Jonathan Clements's Blog, page 289
May 10, 2021
My Best Investments
SOMETIMES OUR BEST investments can be a great guide to what not to do���even better than our worst��investments. Consider three of my best:
1. Master limited partnerships. In 1999, I read an article by Paul Sturm in the��much-missed��SmartMoney��magazine. It was a comprehensive review of a security I hadn���t previously heard about, namely master limited partnerships (MLPs).
The two decades since have made the unique commonplace. Still, for those who remain blissfully ignorant, an MLP combines the tax benefits of a private partnership���gains and losses are passed through to investors, with no taxes owed by the company itself���with the liquidity of a publicly traded company. Because of the peculiar tax structure of MLPs, investors are able to defer taxes on the distributions they receive, sometimes almost indefinitely. MLPs are mostly limited to oil and gas pipeline companies, another result of the vagaries of the tax code.
To me, they were the perfect security: tax-deferred, cash flow rich, inflation-protected and high-yielding. We���re talking about companies like Suburban Propane Partners, NuStar Energy, Kinder Morgan and TEPPCO Partners. I remember feeling like Miller Huggins reviewing the lineup card for the 1927 Yankees: all heavy hitters and reliable. Would you say ���no��� to investing in Earle Combs, Mark Koenig, Babe Ruth and Lou Gehrig, and tax-deferred to boot? I bought my fill and was rewarded quite nicely, though the K-1s were a pain in the ass. But who am I to complain? For some 10 golden years, I felt like a youthful Warren Buffett, consistently outperforming the S&P 500 with less volatility.
But alas poor Yorick, no security or investor is perfect. I���ve come to realize that��every��publicly traded company will borrow to the limit of its cash flow, and investors��� quest for yield is both insatiable and uncompromising. I won���t bore you with the details of the subsequent deleveraging and retail investor flight. But since the Great Recession, my lineup has reliably underperformed the S&P 500. Company restructurings have stuck me with hefty tax bills, reduced distributions and suffering share prices. As Job said, ���The Lord gave, and the Lord hath taken away,��� and maybe a little more.
2. Monarch Cement Company. In 2015, I started following a contributor on the mother-of-all investing websites Seeking Alpha,��whose column was titled ���Sifting the World.��� This name had nothing to do with my memories as a child sifting flour for my mother���s lemon cake and everything to do with a quote from Charlie Munger. I found Sifting���s investment philosophy to be refreshing, because it was the antithesis of the usual Seeking Alpha analysis such as ���Boeing Tanker Fuels Cash��� or ���Pfizer: Buy It for a Safe 4% Plus Dividend Yield.��� Instead, it tended to be event-driven���with a not-so-distant event serving to unlock the value of the recommended security.
In this specific case, Monarch Cement Company (MCEM) had initiated a 1-for-600 reverse stock split, in which each owner of record that owned fewer than 600 shares would receive $30 a share. As the stock was currently trading at some $28.50 and the event was three months away, I was looking at a potential 20%-plus annualized return. I bought 100 shares and waited patiently for my ship to come in.
Well, it never did, as the thesis for this investment turned on the meaning of ���owner of record.��� In this case, it meant investors who hold shares directly in their name, as opposed to the ���beneficial owner,��� who holds shares indirectly, through a bank or broker-dealer, sometimes said to be holding shares in ���street name.��� As I held my shares in street name, my shares were never redeemed for $30 and continued to be worth around $28 to $29.
I was a little embarrassed. But I was also angry and wanted my $30 payday. I placed a $30 sell limit order, which expired unfilled. I promptly forgot about the stock and moved on to my next investment ���score.��� And I���m thankful I did, as I am still the beneficial owner of 100 shares of Monarch, which are now worth��over $100 a share and therefore I get to pat myself on the back thinking about the even higher annualized return that I���ve since achieved.
3. Genzyme. In 2010, my wife hired a personal trainer. She had religiously worked out for years but wanted to take it to the next level. As part of the new training regimen, her trainer had her run up and down stairs at the gym. This struck me as a little odd. I wondered why the trainer had my wife, who wasn���t a spring chicken, running up and down stairs at a gym filled with millions of dollars��� worth of fitness equipment. Then again, I thought, ���What did I know about physical training, he���s the professional.��� Well, my concerns were valid, as a few days later my wife came home with a very sore right knee, which in time became quite painful and eventually required surgery for a torn meniscus.
The surgery went well, but the knee continued to be painful. She tried physical therapy. When that didn���t get the job done, she turned to having a shot of Synvisc injected into her knee. Synvisc is a drug containing hyaluronan, which is a natural joint lubricant and cushion. It is synthesized from the cockscomb of a rooster���the feathers on his crown. I was a little skeptical. Chicken feathers?
The thing is, though, it worked. Almost as important, it was covered by insurance. In fact, it worked so well that my wife wanted to invest in the company that made it, Genzyme. Now, back then, I was a proponent of fundamental analysis, but my wife was quite excited, and I didn���t want to ruin the moment by mentioning terms like price-earnings multiple, quick ratio or drug pipeline, so I said ���yes��� and a few days later she purchased some shares for $54.
A few months later, I���m reading The Wall Street Journal and almost fall off my chair when I notice a certain article mentioning that Sanofi (SNY) was buying Genzyme for $74 a share and we were looking at a 37% annualized return. Apparently, my wife was onto something with her orthopedic analysis and, more important, we would be rolling in it. When I returned home from work, I excitedly told my wife the ���word��� and then started planning how to spend our newfound riches���vacation, new car and such���only to be informed that we owned just 32 shares.
Reviewing my best investments has confirmed what I already knew: Trying to beat the market is a fool���s errand, with outperformance more likely due to luck than skill. The humble investor needs to invest in low-cost mutual funds and have patience. That said, I���ve started putting a little money aside, as my wife is complaining about a sore 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. Master limited partnerships. In 1999, I read an article by Paul Sturm in the��much-missed��SmartMoney��magazine. It was a comprehensive review of a security I hadn���t previously heard about, namely master limited partnerships (MLPs).
The two decades since have made the unique commonplace. Still, for those who remain blissfully ignorant, an MLP combines the tax benefits of a private partnership���gains and losses are passed through to investors, with no taxes owed by the company itself���with the liquidity of a publicly traded company. Because of the peculiar tax structure of MLPs, investors are able to defer taxes on the distributions they receive, sometimes almost indefinitely. MLPs are mostly limited to oil and gas pipeline companies, another result of the vagaries of the tax code.
To me, they were the perfect security: tax-deferred, cash flow rich, inflation-protected and high-yielding. We���re talking about companies like Suburban Propane Partners, NuStar Energy, Kinder Morgan and TEPPCO Partners. I remember feeling like Miller Huggins reviewing the lineup card for the 1927 Yankees: all heavy hitters and reliable. Would you say ���no��� to investing in Earle Combs, Mark Koenig, Babe Ruth and Lou Gehrig, and tax-deferred to boot? I bought my fill and was rewarded quite nicely, though the K-1s were a pain in the ass. But who am I to complain? For some 10 golden years, I felt like a youthful Warren Buffett, consistently outperforming the S&P 500 with less volatility.
But alas poor Yorick, no security or investor is perfect. I���ve come to realize that��every��publicly traded company will borrow to the limit of its cash flow, and investors��� quest for yield is both insatiable and uncompromising. I won���t bore you with the details of the subsequent deleveraging and retail investor flight. But since the Great Recession, my lineup has reliably underperformed the S&P 500. Company restructurings have stuck me with hefty tax bills, reduced distributions and suffering share prices. As Job said, ���The Lord gave, and the Lord hath taken away,��� and maybe a little more.
2. Monarch Cement Company. In 2015, I started following a contributor on the mother-of-all investing websites Seeking Alpha,��whose column was titled ���Sifting the World.��� This name had nothing to do with my memories as a child sifting flour for my mother���s lemon cake and everything to do with a quote from Charlie Munger. I found Sifting���s investment philosophy to be refreshing, because it was the antithesis of the usual Seeking Alpha analysis such as ���Boeing Tanker Fuels Cash��� or ���Pfizer: Buy It for a Safe 4% Plus Dividend Yield.��� Instead, it tended to be event-driven���with a not-so-distant event serving to unlock the value of the recommended security.
In this specific case, Monarch Cement Company (MCEM) had initiated a 1-for-600 reverse stock split, in which each owner of record that owned fewer than 600 shares would receive $30 a share. As the stock was currently trading at some $28.50 and the event was three months away, I was looking at a potential 20%-plus annualized return. I bought 100 shares and waited patiently for my ship to come in.
Well, it never did, as the thesis for this investment turned on the meaning of ���owner of record.��� In this case, it meant investors who hold shares directly in their name, as opposed to the ���beneficial owner,��� who holds shares indirectly, through a bank or broker-dealer, sometimes said to be holding shares in ���street name.��� As I held my shares in street name, my shares were never redeemed for $30 and continued to be worth around $28 to $29.
I was a little embarrassed. But I was also angry and wanted my $30 payday. I placed a $30 sell limit order, which expired unfilled. I promptly forgot about the stock and moved on to my next investment ���score.��� And I���m thankful I did, as I am still the beneficial owner of 100 shares of Monarch, which are now worth��over $100 a share and therefore I get to pat myself on the back thinking about the even higher annualized return that I���ve since achieved.
3. Genzyme. In 2010, my wife hired a personal trainer. She had religiously worked out for years but wanted to take it to the next level. As part of the new training regimen, her trainer had her run up and down stairs at the gym. This struck me as a little odd. I wondered why the trainer had my wife, who wasn���t a spring chicken, running up and down stairs at a gym filled with millions of dollars��� worth of fitness equipment. Then again, I thought, ���What did I know about physical training, he���s the professional.��� Well, my concerns were valid, as a few days later my wife came home with a very sore right knee, which in time became quite painful and eventually required surgery for a torn meniscus.
The surgery went well, but the knee continued to be painful. She tried physical therapy. When that didn���t get the job done, she turned to having a shot of Synvisc injected into her knee. Synvisc is a drug containing hyaluronan, which is a natural joint lubricant and cushion. It is synthesized from the cockscomb of a rooster���the feathers on his crown. I was a little skeptical. Chicken feathers?
The thing is, though, it worked. Almost as important, it was covered by insurance. In fact, it worked so well that my wife wanted to invest in the company that made it, Genzyme. Now, back then, I was a proponent of fundamental analysis, but my wife was quite excited, and I didn���t want to ruin the moment by mentioning terms like price-earnings multiple, quick ratio or drug pipeline, so I said ���yes��� and a few days later she purchased some shares for $54.
A few months later, I���m reading The Wall Street Journal and almost fall off my chair when I notice a certain article mentioning that Sanofi (SNY) was buying Genzyme for $74 a share and we were looking at a 37% annualized return. Apparently, my wife was onto something with her orthopedic analysis and, more important, we would be rolling in it. When I returned home from work, I excitedly told my wife the ���word��� and then started planning how to spend our newfound riches���vacation, new car and such���only to be informed that we owned just 32 shares.
Reviewing my best investments has confirmed what I already knew: Trying to beat the market is a fool���s errand, with outperformance more likely due to luck than skill. The humble investor needs to invest in low-cost mutual funds and have patience. That said, I���ve started putting a little money aside, as my wife is complaining about a sore 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 My Best Investments appeared first on HumbleDollar.
May 9, 2021
Eyeing the Line
AN MIT PROFESSOR named Edward Lorenz published a paper in 1972 titled Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?
It was a catchy title. Though Lorenz didn’t mean it literally, the basic idea was that events in the physical world are highly interconnected—more so than they might appear.
The world of investments is similarly interconnected in ways that aren’t always visible. Just like the weather, investment markets may appear random on the surface, but there is an underlying cause-and-effect logic that drives much of what we see. In finance, the equivalent of Lorenz’s butterfly effect is a notion called the Capital Market Line. The name isn’t as catchy, but the idea is very similar.
The premise of the Capital Market Line is that all investments can be mapped on a continuum. The line starts with government bonds—known as the “risk-free asset”—and then extends to riskier assets, including stocks. Investments further out on the line offer greater return potential but also greater risk. In other words, there’s a tradeoff between risk and return. That’s a well understood concept in finance.
Here’s what’s more interesting about the Capital Market Line: It isn’t simply a menu of independent investment choices. In reality, all the points on the line are interconnected. Specifically, each investment on the line affects its closest neighbors, and they, in turn, affect their closest neighbors. As a result, when the risk or return characteristics of one investment change, that indirectly affects every other investment up and down the line. To visualize this, imagine a crowded subway car. When one person moves, that affects the next person, and the next person, and so on.
The Capital Market Line is worth understanding because it explains so much of what we see in the investment world, and that can help each of us in making decisions with our own portfolio.
In Europe today, you can see the Capital Market Line at work. Because of weak economic growth, the European Central Bank has pushed interest rates below zero. As a result, many banks are no longer paying interest to customers. Instead, accountholders have to pay banks to hold their money. It’s completely upside down. A recent Wall Street Journal article described the result: Frustrated savers have been taking money out of the bank and investing it elsewhere.
The article highlighted a 70-year-old German man named Michael Schacht. “I don’t want to make lots of money,” he said. “I just want a low-risk investment that provides a reasonable return on capital, like 2%, 4%.” But because his bank couldn’t come close to that modest goal, he withdrew his entire balance and opened a brokerage account to buy stocks, bonds and commodities—anything to try to eke out a positive return. He’s not alone. In Germany, the number of brokerage accounts has increased 28% since 2019.
Schacht’s plight is a perfect illustration of the Capital Market Line. When the European Central Bank dropped its interest rate, commercial banks dropped theirs. That prompted millions of new investors to pile into the stock market, and those new investors drove up stock prices to all-time highs.
We’ve seen much the same thing recently in the U.S. Banks are still paying positive interest rates here—thankfully—but bond rates are very low, less than 1% in some cases. The result: Many investors here are making the same choice as folks in Germany. With bond yields so meager, it becomes more and more tempting to take our chances in the stock market, despite the increased risk. Each time another investor decamps from bonds to stocks, it helps push stocks a little higher—like that extra person squeezing himself through the subway doors, forcing everyone else to take a step back.
So far, we’ve been looking at the tradeoffs among cash, bonds and stocks. But those aren’t the only choices. Changes to any investment along the Capital Market Line also cause some investors to search for non-traditional assets. This helps explain the acceleration in home prices over the past year, as well as the sharp rise in cryptocurrencies. Public company stock prices also affect private company valuations, which have seen a similar run-up. In other words, because bond yields are so low, the prices of virtually every other asset have climbed, thus increasing their risk and lowering their prospective returns.
The impact of the Capital Market Line reaches into the furthest corners of the investment world. For example, the recent surge in new special purpose acquisition companies (SPACs) has resulted in a bonanza for holders of many junk bonds. Those two investments might seem unrelated, but here’s the connection: When a SPAC purchases a heavily indebted company, it often triggers a requirement that the company buy back its outstanding debt. This provides a windfall to its bondholders. This is an obscure phenomenon, but it further illustrates the dynamics of the Capital Market Line.
Being an investor at a time like this can feel like an exercise in frustration. Everything seems expensive. That's why I believe it's so important to understand the Capital Market Line. It helps explain why we're seeing what we're seeing, and it helps explain the truth behind the old cliché that “there’s no such thing as a free lunch.” Ultimately, that’s the most important lesson of the Capital Market Line. Many investors have been searching high and low for better deals than those offered by standard investments. Some might exist. But more often than not, the most fundamental principle in finance still holds: If something promises higher returns, it must involve higher risk—and that higher risk could come back to haunt investors.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles.
It was a catchy title. Though Lorenz didn’t mean it literally, the basic idea was that events in the physical world are highly interconnected—more so than they might appear.
The world of investments is similarly interconnected in ways that aren’t always visible. Just like the weather, investment markets may appear random on the surface, but there is an underlying cause-and-effect logic that drives much of what we see. In finance, the equivalent of Lorenz’s butterfly effect is a notion called the Capital Market Line. The name isn’t as catchy, but the idea is very similar.
The premise of the Capital Market Line is that all investments can be mapped on a continuum. The line starts with government bonds—known as the “risk-free asset”—and then extends to riskier assets, including stocks. Investments further out on the line offer greater return potential but also greater risk. In other words, there’s a tradeoff between risk and return. That’s a well understood concept in finance.
Here’s what’s more interesting about the Capital Market Line: It isn’t simply a menu of independent investment choices. In reality, all the points on the line are interconnected. Specifically, each investment on the line affects its closest neighbors, and they, in turn, affect their closest neighbors. As a result, when the risk or return characteristics of one investment change, that indirectly affects every other investment up and down the line. To visualize this, imagine a crowded subway car. When one person moves, that affects the next person, and the next person, and so on.
The Capital Market Line is worth understanding because it explains so much of what we see in the investment world, and that can help each of us in making decisions with our own portfolio.
In Europe today, you can see the Capital Market Line at work. Because of weak economic growth, the European Central Bank has pushed interest rates below zero. As a result, many banks are no longer paying interest to customers. Instead, accountholders have to pay banks to hold their money. It’s completely upside down. A recent Wall Street Journal article described the result: Frustrated savers have been taking money out of the bank and investing it elsewhere.
The article highlighted a 70-year-old German man named Michael Schacht. “I don’t want to make lots of money,” he said. “I just want a low-risk investment that provides a reasonable return on capital, like 2%, 4%.” But because his bank couldn’t come close to that modest goal, he withdrew his entire balance and opened a brokerage account to buy stocks, bonds and commodities—anything to try to eke out a positive return. He’s not alone. In Germany, the number of brokerage accounts has increased 28% since 2019.
Schacht’s plight is a perfect illustration of the Capital Market Line. When the European Central Bank dropped its interest rate, commercial banks dropped theirs. That prompted millions of new investors to pile into the stock market, and those new investors drove up stock prices to all-time highs.
We’ve seen much the same thing recently in the U.S. Banks are still paying positive interest rates here—thankfully—but bond rates are very low, less than 1% in some cases. The result: Many investors here are making the same choice as folks in Germany. With bond yields so meager, it becomes more and more tempting to take our chances in the stock market, despite the increased risk. Each time another investor decamps from bonds to stocks, it helps push stocks a little higher—like that extra person squeezing himself through the subway doors, forcing everyone else to take a step back.
So far, we’ve been looking at the tradeoffs among cash, bonds and stocks. But those aren’t the only choices. Changes to any investment along the Capital Market Line also cause some investors to search for non-traditional assets. This helps explain the acceleration in home prices over the past year, as well as the sharp rise in cryptocurrencies. Public company stock prices also affect private company valuations, which have seen a similar run-up. In other words, because bond yields are so low, the prices of virtually every other asset have climbed, thus increasing their risk and lowering their prospective returns.
The impact of the Capital Market Line reaches into the furthest corners of the investment world. For example, the recent surge in new special purpose acquisition companies (SPACs) has resulted in a bonanza for holders of many junk bonds. Those two investments might seem unrelated, but here’s the connection: When a SPAC purchases a heavily indebted company, it often triggers a requirement that the company buy back its outstanding debt. This provides a windfall to its bondholders. This is an obscure phenomenon, but it further illustrates the dynamics of the Capital Market Line.
Being an investor at a time like this can feel like an exercise in frustration. Everything seems expensive. That's why I believe it's so important to understand the Capital Market Line. It helps explain why we're seeing what we're seeing, and it helps explain the truth behind the old cliché that “there’s no such thing as a free lunch.” Ultimately, that’s the most important lesson of the Capital Market Line. Many investors have been searching high and low for better deals than those offered by standard investments. Some might exist. But more often than not, the most fundamental principle in finance still holds: If something promises higher returns, it must involve higher risk—and that higher risk could come back to haunt investors.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles.The post Eyeing the Line appeared first on HumbleDollar.
May 8, 2021
Not So Different
THE ECONOMY IS recovering and the stock market has recovered. The pandemic isn���t over, but it seems we���re past the worst, at least in the U.S. Feeling better? Take a deep breath, take a step back���and think about the past two decades.
Since early 2000, we���ve had three major stock market declines, or roughly one every decade:
In 2000-02, the S&P 500 tumbled 49%, excluding dividends. The first leg down was triggered by the bursting of the dot-com bubble. The second leg down was driven by the Sept. 11 terrorist attacks and the 3,000 who died that day. The result wasn���t just a brief hit to the economy and U.S. military action in both Afghanistan and Iraq, but also a profound blow to the national psyche. Remember folks buying gas masks, stockpiling food and worrying about anthrax-laced letters? It was a phrase heard over and over: ���The world will never be the same again.���
The S&P 500���s 57% decline in 2007-09 was all about the economy, starting with the real estate market but eventually sending shock waves throughout the business world, toppling major Wall Street firms along the way. Everyday Americans may not have been fearful for their lives, as they were in 2001 and the years that immediately followed, but there was widespread fear that we would see a meltdown of the entire financial system.
The S&P 500���s 34% drop in early 2020 was, of course, all about COVID-19 and the resulting shutdown of the global economy. Many lost their lives, while those who lived saw their daily routine upended. Few of us had ever experienced anything like it.
Why do I recount this disturbing history? Each time, experts and everyday investors cried, ���It���s different this time.��� Yes, each of these three crises were indeed different. If they had been carbon copies of earlier market panics, investors would have spotted the similarities and responded far more calmly.
���History doesn���t repeat, but it rhymes,��� or so goes the saying, which���it seems���wasn���t said by Mark Twain. When the stock market next plunges, it won���t be the same as 2000-02, or 2007-09, or early 2020. But it���ll have similarities: the panicked investors, the widespread fear that the decline will only get worse, the declarations that this market crash is somehow different from all earlier market crashes, and that stocks won���t recover any time soon. Which, needless to say, is about the time when stocks do indeed defy the naysayers and head higher.
To survive a stock market crash, you don���t need a brilliant investment mind. Instead, all that���s required are tenacity, an awareness of market history and enough cash to cover upcoming expenses, so you aren���t forced to sell stocks at the worst possible time.
As I���ve mentioned before, the stock market represents an asymmetrical bet. If all goes well, stocks will fare just fine over the long run. What if economic apocalypse finally arrives? It won���t matter what investments you own. If the globe is reduced to an economic wasteland, nobody���s going to swap their canned goods for your gold bullion, and they certainly won���t barter food for your cryptocurrency or nonfungible tokens.
But I also believe there���s scant chance we���ll ever see that sort of worldwide economic meltdown. Think about the remarkable response to the pandemic���how rapidly governments responded, how quickly businesses adapted, how fast we developed vaccines. This astonishing ability to change and innovate, with an eye to making sure tomorrow is better than today, is what keeps the economy growing���and it���s why we shouldn���t assume the next crisis will be anything more than a painful, but relatively brief, moment in time.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Rick Connor and his wife just retired to the Jersey Shore. Sound appealing? Rick offers four tips for those looking to downsize.
Worried about getting sued? Adam Grossman makes the case for buying umbrella liability insurance���and talks about how to pick the right policy.
Remember the three-legged retirement stool? Phil Kernen says it's time to revive and revise the idea���with a focus on ensuring tax flexibility in retirement.
"I typically keep enough cash to finance our normal expenditures for at least six years," writes Andrew Forsythe. "In fact, with the current bubbly stock market, I���m above that level."
What caught readers' attention last month? Check out the seven most popular articles published by HumbleDollar in April.
Among index funds, which were the winners and sinners in April? Bill Ehart recounts the month that was.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
Since early 2000, we���ve had three major stock market declines, or roughly one every decade:
In 2000-02, the S&P 500 tumbled 49%, excluding dividends. The first leg down was triggered by the bursting of the dot-com bubble. The second leg down was driven by the Sept. 11 terrorist attacks and the 3,000 who died that day. The result wasn���t just a brief hit to the economy and U.S. military action in both Afghanistan and Iraq, but also a profound blow to the national psyche. Remember folks buying gas masks, stockpiling food and worrying about anthrax-laced letters? It was a phrase heard over and over: ���The world will never be the same again.���
The S&P 500���s 57% decline in 2007-09 was all about the economy, starting with the real estate market but eventually sending shock waves throughout the business world, toppling major Wall Street firms along the way. Everyday Americans may not have been fearful for their lives, as they were in 2001 and the years that immediately followed, but there was widespread fear that we would see a meltdown of the entire financial system.
The S&P 500���s 34% drop in early 2020 was, of course, all about COVID-19 and the resulting shutdown of the global economy. Many lost their lives, while those who lived saw their daily routine upended. Few of us had ever experienced anything like it.
Why do I recount this disturbing history? Each time, experts and everyday investors cried, ���It���s different this time.��� Yes, each of these three crises were indeed different. If they had been carbon copies of earlier market panics, investors would have spotted the similarities and responded far more calmly.
���History doesn���t repeat, but it rhymes,��� or so goes the saying, which���it seems���wasn���t said by Mark Twain. When the stock market next plunges, it won���t be the same as 2000-02, or 2007-09, or early 2020. But it���ll have similarities: the panicked investors, the widespread fear that the decline will only get worse, the declarations that this market crash is somehow different from all earlier market crashes, and that stocks won���t recover any time soon. Which, needless to say, is about the time when stocks do indeed defy the naysayers and head higher.
To survive a stock market crash, you don���t need a brilliant investment mind. Instead, all that���s required are tenacity, an awareness of market history and enough cash to cover upcoming expenses, so you aren���t forced to sell stocks at the worst possible time.
As I���ve mentioned before, the stock market represents an asymmetrical bet. If all goes well, stocks will fare just fine over the long run. What if economic apocalypse finally arrives? It won���t matter what investments you own. If the globe is reduced to an economic wasteland, nobody���s going to swap their canned goods for your gold bullion, and they certainly won���t barter food for your cryptocurrency or nonfungible tokens.
But I also believe there���s scant chance we���ll ever see that sort of worldwide economic meltdown. Think about the remarkable response to the pandemic���how rapidly governments responded, how quickly businesses adapted, how fast we developed vaccines. This astonishing ability to change and innovate, with an eye to making sure tomorrow is better than today, is what keeps the economy growing���and it���s why we shouldn���t assume the next crisis will be anything more than a painful, but relatively brief, moment in time.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Rick Connor and his wife just retired to the Jersey Shore. Sound appealing? Rick offers four tips for those looking to downsize.
Worried about getting sued? Adam Grossman makes the case for buying umbrella liability insurance���and talks about how to pick the right policy.
Remember the three-legged retirement stool? Phil Kernen says it's time to revive and revise the idea���with a focus on ensuring tax flexibility in retirement.
"I typically keep enough cash to finance our normal expenditures for at least six years," writes Andrew Forsythe. "In fact, with the current bubbly stock market, I���m above that level."
What caught readers' attention last month? Check out the seven most popular articles published by HumbleDollar in April.
Among index funds, which were the winners and sinners in April? Bill Ehart recounts the month that was.
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 Not So Different appeared first on HumbleDollar.
May 7, 2021
Three Other Legs
THE THREE-LEGGED stool is a metaphor for how the post-Second World War generation looked at retirement. The legs represented Social Security, an employer pension and personal savings. All three legs were viewed as necessary for a solid retirement plan.
Today, that notion seems quaint. Pension plans continue to be phased out. The number of employees covered by a defined benefit pension has been declining for decades, falling to 26% as of 2019, according to the Bureau of Labor Statistics. And while we can be confident that Social Security won���t disappear entirely, demographics may dictate that benefits become less generous. With two of the three legs damaged or missing, we���re left to fend for ourselves, amassing our own savings to pay for retirement.
Still, I think we might want to revive���and revise���the three-legged-stool metaphor. But now, it���s about tax flexibility, especially the flexibility to manage our tax bill during our retirement years.
The first leg of our new stool represents tax-deferred retirement accounts, such as 401(k)s and traditional IRAs, to which many of us have contributed during our working years. The money in these accounts was contributed out of pretax income���which means it was never taxed���and, ever since, has been allowed to grow tax-deferred. But when these dollars are withdrawn, the tax bill comes due, with taxes owed at ordinary income tax rates. Under current rules, we must start taking those withdrawals at age 72.
The second leg represents after-tax retirement dollars. These are any account with the name Roth attached, including Roth 401(k)s and Roth IRAs. Roth accounts are funded with after-tax dollars and are allowed to grow tax-free. When we withdraw funds, we can do so without paying any taxes on our gains, assuming we follow the rules. Furthermore, we aren���t required to take any withdrawals once we���re retired, which means we can leave these accounts to grow and then bequeath them to our heirs.
The third leg is represented by taxable account money. We���re talking about traditional brokerage and mutual fund accounts that don���t have any special tax privileges. Contributions to and withdrawals from these accounts don���t enjoy any tax benefits. Sold an investment winner? Received a dividend? Uncle Sam will expect a cut when we file our next tax return.
My contention: To create a strong foundation for our future retirement, we want the assets represented by these three legs to be as equal as possible. But don���t worry if they aren���t. Most of us with retirement accounts have far more in tax-deferred savings than in tax-free Roth savings. The idea of tax-deferred savings arose in the 1970s, while the idea behind Roth savings only came about in the 1990s. The expansion of Roth accounts to workplace retirement plans took longer still. The upshot: It���s been a challenge to strengthen that particular leg.
At one time, the standard advice was to max out our tax-deferred savings during our working years. This reduced our current tax bill by reducing our taxable income. It was also expected to reduce our tax bill in retirement, because our taxable income���and hence our tax bracket���was expected to be lower. But this is incomplete advice. Stashing everything in traditional retirement accounts will limit our flexibility once we reach retirement.
The fact is, we have no idea what tax brackets will exist during our retirement years. We experienced changing tax rates and brackets as a result of 2017's tax law, and we���re on the cusp of raising those rates back up again. If that doesn���t happen in a new tax law, it could potentially happen in 2026, when parts of the 2017 tax law sunset.
Because of this uncertainty, we should make sure we have options in how we pay for our retirement years and in what accounts we leave behind for our heirs. To minimize our tax bill throughout our retirement years, we should strive to have the choice each year to take tax-free withdrawals from a Roth, or generate taxable income with a traditional IRA, or perhaps realize a long-term capital gain in our regular taxable account. Flexibility is crucial���and that���s what we get with the new three-legged stool.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.
Today, that notion seems quaint. Pension plans continue to be phased out. The number of employees covered by a defined benefit pension has been declining for decades, falling to 26% as of 2019, according to the Bureau of Labor Statistics. And while we can be confident that Social Security won���t disappear entirely, demographics may dictate that benefits become less generous. With two of the three legs damaged or missing, we���re left to fend for ourselves, amassing our own savings to pay for retirement.
Still, I think we might want to revive���and revise���the three-legged-stool metaphor. But now, it���s about tax flexibility, especially the flexibility to manage our tax bill during our retirement years.
The first leg of our new stool represents tax-deferred retirement accounts, such as 401(k)s and traditional IRAs, to which many of us have contributed during our working years. The money in these accounts was contributed out of pretax income���which means it was never taxed���and, ever since, has been allowed to grow tax-deferred. But when these dollars are withdrawn, the tax bill comes due, with taxes owed at ordinary income tax rates. Under current rules, we must start taking those withdrawals at age 72.
The second leg represents after-tax retirement dollars. These are any account with the name Roth attached, including Roth 401(k)s and Roth IRAs. Roth accounts are funded with after-tax dollars and are allowed to grow tax-free. When we withdraw funds, we can do so without paying any taxes on our gains, assuming we follow the rules. Furthermore, we aren���t required to take any withdrawals once we���re retired, which means we can leave these accounts to grow and then bequeath them to our heirs.
The third leg is represented by taxable account money. We���re talking about traditional brokerage and mutual fund accounts that don���t have any special tax privileges. Contributions to and withdrawals from these accounts don���t enjoy any tax benefits. Sold an investment winner? Received a dividend? Uncle Sam will expect a cut when we file our next tax return.
My contention: To create a strong foundation for our future retirement, we want the assets represented by these three legs to be as equal as possible. But don���t worry if they aren���t. Most of us with retirement accounts have far more in tax-deferred savings than in tax-free Roth savings. The idea of tax-deferred savings arose in the 1970s, while the idea behind Roth savings only came about in the 1990s. The expansion of Roth accounts to workplace retirement plans took longer still. The upshot: It���s been a challenge to strengthen that particular leg.
At one time, the standard advice was to max out our tax-deferred savings during our working years. This reduced our current tax bill by reducing our taxable income. It was also expected to reduce our tax bill in retirement, because our taxable income���and hence our tax bracket���was expected to be lower. But this is incomplete advice. Stashing everything in traditional retirement accounts will limit our flexibility once we reach retirement.
The fact is, we have no idea what tax brackets will exist during our retirement years. We experienced changing tax rates and brackets as a result of 2017's tax law, and we���re on the cusp of raising those rates back up again. If that doesn���t happen in a new tax law, it could potentially happen in 2026, when parts of the 2017 tax law sunset.
Because of this uncertainty, we should make sure we have options in how we pay for our retirement years and in what accounts we leave behind for our heirs. To minimize our tax bill throughout our retirement years, we should strive to have the choice each year to take tax-free withdrawals from a Roth, or generate taxable income with a traditional IRA, or perhaps realize a long-term capital gain in our regular taxable account. Flexibility is crucial���and that���s what we get with the new three-legged stool.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.The post Three Other Legs appeared first on HumbleDollar.
May 6, 2021
Sleeping with Cash
HERE AT HUMBLEDOLLAR and in many other places, this point has been made: The best investment portfolio isn���t the one that���s theoretically or empirically superior. Rather, it���s the one that lets you sleep at night.
What I���ve found, as far as my portfolio goes, is that the necessary prerequisite for a good night���s sleep is one thing above all else: an oversized cash reserve. By that, I mean a cash hoard that can handle not only the most likely contingencies, but also unexpected ones���and then some. I typically keep enough cash to finance our normal expenditures for at least six years. In fact, with the current bubbly stock market, I���m above that level. To back that up, I also have a decent allocation to bond funds, consisting mostly of an intermediate-term municipal fund in a taxable account and total bond market index funds in retirement accounts.
Back in 2017, author William Bernstein was quoted in HumbleDollar saying, ���When you���ve won the game, stop playing with money you really need.��� That insight struck a chord with me, and it���s one of the reasons I���ve come to value cash. I���m less interested in getting richer and more interested in guaranteeing that the modest lifestyle that has served my wife and me so well can be maintained for as long as we remain on this planet, regardless of any curveballs thrown our way.
The importance of a good-sized cash reserve was brought home to me over my many years as a criminal defense lawyer. While my early days often involved more dramatic and serious cases, later on my bread-and-butter business was representing basically good, decent people who (or whose kids) made a mistake or two: driving while intoxicated, drug possession and various other weaknesses of the ���there but for the grace of God go I��� type.
What constantly amazed me was how many of these seemingly middle-class folks, at a time of real urgency, struggled to come up with even a modest down payment for my services. For most garden variety misdemeanors, I had long believed it was reasonable to ask for a $1,000 retainer, with a payment plan for any remaining balance that stretched over several months.
But I was surprised time and again by how many potential clients found it difficult or impossible to come up with even that modest lump sum. I ultimately took a tip from a good friend and colleague, and lowered my retainer to $500, compensated for by a slightly longer payment plan. I was rewarded with a significant increase in new clients.
Of course, my healthy allocation to cash was a lot easier to justify not so long ago when it could garner upward of 2% in interest. Several years ago, dinosaur that I am, I became comfortable opening online savings accounts. I guess my resentment at the infinitesimal interest offered by our brick-and-mortar bank finally got to me, and I decided to explore the wonderful world of online banking. We now have a handful of online savings accounts, along with some no-penalty certificates of deposit, and they���ve proven to be easy to manage. The online transfer process works smoothly. I simply have to do enough planning to request the funds needed a few days in advance and���presto���the money lands in my local checking account ready to be deployed.
Nowadays, even at online banks, you���re lucky to get 0.5% interest. That hurts. But it���s still a multiple of what my local bank pays. If it ever goes below zero, as has happened in some European countries, I���ll have to rethink all of this, as that���s a concept my simple mind just can���t comprehend. But until then, I will stay the course.
So, yes, I���m overweight plain old, boring, nonproductive cash. But you know what? I sleep very well.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.
What I���ve found, as far as my portfolio goes, is that the necessary prerequisite for a good night���s sleep is one thing above all else: an oversized cash reserve. By that, I mean a cash hoard that can handle not only the most likely contingencies, but also unexpected ones���and then some. I typically keep enough cash to finance our normal expenditures for at least six years. In fact, with the current bubbly stock market, I���m above that level. To back that up, I also have a decent allocation to bond funds, consisting mostly of an intermediate-term municipal fund in a taxable account and total bond market index funds in retirement accounts.
Back in 2017, author William Bernstein was quoted in HumbleDollar saying, ���When you���ve won the game, stop playing with money you really need.��� That insight struck a chord with me, and it���s one of the reasons I���ve come to value cash. I���m less interested in getting richer and more interested in guaranteeing that the modest lifestyle that has served my wife and me so well can be maintained for as long as we remain on this planet, regardless of any curveballs thrown our way.
The importance of a good-sized cash reserve was brought home to me over my many years as a criminal defense lawyer. While my early days often involved more dramatic and serious cases, later on my bread-and-butter business was representing basically good, decent people who (or whose kids) made a mistake or two: driving while intoxicated, drug possession and various other weaknesses of the ���there but for the grace of God go I��� type.
What constantly amazed me was how many of these seemingly middle-class folks, at a time of real urgency, struggled to come up with even a modest down payment for my services. For most garden variety misdemeanors, I had long believed it was reasonable to ask for a $1,000 retainer, with a payment plan for any remaining balance that stretched over several months.
But I was surprised time and again by how many potential clients found it difficult or impossible to come up with even that modest lump sum. I ultimately took a tip from a good friend and colleague, and lowered my retainer to $500, compensated for by a slightly longer payment plan. I was rewarded with a significant increase in new clients.
Of course, my healthy allocation to cash was a lot easier to justify not so long ago when it could garner upward of 2% in interest. Several years ago, dinosaur that I am, I became comfortable opening online savings accounts. I guess my resentment at the infinitesimal interest offered by our brick-and-mortar bank finally got to me, and I decided to explore the wonderful world of online banking. We now have a handful of online savings accounts, along with some no-penalty certificates of deposit, and they���ve proven to be easy to manage. The online transfer process works smoothly. I simply have to do enough planning to request the funds needed a few days in advance and���presto���the money lands in my local checking account ready to be deployed.
Nowadays, even at online banks, you���re lucky to get 0.5% interest. That hurts. But it���s still a multiple of what my local bank pays. If it ever goes below zero, as has happened in some European countries, I���ll have to rethink all of this, as that���s a concept my simple mind just can���t comprehend. But until then, I will stay the course.
So, yes, I���m overweight plain old, boring, nonproductive cash. But you know what? I sleep very well.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.The post Sleeping with Cash appeared first on HumbleDollar.
May 5, 2021
Moving Right Along
MANY DREAM of retiring to the beach. My wife and I just did it. We recently sold our primary home outside Philadelphia and moved to our vacation home on the New Jersey Shore. The decision wasn���t easy. It was the result of a number of events coming together, including the pandemic, the hot real estate market and an attractive, but unexpected offer on our primary home.
We���d lived in our old home since 1994. But that doesn���t tell the whole story. My parents bought the house in 1965, so it���s where I grew up. Due to my parents��� health and financial circumstances, my wife and I bought it from them, and they lived with us for the remainder of their lives. Our children grew up in the house. Three of our parents died there. That���s a lot of memories to deal with.
In addition to the emotional attachment, this was truly a downsizing. We were leaving behind 2,400 square feet of living space, plus about 900 square feet of finished basement, a detached garage and a beautiful covered porch. This was way more than we needed or wanted to keep up. Meanwhile, the shore house is about 1,600 square feet and much more manageable.
Sound like the sort of thing you���d also like to do? Here are four key lessons we learned along the way.
1. Packing up. One of the common themes on HumbleDollar is a bias against accumulating lots of stuff. If you don���t share that view now, you will after you pack up your life���s possessions. It���s never too early to start paring down. My brother-in-law has a five-year rule. If they haven���t used it in the last five years, it goes.
In our case, we were selling a fully furnished house and moving to a fully furnished house. We identified many items that we wanted to move to the new house. There were also many items we were willing to part with. We were able to donate a ton of stuff to Goodwill and Habitat for Humanity. We gave items to a variety of family members. We also sold stuff on Facebook���s Marketplace.
Still, there were items we were on the fence about. We decided to rent a storage unit nearby, and we swore a blood oath that we would revisit those items in a year and make a final determination.
Lesson: If you���re even thinking about downsizing your home, it���s time to start downsizing your possessions. You���ll thank yourself when it���s time to move.
2. Home renovation. One thing that was obvious about our beach home: The kitchen needed major improvements in terms of both storage and functionality. We decided to do the renovation before we moved. When we renovated our kitchen in our old house, I acted as the general contractor, and did a lot of the demolition and construction. We saved thousands of dollars that way.
When we decided to totally renovate the shore house's kitchen, we knew we had only a short period before we moved. We decided to use a local kitchen and bath company to manage the project. That freed us up to focus on packing up our old home. This worked out well. They removed the old kitchen and installed a new one in four weeks. There remained a short punch list of mostly cosmetic items, but we had a functional kitchen when we moved in.
Lesson: Sometimes it���s worth hiring professionals���especially if you���re time constrained.
3. Moving day. This turned out okay. We rented a 15-foot U-Haul truck, while also making use of a U-Haul service that gets you experienced help on both sides of the move. The movers were polite, energetic and very professional. We were pretty organized on both ends, so the whole thing from pick-up to drop-off was eight hours, including a two-hour drive. Total cost was about $650.
Lesson: If you���re moving a reasonable amount of stuff and you can drive a midsize truck, U-Haul is a cost-effective way to go.
4. Mortgage. The proceeds from our old home weren���t enough to pay off the entire mortgage on the shore home. With my wife still working, and with my consulting and pension income, we were fine carrying both houses. But part of the reason for this move is so my wife can reduce her hours and possibly retire in the near future. She plans to go half time right away and see how it goes from there.
Given all that, we had to decide what to do with the remaining mortgage balance on the beach house. After looking at refinancing, paying it off or leaving it as is, we decided to do a mortgage recast. This concept was new to me. It involves making a large, lump-sum payment on a mortgage. The lender then re-amortizes the new, smaller loan balance over the same term and at the same interest rate. The benefit is a reduced monthly payment and less total interest paid over the life of the loan.
Why choose a recast over a full refinancing? First, our interest rate is already fairly low, so we wouldn���t have saved much. The second reason is low fees. My lender charged $100 to recast. A refinance would have been thousands. A recast is very easy to do, especially compared to a refinance. One caveat: Not all lenders offer recasts and some types of loans aren���t eligible.
Lesson: Explore all options for financing your move.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.
We���d lived in our old home since 1994. But that doesn���t tell the whole story. My parents bought the house in 1965, so it���s where I grew up. Due to my parents��� health and financial circumstances, my wife and I bought it from them, and they lived with us for the remainder of their lives. Our children grew up in the house. Three of our parents died there. That���s a lot of memories to deal with.
In addition to the emotional attachment, this was truly a downsizing. We were leaving behind 2,400 square feet of living space, plus about 900 square feet of finished basement, a detached garage and a beautiful covered porch. This was way more than we needed or wanted to keep up. Meanwhile, the shore house is about 1,600 square feet and much more manageable.
Sound like the sort of thing you���d also like to do? Here are four key lessons we learned along the way.
1. Packing up. One of the common themes on HumbleDollar is a bias against accumulating lots of stuff. If you don���t share that view now, you will after you pack up your life���s possessions. It���s never too early to start paring down. My brother-in-law has a five-year rule. If they haven���t used it in the last five years, it goes.
In our case, we were selling a fully furnished house and moving to a fully furnished house. We identified many items that we wanted to move to the new house. There were also many items we were willing to part with. We were able to donate a ton of stuff to Goodwill and Habitat for Humanity. We gave items to a variety of family members. We also sold stuff on Facebook���s Marketplace.
Still, there were items we were on the fence about. We decided to rent a storage unit nearby, and we swore a blood oath that we would revisit those items in a year and make a final determination.
Lesson: If you���re even thinking about downsizing your home, it���s time to start downsizing your possessions. You���ll thank yourself when it���s time to move.
2. Home renovation. One thing that was obvious about our beach home: The kitchen needed major improvements in terms of both storage and functionality. We decided to do the renovation before we moved. When we renovated our kitchen in our old house, I acted as the general contractor, and did a lot of the demolition and construction. We saved thousands of dollars that way.
When we decided to totally renovate the shore house's kitchen, we knew we had only a short period before we moved. We decided to use a local kitchen and bath company to manage the project. That freed us up to focus on packing up our old home. This worked out well. They removed the old kitchen and installed a new one in four weeks. There remained a short punch list of mostly cosmetic items, but we had a functional kitchen when we moved in.
Lesson: Sometimes it���s worth hiring professionals���especially if you���re time constrained.
3. Moving day. This turned out okay. We rented a 15-foot U-Haul truck, while also making use of a U-Haul service that gets you experienced help on both sides of the move. The movers were polite, energetic and very professional. We were pretty organized on both ends, so the whole thing from pick-up to drop-off was eight hours, including a two-hour drive. Total cost was about $650.
Lesson: If you���re moving a reasonable amount of stuff and you can drive a midsize truck, U-Haul is a cost-effective way to go.
4. Mortgage. The proceeds from our old home weren���t enough to pay off the entire mortgage on the shore home. With my wife still working, and with my consulting and pension income, we were fine carrying both houses. But part of the reason for this move is so my wife can reduce her hours and possibly retire in the near future. She plans to go half time right away and see how it goes from there.
Given all that, we had to decide what to do with the remaining mortgage balance on the beach house. After looking at refinancing, paying it off or leaving it as is, we decided to do a mortgage recast. This concept was new to me. It involves making a large, lump-sum payment on a mortgage. The lender then re-amortizes the new, smaller loan balance over the same term and at the same interest rate. The benefit is a reduced monthly payment and less total interest paid over the life of the loan.
Why choose a recast over a full refinancing? First, our interest rate is already fairly low, so we wouldn���t have saved much. The second reason is low fees. My lender charged $100 to recast. A refinance would have been thousands. A recast is very easy to do, especially compared to a refinance. One caveat: Not all lenders offer recasts and some types of loans aren���t eligible.
Lesson: Explore all options for financing your move.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.The post Moving Right Along appeared first on HumbleDollar.
May 4, 2021
April’s Hits
WHAT CAUGHT YOUR attention last month? Here are the seven most popular articles that we published in April:
"You need a mix of stocks, bonds and other asset classes that aren���t tightly correlated," writes Adam Grossman. "As you think about the risk posed by today's stock prices, this is, I think, the most important thing."
Mike Drak says there are three types of retiree. "What type are you?" he asks. "If you can answer that question, you���ve taken a crucial step toward a happier retirement."
Inflation. Divorce. Taxes. Investment costs. Reckless investing. John Goodell looks at the mathematics of financial misfortune. It isn't pretty.
"I was watching TV and heard a teaser for that evening���s nightly news that went something like: 'Local financial advisor scams gold investors',��� recalls Mike Flack. "I almost crapped my pants."
Jim and Jiab Wasserman moved back to Texas after three years in Spain. Their goal: Buy a car, furniture and all the other possessions that make life possible���and spend no more than $10,000.
Has this year's financial market turmoil left you feeling uncertain? Dennis Friedman offers nine pointers.
Meet HumbleDollar's new sister site, BraggingBucks.com, designed for investors who can't quite shake that hankering for market-beating returns.
Meanwhile, the two best-read newsletters were Risk Less Make More and Hanging Tough. What about our Voices section? In April, the most popular questions asked which everyday purchases do people consider a��bargain, and what percentage of a stock portfolio should be invested abroad.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
"You need a mix of stocks, bonds and other asset classes that aren���t tightly correlated," writes Adam Grossman. "As you think about the risk posed by today's stock prices, this is, I think, the most important thing."
Mike Drak says there are three types of retiree. "What type are you?" he asks. "If you can answer that question, you���ve taken a crucial step toward a happier retirement."
Inflation. Divorce. Taxes. Investment costs. Reckless investing. John Goodell looks at the mathematics of financial misfortune. It isn't pretty.
"I was watching TV and heard a teaser for that evening���s nightly news that went something like: 'Local financial advisor scams gold investors',��� recalls Mike Flack. "I almost crapped my pants."
Jim and Jiab Wasserman moved back to Texas after three years in Spain. Their goal: Buy a car, furniture and all the other possessions that make life possible���and spend no more than $10,000.
Has this year's financial market turmoil left you feeling uncertain? Dennis Friedman offers nine pointers.
Meet HumbleDollar's new sister site, BraggingBucks.com, designed for investors who can't quite shake that hankering for market-beating returns.
Meanwhile, the two best-read newsletters were Risk Less Make More and Hanging Tough. What about our Voices section? In April, the most popular questions asked which everyday purchases do people consider a��bargain, and what percentage of a stock portfolio should be invested abroad.
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 April’s Hits appeared first on HumbleDollar.
May 3, 2021
What’s Up?
ALMOST EVERYTHING on Wall Street went up in April, including some of 2021's laggards, such as gold, bonds and growth stocks.
Investors may not like President Biden’s capital gains and corporate tax hike proposals. But despite the president’s somewhat stealthy pursuit of policies worthy of Franklin D. Roosevelt, stock investors could be forgiven for breaking out into FDR’s 1932 campaign song, Happy Days Are Here Again. Consider:
Stocks have risen more in Biden's first 100 days (symbol: SPY +9.8%) than in the same period of any president’s term since—guess who—FDR’s fourth.
In April, the S&P 500 index posted its biggest monthly gain (SPY +5.3%) since November and reached a record high on April 29.
Companies from Caterpillar to McDonald’s to Amazon posted blowout first-quarter earnings. Corporate profits beat analyst estimates at the best rate since Refinitiv (formerly Thomson Reuters) began tracking such data in 1994. Amazon’s profits tripled to a record $8.1 billion.
The Dow Jones Transportation Average—tracking such industries as airlines, trucking and railroads—ended the month with its 13th consecutive week of gains, the longest streak since it posted 15 straight weeks of gains in 1899. The average is up 23% year to date.
The latest data show a surge in personal income (+21.1% in March vs. February) and a spike in the personal savings rate (27.6% in March).
Personal consumption rose 4.2% in March and is back above its pre-pandemic level.
If you’re looking for reasons to worry, aside from rampant speculation in some markets, a big one is that both inflation and inflation expectations are also up. The 10-year breakeven rate—the difference between the nominal yield on Treasury bonds and the real yield on inflation-indexed Treasury bonds—spiked to 2.41% at month’s end, its highest level since 2013, suggesting investors see inflation at that rate in the decade ahead. Prices are surging for copper, corn, soybeans and even used cars. (A shortage of computer chips is causing automakers to slow production and even temporarily close some factories.)
Even the losers won. In April, Treasurys (symbol: GOVT +0.7%), the overall bond market (AGG +0.7%), gold (GLD +3.6%), gold-mining shares (GDX +5.7%) and emerging markets bonds (EMB +2.4%) all gained, though they remain down year to date.
Rotation. REITs (VNQ +7.9%) and large-cap growth stocks (VUG +6.9%) were the strongest performers among U.S. market segments during the past month. REITs have been strong all year, but VUG had eked out minimal first-quarter gains. By contrast, the microcaps that have led the market year to date, with a 24% advance, fell slightly in April (IWC -0.03%). Small-cap value stocks (VBR +4.0%) are now up 21.6% year to date.
Emerging dichotomy. Last month, emerging market returns were lackluster (IEMG +1.7%), weighed down by the index’s largest component, China (MCHI +0.3%), and by COVID-ravaged India (INDA -2.8%). By contrast, gains were strong in Taiwan (EWT +7.6%) and Brazil (EWZ +6.3%), and solid in Mexico (EWW +3.7%). Taiwan’s market is now leading all major countries year to date (+21.6%), while Brazil remains underwater (-4.1%).
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.
The post What’s Up? appeared first on HumbleDollar.
What���s Up?
ALMOST EVERYTHING on Wall Street went up in April, including some of 2021's laggards, such as gold, bonds and growth stocks.
Investors may not like President Biden���s capital gains and corporate tax hike proposals. But despite the president���s somewhat stealthy pursuit of policies worthy of Franklin D. Roosevelt, stock investors could be forgiven for breaking out into FDR���s 1932 campaign song, Happy Days Are Here Again. Consider:
Stocks have risen more in Biden's��first 100 days (symbol: SPY��+9.8%) than in the same period of any president���s term since���guess who���FDR���s fourth.
In April, the S&P 500 index posted its biggest monthly gain (SPY +5.3%) since November and reached a record high on April 29.
Companies from Caterpillar to McDonald���s to Amazon posted blowout��first-quarter earnings. Corporate profits beat analyst estimates at the best rate since Refinitiv (formerly Thomson Reuters) began tracking such data in 1994. Amazon���s profits tripled to a record $8.1 billion.
The Dow Jones Transportation Average���tracking such industries as airlines, trucking and railroads���ended the month with its 13th��consecutive��week of gains, the longest streak since it posted 15 straight weeks of gains in 1899. The average is up 23% year to date.
The latest data show a surge in personal income (+21.1% in March vs. February) and a spike in the personal��savings��rate (27.6% in March).
Personal consumption rose 4.2% in March and is back above its pre-pandemic level.
If you���re looking for reasons to worry, aside from rampant speculation in some markets, a big one is that both inflation and inflation expectations are also up. The 10-year��breakeven��rate���the difference between the nominal yield on Treasury bonds and the real yield on inflation-indexed Treasury bonds���spiked to 2.41% at month���s end, its highest level since 2013, suggesting investors see inflation at that rate in the decade ahead. Prices are surging for copper, corn, soybeans and even used cars. (A shortage of computer chips is causing automakers to slow production and even temporarily close some factories.)
Even the losers won.��In April, Treasurys (symbol: GOVT +0.7%), the overall bond market (AGG +0.7%), gold (GLD +3.6%), gold-mining shares (GDX +5.7%) and emerging markets bonds (EMB +2.4%) all gained, though they remain down year to date.
Rotation. REITs (VNQ +7.9%) and large-cap growth stocks (VUG +6.9%) were the strongest performers among U.S. market segments during the past month. REITs have been strong all year, but VUG had eked out minimal first-quarter gains. By contrast, the microcaps that have led the market year to date, with a 24% advance, fell slightly in April (IWC -0.03%). Small-cap value stocks (VBR +4.0%) are now up 21.6% year to date.
Emerging dichotomy.��Last month, emerging market returns were lackluster (IEMG +1.7%), weighed down by the index���s largest component, China (MCHI +0.3%), and by COVID-ravaged India (INDA -2.8%). By contrast, gains were strong in Taiwan (EWT +7.6%) and Brazil (EWZ +6.3%), and solid in Mexico (EWW +3.7%). Taiwan���s market is now leading all major countries year to date (+21.6%), while Brazil remains underwater (-4.1%).
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart��and check out his earlier articles.
The post What���s Up? appeared first on HumbleDollar.
May 2, 2021
Grab an Umbrella
ON FEB. 27, 1992, Stella Liebeck ordered a cup of coffee from a McDonald���s drive-through. Moments later, as she attempted to open the lid, the cup spilled, causing a burn that sent her to the hospital. Her injury was serious but self-inflicted and not life-threatening. Nonetheless, she sued McDonald���s, and a jury awarded her almost $3 million. That award was reduced upon appeal, but this case is often cited as an example of an out-of-control legal system exploited by personal injury lawyers.
Drive down many highways in America, in fact, and you���ll see their billboards lining the road. ���Injured? Car Crash? Call Now!��� These billboards may seem��laughable. But if you have a high net worth, personal injury lawsuits are a real risk���and one you should protect against. That���s where umbrella liability insurance comes in.
So named because it provides coverage on top of your existing home or auto policy, umbrella insurance picks up where those other policies leave off, extending liability coverage to $1 million or more. If someone's injured in a car accident or in your home, and a lawsuit results, umbrella insurance will cover you. Umbrella policies also cover more unusual types of claims, including accusations of libel and slander. Another key benefit: Since the insurance company would be on the hook for any verdict, it���ll pay to defend you. For all these reasons, if you don���t already have umbrella insurance, I highly recommend it.
How much coverage should you have? There���s no single right number, but below are some guidelines:
Cost of coverage.��The first thing to know is that multimillion-dollar verdicts, while highly publicized, are relatively rare. Insurance companies pay few claims the size of Ms. Liebeck���s. As a result, this type of insurance is not expensive. While every individual���s risk profile is different, in general, a $1 million policy might cost between $200 and $400 a year. Because claims are less likely at higher levels, additional coverage is even more cost efficient. A $2 million policy, for example, doesn���t cost twice as much as a $1 million policy.
Recommended coverage.��Because price generally isn���t an obstacle, I advocate erring on the side of buying more coverage rather than less. For most people, I suggest a policy in the $1 million to $5 million range, with $10 million as the absolute maximum you might consider. Below are further guidelines to help narrow this range.
Net worth considerations.��In deciding on coverage level, net worth seems like a logical starting point. If you have $5 million in assets, for example, you might assume you need $5 million in coverage. That seems logical, but I���d approach it differently. Instead, consider the risk you���re trying to insure against. Specifically, if there���s a claim, how large might it be? Because 90%-plus of cases are settled out of court���often confidentially���reliable statistics are hard to come by. But in one��roundup��of big verdicts and settlements, the vast majority fell between $1 million and $5 million. That���s why I recommend coverage in that range, even if your net worth is higher or lower than that.
That said, your net worth is relevant in two respects. The first is how wealthy you appear. In the world of personal injury law, most lawyers work on a contingency fee basis, meaning they don���t get paid unless they win���and collect. For that reason, they don���t take every case. They���re much more interested in cases where the prospective defendant appears well-to-do. If you���re a doctor or a business owner, or you have a generally high profile, you���ll want to err on the side of having more coverage.
By the same token, if your financial situation appears modest, then perhaps you could go without umbrella coverage. I don't think it's advisable because, regardless of wealth level, you still have the same risk of being involved in an accident as anyone else. But your risk of being sued is probably lower.
Net worth is relevant in one other respect. A fundamental principle of insurance is that you should only pay to insure against losses you couldn���t afford on your own. If you have sufficient assets and feel you could afford even a multimillion-dollar claim, then maybe you can forgo coverage. Bill Gates, for example, might not carry umbrella insurance. But that���s an extreme.
Bottom line: Unless your net worth is all the way at one end or the other of the spectrum, I wouldn't take any chances and would secure umbrella coverage in that $1 million to $5 million range.
Risk factors.��In deciding on coverage, what other factors should you consider? Read through an insurance application, and you���ll find some clues. My own application included these questions:
Do you operate any aircraft?
Do you own any watercraft? Are they used in racing activities?
Do you conduct business or farming operations at any property you own?
Additional risk factors include:
Teenage drivers
A pool, trampoline or zip line
A boat, ATV, RV or snowmobile
Dogs
Renting your home through Airbnb
Most of the above probably isn���t surprising. But some questions on an umbrella application might surprise you. For example:
Do you serve on any nonprofit boards?
Do you coach any children���s athletic teams?
In short, the application itself could help guide your coverage decision.
Exclusions.��In choosing a policy, the coverage level is key, but it isn���t the only thing. Also be sure to read the exclusions. Check there aren���t any mismatches between the particulars of your life and the fine print of the policy.
A final note:��If you���re a business owner, you can���and should���secure umbrella coverage for your business as well.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. In his series of free��e-books, he advocates an evidence-based��approach to personal finance. Follow Adam on Twitter @AdamMGrossman��and check out his earlier articles.
Drive down many highways in America, in fact, and you���ll see their billboards lining the road. ���Injured? Car Crash? Call Now!��� These billboards may seem��laughable. But if you have a high net worth, personal injury lawsuits are a real risk���and one you should protect against. That���s where umbrella liability insurance comes in.
So named because it provides coverage on top of your existing home or auto policy, umbrella insurance picks up where those other policies leave off, extending liability coverage to $1 million or more. If someone's injured in a car accident or in your home, and a lawsuit results, umbrella insurance will cover you. Umbrella policies also cover more unusual types of claims, including accusations of libel and slander. Another key benefit: Since the insurance company would be on the hook for any verdict, it���ll pay to defend you. For all these reasons, if you don���t already have umbrella insurance, I highly recommend it.
How much coverage should you have? There���s no single right number, but below are some guidelines:
Cost of coverage.��The first thing to know is that multimillion-dollar verdicts, while highly publicized, are relatively rare. Insurance companies pay few claims the size of Ms. Liebeck���s. As a result, this type of insurance is not expensive. While every individual���s risk profile is different, in general, a $1 million policy might cost between $200 and $400 a year. Because claims are less likely at higher levels, additional coverage is even more cost efficient. A $2 million policy, for example, doesn���t cost twice as much as a $1 million policy.
Recommended coverage.��Because price generally isn���t an obstacle, I advocate erring on the side of buying more coverage rather than less. For most people, I suggest a policy in the $1 million to $5 million range, with $10 million as the absolute maximum you might consider. Below are further guidelines to help narrow this range.
Net worth considerations.��In deciding on coverage level, net worth seems like a logical starting point. If you have $5 million in assets, for example, you might assume you need $5 million in coverage. That seems logical, but I���d approach it differently. Instead, consider the risk you���re trying to insure against. Specifically, if there���s a claim, how large might it be? Because 90%-plus of cases are settled out of court���often confidentially���reliable statistics are hard to come by. But in one��roundup��of big verdicts and settlements, the vast majority fell between $1 million and $5 million. That���s why I recommend coverage in that range, even if your net worth is higher or lower than that.
That said, your net worth is relevant in two respects. The first is how wealthy you appear. In the world of personal injury law, most lawyers work on a contingency fee basis, meaning they don���t get paid unless they win���and collect. For that reason, they don���t take every case. They���re much more interested in cases where the prospective defendant appears well-to-do. If you���re a doctor or a business owner, or you have a generally high profile, you���ll want to err on the side of having more coverage.
By the same token, if your financial situation appears modest, then perhaps you could go without umbrella coverage. I don't think it's advisable because, regardless of wealth level, you still have the same risk of being involved in an accident as anyone else. But your risk of being sued is probably lower.
Net worth is relevant in one other respect. A fundamental principle of insurance is that you should only pay to insure against losses you couldn���t afford on your own. If you have sufficient assets and feel you could afford even a multimillion-dollar claim, then maybe you can forgo coverage. Bill Gates, for example, might not carry umbrella insurance. But that���s an extreme.
Bottom line: Unless your net worth is all the way at one end or the other of the spectrum, I wouldn't take any chances and would secure umbrella coverage in that $1 million to $5 million range.
Risk factors.��In deciding on coverage, what other factors should you consider? Read through an insurance application, and you���ll find some clues. My own application included these questions:
Do you operate any aircraft?
Do you own any watercraft? Are they used in racing activities?
Do you conduct business or farming operations at any property you own?
Additional risk factors include:
Teenage drivers
A pool, trampoline or zip line
A boat, ATV, RV or snowmobile
Dogs
Renting your home through Airbnb
Most of the above probably isn���t surprising. But some questions on an umbrella application might surprise you. For example:
Do you serve on any nonprofit boards?
Do you coach any children���s athletic teams?
In short, the application itself could help guide your coverage decision.
Exclusions.��In choosing a policy, the coverage level is key, but it isn���t the only thing. Also be sure to read the exclusions. Check there aren���t any mismatches between the particulars of your life and the fine print of the policy.
A final note:��If you���re a business owner, you can���and should���secure umbrella coverage for your business as well.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. In his series of free��e-books, he advocates an evidence-based��approach to personal finance. Follow Adam on Twitter @AdamMGrossman��and check out his earlier articles.The post Grab an Umbrella appeared first on HumbleDollar.
