Jonathan Clements's Blog, page 272
August 22, 2021
Walking the Talk?
BANK OF AMERICA���S monthly fund manager survey takes the pulse of portfolio managers around the world. The latest survey was released last week���and some of the results weren���t so rosy.
Despite a record-breaking quarter for corporate profits, which blew past analysts��� predictions, money managers have turned more bearish. Perhaps recent market volatility, especially among foreign stocks, has caused jitters. Also casting an ominous cloud is the Delta variant���s global spread. On top of that, some money managers see tech stock���s rich valuations as a sign that this investing theme is ���overcrowded.��� Finally, inflation and the Federal Reserve���s plans to taper bond purchases are seen as short-term risks.
To be sure, portfolio managers always have some worries. There���s never certainty about the financial markets��� short-term outlook���a reason all investors should take a long view.
In the Bank of America report, there���s a pair of data points I regularly check. First is the level of cash that portfolio managers have on hand. It ticked up to 4.2% of assets under management, but that���s on the low end for the past decade. Cash levels peaked near 6% in early 2016 and during 2020���s COVID-19 crash. Second, I'm interested in what respondents want corporations to do with their excess cash. When the focus is on capital spending and returning cash to shareholders, it���s a sign that portfolio managers��� appetite for risk is high. But when volatility strikes, suddenly portfolio managers want firms to shore up their balance sheets. Right now, fund managers prefer that executives engage in riskier uses for corporate cash.
I found it strange that sentiment questions in the survey had generally bearish responses, yet portfolio managers were still positioned aggressively. According to the report, expectations for global economic growth are at their lowest level since April 2020. At the same time, the percentage of money managers overweighted in stocks is well above the long-term average. Could that be a red flag after a summer lull in volatility?
Despite a record-breaking quarter for corporate profits, which blew past analysts��� predictions, money managers have turned more bearish. Perhaps recent market volatility, especially among foreign stocks, has caused jitters. Also casting an ominous cloud is the Delta variant���s global spread. On top of that, some money managers see tech stock���s rich valuations as a sign that this investing theme is ���overcrowded.��� Finally, inflation and the Federal Reserve���s plans to taper bond purchases are seen as short-term risks.
To be sure, portfolio managers always have some worries. There���s never certainty about the financial markets��� short-term outlook���a reason all investors should take a long view.
In the Bank of America report, there���s a pair of data points I regularly check. First is the level of cash that portfolio managers have on hand. It ticked up to 4.2% of assets under management, but that���s on the low end for the past decade. Cash levels peaked near 6% in early 2016 and during 2020���s COVID-19 crash. Second, I'm interested in what respondents want corporations to do with their excess cash. When the focus is on capital spending and returning cash to shareholders, it���s a sign that portfolio managers��� appetite for risk is high. But when volatility strikes, suddenly portfolio managers want firms to shore up their balance sheets. Right now, fund managers prefer that executives engage in riskier uses for corporate cash.
I found it strange that sentiment questions in the survey had generally bearish responses, yet portfolio managers were still positioned aggressively. According to the report, expectations for global economic growth are at their lowest level since April 2020. At the same time, the percentage of money managers overweighted in stocks is well above the long-term average. Could that be a red flag after a summer lull in volatility?
The post Walking the Talk? appeared first on HumbleDollar.
The Good Steward
I GOT STUCK IN a conversation at a dinner party recently with a name dropper. It was painful. Wanting to impress me, I suppose, I learned that, ���Yes, Janet Yellen and I are good friends. I���ll be traveling to D.C. soon and I���m looking forward to connecting.���
But it didn���t end there. I also heard about this person���s exotic travels and homes around the world. And the fabulous career that supported this lavish lifestyle. And the incredibly insightful views this person had on politics and other issues.
If I���d had the chance, I could have offered that I once met Janet Yellen at the buffet table during a lunch break at a Federal Reserve conference. I said ���hello��� to her and she said ���hello��� back. Janet and I are close, too.
I recount this experience not because I think narcissists can���t grow wealthy. They can and do. Still, I think we should look to the old-fashioned virtues of humility and stewardship to guide our thinking about money. King Solomon���s Proverbs tells us, ���The outcome of humility and of the fear of the Lord is wealth, honor, and life.��� How does this ancient wisdom speak to us in the 21st century? Consider four ways.
First, humility in investing leads us to avoid big investment bets. If the market professionals can���t beat the averages, humble investors will lean toward spreading their money broadly, owning a globally diversified mix of stocks and bonds.
Second, humble investors won���t assume high future investment returns, instead compensating by saving as much as they reasonably can.
Third, humble investors won���t assume that a long life is guaranteed. To protect those who depend on us, we make sure they���ll be okay if something happens to us. This includes not only life and disability insurance, but also a well-designed estate plan.
A fourth lesson comes from the book The Millionaire Next Door : We can���t necessarily spot those around us who have grown wealthy. Why not? Unlike my dinner party friend, the humble wealthy don���t need to impress anyone with a show of wealth. They typically don���t want recognition for donations. That same humility may lead them to drive older cars and wear less expensive clothes, which leads to increased savings. A virtuous cycle exists in the lifestyle of the humble.
But, in my opinion, humility alone isn���t enough to have a successful relationship with money. After writing a book on money a few years ago, I did a number of radio interviews. In one interview on a Christian radio station, I was asked how I could encourage Christians to save money when Jesus taught that we shouldn���t lay up treasures on earth but instead store them in heaven.
It���s a great question���and I think there���s only one answer for those of us in the Christian tradition. We don���t actually own anything in this life. Rather, we are stewards of what we���ve been given and must manage our wealth accordingly. That has three implications for how we handle our money���implications that I think are useful to everybody, no matter what their religious beliefs.
First, as a steward, we need to consider the most effective way we can use our wealth to help others. The radio interviewer may have thought the best way to do that is to give all but essential money to churches and nonprofits. The evidence, however, suggests otherwise.
The World Bank estimates that more than a billion people have been lifted out of extreme poverty in the last 25 years. A realistic goal set by some: Erase almost all abject poverty in the world by 2030.
This incredible progress in eliminating poverty is partly the result of charitable efforts, but it���s also because more people have access to capital, thanks to free markets. To be clear, it���s good to give money to charitable ventures. But in the stewardship model of managing wealth, investing in businesses that employ people���and which provide life-enhancing goods and services���is also a virtuous choice. Since businesses are lifting more people out of poverty that any other efforts, it makes sense to have our money invested there.
Second, a humble person may not be inclined to negotiate a hard bargain for goods and services for him or herself. A good steward, however, will negotiate furiously to get the best deal. Sometimes, I talk to Christians who think it���s virtuous to avoid aggressively pursuing their career. I advise them to change their thinking. Diligent stewards will see maximizing their salary for their God-given abilities as a part of good stewardship, and then they���ll use the resulting wealth to improve the world around them.
Third, the good steward sees all of life as an opportunity to be wise with the resources he or she has been given. Children are to be educated for future productivity. Money is to be grown in investments that serve others. Time is to be used productively, balancing opportunities to work with the need for rest. Supporting the nonprofit sector���both financially and by volunteering���remains an important part of good stewardship.
What happens when humility and stewardship are not central to managing our wealth? Instead of seeing money as a tool to support a purposeful life, it becomes the thing that we imagine gives our life meaning. But that likely won���t satisfy us for long.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.
But it didn���t end there. I also heard about this person���s exotic travels and homes around the world. And the fabulous career that supported this lavish lifestyle. And the incredibly insightful views this person had on politics and other issues.
If I���d had the chance, I could have offered that I once met Janet Yellen at the buffet table during a lunch break at a Federal Reserve conference. I said ���hello��� to her and she said ���hello��� back. Janet and I are close, too.
I recount this experience not because I think narcissists can���t grow wealthy. They can and do. Still, I think we should look to the old-fashioned virtues of humility and stewardship to guide our thinking about money. King Solomon���s Proverbs tells us, ���The outcome of humility and of the fear of the Lord is wealth, honor, and life.��� How does this ancient wisdom speak to us in the 21st century? Consider four ways.
First, humility in investing leads us to avoid big investment bets. If the market professionals can���t beat the averages, humble investors will lean toward spreading their money broadly, owning a globally diversified mix of stocks and bonds.
Second, humble investors won���t assume high future investment returns, instead compensating by saving as much as they reasonably can.
Third, humble investors won���t assume that a long life is guaranteed. To protect those who depend on us, we make sure they���ll be okay if something happens to us. This includes not only life and disability insurance, but also a well-designed estate plan.
A fourth lesson comes from the book The Millionaire Next Door : We can���t necessarily spot those around us who have grown wealthy. Why not? Unlike my dinner party friend, the humble wealthy don���t need to impress anyone with a show of wealth. They typically don���t want recognition for donations. That same humility may lead them to drive older cars and wear less expensive clothes, which leads to increased savings. A virtuous cycle exists in the lifestyle of the humble.
But, in my opinion, humility alone isn���t enough to have a successful relationship with money. After writing a book on money a few years ago, I did a number of radio interviews. In one interview on a Christian radio station, I was asked how I could encourage Christians to save money when Jesus taught that we shouldn���t lay up treasures on earth but instead store them in heaven.
It���s a great question���and I think there���s only one answer for those of us in the Christian tradition. We don���t actually own anything in this life. Rather, we are stewards of what we���ve been given and must manage our wealth accordingly. That has three implications for how we handle our money���implications that I think are useful to everybody, no matter what their religious beliefs.
First, as a steward, we need to consider the most effective way we can use our wealth to help others. The radio interviewer may have thought the best way to do that is to give all but essential money to churches and nonprofits. The evidence, however, suggests otherwise.
The World Bank estimates that more than a billion people have been lifted out of extreme poverty in the last 25 years. A realistic goal set by some: Erase almost all abject poverty in the world by 2030.
This incredible progress in eliminating poverty is partly the result of charitable efforts, but it���s also because more people have access to capital, thanks to free markets. To be clear, it���s good to give money to charitable ventures. But in the stewardship model of managing wealth, investing in businesses that employ people���and which provide life-enhancing goods and services���is also a virtuous choice. Since businesses are lifting more people out of poverty that any other efforts, it makes sense to have our money invested there.
Second, a humble person may not be inclined to negotiate a hard bargain for goods and services for him or herself. A good steward, however, will negotiate furiously to get the best deal. Sometimes, I talk to Christians who think it���s virtuous to avoid aggressively pursuing their career. I advise them to change their thinking. Diligent stewards will see maximizing their salary for their God-given abilities as a part of good stewardship, and then they���ll use the resulting wealth to improve the world around them.
Third, the good steward sees all of life as an opportunity to be wise with the resources he or she has been given. Children are to be educated for future productivity. Money is to be grown in investments that serve others. Time is to be used productively, balancing opportunities to work with the need for rest. Supporting the nonprofit sector���both financially and by volunteering���remains an important part of good stewardship.
What happens when humility and stewardship are not central to managing our wealth? Instead of seeing money as a tool to support a purposeful life, it becomes the thing that we imagine gives our life meaning. But that likely won���t satisfy us for long.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.The post The Good Steward appeared first on HumbleDollar.
August 21, 2021
Got to Help Yourself
AT THE END OF EACH month, my pension arrives in my bank account. I can count on the same amount every month. It���s comforting.
In the old days, nearly 50% of working Americans had pension benefits. But it was never more than that. For most workers, the three-legged stool really only had two legs, Social Security and personal savings. Today, 76% of state and local government workers have a pension plan, versus just 12% of private sector workers. No matter how you slice it, most Americans are on their own when it comes to retirement savings.
There are several reasons traditional pensions have disappeared in the private sector. They���re expensive to fund and administer. They create large long-term liabilities for companies. Maybe most important, they only provide value to long-term employees. My pension is based on working for the same employer for nearly 50 years. That sort of tenure is highly unusual. In fact, private sector tenure of even 10 years was never common in any generation and, when it did occur, it was concentrated in large companies and certain industries, typically those that are unionized.
Given the disappearance of pensions, it���s no wonder so many retirees rely heavily on Social Security. But what���s curious is why we have a crisis when it comes to retirement savings. After all, to help those without pensions, we���ve had IRAs since 1974 and 401(k) plans since 1981. To be blunt, too many workers in the last half-century have put spending ahead of saving. And, yes, all but the poorest among us can afford to save���if we make it a priority and we make the necessary sacrifices.
The post Got to Help Yourself appeared first on HumbleDollar.
Million Dollar Dream
WHEN I TOLD MY WIFE a few years ago that I wanted to retire by age 50, she was supportive from the get-go. The memories of her dad passing away soon after his 52nd birthday played a role in her snap approval. But it took us a while to sort through the full financial implications.
I figured that our lifestyle, including our foreign travels and occasional splurges, would be the same even if my paychecks stopped prematurely. On the flip side, we wouldn���t be able to upsize to a bigger house���a dream my wife had cherished for some time. Still, she insisted that I move forward with my early retirement plans.
All we needed in a new home was a little bit more space and privacy than our current house offers. But we live in a high-cost area where home prices are roughly four times the national average. At the time, local houses that met our criteria were approaching $1 million. The upsizing cost���the price difference, real-estate commissions, moving expenses and, most important, the increased tax and upkeep costs���seemed out of reach.
Ironically, thanks to this year���s red-hot housing market, we apparently now live in a $1 million home. Neighborhood houses, some identical to ours, routinely sell at lightning speed for seven figures. The recent mania revived our unfulfilled wish.
Could we afford to move to a bigger place? I realized that, since my initial decision to take early retirement, things had worked out better than I anticipated. How so? Instead of quitting my job at age 50, I switched to a part-time role that gave me needed personal time but still kept a paycheck coming in, even if it is somewhat smaller. On top of that, my previously earned stock grants continued to vest every quarter. Fingers crossed, our dream of a bigger house may soon come true.
I figured that our lifestyle, including our foreign travels and occasional splurges, would be the same even if my paychecks stopped prematurely. On the flip side, we wouldn���t be able to upsize to a bigger house���a dream my wife had cherished for some time. Still, she insisted that I move forward with my early retirement plans.
All we needed in a new home was a little bit more space and privacy than our current house offers. But we live in a high-cost area where home prices are roughly four times the national average. At the time, local houses that met our criteria were approaching $1 million. The upsizing cost���the price difference, real-estate commissions, moving expenses and, most important, the increased tax and upkeep costs���seemed out of reach.
Ironically, thanks to this year���s red-hot housing market, we apparently now live in a $1 million home. Neighborhood houses, some identical to ours, routinely sell at lightning speed for seven figures. The recent mania revived our unfulfilled wish.
Could we afford to move to a bigger place? I realized that, since my initial decision to take early retirement, things had worked out better than I anticipated. How so? Instead of quitting my job at age 50, I switched to a part-time role that gave me needed personal time but still kept a paycheck coming in, even if it is somewhat smaller. On top of that, my previously earned stock grants continued to vest every quarter. Fingers crossed, our dream of a bigger house may soon come true.
The post Million Dollar Dream appeared first on HumbleDollar.
Cooling Off
TODAY’S STOCK MARKET reminds me of Charles Dickens’s famous line: “It was the best of times, it was the worst of times....”
It’s the best of times, of course, because the market continues to hit new highs. From a low of 2,237 in March 2020, the S&P 500 has doubled. Over the 10 years through July, the S&P has delivered an average annual return of 15.4%, including dividends, far above the historical average of 10%. Since the downturn in 2009, the market has logged just one negative year: In 2018, there was a modest, all-but-forgotten decline of 4.4%.
So why would anyone say that it’s also the worst of times? The worry is that things are too good. Investors have enjoyed seeing the numbers on their financial statements get bigger, but it also feels like climbing a ladder: With every step higher, there is farther—potentially—to fall. And it isn’t just the stock market. With interest rates near all-time lows, the potential for losses in the bond market has also grown.
As investors, we’re all taught to think long term. Everyone understands that the market can be unpredictable and volatile from year to year, so we’re supposed to stay focused on the horizon, not the day to day. But there’s a difference between what we know we should do and what we’re actually capable of doing. While the overall market results cited above have been very positive, it certainly hasn’t been a straight line. The pandemic has left millions unemployed and has turned some industries upside down. The financial markets are also displaying excesses—from cryptocurrencies to meme stocks—that make people nervous.
This skittishness isn’t just affecting those currently invested. You also see it among those sitting on the sidelines, too nervous to put money into a market that appears "priced for perfection." In an environment like this, how can we keep our investment cool? Below are six ideas:
1. Remove emotion. What does this mean in practice? Whether you work with an advisor or not, I would draw up a formal investment policy statement. It need not be complicated—a single page will do.
In this document, you can spell out your strategy, including asset allocation targets and rebalancing rules. Then try hard to adhere to it. This can be valuable in an environment like today’s, but it can be even more helpful when the market goes haywire.
Consider what stocks did early last year. Before the Federal Reserve stepped in, the market plunged more than 30%—its quickest decline ever. The drop was terrifying, and no one knew when it would end. But investors who had asset allocation targets and rebalanced according to their plan benefitted greatly during the ensuing rebound.
2. Forget forecasting. The stock market is cruel. It can make the smartest person feel clumsy. Again, think back to last year. As Zoom took over people’s work lives, many predicted doom for commercial real estate. Others, meanwhile, worried about the election. And as the pandemic raged, many worried that we were headed for a prolonged economic downturn. One prominent hedge fund manager declared, “Hell is coming.”
Things, of course, turned out much better than anyone expected. As a result, the investor who fared best was the one who didn't tinker too much. It's counterintuitive, but—unlike in other areas of our lives—there’s only a loose connection between effort and results when it comes to investing.
3. Take it slow. If you have cash you'd like to invest but are hesitant to jump into the market, that's understandable. Dollar-cost averaging is a common solution to this problem. Can you do better? Maybe. There are lots of variations on traditional dollar-cost averaging.
For instance, there’s value averaging. Indeed, I often accelerate stock market purchases when prices drop. But ultimately, there's no way to know in advance which buying strategy will deliver the best result. The most important thing, in my view, is just to get started at a pace that you'll be able to stick with.
4. Take the long view. The late Jack Bogle, founder of Vanguard Group, urged investors to think in terms of decades. That's because the market is entirely unpredictable in the short term but at least a little bit predictable in the medium and long term. If the market is high today, for example, it might be even higher next year. But it stands to reason that prospective returns over the next decade will be lower following a dozen years in which results were so far above average.
What does this mean for you? If you're in retirement or retiring soon, you'll want to build a financial buffer into your plan. I wouldn't count on 10% returns—the historical annual average—over the coming decade. On the other hand, if you're earlier in your career, it would defy math to conclude that an expensive market today necessarily means that returns will be below average for multiple decades into the future. Yes, you want to consider that possibility in your financial plan. But it's just one potential outcome. If you're 30, 40 or even 50 years old today, I wouldn't take an overly defensive posture just because the market currently seems high.
5. Consider history. Investment commentators love debating whether the market is headed higher or lower. But these debates usually aren’t productive. I’m not predicting that the market will go down or that it’ll go up—in the near term. Instead, what I’m predicting is that over the long term it will go higher. That’s where I find history instructive.
If you went back to 1929, I’m sure there was a lot of handwringing after the market had doubled over the prior two years. Similarly, there was plenty of investor angst in 2000 and 2008. And those worries were vindicated, but only in the short run. In all of these cases, the market eventually bounced back and went much higher. I see it the same way today. Maybe the market is high and maybe the next decade will be far less profitable. But that isn't guaranteed—and it tells you nothing about the decades after that.
6. Have faith. In recent years, I’ve heard growing murmurs that America's economy is starting to crumble—and that we're headed for a long period of malaise like Japan or even the Roman Empire. Are those things possible? I suppose.
But I’ve also heard powerful arguments to the contrary. Larry Siegel's 2019 book Fewer, Richer, Greener argues that we're entering a period of unprecedented prosperity. I’m not sure which version of the future we’ll see.
But again, consider history. As Warren Buffett noted in 2008, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.”
We can now add another pandemic to that list, and no doubt there will be other unnerving events in the decades ahead. Still, I believe history’s lesson is clear: Our economy—and our markets—will continue to prosper over the long term.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Hooking up a railcar in subzero temperatures isn’t something I’ll be doing if I can supplement my savings with Social Security," says Juan Fourneau, explaining why he'll likely claim benefits at 62.
Catherine Horiuchi just paid for the first college semester for one of her daughters. It is, she notes, the largest sum she has ever spent, except for the homes she's bought.
"I’m hesitant to say the experts are wrong about how much you need for emergencies," says Bill Ehart. "They suggest having three-to-six months’ worth of fixed expenses saved up. But they’re wrong."
If you think your workplace retirement plan is bad, check out the offerings in many school districts. "The 403(b) business is designed to make money from teachers, not for them," writes Chris Nye.
Planning to rent a car? Take some tips—13 to be precise—from Mike Flack, who knows a little about the subject after spending four years driving across four continents.
"When Genevieve was young, we made an event of opening her savings account," recounts Greg Spears. "We chose a bank with a grand marble lobby where a kindly banker welcomed their littlest customer."
While you're at it, also check out last week's blog posts, including John Lim's three thoughts, Dennis Friedman's six crucial numbers, Mike Zaccardi on the VIX, Kyle McIntosh on investing abroad and Mike Drak on a fulfilling retirement.
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.
It’s the best of times, of course, because the market continues to hit new highs. From a low of 2,237 in March 2020, the S&P 500 has doubled. Over the 10 years through July, the S&P has delivered an average annual return of 15.4%, including dividends, far above the historical average of 10%. Since the downturn in 2009, the market has logged just one negative year: In 2018, there was a modest, all-but-forgotten decline of 4.4%.
So why would anyone say that it’s also the worst of times? The worry is that things are too good. Investors have enjoyed seeing the numbers on their financial statements get bigger, but it also feels like climbing a ladder: With every step higher, there is farther—potentially—to fall. And it isn’t just the stock market. With interest rates near all-time lows, the potential for losses in the bond market has also grown.
As investors, we’re all taught to think long term. Everyone understands that the market can be unpredictable and volatile from year to year, so we’re supposed to stay focused on the horizon, not the day to day. But there’s a difference between what we know we should do and what we’re actually capable of doing. While the overall market results cited above have been very positive, it certainly hasn’t been a straight line. The pandemic has left millions unemployed and has turned some industries upside down. The financial markets are also displaying excesses—from cryptocurrencies to meme stocks—that make people nervous.
This skittishness isn’t just affecting those currently invested. You also see it among those sitting on the sidelines, too nervous to put money into a market that appears "priced for perfection." In an environment like this, how can we keep our investment cool? Below are six ideas:
1. Remove emotion. What does this mean in practice? Whether you work with an advisor or not, I would draw up a formal investment policy statement. It need not be complicated—a single page will do.
In this document, you can spell out your strategy, including asset allocation targets and rebalancing rules. Then try hard to adhere to it. This can be valuable in an environment like today’s, but it can be even more helpful when the market goes haywire.
Consider what stocks did early last year. Before the Federal Reserve stepped in, the market plunged more than 30%—its quickest decline ever. The drop was terrifying, and no one knew when it would end. But investors who had asset allocation targets and rebalanced according to their plan benefitted greatly during the ensuing rebound.
2. Forget forecasting. The stock market is cruel. It can make the smartest person feel clumsy. Again, think back to last year. As Zoom took over people’s work lives, many predicted doom for commercial real estate. Others, meanwhile, worried about the election. And as the pandemic raged, many worried that we were headed for a prolonged economic downturn. One prominent hedge fund manager declared, “Hell is coming.”
Things, of course, turned out much better than anyone expected. As a result, the investor who fared best was the one who didn't tinker too much. It's counterintuitive, but—unlike in other areas of our lives—there’s only a loose connection between effort and results when it comes to investing.
3. Take it slow. If you have cash you'd like to invest but are hesitant to jump into the market, that's understandable. Dollar-cost averaging is a common solution to this problem. Can you do better? Maybe. There are lots of variations on traditional dollar-cost averaging.
For instance, there’s value averaging. Indeed, I often accelerate stock market purchases when prices drop. But ultimately, there's no way to know in advance which buying strategy will deliver the best result. The most important thing, in my view, is just to get started at a pace that you'll be able to stick with.
4. Take the long view. The late Jack Bogle, founder of Vanguard Group, urged investors to think in terms of decades. That's because the market is entirely unpredictable in the short term but at least a little bit predictable in the medium and long term. If the market is high today, for example, it might be even higher next year. But it stands to reason that prospective returns over the next decade will be lower following a dozen years in which results were so far above average.
What does this mean for you? If you're in retirement or retiring soon, you'll want to build a financial buffer into your plan. I wouldn't count on 10% returns—the historical annual average—over the coming decade. On the other hand, if you're earlier in your career, it would defy math to conclude that an expensive market today necessarily means that returns will be below average for multiple decades into the future. Yes, you want to consider that possibility in your financial plan. But it's just one potential outcome. If you're 30, 40 or even 50 years old today, I wouldn't take an overly defensive posture just because the market currently seems high.
5. Consider history. Investment commentators love debating whether the market is headed higher or lower. But these debates usually aren’t productive. I’m not predicting that the market will go down or that it’ll go up—in the near term. Instead, what I’m predicting is that over the long term it will go higher. That’s where I find history instructive.
If you went back to 1929, I’m sure there was a lot of handwringing after the market had doubled over the prior two years. Similarly, there was plenty of investor angst in 2000 and 2008. And those worries were vindicated, but only in the short run. In all of these cases, the market eventually bounced back and went much higher. I see it the same way today. Maybe the market is high and maybe the next decade will be far less profitable. But that isn't guaranteed—and it tells you nothing about the decades after that.
6. Have faith. In recent years, I’ve heard growing murmurs that America's economy is starting to crumble—and that we're headed for a long period of malaise like Japan or even the Roman Empire. Are those things possible? I suppose.
But I’ve also heard powerful arguments to the contrary. Larry Siegel's 2019 book Fewer, Richer, Greener argues that we're entering a period of unprecedented prosperity. I’m not sure which version of the future we’ll see.
But again, consider history. As Warren Buffett noted in 2008, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.”
We can now add another pandemic to that list, and no doubt there will be other unnerving events in the decades ahead. Still, I believe history’s lesson is clear: Our economy—and our markets—will continue to prosper over the long term.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Hooking up a railcar in subzero temperatures isn’t something I’ll be doing if I can supplement my savings with Social Security," says Juan Fourneau, explaining why he'll likely claim benefits at 62.
Catherine Horiuchi just paid for the first college semester for one of her daughters. It is, she notes, the largest sum she has ever spent, except for the homes she's bought.
"I’m hesitant to say the experts are wrong about how much you need for emergencies," says Bill Ehart. "They suggest having three-to-six months’ worth of fixed expenses saved up. But they’re wrong."
If you think your workplace retirement plan is bad, check out the offerings in many school districts. "The 403(b) business is designed to make money from teachers, not for them," writes Chris Nye.
Planning to rent a car? Take some tips—13 to be precise—from Mike Flack, who knows a little about the subject after spending four years driving across four continents.
"When Genevieve was young, we made an event of opening her savings account," recounts Greg Spears. "We chose a bank with a grand marble lobby where a kindly banker welcomed their littlest customer."
While you're at it, also check out last week's blog posts, including John Lim's three thoughts, Dennis Friedman's six crucial numbers, Mike Zaccardi on the VIX, Kyle McIntosh on investing abroad and Mike Drak on a fulfilling retirement.
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 Cooling Off appeared first on HumbleDollar.
August 20, 2021
Mixed Bag
WHEN DESIGNING a portfolio, a critical decision is how to allocate your money across stocks, bonds and other investments. Within stocks, you’ll need to make an additional choice: How to split money between U.S. and international. A quick survey of finance-related websites turns up recommendations of 25% to 40% for an investor’s foreign stock allocation.
While I agree that investors should have a meaningful percentage of their portfolio in overseas stocks, I don’t think investors should lose sleep over whether they’re at the high or low end of this range. The reason: Companies in U.S. stock funds have significant foreign exposure. Ditto for stocks in international funds.
For instance, the top five companies in the S&P 500—Apple, Microsoft, Amazon, Google’s parent Alphabet and Facebook—represent more than 20% of the S&P 500 index’s value. Based on their most recent quarterly earnings reports, I calculate that these companies on average earn more than half of their revenues outside the U.S. While the foreign sales percentage may be lower for smaller companies in the S&P 500, investors in broadly diversified U.S. stock funds clearly have substantial international exposure.
Similarly, international stock funds offer significant exposure to the U.S. economy. I analyzed the revenue mix of the top five companies in the MSCI EAFE index, namely Nestle, ASML, Roche, LVMH and Novartis. Using recent earnings reports, I calculate that an average 30% of revenues for these companies were earned in the U.S.
While these five stocks only represent 8% of the MSCI EAFE index’s value—it’s a much less concentrated index than the S&P 500—there’s no doubt that international firms have significant exposure to the U.S. economy.
My allocation advice: Instead of trying to perfect your allocation to international stock funds, spend more time making sure your overall allocation to all stocks is correct because that, more than anything, will drive your portfolio’s risk level.
While I agree that investors should have a meaningful percentage of their portfolio in overseas stocks, I don’t think investors should lose sleep over whether they’re at the high or low end of this range. The reason: Companies in U.S. stock funds have significant foreign exposure. Ditto for stocks in international funds.
For instance, the top five companies in the S&P 500—Apple, Microsoft, Amazon, Google’s parent Alphabet and Facebook—represent more than 20% of the S&P 500 index’s value. Based on their most recent quarterly earnings reports, I calculate that these companies on average earn more than half of their revenues outside the U.S. While the foreign sales percentage may be lower for smaller companies in the S&P 500, investors in broadly diversified U.S. stock funds clearly have substantial international exposure.
Similarly, international stock funds offer significant exposure to the U.S. economy. I analyzed the revenue mix of the top five companies in the MSCI EAFE index, namely Nestle, ASML, Roche, LVMH and Novartis. Using recent earnings reports, I calculate that an average 30% of revenues for these companies were earned in the U.S.
While these five stocks only represent 8% of the MSCI EAFE index’s value—it’s a much less concentrated index than the S&P 500—there’s no doubt that international firms have significant exposure to the U.S. economy.
My allocation advice: Instead of trying to perfect your allocation to international stock funds, spend more time making sure your overall allocation to all stocks is correct because that, more than anything, will drive your portfolio’s risk level.
The post Mixed Bag appeared first on HumbleDollar.
It Takes a Village
FINDING HIGH-QUALITY, affordable childcare has always been a challenge, but it became especially so during the pandemic. Suddenly, thousands of parents were working from home. Many childcare centers closed or restricted new enrollment. Our small South Jersey town saw an influx of families fleeing New York and Philadelphia. That put a strain on limited local resources, and spots for the summer have been hard to find.
I know a little about this because my youngest son and daughter-in-law have been struggling to find consistent childcare for their 17-month-old son James. They’ve been successful, but it’s taken a combination of babysitters, flexible work schedules and extended family support.
The childcare website Winnie shows that, in Manhattan, there’s a one-year waiting list for infants and a two-year waiting list for preschool children. According to Winnie, childcare in Manhattan—one of the most expensive places in the country to live—costs between $1,300 and $2,500 per month. This equates to $15,600 to $30,000 per year.
That sounds like a lot of money for childcare and, for most U.S. families, it would be. But I think it’s helpful to look at the cost on a per-hour basis. Assuming a child attends 48 weeks a year and 40 hours per week, that’s 1,920 hours of childcare per year. At the high end of $30,000, that’s $15.63 per hour. That’s similar to what the fast-food restaurants are paying in our area. My conclusion: As expensive as childcare is, it seems like a bargain compared to many of the other services we pay for.
I know a little about this because my youngest son and daughter-in-law have been struggling to find consistent childcare for their 17-month-old son James. They’ve been successful, but it’s taken a combination of babysitters, flexible work schedules and extended family support.
The childcare website Winnie shows that, in Manhattan, there’s a one-year waiting list for infants and a two-year waiting list for preschool children. According to Winnie, childcare in Manhattan—one of the most expensive places in the country to live—costs between $1,300 and $2,500 per month. This equates to $15,600 to $30,000 per year.
That sounds like a lot of money for childcare and, for most U.S. families, it would be. But I think it’s helpful to look at the cost on a per-hour basis. Assuming a child attends 48 weeks a year and 40 hours per week, that’s 1,920 hours of childcare per year. At the high end of $30,000, that’s $15.63 per hour. That’s similar to what the fast-food restaurants are paying in our area. My conclusion: As expensive as childcare is, it seems like a bargain compared to many of the other services we pay for.
The post It Takes a Village appeared first on HumbleDollar.
Less Is More
I RECENTLY INJURED my lower back playing tennis. I rested for a day and then decided I was well enough to resume my usual activities. But my haste worsened the pain, extending my recuperation to more than a week. Every move���even sneezing���hurt. Putting on my pants was a major struggle. I was forced to do nothing except rest.
Doing nothing was the one of the hardest things I���ve ever done. Ironically, at the time of my injury, I was working with Jim on writing a book on Daoism, and I happened to be focusing on the idea of wu wei or ���nonaction.��� The notion: We shouldn���t act unnecessarily and instead do so only when we absolutely have to.
In the Dao De Ching , Lao Tzu cautions against interfering with the state of things. He sees the world as one of precious balance, where an action that isn���t carefully considered might easily lead to an avalanche of unwanted effects before balance is eventually restored.
This got me thinking about the financial world���and about how much better off we���d be if we adopted this kind of cautionary thinking by investing in index funds, keeping costs low and interfering with our portfolio's natural growth as little as possible. History has shown it���s extremely difficult to beat the market averages year in and year out.
Sometimes, a rush to action hurts us. As Warren Buffett once observed, "The stock market is a device to transfer money from the impatient to the patient."
Doing nothing was the one of the hardest things I���ve ever done. Ironically, at the time of my injury, I was working with Jim on writing a book on Daoism, and I happened to be focusing on the idea of wu wei or ���nonaction.��� The notion: We shouldn���t act unnecessarily and instead do so only when we absolutely have to.
In the Dao De Ching , Lao Tzu cautions against interfering with the state of things. He sees the world as one of precious balance, where an action that isn���t carefully considered might easily lead to an avalanche of unwanted effects before balance is eventually restored.
This got me thinking about the financial world���and about how much better off we���d be if we adopted this kind of cautionary thinking by investing in index funds, keeping costs low and interfering with our portfolio's natural growth as little as possible. History has shown it���s extremely difficult to beat the market averages year in and year out.
Sometimes, a rush to action hurts us. As Warren Buffett once observed, "The stock market is a device to transfer money from the impatient to the patient."
The post Less Is More appeared first on HumbleDollar.
13 Rental Car Rules
IN SEPTEMBER 2017,��my wife and I sold our��home, car and almost all our earthly possessions. We spent the next four years driving across four continents. Along the way, I learned a great deal about renting a car that, in this rental-car-challenged world, could make your travels less costly and more reliable.
1. I use Expedia, Kayak and Hotwire to compare rental car rates. When you book, pay attention to whether your reservation is free cancellation or pay now (noncancellable). You can sometimes save with a noncancellable booking, but what if your plane is delayed or you cancel your trip?
2. Rental companies use bait-and-switch pricing. You notice a car you like for $30 a day. Since you will be renting for three days, you would expect to be charged $90. Wrong. When you click "book," the price is now magically $205.72 due to concession fee recovery, vehicle license cost recovery, customer facility charge, tax and whatever else. The upshot: Look carefully at the bottom line before booking.
3. One option is to book a free cancellation rental car and then scour the internet for a better deal.��Payment may be charged prior to the fully cancellable date, so���if you cancel���you���ll have to wait for the refund to hit your credit card. If this is a foreign transaction, changes in the exchange rate could cause the refund to be more or less than the initial charge. If it���s less, call your credit card company to ask for the difference. If it���s more, don���t bother.
4. Almost all rental car companies make you pay an extra fee for an extra driver unless it���s your spouse���and some charge for your spouse as well. In some states, such as California, this is against the law. In others, the additional-driver fee is capped.��Do your homework and confirm the charge at the rental counter.
5. Beware the��manager's special. The manager's special generally offers significant savings, but you could end up with a van, mini-van, pickup truck or exotic car that���s hard to drive. Worse yet, your credit card or auto policy may not provide insurance coverage for that type of vehicle.
We rented a manager���s special in Michigan to save $250. It was a Ram 1500 pickup truck. After snaring the rear bumper on a utility pole��guy wire���don't ask���I discovered my insurance didn���t cover pickups. Uh-oh. The wife took it to get the bumper fixed and, because the body shop couldn���t perfectly repair it, she wasn't charged. When she returned the truck, the rental car company didn't mind the minor imperfection. It was our lucky day.
6. Most rental car companies will offer you some kind of toll transponder for a fee. In some places, such as New York City and New Jersey, it���s almost a necessity. But in Los Angeles and San Diego, you won���t need it because tolls are paid online via tag number.
If the rental car company charges your credit card for tolls after returning the car, dispute them if they seem unreasonable. After one trip, I noticed a $25 toll charge from the rental car company. As this seemed a little steep, I disputed the charge with my credit card company and won.
7. Document existing damage to the car��and��take photos or a video of the car prior to leaving the rental car lot. While you���re at it, snap a photo of your rental contract.
We rented a car in Marrakesh, Morocco, and returned it at the Rabat airport. The agent claimed the left front blinker was damaged. Fortunately, I had a��photo��showing the damage was preexisting. Case dismissed.
8. If the tank isn���t full, take a photo of the gas gauge at pickup and at return.��We rented a U-Haul van to move all the worldly possessions of my dear 92-year-old mother. Dropped the van off in Herndon, Virginia, and took a photo of the gas gauge. A few weeks later, I was charged $30 for not returning the van with the same amount of gas it had when I picked it up. I showed them the before and after photos, and the charge was reversed.
9. The collision and comprehensive coverage on your existing auto insurance will generally provide collision and comprehensive insurance for your rental car. Ditto for your liability insurance coverage.
If you don���t own a car, it may be worth it to buy rental car liability insurance that provides liability insurance in the U.S. Have a copy of your insurance card because some rental car companies make you buy liability insurance if you can���t prove you have auto insurance. This happened to me in Puerto Rico.
10. Compare the price you were quoted online with the rental contract you���re being asked to sign. Make sure you understand any and all additional charges, such as toll transponder, GPS and upgrades. If you need to dispute unexpected additional charges, this will help your case with your credit card company.
11. Compare the rental contract price with the amount your credit card is charged. It should be the same as the final invoice that was printed or emailed when you returned the car. If there���s a difference you don���t agree with, dispute the charge. I was once charged $422.72 more than the rental contract price. I disputed it with my credit card and won after I produced a photo of my rental contract price.
12. As a rule, don���t buy collision damage waiver coverage in the U.S. You���re more than adequately covered through your auto insurance and credit card. If you���re renting outside the U.S., review your credit card benefits. Many credit cards specifically exclude this coverage in Israel, Jamaica, the Republic of Ireland and Northern Ireland. If in doubt, get a document from your credit card issuer verifying coverage. You may need to show it at pickup���and, if you don���t have it, you may be required to purchase insurance.
13. Renting an automatic transmission overseas can be quite costly. I rented a car with a manual transmission in Ireland and the U.K., and managed just fine. What one man can do, another can. When backing up, however, just remember to look over the "other" shoulder.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.
1. I use Expedia, Kayak and Hotwire to compare rental car rates. When you book, pay attention to whether your reservation is free cancellation or pay now (noncancellable). You can sometimes save with a noncancellable booking, but what if your plane is delayed or you cancel your trip?
2. Rental companies use bait-and-switch pricing. You notice a car you like for $30 a day. Since you will be renting for three days, you would expect to be charged $90. Wrong. When you click "book," the price is now magically $205.72 due to concession fee recovery, vehicle license cost recovery, customer facility charge, tax and whatever else. The upshot: Look carefully at the bottom line before booking.
3. One option is to book a free cancellation rental car and then scour the internet for a better deal.��Payment may be charged prior to the fully cancellable date, so���if you cancel���you���ll have to wait for the refund to hit your credit card. If this is a foreign transaction, changes in the exchange rate could cause the refund to be more or less than the initial charge. If it���s less, call your credit card company to ask for the difference. If it���s more, don���t bother.
4. Almost all rental car companies make you pay an extra fee for an extra driver unless it���s your spouse���and some charge for your spouse as well. In some states, such as California, this is against the law. In others, the additional-driver fee is capped.��Do your homework and confirm the charge at the rental counter.
5. Beware the��manager's special. The manager's special generally offers significant savings, but you could end up with a van, mini-van, pickup truck or exotic car that���s hard to drive. Worse yet, your credit card or auto policy may not provide insurance coverage for that type of vehicle.
We rented a manager���s special in Michigan to save $250. It was a Ram 1500 pickup truck. After snaring the rear bumper on a utility pole��guy wire���don't ask���I discovered my insurance didn���t cover pickups. Uh-oh. The wife took it to get the bumper fixed and, because the body shop couldn���t perfectly repair it, she wasn't charged. When she returned the truck, the rental car company didn't mind the minor imperfection. It was our lucky day.
6. Most rental car companies will offer you some kind of toll transponder for a fee. In some places, such as New York City and New Jersey, it���s almost a necessity. But in Los Angeles and San Diego, you won���t need it because tolls are paid online via tag number.
If the rental car company charges your credit card for tolls after returning the car, dispute them if they seem unreasonable. After one trip, I noticed a $25 toll charge from the rental car company. As this seemed a little steep, I disputed the charge with my credit card company and won.
7. Document existing damage to the car��and��take photos or a video of the car prior to leaving the rental car lot. While you���re at it, snap a photo of your rental contract.
We rented a car in Marrakesh, Morocco, and returned it at the Rabat airport. The agent claimed the left front blinker was damaged. Fortunately, I had a��photo��showing the damage was preexisting. Case dismissed.
8. If the tank isn���t full, take a photo of the gas gauge at pickup and at return.��We rented a U-Haul van to move all the worldly possessions of my dear 92-year-old mother. Dropped the van off in Herndon, Virginia, and took a photo of the gas gauge. A few weeks later, I was charged $30 for not returning the van with the same amount of gas it had when I picked it up. I showed them the before and after photos, and the charge was reversed.
9. The collision and comprehensive coverage on your existing auto insurance will generally provide collision and comprehensive insurance for your rental car. Ditto for your liability insurance coverage.
If you don���t own a car, it may be worth it to buy rental car liability insurance that provides liability insurance in the U.S. Have a copy of your insurance card because some rental car companies make you buy liability insurance if you can���t prove you have auto insurance. This happened to me in Puerto Rico.
10. Compare the price you were quoted online with the rental contract you���re being asked to sign. Make sure you understand any and all additional charges, such as toll transponder, GPS and upgrades. If you need to dispute unexpected additional charges, this will help your case with your credit card company.
11. Compare the rental contract price with the amount your credit card is charged. It should be the same as the final invoice that was printed or emailed when you returned the car. If there���s a difference you don���t agree with, dispute the charge. I was once charged $422.72 more than the rental contract price. I disputed it with my credit card and won after I produced a photo of my rental contract price.
12. As a rule, don���t buy collision damage waiver coverage in the U.S. You���re more than adequately covered through your auto insurance and credit card. If you���re renting outside the U.S., review your credit card benefits. Many credit cards specifically exclude this coverage in Israel, Jamaica, the Republic of Ireland and Northern Ireland. If in doubt, get a document from your credit card issuer verifying coverage. You may need to show it at pickup���and, if you don���t have it, you may be required to purchase insurance.
13. Renting an automatic transmission overseas can be quite costly. I rented a car with a manual transmission in Ireland and the U.K., and managed just fine. What one man can do, another can. When backing up, however, just remember to look over the "other" shoulder.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post 13 Rental Car Rules appeared first on HumbleDollar.
August 19, 2021
Neighborly Advice
NOW MORE THAN EVER, people are hungry for yield or, failing that, a reliable return that doesn���t hinge on the performance of the stock and bond markets. Those puny money market and ���high yield��� savings account rates may suffice for your emergency fund. But after factoring in inflation, keeping too much in cash investments is a losing proposition.
Last week, a 50-something neighbor asked me for investment ideas to help him bridge the gap between now and retirement. Spoiler alert: I didn���t have an elixir. I simply suggested taking a holistic investment approach that focused on total return���price appreciation plus income���and that was based on his ability, willingness and need to bear risk. My concern: If he started reaching for extra yield, he could end up taking risks he didn���t fully grasp.
Confession: Like my neighbor, I���ve been also pondering how I can boost my returns without taking unreasonable risk. With a little extra cash I had, I recently bought some Series I savings bonds. But I���ve also been considering other riskier options:
A target-date income fund. That would represent a step out on the risk spectrum relative to cash.
A minimum-volatility stock fund. That would have even more upside, but nobody should assume ���minimum volatility��� means no volatility.
A mini-portfolio of low-beta individual stocks.
There are also alternative investments like physical real estate, art, wine and even farmland���all just a few computer clicks away. These days, it seems anyone can all too easily reach for yield or return in all manner of investments. Be careful. Those alts are expensive and illiquid, too.
Here���s a trick: Pretend you���re managing someone else���s money. While I don���t want to handle my neighbor���s investment account, I found it easy to recommend a simple, low-cost solution to him, even as I���m mildly confounded by the paradox of choice. What to do? I should probably follow the advice I doled out to my neighbor���and stick with plain-vanilla investments.
Last week, a 50-something neighbor asked me for investment ideas to help him bridge the gap between now and retirement. Spoiler alert: I didn���t have an elixir. I simply suggested taking a holistic investment approach that focused on total return���price appreciation plus income���and that was based on his ability, willingness and need to bear risk. My concern: If he started reaching for extra yield, he could end up taking risks he didn���t fully grasp.
Confession: Like my neighbor, I���ve been also pondering how I can boost my returns without taking unreasonable risk. With a little extra cash I had, I recently bought some Series I savings bonds. But I���ve also been considering other riskier options:
A target-date income fund. That would represent a step out on the risk spectrum relative to cash.
A minimum-volatility stock fund. That would have even more upside, but nobody should assume ���minimum volatility��� means no volatility.
A mini-portfolio of low-beta individual stocks.
There are also alternative investments like physical real estate, art, wine and even farmland���all just a few computer clicks away. These days, it seems anyone can all too easily reach for yield or return in all manner of investments. Be careful. Those alts are expensive and illiquid, too.
Here���s a trick: Pretend you���re managing someone else���s money. While I don���t want to handle my neighbor���s investment account, I found it easy to recommend a simple, low-cost solution to him, even as I���m mildly confounded by the paradox of choice. What to do? I should probably follow the advice I doled out to my neighbor���and stick with plain-vanilla investments.
The post Neighborly Advice appeared first on HumbleDollar.
