Jonathan Clements's Blog, page 266
September 11, 2021
Financial Dogma
I���VE BEEN TRAINING dogs for nearly 30 years. I���ve won enough awards in dog competitions to wallpaper my office with rosette ribbons. My 15 minutes of fame also involved dogs. Almost 20 years ago, I appeared on an episode of The Tonight Show with Jay Leno, where one of my corgis happily demonstrated his ability to ride a skateboard.
Just as there are many ways to skin a cat, there are also many ways to train a dog. I���m always trying to improve my training techniques. I spend a great deal of time reading and learning from other dog trainers. One insight I recently came across attempted to summarize the basis of all successful dog training techniques: The hope must outweigh the struggle.
Simply put, when training a dog to perform any new behavior, the dog must have a reason to do what is asked of him or her. In most cases that reason is the hope of receiving some type of reward, such as a piece of food. But if the struggle to perform the behavior outweighs the final reward, the dog will shut down, refusing to put any additional effort into the behavior.
I began to think about the notions of struggle and hope as they pertain to personal finance. I remember in 2008 when the Great Recession meant watching my retirement account balance plummet in value. After years of setting aside a portion of my paycheck, I was suddenly left with an account worth a fraction of what its value had been just a few months earlier. At that point, the struggle to save outweighed the hope of ever having enough money to retire. The result: Over the next couple of years, I purchased a new car and two new all-terrain vehicles, and I spent tens of thousands of dollars renovating my home.
A few years later, I was living as a divorcee. Unsure if I���d ever be able to retire, I began setting aside nearly 50% of my salary. I educated myself about investing and eventually transferred a large portion of my portfolio into higher-risk mutual funds. As I started to see my account balance grow, I felt hopeful about my future. Instead of spending money, I became obsessed with figuring out how to save even more. The hope of having a modest nest egg more than outweighed the struggle of living frugally.
Just as there are many ways to skin a cat, there are also many ways to train a dog. I���m always trying to improve my training techniques. I spend a great deal of time reading and learning from other dog trainers. One insight I recently came across attempted to summarize the basis of all successful dog training techniques: The hope must outweigh the struggle.
Simply put, when training a dog to perform any new behavior, the dog must have a reason to do what is asked of him or her. In most cases that reason is the hope of receiving some type of reward, such as a piece of food. But if the struggle to perform the behavior outweighs the final reward, the dog will shut down, refusing to put any additional effort into the behavior.
I began to think about the notions of struggle and hope as they pertain to personal finance. I remember in 2008 when the Great Recession meant watching my retirement account balance plummet in value. After years of setting aside a portion of my paycheck, I was suddenly left with an account worth a fraction of what its value had been just a few months earlier. At that point, the struggle to save outweighed the hope of ever having enough money to retire. The result: Over the next couple of years, I purchased a new car and two new all-terrain vehicles, and I spent tens of thousands of dollars renovating my home.
A few years later, I was living as a divorcee. Unsure if I���d ever be able to retire, I began setting aside nearly 50% of my salary. I educated myself about investing and eventually transferred a large portion of my portfolio into higher-risk mutual funds. As I started to see my account balance grow, I felt hopeful about my future. Instead of spending money, I became obsessed with figuring out how to save even more. The hope of having a modest nest egg more than outweighed the struggle of living frugally.
The post Financial Dogma appeared first on HumbleDollar.
Twenty Years Ago
ON SEPT. 11, 2001, I spent an hour and a half standing on a crowded subway train two blocks from the World Trade Center. During that time, both towers collapsed. No smoke came shooting down the subway tunnel. The earth didn���t noticeably shake. There were no deafening noises. Instead, we were just another subway car packed with disgruntled passengers, muttering about the perils of public transport.
It was only when the train backed up to Penn Station in midtown Manhattan that we learned what had happened that day. ���They���ve hit the World Trade Center,��� a policeman was shouting. ���They���ve hit the Pentagon. And there are eight planes still unaccounted for. Everybody needs to evacuate the station. Now.���
In the days that followed, people took to saying, ���The world will never be the same again.��� Some folks bought gas masks. Many loaded up on basic provisions. Families settled on a safe place to meet, should another terrorist attack occur.
Sept. 11th was a terrible and terrifying tragedy that played out on television for all the world to see���and we should never forget the loss of life that day. By contrast, the resulting stock market plunge seems of little import. Still, there was indeed a large market reaction, one that offers three lessons for today���s investor:
1. Extraordinary market declines are anything but. Every decade or so, we get a big stock market swoon. All feel catastrophic at the time, and yet���in retrospect���they seem almost routine. Think back over the past half-century and what���s happened to the S&P 500.
We had 1973-74���s grueling 48% drop triggered by the OPEC oil embargo and escalating inflation, 1980-82���s 27% bear market wrought by a double-dip recession, 1987���s stunning 34% crash, 1990���s 20% decline following the Iraqi invasion of Kuwait, 2000-02���s 49% meltdown caused by the dot-com bust and 9/11 terrorist attacks, 2007-09���s global financial crisis with its 57% bloodbath, and 2020���s 34% coronavirus crash.
Each of these market collapses had a different cause and played out in a different way. Yet the smart way to behave was the same every time: Investors needed to grit their teeth, rebalance back to their portfolio���s target stock percentage and, if at all possible, shovel any extra cash into broadly diversified stock funds.
2. The talking heads are clueless. While many warned that stocks were overpriced in 2000, nobody predicted the 9/11 terrorist attacks. A few foresaw the dangers in the mortgage-bond market in the mid-2000s, but the magnitude of the financial fallout eluded almost everybody. Nobody predicted 2020���s pandemic.
In each case, the stock market���s collapse was driven by news���which, by definition, isn���t known ahead of time. The next big market decline will also be driven by news. I won���t forecast it and nor will you, which is why we should stop trying.
I have enough for retirement not because I���ve ever managed to predict a stock market decline. Rather, I have enough, in part, because I stood my ground when stocks collapsed and, indeed, I merrily bought more. We win the game not by anticipating market declines, but by knowing how to react when they happen.
3. Stock prices go to extremes. As John Lim explained in a recent blog post, share prices should reflect their intrinsic value, which is the present value of future dividends. What if a global pandemic causes all stocks to stop paying all dividends for the next two years? As John explains, stocks should���in theory���fall just 6.1% because that���s the drop in intrinsic value.
But, of course, share prices fell far more than that in 2020, and also in the other market declines mentioned above. Therein lies the opportunity for level-headed investors. I believe markets are reasonably efficient, meaning it���s awfully hard to identify stocks that���ll outperform the market averages. That���s why I���m entirely invested in index funds.
But while mispriced individual stocks are hard to find, every so often investors collectively panic and drive down the overall market more than the fundamentals justify. I can���t tell you when that���ll next happen. But when it does, I���ll be buying���and you should, too. This may sound like the cardinal sin of market-timing, but it isn���t. I���m not encouraging you to forecast the next big decline or to sit on a big pile of cash in anticipation of a market crash. But there will indeed be many more declines, and riches await those who keep their heads and seize the opportunity.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
What's the best way to draw down a retirement portfolio? Adam Grossman digs into the bucket system���and details its plusses and minuses.
"The Labor Department reported that a record number of Americans have recently quit their jobs, part of what pundits are calling��'the Great Resignation'," writes James Kerr. "I���m one of them."
Should you pay cash, finance or lease your next car? Rick Connor and his wife were in the market for a new SUV, so he decided to run the numbers.
Delay claiming Social Security. Save 10 times your salary before retiring. Don't buy a home unless you'll stay put for at least five years. Kristine Hayes talks about the rules she's breaking.
Should investors care about the size of the federal budget deficit? Greg Spears digs into Modern Monetary Theory���and wonders whether even higher inflation lies ahead.
���No matter how big a house we buy, we soon crowd it with new possessions, and then wish we had an even bigger place," notes Jim Wasserman. "One solution may lie in the sharing economy."
Also check out the past week's blog posts, including Dennis Friedman on sequence-of-return risk, John Lim on the annuity puzzle, Bill Ehart on falling fund expenses, Dick Quinn on claiming Social Security, Kyle McIntosh on pet insurance��and Mike Zaccardi on gold.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
It was only when the train backed up to Penn Station in midtown Manhattan that we learned what had happened that day. ���They���ve hit the World Trade Center,��� a policeman was shouting. ���They���ve hit the Pentagon. And there are eight planes still unaccounted for. Everybody needs to evacuate the station. Now.���
In the days that followed, people took to saying, ���The world will never be the same again.��� Some folks bought gas masks. Many loaded up on basic provisions. Families settled on a safe place to meet, should another terrorist attack occur.
Sept. 11th was a terrible and terrifying tragedy that played out on television for all the world to see���and we should never forget the loss of life that day. By contrast, the resulting stock market plunge seems of little import. Still, there was indeed a large market reaction, one that offers three lessons for today���s investor:
1. Extraordinary market declines are anything but. Every decade or so, we get a big stock market swoon. All feel catastrophic at the time, and yet���in retrospect���they seem almost routine. Think back over the past half-century and what���s happened to the S&P 500.
We had 1973-74���s grueling 48% drop triggered by the OPEC oil embargo and escalating inflation, 1980-82���s 27% bear market wrought by a double-dip recession, 1987���s stunning 34% crash, 1990���s 20% decline following the Iraqi invasion of Kuwait, 2000-02���s 49% meltdown caused by the dot-com bust and 9/11 terrorist attacks, 2007-09���s global financial crisis with its 57% bloodbath, and 2020���s 34% coronavirus crash.
Each of these market collapses had a different cause and played out in a different way. Yet the smart way to behave was the same every time: Investors needed to grit their teeth, rebalance back to their portfolio���s target stock percentage and, if at all possible, shovel any extra cash into broadly diversified stock funds.
2. The talking heads are clueless. While many warned that stocks were overpriced in 2000, nobody predicted the 9/11 terrorist attacks. A few foresaw the dangers in the mortgage-bond market in the mid-2000s, but the magnitude of the financial fallout eluded almost everybody. Nobody predicted 2020���s pandemic.
In each case, the stock market���s collapse was driven by news���which, by definition, isn���t known ahead of time. The next big market decline will also be driven by news. I won���t forecast it and nor will you, which is why we should stop trying.
I have enough for retirement not because I���ve ever managed to predict a stock market decline. Rather, I have enough, in part, because I stood my ground when stocks collapsed and, indeed, I merrily bought more. We win the game not by anticipating market declines, but by knowing how to react when they happen.
3. Stock prices go to extremes. As John Lim explained in a recent blog post, share prices should reflect their intrinsic value, which is the present value of future dividends. What if a global pandemic causes all stocks to stop paying all dividends for the next two years? As John explains, stocks should���in theory���fall just 6.1% because that���s the drop in intrinsic value.
But, of course, share prices fell far more than that in 2020, and also in the other market declines mentioned above. Therein lies the opportunity for level-headed investors. I believe markets are reasonably efficient, meaning it���s awfully hard to identify stocks that���ll outperform the market averages. That���s why I���m entirely invested in index funds.
But while mispriced individual stocks are hard to find, every so often investors collectively panic and drive down the overall market more than the fundamentals justify. I can���t tell you when that���ll next happen. But when it does, I���ll be buying���and you should, too. This may sound like the cardinal sin of market-timing, but it isn���t. I���m not encouraging you to forecast the next big decline or to sit on a big pile of cash in anticipation of a market crash. But there will indeed be many more declines, and riches await those who keep their heads and seize the opportunity.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
What's the best way to draw down a retirement portfolio? Adam Grossman digs into the bucket system���and details its plusses and minuses.
"The Labor Department reported that a record number of Americans have recently quit their jobs, part of what pundits are calling��'the Great Resignation'," writes James Kerr. "I���m one of them."
Should you pay cash, finance or lease your next car? Rick Connor and his wife were in the market for a new SUV, so he decided to run the numbers.
Delay claiming Social Security. Save 10 times your salary before retiring. Don't buy a home unless you'll stay put for at least five years. Kristine Hayes talks about the rules she's breaking.
Should investors care about the size of the federal budget deficit? Greg Spears digs into Modern Monetary Theory���and wonders whether even higher inflation lies ahead.
���No matter how big a house we buy, we soon crowd it with new possessions, and then wish we had an even bigger place," notes Jim Wasserman. "One solution may lie in the sharing economy."
Also check out the past week's blog posts, including Dennis Friedman on sequence-of-return risk, John Lim on the annuity puzzle, Bill Ehart on falling fund expenses, Dick Quinn on claiming Social Security, Kyle McIntosh on pet insurance��and Mike Zaccardi on gold.
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 Twenty Years Ago appeared first on HumbleDollar.
September 10, 2021
Beginning Benefits
IT���S A QUESTION that gets asked all the time: What���s the best age to start Social Security benefits?
The discussion quickly deteriorates into calculating the breakeven point. Are you better off with a lower benefit for a longer period or a larger benefit for a shorter time���that is, assuming you live to your actuarial life expectancy? What if you die before you reach breakeven? Yeah, what if? You won���t be around to complete the final calculation.
Some folks want to maximize their total benefits received over their lifetime. But who cares? Social Security is insurance. There���s no guaranteed relationship between the taxes you paid and the total benefits you collect. If you really want to beat the system, get married 11 years before you retire, get divorced 10 years later and, a year before you start your benefits, remarry. Voila, three people will collect benefits based on the earnings of one person.
Fear not, chances are you���ll get back all that you ���invested��� in Social Security and a good deal more. I certainly have.
The real goal, I���d argue, is to maximize the monthly benefit when you need the income the most. For some people, that will mean starting at age 62. But for others���perhaps the more fortunate���starting benefits at age 70 helps assure a higher income in later years. The most popular age to claim benefits is still 62, but the average starting age has been gradually rising. Whatever you do, don���t start your benefits because you believe Social Security won���t be around later. It isn���t going away.
For couples, when one spouse begins collecting benefits may impact the other spouse���s benefits. Because of the earnings offset, one thing you may not want to do is begin Social Security if you���re still working and you���re younger than your full Social Security retirement age. You can earn a certain amount while avoiding a reduction in benefits, but it���s best to check the rules before you claim.
The post Beginning Benefits appeared first on HumbleDollar.
Altered State
IN A RECENT POST, I suggested three questions that folks should consider before moving out of California. As a California native who has lived many other places, I appreciate the weather and convenience of living here, and I urged others to think carefully before moving away.
The post generated some great discussion when I shared it on my Facebook page. Based on the comments left by my friends, here are some added considerations and tips for those thinking of leaving California:
Take a test drive. One friend shared how she and her husband rented their California home for the past two years, while staying in short-term rentals in other places. That provided them with a low-risk way to try out several different U.S. locations for their future retirement. What they found is that they don���t want a true four-season climate because they like to exercise outside each day. They���ve decided to relocate to California���s Central Coast, while visiting some of their favorite ���test drive��� spots when those locations are ���in season.���
Consider politics. Another friend shared that her parents heavily factored in local political views when selecting a retirement destination. This situation reminded me of a person I met over the summer who was relocating from Seattle to Texas strictly for political reasons. While it���s a shame we���ve become such a polarized country, you���ll likely be happier with your new destination if you consider the political views of the locals before making a major move.
Prioritize and compromise. One of my onetime athletic coaches shared that he and his wife have agreed that, if they move out of California, they need to have enough land for either a pool or a goat. Each is passionate about one of the two, but they don���t see a scenario in which they can have both. This seemed like a good compromise: The one who misses out of his or her dream will at least get to enjoy the other���s happiness.
The post generated some great discussion when I shared it on my Facebook page. Based on the comments left by my friends, here are some added considerations and tips for those thinking of leaving California:
Take a test drive. One friend shared how she and her husband rented their California home for the past two years, while staying in short-term rentals in other places. That provided them with a low-risk way to try out several different U.S. locations for their future retirement. What they found is that they don���t want a true four-season climate because they like to exercise outside each day. They���ve decided to relocate to California���s Central Coast, while visiting some of their favorite ���test drive��� spots when those locations are ���in season.���
Consider politics. Another friend shared that her parents heavily factored in local political views when selecting a retirement destination. This situation reminded me of a person I met over the summer who was relocating from Seattle to Texas strictly for political reasons. While it���s a shame we���ve become such a polarized country, you���ll likely be happier with your new destination if you consider the political views of the locals before making a major move.
Prioritize and compromise. One of my onetime athletic coaches shared that he and his wife have agreed that, if they move out of California, they need to have enough land for either a pool or a goat. Each is passionate about one of the two, but they don���t see a scenario in which they can have both. This seemed like a good compromise: The one who misses out of his or her dream will at least get to enjoy the other���s happiness.
The post Altered State appeared first on HumbleDollar.
Shared Spaces
WHEN YOU���RE STUCK in traffic, have you ever idly wished for another lane to ease the congestion?
Not long ago, I listened to a podcast about the eternal problem of highway congestion in Texas, especially in the Dallas-Houston-San Antonio triangle. The expert said that our fundamental problem is that planners think of traffic as a liquid, so their answer to flow problems is always to ���build a bigger pipeline������meaning more highways.
Traffic, however, behaves less like a liquid and more like a gas. It expands to fill whatever space is available. If you build more highways, more people will come to use them. More development will follow, and soon there will be even more congestion, not less. The expert advocated that we stop expanding highways and instead invest in shared infrastructure, such as high-speed trains.
The highway paradox (more gets you less) is similar to John Lim's��recent piece about wealth. Higher income and wealth often don���t lead to increased happiness. It���s because of hedonic adaptation���greater levels of consumption quickly become our new normal. No matter how big a house we buy, we soon crowd it with new possessions, and then wish we had an even bigger place.
One solution may lie in the sharing economy. When our sons were growing up, our family of four tried to share space and possessions rather than loading ourselves down with more stuff. We created one family workroom where I���a teacher���would grade and our sons would do their homework. This saved space, while also creating connections when we���d take a break to chat and laugh together. The best keepsakes were the collective memories of those shared experiences within the family rather than more stuff.
Similarly, we should strive to make more use of shared public spaces that we already fund with our taxes. Municipal amenities provide us with better facilities at a lower cost than an individual family can obtain and with lower impact on the environment, plus using these facilities can trim a family���s discretionary expenses without cutting down on the fun.
As water is getting scarce, the cost of keeping up our swimming pool was rising. On top of that, pools don't increase��home value much and may, in the future, actually be a��deterrent��to buyers. We opted to fill in our pool and create a great new yard. Now we swim in city pools or creeks, or in the lakes and swimming holes in nearby state parks. There���s a free municipal fountain park less than a quarter mile away, and a full city waterpark���with three giant water slides���within two miles.
We���re also fans of the local municipal tennis center. It provides just as much playing time, and at a much lower cost, than the country club we once belonged to. The tennis center has pros, drills and leagues. Being a tennis fanatic, I found a great group of guys to play with, and we have been a competitive USTA team now for 15 years.
There are other shared municipal resources that are great for families���and their budgets���in our area. Consider:
Public libraries are a treasure trove of entertainment, with most of the treasure (books and videos) accessible online.
Hiking trails and nature preserves are a reliable and renewable source of family adventure and exercise.
A nearby park has become a gathering place for family cookouts, group exercise and just general hanging around. The cookout pavilion and surrounding grassy area is a popular birthday party site���and perfect for very junior Olympic games.
Of course, you don���t have to give up all private enjoyments for shared public ones. Just find a couple that work for you���like my tennis center and swim park examples���and start incorporating them into your life. We still have a car, but we take public transportation when we can. Sometimes that even allows us to zip past those infernal backups on the highway.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He has authored several educational children's books, including "Summa," a children's story for multiracial, multi-ethnic and multicultural families. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they are currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.
Not long ago, I listened to a podcast about the eternal problem of highway congestion in Texas, especially in the Dallas-Houston-San Antonio triangle. The expert said that our fundamental problem is that planners think of traffic as a liquid, so their answer to flow problems is always to ���build a bigger pipeline������meaning more highways.
Traffic, however, behaves less like a liquid and more like a gas. It expands to fill whatever space is available. If you build more highways, more people will come to use them. More development will follow, and soon there will be even more congestion, not less. The expert advocated that we stop expanding highways and instead invest in shared infrastructure, such as high-speed trains.
The highway paradox (more gets you less) is similar to John Lim's��recent piece about wealth. Higher income and wealth often don���t lead to increased happiness. It���s because of hedonic adaptation���greater levels of consumption quickly become our new normal. No matter how big a house we buy, we soon crowd it with new possessions, and then wish we had an even bigger place.
One solution may lie in the sharing economy. When our sons were growing up, our family of four tried to share space and possessions rather than loading ourselves down with more stuff. We created one family workroom where I���a teacher���would grade and our sons would do their homework. This saved space, while also creating connections when we���d take a break to chat and laugh together. The best keepsakes were the collective memories of those shared experiences within the family rather than more stuff.
Similarly, we should strive to make more use of shared public spaces that we already fund with our taxes. Municipal amenities provide us with better facilities at a lower cost than an individual family can obtain and with lower impact on the environment, plus using these facilities can trim a family���s discretionary expenses without cutting down on the fun.
As water is getting scarce, the cost of keeping up our swimming pool was rising. On top of that, pools don't increase��home value much and may, in the future, actually be a��deterrent��to buyers. We opted to fill in our pool and create a great new yard. Now we swim in city pools or creeks, or in the lakes and swimming holes in nearby state parks. There���s a free municipal fountain park less than a quarter mile away, and a full city waterpark���with three giant water slides���within two miles.
We���re also fans of the local municipal tennis center. It provides just as much playing time, and at a much lower cost, than the country club we once belonged to. The tennis center has pros, drills and leagues. Being a tennis fanatic, I found a great group of guys to play with, and we have been a competitive USTA team now for 15 years.
There are other shared municipal resources that are great for families���and their budgets���in our area. Consider:
Public libraries are a treasure trove of entertainment, with most of the treasure (books and videos) accessible online.
Hiking trails and nature preserves are a reliable and renewable source of family adventure and exercise.
A nearby park has become a gathering place for family cookouts, group exercise and just general hanging around. The cookout pavilion and surrounding grassy area is a popular birthday party site���and perfect for very junior Olympic games.
Of course, you don���t have to give up all private enjoyments for shared public ones. Just find a couple that work for you���like my tennis center and swim park examples���and start incorporating them into your life. We still have a car, but we take public transportation when we can. Sometimes that even allows us to zip past those infernal backups on the highway.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He has authored several educational children's books, including "Summa," a children's story for multiracial, multi-ethnic and multicultural families. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they are currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.The post Shared Spaces appeared first on HumbleDollar.
September 9, 2021
Early Intervention
WHEN I RETIRED, friends would ask me how I was going to celebrate my retirement. A buddy suggested I take a cruise around the world. Another friend said, ���Why don���t you explore Europe?��� I did neither. I wound up exploring San Diego, which is about 120 miles from my home. That's pretty much how my early retirement went. There were no expensive vacations or large purchases.
I didn���t feel comfortable spending a lot of money when I first retired. I was concerned about the stock market tanking and putting my investment portfolio at risk. According to a Prudential study, the worst time to lose money is the five years before retirement and the five years after.
During this 10-year window, you don���t want to spend assets that have performed poorly or suffer big self-inflicted investment wounds, because your portfolio may never recover. Retirees who are largely or entirely dependent on their investments for income are especially at risk.
The reason: When retirees withdraw money from their portfolio, those withdrawals���coupled with negative investment returns���can be especially damaging early in retirement. At that point, your nest egg is typically at its largest, so bad investment returns mean big dollar losses, plus you still have many years of retirement to pay for. This is often referred to as sequence-of-return risk.
Since we can���t control how the stock market performs, here are five ways to protect yourself, especially early in retirement:
Spend conservatively.
Reduce portfolio withdrawals during bad years for the market.
Maintain a cash reserve equal to two or three years of retirement expenses.
Diversify by moving part of your stock market money into bonds.
Buy an income annuity to cover your fixed living costs.
I didn���t feel comfortable spending a lot of money when I first retired. I was concerned about the stock market tanking and putting my investment portfolio at risk. According to a Prudential study, the worst time to lose money is the five years before retirement and the five years after.
During this 10-year window, you don���t want to spend assets that have performed poorly or suffer big self-inflicted investment wounds, because your portfolio may never recover. Retirees who are largely or entirely dependent on their investments for income are especially at risk.
The reason: When retirees withdraw money from their portfolio, those withdrawals���coupled with negative investment returns���can be especially damaging early in retirement. At that point, your nest egg is typically at its largest, so bad investment returns mean big dollar losses, plus you still have many years of retirement to pay for. This is often referred to as sequence-of-return risk.
Since we can���t control how the stock market performs, here are five ways to protect yourself, especially early in retirement:
Spend conservatively.
Reduce portfolio withdrawals during bad years for the market.
Maintain a cash reserve equal to two or three years of retirement expenses.
Diversify by moving part of your stock market money into bonds.
Buy an income annuity to cover your fixed living costs.
The post Early Intervention appeared first on HumbleDollar.
Price of Ignorance
PETER LYNCH, the famed Fidelity Investments��� mutual fund manager, used to advise investors to ���buy what you know.��� But many of today���s investors have other ideas.
Obscure cryptocurrencies and nonfungible tokens have taken the financial social media by storm. Most investors have heard of bitcoin, ethereum and dogecoin. But a new set of coins have emerged���cardano and solana are the hot trades. Meanwhile, JPEG and GIF image files are changing hands for ridiculous amounts of money. I���m reminded of another investing adage, this one from Warren Buffett: ���Price is what you pay. Value is what you get.��� I wonder what the Oracle of Omaha thinks about all this.
In February, market-watchers marveled at NBA Top Shot. It���s a platform where individuals can own GIF images of superstars as if they were digital trading cards. Sales surged as it went viral across social media. Individual ���moments��� sold for more than $100,000. At the peak of the frenzy, the combined value of all NBA Top Shot moments had a market cap above the value of some NBA teams.
One-upping those prices is the latest round of insanity. EtherRock 27 (yes, that���s a thing) recently sold for some $3 million. It���s a picture of a fake rock. What���s the appeal? Perhaps it���s the chance to impress acquaintances at a dinner party by saying you have so much money you can just throw it at the most useless thing imaginable.
I believe financial markets often know more than what my small brain can fathom. No, I don���t own any GIFs or cryptocurrencies. But I do believe the assets of the future could look different from what seasoned investors are used to purchasing today. Keep an open mind���but don���t go all-in buying things you don���t truly understand.
Obscure cryptocurrencies and nonfungible tokens have taken the financial social media by storm. Most investors have heard of bitcoin, ethereum and dogecoin. But a new set of coins have emerged���cardano and solana are the hot trades. Meanwhile, JPEG and GIF image files are changing hands for ridiculous amounts of money. I���m reminded of another investing adage, this one from Warren Buffett: ���Price is what you pay. Value is what you get.��� I wonder what the Oracle of Omaha thinks about all this.
In February, market-watchers marveled at NBA Top Shot. It���s a platform where individuals can own GIF images of superstars as if they were digital trading cards. Sales surged as it went viral across social media. Individual ���moments��� sold for more than $100,000. At the peak of the frenzy, the combined value of all NBA Top Shot moments had a market cap above the value of some NBA teams.
One-upping those prices is the latest round of insanity. EtherRock 27 (yes, that���s a thing) recently sold for some $3 million. It���s a picture of a fake rock. What���s the appeal? Perhaps it���s the chance to impress acquaintances at a dinner party by saying you have so much money you can just throw it at the most useless thing imaginable.
I believe financial markets often know more than what my small brain can fathom. No, I don���t own any GIFs or cryptocurrencies. But I do believe the assets of the future could look different from what seasoned investors are used to purchasing today. Keep an open mind���but don���t go all-in buying things you don���t truly understand.
The post Price of Ignorance appeared first on HumbleDollar.
Protecting Poppy
OUR DOG LIKES SOCKS. A few months after Poppy joined our family, she consumed her first sock. Since then, she���s eaten two more. After the first sock was removed, our veterinarian offered some valuable advice: Get pet insurance because Poppy is likely to do this again. Within a few days, we purchased a policy from Healthy Paws for $38 a month. The policy has proven valuable: We���ve had four other unplanned trips to the vet over the past 21 months.
For those considering pet insurance���especially first-time pet owners���here���s why I���d recommend coverage:
Ease of use. Everything with Healthy Paws is done through a well-designed app. It was easy to sign up and submit claims. For costs you incur, you simply take a picture of the invoice. It���s then reviewed within a few days. So far, there���s been no pushback on charges we���ve submitted and the insurer has always paid claims���net of deductibles���within a few weeks.
Straightforward coverage. I often hold my breath when I receive a medical bill for our family���s health coverage because I���m never sure what���s covered. By contrast, Healthy Paws makes coverage easy to understand. We have a deductible of $250 per year. After that, pet insurance covers 80% of most charges. So far, all tests, treatments and prescriptions have been covered.
Good return on investment. We saw pet insurance as a safety net that would provide peace of mind. We never thought we���d see a positive return on investment. But so far, our premiums have been $800, while the insurance has covered $1,500 in claims. That recovery rate of 188% is well above the industry average of 70%. We hope our recovery rate is much lower in the future. That said, it���s good to know we���re covered if Poppy gets a hankering for another sock.
For those considering pet insurance���especially first-time pet owners���here���s why I���d recommend coverage:
Ease of use. Everything with Healthy Paws is done through a well-designed app. It was easy to sign up and submit claims. For costs you incur, you simply take a picture of the invoice. It���s then reviewed within a few days. So far, there���s been no pushback on charges we���ve submitted and the insurer has always paid claims���net of deductibles���within a few weeks.
Straightforward coverage. I often hold my breath when I receive a medical bill for our family���s health coverage because I���m never sure what���s covered. By contrast, Healthy Paws makes coverage easy to understand. We have a deductible of $250 per year. After that, pet insurance covers 80% of most charges. So far, all tests, treatments and prescriptions have been covered.
Good return on investment. We saw pet insurance as a safety net that would provide peace of mind. We never thought we���d see a positive return on investment. But so far, our premiums have been $800, while the insurance has covered $1,500 in claims. That recovery rate of 188% is well above the industry average of 70%. We hope our recovery rate is much lower in the future. That said, it���s good to know we���re covered if Poppy gets a hankering for another sock.
The post Protecting Poppy appeared first on HumbleDollar.
The New Economics
FROM THE TIME I started covering Washington as a reporter in 1980, politicians have been condemning the federal budget deficit. Ronald Reagan was running for president that year. He excoriated his opponent, President Jimmy Carter, for increasing the federal debt by���brace yourself���$55 billion in 1979. These days, that wouldn���t pay a week���s bar tab for Uncle Sam.
With the sole exception of Bill Clinton, every president for 40 years has added to the federal debt, all while campaigning loudly against deficit spending. It���s like seeing the Saturday night drunk singing in the church choir on Sunday morning. Lord be praised, the sinner is saved. Or not.
But nothing compares with the bender we���re on today. There���s a new economic theory in Washington, and it contends that deficits don���t matter. You won���t hear many politicians saying that out loud, but their votes suggest we���re in a new economic era governed by Modern Monetary Theory (MMT).
Standard Keynesian economics calls for the government to run a deficit when the economy is depressed. That���s what happened in 2009 when Congress passed a $787 billion stimulus bill to fight the Great Recession. Government deficits can create demand for goods and services when the private sector is struggling, thus restoring the economy to its normal function.
Since COVID-19 hobbled the world economy in March 2020, Washington has run deficits of incredible size. Over the past year and a half, Congress has passed six major bills providing $5.3 trillion in rescue spending, according to the deficit-hating Peter G. Peterson Foundation. Still on the runway is a $1 trillion infrastructure bill, which is expected to pass into law this fall. Behind that is a $3.5 trillion Democratic wish-list proposal.
Washington is spending as if it can simply print more money to pay its obligations. That, in a nutshell, is the theory behind MMT. Let me try to explain. The dollar has a value because we all agree that it does. But it hasn���t been backed by anything tangible since Aug. 15, 1971. That���s when President Richard Nixon suspended the right of other nations to convert their U.S. dollars into gold.
���Today we have a strictly fiat currency. That means the government no longer promises to turn dollars into gold���. With a fiat currency, it���s impossible for Uncle Sam to run out of money,��� writes economist Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People���s Economy.
Kelton preached MMT as the Democratic staff economist on the Senate Budget Committee, which she joined in 2015. She told senators that the U.S. government wasn���t like a family or a small business that has to keep its income and spending in balance. Instead, the government can simply create all the money it needs by applying a few keystrokes to a Federal Reserve computer file.
Deficit hawks have long wrung their hands over the terrible things that���ll happen if the government continues to overspend. Interest rates will soar. The value of the dollar will crumble. Grandma will lose her Social Security. Yet, after decades of deficits, none of this has come to pass. Under the new thinking, the federal government has actually spent too little. In the MMT view, government debt is actually an asset to investors.
Here is Kelton again, referring to a running tally of the federal debt on display in New York City: ���The debt clock on West 43rd Street simply displays an historical record of how many dollars the federal government has added to people���s pockets without subtracting (taxing) them away. These dollars are being saved in the form of U.S. Treasuries. If you���re lucky enough to own some, congratulations! They���re part of your wealth. While others refer to it as a debt clock, it���s really a U.S. dollar savings clock.���
MMT can sound like Alice in Wonderland to conventional economists. When governments print too much money, the currency can be degraded to the point of worthlessness. John Kenneth Galbraith tells the story in his book Money of a Harvard graduate student who lost a packet of toilet paper to a pickpocket in a crowded Moscow subway. The student was amused that the thief missed his cash, held in Soviet currency.
���Only later did the young scholar come to realize that the gentle product stolen was more valuable than the packet of notes in the other pocket,��� Galbraith dryly observed.
Perhaps MMT is right. It would be the answer to every politician���s prayer to be able to spend with abandon. They can just never admit to it.
Kelton explained MMT to her local congressman when she was teaching economics at the University of Missouri-Kansas City. He listened for 45 minutes, but his twisted posture displayed a deep unease. Finally, he straightened up in his big chair. Kelton thought he finally understood that deficits don���t matter. ���I can���t say that,��� he told her quietly.
Pay attention to what politicians do, not what they say. By that rule, it seems that MMT is carrying the day. Will all of this lead to higher inflation? None of us should get into the predictions business���but we all need to be in the risk management business. Ponder what higher inflation might mean to your financial future. If the consequences would be dire, consider hedging that risk.
Inflation-indexed Treasury bonds and Series I savings bonds, anyone?
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.
With the sole exception of Bill Clinton, every president for 40 years has added to the federal debt, all while campaigning loudly against deficit spending. It���s like seeing the Saturday night drunk singing in the church choir on Sunday morning. Lord be praised, the sinner is saved. Or not.
But nothing compares with the bender we���re on today. There���s a new economic theory in Washington, and it contends that deficits don���t matter. You won���t hear many politicians saying that out loud, but their votes suggest we���re in a new economic era governed by Modern Monetary Theory (MMT).
Standard Keynesian economics calls for the government to run a deficit when the economy is depressed. That���s what happened in 2009 when Congress passed a $787 billion stimulus bill to fight the Great Recession. Government deficits can create demand for goods and services when the private sector is struggling, thus restoring the economy to its normal function.
Since COVID-19 hobbled the world economy in March 2020, Washington has run deficits of incredible size. Over the past year and a half, Congress has passed six major bills providing $5.3 trillion in rescue spending, according to the deficit-hating Peter G. Peterson Foundation. Still on the runway is a $1 trillion infrastructure bill, which is expected to pass into law this fall. Behind that is a $3.5 trillion Democratic wish-list proposal.
Washington is spending as if it can simply print more money to pay its obligations. That, in a nutshell, is the theory behind MMT. Let me try to explain. The dollar has a value because we all agree that it does. But it hasn���t been backed by anything tangible since Aug. 15, 1971. That���s when President Richard Nixon suspended the right of other nations to convert their U.S. dollars into gold.
���Today we have a strictly fiat currency. That means the government no longer promises to turn dollars into gold���. With a fiat currency, it���s impossible for Uncle Sam to run out of money,��� writes economist Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People���s Economy.
Kelton preached MMT as the Democratic staff economist on the Senate Budget Committee, which she joined in 2015. She told senators that the U.S. government wasn���t like a family or a small business that has to keep its income and spending in balance. Instead, the government can simply create all the money it needs by applying a few keystrokes to a Federal Reserve computer file.
Deficit hawks have long wrung their hands over the terrible things that���ll happen if the government continues to overspend. Interest rates will soar. The value of the dollar will crumble. Grandma will lose her Social Security. Yet, after decades of deficits, none of this has come to pass. Under the new thinking, the federal government has actually spent too little. In the MMT view, government debt is actually an asset to investors.
Here is Kelton again, referring to a running tally of the federal debt on display in New York City: ���The debt clock on West 43rd Street simply displays an historical record of how many dollars the federal government has added to people���s pockets without subtracting (taxing) them away. These dollars are being saved in the form of U.S. Treasuries. If you���re lucky enough to own some, congratulations! They���re part of your wealth. While others refer to it as a debt clock, it���s really a U.S. dollar savings clock.���
MMT can sound like Alice in Wonderland to conventional economists. When governments print too much money, the currency can be degraded to the point of worthlessness. John Kenneth Galbraith tells the story in his book Money of a Harvard graduate student who lost a packet of toilet paper to a pickpocket in a crowded Moscow subway. The student was amused that the thief missed his cash, held in Soviet currency.
���Only later did the young scholar come to realize that the gentle product stolen was more valuable than the packet of notes in the other pocket,��� Galbraith dryly observed.
Perhaps MMT is right. It would be the answer to every politician���s prayer to be able to spend with abandon. They can just never admit to it.
Kelton explained MMT to her local congressman when she was teaching economics at the University of Missouri-Kansas City. He listened for 45 minutes, but his twisted posture displayed a deep unease. Finally, he straightened up in his big chair. Kelton thought he finally understood that deficits don���t matter. ���I can���t say that,��� he told her quietly.
Pay attention to what politicians do, not what they say. By that rule, it seems that MMT is carrying the day. Will all of this lead to higher inflation? None of us should get into the predictions business���but we all need to be in the risk management business. Ponder what higher inflation might mean to your financial future. If the consequences would be dire, consider hedging that risk.
Inflation-indexed Treasury bonds and Series I savings bonds, anyone?
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.The post The New Economics appeared first on HumbleDollar.
September 8, 2021
Scope Creep
DURING OUR TIME in Spain, we came to admire the water fountains common in mudejar architecture, the Moorish-style homes of Andalusia. During the lockdown, while I tried my hand at creating art, Jim picked up the hobby of making water��fountains using a few basic items, including a small water pump and terra cotta planters that he found around the apartment.
As the lockdown dragged on, Jim progressed to building more complex fountains. He built an indoor one in a Zen-like style, with water flowing through bamboo pipes into a big terra cotta bowl. The cats claimed this as their drinking fountain. He built another small tabletop fountain for my office. The water bubbled over rocks, so I could enjoy the sound of flowing water. This was also claimed by the cats. Still, although the cats enjoyed the fountains, I think it���s Jim who got the most joy���from making them.
About a month ago, we settled back into our townhome in Dallas. Jim wanted to build a fountain to remind us of our time in Andalusia. We already had a large ceramic planter that I���d purchased for $5 at a garage sale, along with a pump given to Jim as a gift. The pump, however, was too powerful. The simplest solution was to buy a smaller $10 pump from Amazon. With the smaller pump and the ceramic pot that we had, Jim could have built a basic fountain in under 30 minutes for $15.
But basic wasn���t the type of fountain he wanted to build. It was a classic example of scope creep���a problem not only in the corporate world, but also in the world of remodeling, as Dick Quinn has written about.
Long story short: Jim tinkered with the ceramic pot so much that it ended up damaged. That meant we needed a new planter. After several days of redesigns and searching for parts, the tab for our $15 fountain is now at $100, and it���s still a work in progress. The cats are getting impatient.
As the lockdown dragged on, Jim progressed to building more complex fountains. He built an indoor one in a Zen-like style, with water flowing through bamboo pipes into a big terra cotta bowl. The cats claimed this as their drinking fountain. He built another small tabletop fountain for my office. The water bubbled over rocks, so I could enjoy the sound of flowing water. This was also claimed by the cats. Still, although the cats enjoyed the fountains, I think it���s Jim who got the most joy���from making them.
About a month ago, we settled back into our townhome in Dallas. Jim wanted to build a fountain to remind us of our time in Andalusia. We already had a large ceramic planter that I���d purchased for $5 at a garage sale, along with a pump given to Jim as a gift. The pump, however, was too powerful. The simplest solution was to buy a smaller $10 pump from Amazon. With the smaller pump and the ceramic pot that we had, Jim could have built a basic fountain in under 30 minutes for $15.
But basic wasn���t the type of fountain he wanted to build. It was a classic example of scope creep���a problem not only in the corporate world, but also in the world of remodeling, as Dick Quinn has written about.
Long story short: Jim tinkered with the ceramic pot so much that it ended up damaged. That meant we needed a new planter. After several days of redesigns and searching for parts, the tab for our $15 fountain is now at $100, and it���s still a work in progress. The cats are getting impatient.
The post Scope Creep appeared first on HumbleDollar.
