprising that stocks are up strongly in 2021, with Vanguard Total World Stock ETF (symbol: VT) gaining more than 15% through last Friday.
What���s driving the massive flood of money into stocks? The extra liquidity supplied by the Federal Reserve and other central banks has obviously helped, as has the bevy of government stimulus and recovery packages. These aggressive monetary and fiscal policies have no doubt also fueled run-ups in things like cryptocurrencies, nonfungible tokens and collectibles.
To be sure, corporate profits have rebounded impressively from last year���s depressed levels, helping to justify the stock market run-up. Moreover, not all sectors have benefited, which suggests the buying hasn���t been indiscriminate. Niches like gold and emerging market stocks haven���t gotten much love this year. Long-term Treasurys and global corporate bonds are also laggards. Despite investors��� huge 2021 appetite, it seems diversification is still a worthwhile strategy.
To appreciate the magnitude of this year���s inflows, consider that 2017 ranks as the next strongest year���at a relatively paltry $300 billion. Other years, such as 2008, 2016 and 2019, featured significant outflows. But in 2021, it���s all aboard the stock market train.
In fact, investors have been pouring so much cash into the stock market that this year���s total could eclipse cumulative flows for the prior 20 years. Given this buying frenzy, it���s not surprising that stocks are up strongly in 2021, with Vanguard Total World Stock ETF (symbol: VT) gaining more than 15% through last Friday.
What���s driving the massive flood of money into stocks? The extra liquidity supplied by the Federal Reserve and other central banks has obviously helped, as has the bevy of government stimulus and recovery packages. These aggressive monetary and fiscal policies have no doubt also fueled run-ups in things like cryptocurrencies, nonfungible tokens and collectibles.
To be sure, corporate profits have rebounded impressively from last year���s depressed levels, helping to justify the stock market run-up. Moreover, not all sectors have benefited, which suggests the buying hasn���t been indiscriminate. Niches like gold and emerging market stocks haven���t gotten much love this year. Long-term Treasurys and global corporate bonds are also laggards. Despite investors��� huge 2021 appetite, it seems diversification is still a worthwhile strategy.
The post All Aboard appeared first on HumbleDollar.
Leaving on Bad Terms
I HAVE A RELATIVE���let���s call her Jane. Last year, in the early days of the pandemic, Jane had the foresight to buy shares in vaccine maker Moderna. With the benefit of hindsight, it was a smart decision.
But it wasn���t a difficult one, in Jane's view. It was��no secret��that the company was working on a COVID-19 vaccine. It was also clear that vaccines would be in high demand. That made the investment case clear. Jane was right. Since then, Moderna���s shares have risen tenfold. This year, it���s been the single best-performing stock in the S&P 500.
Jane is a happy investor���but she also has a problem: Deciding when to sell has turned out to be much tougher than deciding to buy. She could, of course, sell now and declare victory. Who wouldn���t be happy with a tenfold gain? But then again, that might be premature. Moderna has lots of other drugs in its pipeline and might be just getting started.
To be sure, this is a good problem to have. Still, it isn���t an easy decision���and it turns out that Jane isn���t alone. According to a��recent paper��titled ���Selling Fast and Buying Slow,��� professional investors struggle with the same issue. That is, they struggle more with selling than buying.
The paper���s researchers selected a group of more than 700 large, professionally managed portfolios, each averaging nearly $600 million. These included pensions, university endowments and the like. Then they examined the trades in these portfolios over a 16-year period. What they found was surprising.
First, despite the mantra���and��the data���that ���active management underperforms,��� the data revealed that active managers actually display significant skill when buying. The average stock they purchased went on to outperform by more than one percentage point over the next year. While that might not sound like a lot, consistent outperformance by a margin like that would be notable. That was the first surprising finding.
The second finding was that these same investors���who were so skilled at buying���completely fell apart when it came to selling. While their purchases outperformed, their sales��underperformed by almost a percentage point over the next year, meaning the managers would have been better off selling a random selection of other stocks that they held.
The researchers wondered how this could be the case���that the same investors who were so good at buying had such a hard time with selling. They were seemingly two sides of the same coin. The authors��� conclusion: ���an asymmetric allocation of limited cognitive resources towards buying and away from selling.���
In other words, selling isn���t fundamentally harder than buying. Instead, investors simply think harder and put more effort into buying decisions, and that���s why those results are better. How were the researchers able to prove this? In studying millions of trades, they were able to identify four key patterns, each of which supports their conclusion:
1. When portfolio managers used more up-to-date information, they made better decisions.��The study found that investors weren���t uniformly bad at selling decisions. One situation in which they did measurably better was when companies issued quarterly earnings reports. On those specific days���when there was more current data available���portfolio managers made much better decisions. Selling decisions on earnings release dates actually��outperformed���proof that good selling decisions can be made, but they need to be made using more current data.
2. When portfolio managers saw a stock as being important, they made better decisions.��How did the researchers know if a stock was important to a manager? The proxy they used was the stock's percentage weight in the portfolio, the logic being that stocks with bigger weightings have more impact on a portfolio's overall results and thus were more important. Sure enough, managers made better decisions with these more heavily weighted stocks. In other words, when they felt it was important enough, portfolio managers put in the time to make a better decision, and those efforts paid off.
3. When portfolio managers took their eye off the fundamentals, they made worse decisions.��The data revealed that portfolio managers were much more apt to sell a stock that, in the recent past, had either outperformed or underperformed by a wide margin. In other words, instead of logically evaluating a stock���s prospects���as investors are taught to do���portfolio managers spent time looking in the rearview mirror. While it might seem like a good idea to sell a stock that's recently outperformed (because it might now be overpriced) or that's recently underperformed (because it might indicate a problem at the company), it turns out that, on average, these judgments end up hurting rather than helping.
4. When portfolio managers were feeling stressed, they made worse decisions.��How could the researchers have known when managers were under stress? The proxy they used was recent performance. If a fund had been doing poorly, they presumed that the portfolio manager would be feeling stress. During those periods, selling decisions measurably underperformed.
What does all this mean for individual investors? I draw a few conclusions. First, I see this as another reason to steer clear of trading individual stocks and to instead choose index funds. That can insulate you from agonizing decisions, like Jane���s challenge with her Moderna shares.
For better or worse, index funds that own Moderna stock right now aren���t giving it any thought; they're simply holding it. Over the long term, that might help or it might hurt. But according to multiple studies, on average it seems to help. That is, it helps to remove the human element.
This research helps illustrate why. Investing is a psychological minefield. If even the most sophisticated fund managers���those running half-billion-dollar accounts for pensions and endowments���are susceptible to the challenges outlined above, then no one is immune. When you own an index fund, on the other hand, you can sidestep a large part of that minefield. But what if you already own some individual stocks? Then what? I see a number of useful lessons.
First, treat selling with as much deliberation as buying. This seems like it ought to be obvious. But as the authors point out, investors put more effort into buying than selling because buying is inherently more enjoyable. The hunt for new ideas is a discovery process, and it's interesting. Selling, on the other hand, tends to be viewed as more of a housekeeping chore���to raise cash for a withdrawal, to reallocate to a new idea, or to rebalance a portfolio.
Second, map out a plan with decision rules for selling shares. That can help you avoid reacting to anecdotes, snippets of news or recent performance. You could, for example, employ a dollar-cost averaging approach to sales. Instead of trying to make judgments about where a stock is going, simply make a schedule to sell incrementally and mechanistically.
Third, consider how each stock fits into your overall portfolio. If it���s a large position that ends up distorting your portfolio���s overall balance and that you���re thinking of selling, that's worth more of your attention than a small holding. A small holding won't hurt much if it underperforms���but it might help a lot if it outperforms, as explained below.
Finally, and maybe most counterintuitively, don���t cavalierly sell small positions just because of their modest size. One of the key ways you can go wrong when you sell a stock is to sell a winner prematurely. Imagine, for example, if you'd sold a small position in Apple or Amazon five years ago. In both cases, recent performance had been strong, and they might have looked overpriced. And yet they went on to deliver such strong results that even a small holding could have made a big difference to your results.
If all of this sounds like a lot of work, I agree. I think that helps explain the study's core finding, that investors tend to give short shrift to selling decisions. It isn���t that people can't sell well. It's just exhausting. But if you venture down that road, I hope the above guidelines are of some help.
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.
But it wasn���t a difficult one, in Jane's view. It was��no secret��that the company was working on a COVID-19 vaccine. It was also clear that vaccines would be in high demand. That made the investment case clear. Jane was right. Since then, Moderna���s shares have risen tenfold. This year, it���s been the single best-performing stock in the S&P 500.
Jane is a happy investor���but she also has a problem: Deciding when to sell has turned out to be much tougher than deciding to buy. She could, of course, sell now and declare victory. Who wouldn���t be happy with a tenfold gain? But then again, that might be premature. Moderna has lots of other drugs in its pipeline and might be just getting started.
To be sure, this is a good problem to have. Still, it isn���t an easy decision���and it turns out that Jane isn���t alone. According to a��recent paper��titled ���Selling Fast and Buying Slow,��� professional investors struggle with the same issue. That is, they struggle more with selling than buying.
The paper���s researchers selected a group of more than 700 large, professionally managed portfolios, each averaging nearly $600 million. These included pensions, university endowments and the like. Then they examined the trades in these portfolios over a 16-year period. What they found was surprising.
First, despite the mantra���and��the data���that ���active management underperforms,��� the data revealed that active managers actually display significant skill when buying. The average stock they purchased went on to outperform by more than one percentage point over the next year. While that might not sound like a lot, consistent outperformance by a margin like that would be notable. That was the first surprising finding.
The second finding was that these same investors���who were so skilled at buying���completely fell apart when it came to selling. While their purchases outperformed, their sales��underperformed by almost a percentage point over the next year, meaning the managers would have been better off selling a random selection of other stocks that they held.
The researchers wondered how this could be the case���that the same investors who were so good at buying had such a hard time with selling. They were seemingly two sides of the same coin. The authors��� conclusion: ���an asymmetric allocation of limited cognitive resources towards buying and away from selling.���
In other words, selling isn���t fundamentally harder than buying. Instead, investors simply think harder and put more effort into buying decisions, and that���s why those results are better. How were the researchers able to prove this? In studying millions of trades, they were able to identify four key patterns, each of which supports their conclusion:
1. When portfolio managers used more up-to-date information, they made better decisions.��The study found that investors weren���t uniformly bad at selling decisions. One situation in which they did measurably better was when companies issued quarterly earnings reports. On those specific days���when there was more current data available���portfolio managers made much better decisions. Selling decisions on earnings release dates actually��outperformed���proof that good selling decisions can be made, but they need to be made using more current data.
2. When portfolio managers saw a stock as being important, they made better decisions.��How did the researchers know if a stock was important to a manager? The proxy they used was the stock's percentage weight in the portfolio, the logic being that stocks with bigger weightings have more impact on a portfolio's overall results and thus were more important. Sure enough, managers made better decisions with these more heavily weighted stocks. In other words, when they felt it was important enough, portfolio managers put in the time to make a better decision, and those efforts paid off.
3. When portfolio managers took their eye off the fundamentals, they made worse decisions.��The data revealed that portfolio managers were much more apt to sell a stock that, in the recent past, had either outperformed or underperformed by a wide margin. In other words, instead of logically evaluating a stock���s prospects���as investors are taught to do���portfolio managers spent time looking in the rearview mirror. While it might seem like a good idea to sell a stock that's recently outperformed (because it might now be overpriced) or that's recently underperformed (because it might indicate a problem at the company), it turns out that, on average, these judgments end up hurting rather than helping.
4. When portfolio managers were feeling stressed, they made worse decisions.��How could the researchers have known when managers were under stress? The proxy they used was recent performance. If a fund had been doing poorly, they presumed that the portfolio manager would be feeling stress. During those periods, selling decisions measurably underperformed.
What does all this mean for individual investors? I draw a few conclusions. First, I see this as another reason to steer clear of trading individual stocks and to instead choose index funds. That can insulate you from agonizing decisions, like Jane���s challenge with her Moderna shares.
For better or worse, index funds that own Moderna stock right now aren���t giving it any thought; they're simply holding it. Over the long term, that might help or it might hurt. But according to multiple studies, on average it seems to help. That is, it helps to remove the human element.
This research helps illustrate why. Investing is a psychological minefield. If even the most sophisticated fund managers���those running half-billion-dollar accounts for pensions and endowments���are susceptible to the challenges outlined above, then no one is immune. When you own an index fund, on the other hand, you can sidestep a large part of that minefield. But what if you already own some individual stocks? Then what? I see a number of useful lessons.
First, treat selling with as much deliberation as buying. This seems like it ought to be obvious. But as the authors point out, investors put more effort into buying than selling because buying is inherently more enjoyable. The hunt for new ideas is a discovery process, and it's interesting. Selling, on the other hand, tends to be viewed as more of a housekeeping chore���to raise cash for a withdrawal, to reallocate to a new idea, or to rebalance a portfolio.
Second, map out a plan with decision rules for selling shares. That can help you avoid reacting to anecdotes, snippets of news or recent performance. You could, for example, employ a dollar-cost averaging approach to sales. Instead of trying to make judgments about where a stock is going, simply make a schedule to sell incrementally and mechanistically.
Third, consider how each stock fits into your overall portfolio. If it���s a large position that ends up distorting your portfolio���s overall balance and that you���re thinking of selling, that's worth more of your attention than a small holding. A small holding won't hurt much if it underperforms���but it might help a lot if it outperforms, as explained below.
Finally, and maybe most counterintuitively, don���t cavalierly sell small positions just because of their modest size. One of the key ways you can go wrong when you sell a stock is to sell a winner prematurely. Imagine, for example, if you'd sold a small position in Apple or Amazon five years ago. In both cases, recent performance had been strong, and they might have looked overpriced. And yet they went on to deliver such strong results that even a small holding could have made a big difference to your results.
If all of this sounds like a lot of work, I agree. I think that helps explain the study's core finding, that investors tend to give short shrift to selling decisions. It isn���t that people can't sell well. It's just exhausting. But if you venture down that road, I hope the above guidelines are of some help.
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 Leaving on Bad Terms appeared first on HumbleDollar.
September 11, 2021
A Nice Complement
THE RIGHT PARTNER is not one whose outlook is the same as yours, but rather one whose outlook complements you. For me and my wife Jiab, we agree on shopping decisions most of the time. When we disagree, however, it���s due to each of our ���leans.��� I lean toward spending a bit more money to save time. To be finished with shopping, I'll say at some point that what we've found is good enough. Jiab, on the other hand, leans toward spending more time shopping. She wants to make sure we get the ultimate value in our purchase.
It depends on what we���re shopping for, but there are times and products when our differences emerge. Sometimes, she adopts my lean and stops shopping���while secretly looking over her shoulder, still hunting for the best deal. At other times, we keep going���and I drag myself along like an obstinate toddler who just wants to go home.
Perhaps it���s a difference in dopamine release. I love the idea of being done with a task, crossing it off and having the freedom to choose what to do next. Jiab���s pleasure center fires when she knows there���s no better deal to be had out there���anywhere���and so she has ���won��� at shopping.
In cavepeople terms, Jiab wants to ensure that her hunting expedition brought down the best mammoth with the fewest arrows, even if it delayed the tribe���s feast a bit. By contrast, I want to be back at the cave early, lounging by the fire, even if I have to make new arrows for tomorrow because I shot all mine today.
Jiab wants best. I���m happy with good enough. It���s a balance of views that keeps us centered. And sometimes we even learn from one another. Just yesterday, I compared prices on the internet for an hour. Jiab avoided standing in a long line to save $1.50. As the Spanish say, poco a poco, little by little.
I���d say more, but I know Jiab will be reading this. I���ve said enough.
It depends on what we���re shopping for, but there are times and products when our differences emerge. Sometimes, she adopts my lean and stops shopping���while secretly looking over her shoulder, still hunting for the best deal. At other times, we keep going���and I drag myself along like an obstinate toddler who just wants to go home.
Perhaps it���s a difference in dopamine release. I love the idea of being done with a task, crossing it off and having the freedom to choose what to do next. Jiab���s pleasure center fires when she knows there���s no better deal to be had out there���anywhere���and so she has ���won��� at shopping.
In cavepeople terms, Jiab wants to ensure that her hunting expedition brought down the best mammoth with the fewest arrows, even if it delayed the tribe���s feast a bit. By contrast, I want to be back at the cave early, lounging by the fire, even if I have to make new arrows for tomorrow because I shot all mine today.
Jiab wants best. I���m happy with good enough. It���s a balance of views that keeps us centered. And sometimes we even learn from one another. Just yesterday, I compared prices on the internet for an hour. Jiab avoided standing in a long line to save $1.50. As the Spanish say, poco a poco, little by little.
I���d say more, but I know Jiab will be reading this. I���ve said enough.
The post A Nice Complement appeared first on HumbleDollar.
