Jonathan Clements's Blog, page 290
May 1, 2021
Built for Ease
MY FATHER LOATHED the idea that he would spend his final years in a nursing home. In the end, he never had to confront that possibility: At age 75, while riding his bicycle, he was struck and killed by a speeding car.
Still, I think often about his reluctance���because I share it. Despite exercising every day, I know I���m not as flexible or as fast as I once was, and it takes longer for the stiffness in my muscles to ease each morning. Meanwhile, I���m well aware that two of my four grandparents had dementia at the end of their life.
Perhaps, as I age, the idea of some form of assisted living will grow more appealing. Perhaps I won���t have any choice. But for now, as I make decisions big and small, I think about what it���ll take to maintain my independence and how to make matters easier for my octogenarian self. Like almost everybody else, I want to stay in control of my life for as long as possible and I hate the notion that I might end up heavily dependent on others.
That desire was a big factor in my recent home purchase. I bought a house that���s close to my daughter and where I could live on one floor. While I���d like my new home to be my final stop, I���m not entirely sure it will be. If necessary, I might move to an apartment���perhaps one I���d rent, so my kids wouldn���t have to worry about selling the place after my death.
Now that housing is settled���at least for now���I���m thinking more about my portfolio and how I���ll generate income later in retirement. This is an issue that others are also wrestling with: I get frequent emails from readers who want to make sure their finances will remain manageable, even if they suffer some cognitive decline, or who want to ensure that their spouse can easily take over the household finances.
Worried about either or both of those issues? Here are three steps I���m toying with:
Radical simplicity. Today, I have four bank accounts, four credit cards and 11 different mutual funds���and, in some cases, I own the same fund in multiple accounts, because I have a taxable account, a traditional IRA, a Roth IRA, an inherited IRA and a solo 401(k).
I���m not ready to do it yet, but at some point I plan to cancel all but one credit card and eliminate two of my four bank accounts, so I have just one checking account and one savings account. Meanwhile, I may move all of my fund holdings into a single target-date fund, though I���ll end up owning that one fund in multiple different accounts, because I���ll still have a traditional IRA, Roth IRA and so on.
Lifetime income. As I���ve discussed in earlier articles, I plan to delay claiming Social Security until age 70, while using some of my bond fund money to purchase immediate fixed annuities that pay lifetime income. There���s a host of reasons for this, including hedging the risk of a long life, generating more income in an extremely low-yield environment and giving myself the leeway to invest more heavily in stocks, which���assuming I live to a ripe old age���could offset the money lost to the annuity purchases, thanks to higher overall portfolio returns.
But to this list of reasons, let me add another: If I suffer some cognitive decline, arranging a healthy stream of lifetime income should make my financial life relatively easy to handle. Every month, I���ll get income deposited into my checking account from Social Security and my immediate fixed annuities. The only potentially tricky part is calculating and taking my required minimum distribution from my retirement accounts each year, though even that can be automated.
Hiring help. Instead of going the route of a radically simpler portfolio and buying immediate fixed annuities���or perhaps in conjunction with those steps���I might hire a financial advisor to oversee my finances. I���ve always handled my own portfolio. Hiring an advisor would have struck me as unthinkable a decade ago. But later in retirement, having someone to manage my finances may be the price I���ll need to pay to avoid self-inflicted financial wounds.
What would I look for in a financial advisor? Someone who���s low cost and fee only, legally obligated to act as a fiduciary (and not just part of the time) and who builds portfolios using index funds. He or she will also need to be significantly younger. After all, I���ll need someone who will still be working when I���m at the end of my life. One other criterion: He or she will need a thick skin. I suspect my octogenarian self will make for an ornery client.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Want a more fulfilling retirement? Joe Kesler's advice: Figure out what it is about work that you want to preserve���and what you'd like to eliminate.
"You don���t have to be a genius to achieve your investment goals," writes Vanguard's former CEO, Jack Brennan. "But if you���re a disciplined and confident yet humble investor, you���ll end up looking like one."
Got a dispute or a problem with a large company? Forget calling customer service and do what Andrew Forsythe does: Complain directly to the chief executive.
"Since the beginning of the pandemic, I haven���t had a haircut and figure I���m at least $125 richer," notes Mike Flack. "It���s all getting a little out of control, but until the wife says it���s an issue, it���s free money."
Dealing with a landlord who is refusing to return your security deposit? Take some tips from attorney John Goodell, who's helped military servicemembers get their money back.
If you���re unhappy with low-yielding bonds and the pricey S&P 500, there's no need to buy bitcoin, gold or private funds, says Adam Grossman. Instead, just tilt toward value and foreign stocks.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
Still, I think often about his reluctance���because I share it. Despite exercising every day, I know I���m not as flexible or as fast as I once was, and it takes longer for the stiffness in my muscles to ease each morning. Meanwhile, I���m well aware that two of my four grandparents had dementia at the end of their life.
Perhaps, as I age, the idea of some form of assisted living will grow more appealing. Perhaps I won���t have any choice. But for now, as I make decisions big and small, I think about what it���ll take to maintain my independence and how to make matters easier for my octogenarian self. Like almost everybody else, I want to stay in control of my life for as long as possible and I hate the notion that I might end up heavily dependent on others.
That desire was a big factor in my recent home purchase. I bought a house that���s close to my daughter and where I could live on one floor. While I���d like my new home to be my final stop, I���m not entirely sure it will be. If necessary, I might move to an apartment���perhaps one I���d rent, so my kids wouldn���t have to worry about selling the place after my death.
Now that housing is settled���at least for now���I���m thinking more about my portfolio and how I���ll generate income later in retirement. This is an issue that others are also wrestling with: I get frequent emails from readers who want to make sure their finances will remain manageable, even if they suffer some cognitive decline, or who want to ensure that their spouse can easily take over the household finances.
Worried about either or both of those issues? Here are three steps I���m toying with:
Radical simplicity. Today, I have four bank accounts, four credit cards and 11 different mutual funds���and, in some cases, I own the same fund in multiple accounts, because I have a taxable account, a traditional IRA, a Roth IRA, an inherited IRA and a solo 401(k).
I���m not ready to do it yet, but at some point I plan to cancel all but one credit card and eliminate two of my four bank accounts, so I have just one checking account and one savings account. Meanwhile, I may move all of my fund holdings into a single target-date fund, though I���ll end up owning that one fund in multiple different accounts, because I���ll still have a traditional IRA, Roth IRA and so on.
Lifetime income. As I���ve discussed in earlier articles, I plan to delay claiming Social Security until age 70, while using some of my bond fund money to purchase immediate fixed annuities that pay lifetime income. There���s a host of reasons for this, including hedging the risk of a long life, generating more income in an extremely low-yield environment and giving myself the leeway to invest more heavily in stocks, which���assuming I live to a ripe old age���could offset the money lost to the annuity purchases, thanks to higher overall portfolio returns.
But to this list of reasons, let me add another: If I suffer some cognitive decline, arranging a healthy stream of lifetime income should make my financial life relatively easy to handle. Every month, I���ll get income deposited into my checking account from Social Security and my immediate fixed annuities. The only potentially tricky part is calculating and taking my required minimum distribution from my retirement accounts each year, though even that can be automated.
Hiring help. Instead of going the route of a radically simpler portfolio and buying immediate fixed annuities���or perhaps in conjunction with those steps���I might hire a financial advisor to oversee my finances. I���ve always handled my own portfolio. Hiring an advisor would have struck me as unthinkable a decade ago. But later in retirement, having someone to manage my finances may be the price I���ll need to pay to avoid self-inflicted financial wounds.
What would I look for in a financial advisor? Someone who���s low cost and fee only, legally obligated to act as a fiduciary (and not just part of the time) and who builds portfolios using index funds. He or she will also need to be significantly younger. After all, I���ll need someone who will still be working when I���m at the end of my life. One other criterion: He or she will need a thick skin. I suspect my octogenarian self will make for an ornery client.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Want a more fulfilling retirement? Joe Kesler's advice: Figure out what it is about work that you want to preserve���and what you'd like to eliminate.
"You don���t have to be a genius to achieve your investment goals," writes Vanguard's former CEO, Jack Brennan. "But if you���re a disciplined and confident yet humble investor, you���ll end up looking like one."
Got a dispute or a problem with a large company? Forget calling customer service and do what Andrew Forsythe does: Complain directly to the chief executive.
"Since the beginning of the pandemic, I haven���t had a haircut and figure I���m at least $125 richer," notes Mike Flack. "It���s all getting a little out of control, but until the wife says it���s an issue, it���s free money."
Dealing with a landlord who is refusing to return your security deposit? Take some tips from attorney John Goodell, who's helped military servicemembers get their money back.
If you���re unhappy with low-yielding bonds and the pricey S&P 500, there's no need to buy bitcoin, gold or private funds, says Adam Grossman. Instead, just tilt toward value and foreign stocks.
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 Built for Ease appeared first on HumbleDollar.
April 30, 2021
Renters’ Revenge
MUCH IS WRITTEN about whether it���s better to rent or own your home. Not nearly enough ink is devoted to the issue of renting from a bad landlord.
Perhaps personal finance writers avoid the topic because they���re wary of providing legal advice when discussing potential remedies. On top of that, landlord-tenant law varies greatly from state to state, with some states offering greater protection to tenants and others affording landlords wider latitude.
I know a fair amount about this because I not only spent 14 years as an active-duty Army servicemember who had to move frequently, but also I���m an attorney and for two years ran the military���s largest legal assistance office, which is located at Fort Hood, Texas. The state is among the top three nationally when it comes to both servicemember��population and total military retiree��population.
While there are several tactics used by dishonest landlords to exact maximum money from their tenants, perhaps the most egregious is withholding security deposits without a valid reason. In the Fort Hood area, it was common for landlords to withhold a soldier���s entire deposit, regardless of what type of work needed to be done on the dwelling after a soldier vacated.
There���s a federal law called the Servicemember's��Civil Relief��Act, which protects servicemembers from certain issues, such as breaking a lease due to military orders. Problem is, servicemembers must assert this right in court for the protection to kick in. Landlords know this and assume a transient population like the military won���t fight to get their deposit back.
How did our legal team solve this problem? We hired a Texas-licensed civilian attorney, who could get us into the local courts. Adhering to the tenet that the best defense is a good offense, we began suing. In the first year of the program, we took the six most egregious cases to court. We won all of them, ensuring that the security deposits involved were returned to the soldiers and their families.
While landlords had to pay their attorneys, our efforts were simply an additional legal service that our office provided. In my final few months as Chief of Client Services, I began to notice that we were getting fewer complaints. My assumption is that we had flipped the script���that landlords didn���t want to pony up legal fees and explain their actions to a judge.
The lesson for tenants in this situation: Consider your options, including speaking with an attorney who���s an expert in this area of the law, doing research on your state���s laws and utilizing small claims court. The American Bar Association offers some excellent general��guidance on the topic.
Does this read like an article for HumbleBrag rather than HumbleDollar? A confession: Before my time at Fort Hood, when my eyes were opened to all the possible pitfalls facing renters, I was the tenant who signed a very landlord-friendly contract for a rental in Arlington, Virginia. Did I read the entire contract? Yes. Was I an attorney when I signed it? Yes (sigh).
In 2011, my wife and I agreed to a rental contract with a clause that allowed the owner to take possession if he had to move back to the area for work. Nine months into our lease, our landlord���a Silicon Valley software engineer���told us that he needed his home back.
I had read the contract carefully. I could have refused to sign it or negotiated a different clause. But my new assignment was starting soon. We were desperate for a reasonably priced rental with a fenced-in yard that was near to my wife���s medical school and my workplace. I played the odds. We lost.
Neither my wife nor I can recall whether the landlord kept our deposit, which is probably just as well. You know what they say about ���ignorance��� and ���bliss.���
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John at HighGroundPlanning.com��and on Twitter @HighGroundPlan, and check out his earlier articles.
Perhaps personal finance writers avoid the topic because they���re wary of providing legal advice when discussing potential remedies. On top of that, landlord-tenant law varies greatly from state to state, with some states offering greater protection to tenants and others affording landlords wider latitude.
I know a fair amount about this because I not only spent 14 years as an active-duty Army servicemember who had to move frequently, but also I���m an attorney and for two years ran the military���s largest legal assistance office, which is located at Fort Hood, Texas. The state is among the top three nationally when it comes to both servicemember��population and total military retiree��population.
While there are several tactics used by dishonest landlords to exact maximum money from their tenants, perhaps the most egregious is withholding security deposits without a valid reason. In the Fort Hood area, it was common for landlords to withhold a soldier���s entire deposit, regardless of what type of work needed to be done on the dwelling after a soldier vacated.
There���s a federal law called the Servicemember's��Civil Relief��Act, which protects servicemembers from certain issues, such as breaking a lease due to military orders. Problem is, servicemembers must assert this right in court for the protection to kick in. Landlords know this and assume a transient population like the military won���t fight to get their deposit back.
How did our legal team solve this problem? We hired a Texas-licensed civilian attorney, who could get us into the local courts. Adhering to the tenet that the best defense is a good offense, we began suing. In the first year of the program, we took the six most egregious cases to court. We won all of them, ensuring that the security deposits involved were returned to the soldiers and their families.
While landlords had to pay their attorneys, our efforts were simply an additional legal service that our office provided. In my final few months as Chief of Client Services, I began to notice that we were getting fewer complaints. My assumption is that we had flipped the script���that landlords didn���t want to pony up legal fees and explain their actions to a judge.
The lesson for tenants in this situation: Consider your options, including speaking with an attorney who���s an expert in this area of the law, doing research on your state���s laws and utilizing small claims court. The American Bar Association offers some excellent general��guidance on the topic.
Does this read like an article for HumbleBrag rather than HumbleDollar? A confession: Before my time at Fort Hood, when my eyes were opened to all the possible pitfalls facing renters, I was the tenant who signed a very landlord-friendly contract for a rental in Arlington, Virginia. Did I read the entire contract? Yes. Was I an attorney when I signed it? Yes (sigh).
In 2011, my wife and I agreed to a rental contract with a clause that allowed the owner to take possession if he had to move back to the area for work. Nine months into our lease, our landlord���a Silicon Valley software engineer���told us that he needed his home back.
I had read the contract carefully. I could have refused to sign it or negotiated a different clause. But my new assignment was starting soon. We were desperate for a reasonably priced rental with a fenced-in yard that was near to my wife���s medical school and my workplace. I played the odds. We lost.
Neither my wife nor I can recall whether the landlord kept our deposit, which is probably just as well. You know what they say about ���ignorance��� and ���bliss.���
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John at HighGroundPlanning.com��and on Twitter @HighGroundPlan, and check out his earlier articles.The post Renters’ Revenge appeared first on HumbleDollar.
April 29, 2021
Going to the Top
WE INCREASINGLY DO business with gigantic impersonal companies: banks, insurers, credit card issuers, cable and phone companies, utilities, and huge retailers like Amazon, Home Depot and Walmart. Often, we deal with them at a distance—by phone, mail, and especially online or via email.
When disputes or problems arise, we’re typically forced to contact their so-called customer service departments, which are often sorely lacking in service. Even before getting to a human, we have to run the gauntlet of an annoying robot, and once we have a human on the phone, the canned response tends to be, “Sorry, but our policy is….”
I’m not interested in what the usual policy is. What I want is to speak to somebody who has the power to ignore it. And what I’ve learned from many experiences over many years is the benefit of going to the top.
My eyes were first opened in the prehistoric early days of cellphones. I’d been convinced by my wife and teenage daughters that the latter each needed a cellphone “for emergencies.” This was way before “unlimited” plans. You were billed—and a goodly amount—per minute. It was hard enough dealing with all the “emergencies” that our dear girls racked up, but I also got hit with some big charges that I truly thought were a mistake.
After the usual frustrations trying to straighten things out with Verizon, I decided on a Hail Mary pass and made my first serious attempt to go to the top. I managed to find an email address for Verizon’s chief executive and sent a long, detailed (and courteous) message to him explaining the problem. To my surprise, shortly thereafter, I received a telephone call from an extremely nice man in the “executive escalations” department. Not only did he fix my problem, but also he invited me to keep his contact information and let him know of any future issues. He probably regretted that. I contacted him several times over the next few years, but he always graciously came to my aid.
This was a lesson I didn’t forget. In the ensuing years, I had similar experiences with Home Depot, Honda, Chase, Bank of America, Time Warner Cable (now Spectrum), our local water utility and many others. I wasn’t successful every time, but often enough I was and, on occasion, the results were head spinning. A few years ago, PayPal was driving me crazy with something. I found an email address for the chief operating officer. I sent him a message on a Saturday morning. Two hours later, he personally replied, offering to intervene. I gladly accepted. He assigned someone on his team to help me, and help me he did.
You'll seldom get a reply from the chief executive or chief operating officer him or herself, of course. More often, it’s from a member of some type of executive escalation team. These folks tend to be pretty good. My guess is that it’s a plum assignment, and I’ve generally been impressed with the people from that group. In fact, the Bank of America team member I dealt with on a small matter was so good that now I ask for him by name—and usually get him.
Often, the hardest part of this whole process is kicking it off. You need a good email address for the brass. There are some websites that can help, such as this one, this one and this one. But often, the best method is simply to locate the corporate officers on the company website and then figure out the email structure the company uses, such as Bob.Smith@xyz.com. You may have to guess how the executive lists his or her name for email purposes. Is it Bob.Smith or Robert.Smith, or does the executive have a middle name or use an initial? One method is to send the same email to every possible variation. Some will bounce back, but the one that doesn’t probably got through.
Another key: Once you get through to someone in the executive suite, keep his or her contact information—forever. I prefer an email address because of the value of having a paper trail. If someone calls, I’m usually cheeky enough to ask for one. Recently, I emailed a gent in HP escalations, who had assisted me almost four years ago, and asked for his help with a current laptop issue. He had left HP, but another team member promptly responded. Even though my computer was three years out of warranty, I ended up with a generous gift card to use on my next one.
I likewise had kept the email address of the chief executive of our local PBS channel. When the sound and picture scrambled during a recent NewsHour, I shot him an email. To my surprise, I had an almost immediate reply—at 6:30 p.m. on a Friday—from him and from the engineer he’d assigned to the problem.
You’ve probably guessed by now that I’m a world-class complainer. But there’s an important flip side: If a team member is helpful to me, especially if he or she goes above and beyond the call of duty, I make a habit of singing his or her praises to the higher ups in the organization. If I’m going to complain when something is done wrong, it’s only fair to praise and say “thank you” when something’s done right.
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.
When disputes or problems arise, we’re typically forced to contact their so-called customer service departments, which are often sorely lacking in service. Even before getting to a human, we have to run the gauntlet of an annoying robot, and once we have a human on the phone, the canned response tends to be, “Sorry, but our policy is….”
I’m not interested in what the usual policy is. What I want is to speak to somebody who has the power to ignore it. And what I’ve learned from many experiences over many years is the benefit of going to the top.
My eyes were first opened in the prehistoric early days of cellphones. I’d been convinced by my wife and teenage daughters that the latter each needed a cellphone “for emergencies.” This was way before “unlimited” plans. You were billed—and a goodly amount—per minute. It was hard enough dealing with all the “emergencies” that our dear girls racked up, but I also got hit with some big charges that I truly thought were a mistake.
After the usual frustrations trying to straighten things out with Verizon, I decided on a Hail Mary pass and made my first serious attempt to go to the top. I managed to find an email address for Verizon’s chief executive and sent a long, detailed (and courteous) message to him explaining the problem. To my surprise, shortly thereafter, I received a telephone call from an extremely nice man in the “executive escalations” department. Not only did he fix my problem, but also he invited me to keep his contact information and let him know of any future issues. He probably regretted that. I contacted him several times over the next few years, but he always graciously came to my aid.
This was a lesson I didn’t forget. In the ensuing years, I had similar experiences with Home Depot, Honda, Chase, Bank of America, Time Warner Cable (now Spectrum), our local water utility and many others. I wasn’t successful every time, but often enough I was and, on occasion, the results were head spinning. A few years ago, PayPal was driving me crazy with something. I found an email address for the chief operating officer. I sent him a message on a Saturday morning. Two hours later, he personally replied, offering to intervene. I gladly accepted. He assigned someone on his team to help me, and help me he did.
You'll seldom get a reply from the chief executive or chief operating officer him or herself, of course. More often, it’s from a member of some type of executive escalation team. These folks tend to be pretty good. My guess is that it’s a plum assignment, and I’ve generally been impressed with the people from that group. In fact, the Bank of America team member I dealt with on a small matter was so good that now I ask for him by name—and usually get him.
Often, the hardest part of this whole process is kicking it off. You need a good email address for the brass. There are some websites that can help, such as this one, this one and this one. But often, the best method is simply to locate the corporate officers on the company website and then figure out the email structure the company uses, such as Bob.Smith@xyz.com. You may have to guess how the executive lists his or her name for email purposes. Is it Bob.Smith or Robert.Smith, or does the executive have a middle name or use an initial? One method is to send the same email to every possible variation. Some will bounce back, but the one that doesn’t probably got through.
Another key: Once you get through to someone in the executive suite, keep his or her contact information—forever. I prefer an email address because of the value of having a paper trail. If someone calls, I’m usually cheeky enough to ask for one. Recently, I emailed a gent in HP escalations, who had assisted me almost four years ago, and asked for his help with a current laptop issue. He had left HP, but another team member promptly responded. Even though my computer was three years out of warranty, I ended up with a generous gift card to use on my next one.
I likewise had kept the email address of the chief executive of our local PBS channel. When the sound and picture scrambled during a recent NewsHour, I shot him an email. To my surprise, I had an almost immediate reply—at 6:30 p.m. on a Friday—from him and from the engineer he’d assigned to the problem.
You’ve probably guessed by now that I’m a world-class complainer. But there’s an important flip side: If a team member is helpful to me, especially if he or she goes above and beyond the call of duty, I make a habit of singing his or her praises to the higher ups in the organization. If I’m going to complain when something is done wrong, it’s only fair to praise and say “thank you” when something’s done right.
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 Going to the Top appeared first on HumbleDollar.
April 28, 2021
Free Money
THERE’S A LITERARY rite of passage that requires every financial blogger to write at least one article about free money. Far be it for me to break with this tradition.
Titling an article “free money” will catch most readers’ attention. After all, we all want something for nothing. You know what they say: “Money found is twice as sweet as money earned.” It’s also a topic that’s a bottomless well of ideas limited only by the creativity of the writer. I will bound my creativity by limiting my ideas to those that don’t involve coffee, index funds and Roth IRAs.
1. Dispute credit card charges. Everyone knows you should dispute fraudulent credit card charges, but three years of endless travel have taught me that credit cards also offer the chance to dispute charges for unsatisfactory products and services—an opportunity most cardholders never exploit.
If you pay for a product or service that you find unsatisfactory, disputing the charge may be an option. There is a gray area involving fine print I’ve never read, as well as a gray area of morality that I won’t address. Put simply, if you honestly feel wronged, dispute the charge and let fate be the arbiter. Consider two examples.
First, in March 2020, I booked and prepaid for a bed at a youth hostel in New Orleans. When COVID-19 hit, I canceled my stay for obvious reasons and asked for a refund. The hostel did not close and therefore refused. I could have reviewed all of the New Orleans public health notices and the hostel’s fine print. Instead, I just disputed the charge and won.
Second, I used GoDaddy to buy a domain name and hosting services for my website. When I found GoDaddy had used a bait and switch regarding its website builder, and now wanted to charge me an additional $100 or I’d lose a month’s worth of work, I canceled and asked for a refund. GoDaddy refunded the hosting charge but refused to refund the charge for the domain name. I could have reviewed GoDaddy’s terms and conditions. Instead, I just disputed the charge and won.
Note: This is a compelling reason to use a credit card rather than pay with cash, a debit card or Venmo.
2. Veteran’s discounts. Some businesses give them, some don’t. But either way, don’t rely on businesses to post them, because many times they don’t. Instead, simply ask for a military discount.
If the organization has a published discount, you'll get it. If it has an unpublished discount, you’ll get it. If the organization doesn’t have one but the person behind the counter is a veteran, or connected to a veteran, or just plain patriotic, maybe you’ll get one anyway.
This tactic has worked for me quite often. Veterans should have zero qualms about using it. It’s a benefit that you’ve earned, often with blood. Make sure you have your military ID, Veteran ID Card or DD-214 handy. If you’re with your spouse, confidently ask for two discounts. It’s a benefit your spouse has also earned. What if you aren’t a veteran? Don’t even think about it.
Bonus tip: If you’re a veteran, get a Veteran ID Card, so you can get free access to all national parks.
3. Amazon credit cards and gift cards. I’ve opened two Amazon credit cards over the past two years. An American Express card gave me an immediate $200 credit, with another $100 after spending $1,000, which enabled me to buy a new HP laptop for $50. Meanwhile, an Amazon Visa card gave me an immediate $100 credit, which made for some very economical Christmas presents.
Separately, if you currently have an Amazon gift card, there may be an offer to get a $10 bonus when you reload your gift card with $100 using a credit card.
4. Sidewalk money. When I say this, it isn’t another euphemism for free money. Instead, I’d direct your attention to money that’s quite literally lying on the sidewalk. I like to walk for exercise—11,000 steps a day. If I see a penny, a dime, a double sawbuck, a Visa gift card with $42.72 left on it or a $20 gift card for Jack Stack BBQ, I pick it up. Every now and then, I visit a Coinstar kiosk with the cash I’ve collected, but I avoid the 11% vigorish by converting my loot into an Amazon gift card (see No. 3).
5. Sell books on Amazon. I’m not talking about books from my bookshelf that I’ve previously bought. When you sell them, you actually lose money. Rather, I’m talking about books found on the sidewalk (see No. 4), in the garbage, in free libraries, in thrift stores and at garage sales. I don’t bother trying to resell bestsellers, instead focusing on technical manuals and more obscure titles. I always add photographs to my listing. When buyers pay $95 for a used book, they want to be able to see it. I generally shoot for a minimum $10 margin.
Bonus strategy: Since the beginning of the pandemic, I haven’t had a haircut and figure I’m at least $125 richer. It’s all getting a little out of control, but until the wife says it’s an issue, it’s free money.
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.
Titling an article “free money” will catch most readers’ attention. After all, we all want something for nothing. You know what they say: “Money found is twice as sweet as money earned.” It’s also a topic that’s a bottomless well of ideas limited only by the creativity of the writer. I will bound my creativity by limiting my ideas to those that don’t involve coffee, index funds and Roth IRAs.
1. Dispute credit card charges. Everyone knows you should dispute fraudulent credit card charges, but three years of endless travel have taught me that credit cards also offer the chance to dispute charges for unsatisfactory products and services—an opportunity most cardholders never exploit.
If you pay for a product or service that you find unsatisfactory, disputing the charge may be an option. There is a gray area involving fine print I’ve never read, as well as a gray area of morality that I won’t address. Put simply, if you honestly feel wronged, dispute the charge and let fate be the arbiter. Consider two examples.
First, in March 2020, I booked and prepaid for a bed at a youth hostel in New Orleans. When COVID-19 hit, I canceled my stay for obvious reasons and asked for a refund. The hostel did not close and therefore refused. I could have reviewed all of the New Orleans public health notices and the hostel’s fine print. Instead, I just disputed the charge and won.
Second, I used GoDaddy to buy a domain name and hosting services for my website. When I found GoDaddy had used a bait and switch regarding its website builder, and now wanted to charge me an additional $100 or I’d lose a month’s worth of work, I canceled and asked for a refund. GoDaddy refunded the hosting charge but refused to refund the charge for the domain name. I could have reviewed GoDaddy’s terms and conditions. Instead, I just disputed the charge and won.
Note: This is a compelling reason to use a credit card rather than pay with cash, a debit card or Venmo.
2. Veteran’s discounts. Some businesses give them, some don’t. But either way, don’t rely on businesses to post them, because many times they don’t. Instead, simply ask for a military discount.
If the organization has a published discount, you'll get it. If it has an unpublished discount, you’ll get it. If the organization doesn’t have one but the person behind the counter is a veteran, or connected to a veteran, or just plain patriotic, maybe you’ll get one anyway.
This tactic has worked for me quite often. Veterans should have zero qualms about using it. It’s a benefit that you’ve earned, often with blood. Make sure you have your military ID, Veteran ID Card or DD-214 handy. If you’re with your spouse, confidently ask for two discounts. It’s a benefit your spouse has also earned. What if you aren’t a veteran? Don’t even think about it.
Bonus tip: If you’re a veteran, get a Veteran ID Card, so you can get free access to all national parks.
3. Amazon credit cards and gift cards. I’ve opened two Amazon credit cards over the past two years. An American Express card gave me an immediate $200 credit, with another $100 after spending $1,000, which enabled me to buy a new HP laptop for $50. Meanwhile, an Amazon Visa card gave me an immediate $100 credit, which made for some very economical Christmas presents.
Separately, if you currently have an Amazon gift card, there may be an offer to get a $10 bonus when you reload your gift card with $100 using a credit card.
4. Sidewalk money. When I say this, it isn’t another euphemism for free money. Instead, I’d direct your attention to money that’s quite literally lying on the sidewalk. I like to walk for exercise—11,000 steps a day. If I see a penny, a dime, a double sawbuck, a Visa gift card with $42.72 left on it or a $20 gift card for Jack Stack BBQ, I pick it up. Every now and then, I visit a Coinstar kiosk with the cash I’ve collected, but I avoid the 11% vigorish by converting my loot into an Amazon gift card (see No. 3).
5. Sell books on Amazon. I’m not talking about books from my bookshelf that I’ve previously bought. When you sell them, you actually lose money. Rather, I’m talking about books found on the sidewalk (see No. 4), in the garbage, in free libraries, in thrift stores and at garage sales. I don’t bother trying to resell bestsellers, instead focusing on technical manuals and more obscure titles. I always add photographs to my listing. When buyers pay $95 for a used book, they want to be able to see it. I generally shoot for a minimum $10 margin.
Bonus strategy: Since the beginning of the pandemic, I haven’t had a haircut and figure I’m at least $125 richer. It’s all getting a little out of control, but until the wife says it’s an issue, it’s free money.
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 Free Money appeared first on HumbleDollar.
April 27, 2021
Straight Talk
TWO DECADES AGO, we witnessed the bursting of one of history���s biggest stock market bubbles. Many investors were left burned and bewildered. At the time, I was chief executive of Vanguard and saw the need for a practical, back-to-basics guide to help investors navigate the financial markets. My 2002 book Straight Talk on Investing was born.
Since then, we���ve endured a few more market shocks, plus the investing landscape has changed considerably���mostly for the better. Product choice is greater, investment costs are lower and convenience has vastly improved. What���s more, professional financial advice is now more accessible and affordable. I genuinely believe that there���s never been a better time to be an investor.
That said, today, I see much of the same unbridled enthusiasm among market participants that I saw two decades ago, during the heady days of the late 1990s bull market. This zeal is often fueled by financial firms that lead individuals to confuse trading and speculating with investing. Social media is further fanning the flames.
The reality: Investing is not a game���and ���gamifying��� it strikes me as irresponsible.
The timing is coincidental, but an updated and expanded More Straight Talk on Investing was just published. It offers a remedy to today���s speculation and short-termism by emphasizing a timeless, tried-and-true investing approach based on balance, diversification, low costs and a long-term orientation.
At the end of the book, readers will find a summary of 12 principles that offer sound foundational knowledge to novices and a good refresher for those with more experience. I believe these ���CliffsNotes��� serve as a tonic to true investors and strong medicine to gamers:
1. Develop a financial plan. Identify your goals and design an investment program that���ll enable you to reach them. Be conservative when projecting how fast your money will grow.
2. Become a disciplined saver. Learn to live below your means. Make it a habit to put away money every month. If you aren���t naturally disposed toward saving money, find ways to trick yourself into doing so, such as automating your savings program.
3. Start investing early and keep it up. Make time your ally. Begin setting aside money for your goals as soon as possible. Keep plugging away, contributing fixed amounts on a regular basis in both good markets and bad.
4. Invest with balance and diversification. For balance, invest across the three major asset classes: stocks, bonds and cash investments. For diversification, make sure you aren���t overly exposed to any single company, industry or investment style. For an individual, mutual funds and exchange-traded funds are the simplest, most effective vehicles for accomplishing these two strategies.
5. Control costs. Avoid funds with high annual expenses. The average mutual fund expense ratio was 0.63% in 2019, but there are funds that charge much, much less. While you watch your costs, don���t forget to minimize the bite from taxes.
6. Manage risk. Create a portfolio that���ll enable you to sleep at night. If you design an investment mix that fits with your objectives, time horizon, risk tolerance and financial situation, you should be able to endure volatile times in the markets without feeling that you need to make drastic changes to your portfolio.
7. Be a buy-and-hold investor.��Those who frequently trade stocks, bonds and funds rarely succeed over the long term. A surer path to success is to settle on a trusted financial firm or firms, set up a sensible portfolio and stick with it.
8. Avoid fads and ���can���t-miss��� opportunities. You���re sure to encounter people promoting alluring new investment opportunities in individual securities or narrow market sectors. Don���t be tempted to abandon your diversified strategy���or you could quickly undo all the good that you���ve accomplished.
9. Tune out distractions. Resist the barrage of news and information about the market���s daily movements. Much of this information is irrelevant to you as a buy-and-hold investor. The danger: It may tempt you to make investment moves that aren���t in your best long-term interest.
10. Maintain perspective. There will be good times and challenging times during your investment career. When times are good, be grateful, not greedy. When times are bad, be patient. Focusing on your long-term goals is a winning strategy for all seasons.
11. Give your portfolio an occasional tune-up. No investor should put his or her investment mix on autopilot. Periodic rebalancing will keep your portfolio aligned with its target asset allocation, while life changes may necessitate tweaking those targets.
12. Define ���enough.��� Know when you have enough money to meet your goals. You���ll be content and, more important, far less likely to reach for more and take unnecessary risks.
Even accounting for the stock market���s remarkable drop last year, at the start of the pandemic, we���ve enjoyed a strong bull market that goes all the way back to 2009���exceedingly long by historical standards. And long bull markets tend to lull people into a false sense that it���s easy to succeed as an investor. There���s a tired, but true, adage that says, ���Never confuse genius with a bull market.��� You don���t have to be a genius to achieve your investment goals. But if you���re a knowledgeable, disciplined and confident yet humble investor, you���ll end up looking like one.
Jack Brennan is chairman emeritus of Vanguard. He joined the company in 1982 and served as chief��executive officer from 1996 to 2008.
Since then, we���ve endured a few more market shocks, plus the investing landscape has changed considerably���mostly for the better. Product choice is greater, investment costs are lower and convenience has vastly improved. What���s more, professional financial advice is now more accessible and affordable. I genuinely believe that there���s never been a better time to be an investor.
That said, today, I see much of the same unbridled enthusiasm among market participants that I saw two decades ago, during the heady days of the late 1990s bull market. This zeal is often fueled by financial firms that lead individuals to confuse trading and speculating with investing. Social media is further fanning the flames.
The reality: Investing is not a game���and ���gamifying��� it strikes me as irresponsible.
The timing is coincidental, but an updated and expanded More Straight Talk on Investing was just published. It offers a remedy to today���s speculation and short-termism by emphasizing a timeless, tried-and-true investing approach based on balance, diversification, low costs and a long-term orientation.
At the end of the book, readers will find a summary of 12 principles that offer sound foundational knowledge to novices and a good refresher for those with more experience. I believe these ���CliffsNotes��� serve as a tonic to true investors and strong medicine to gamers:
1. Develop a financial plan. Identify your goals and design an investment program that���ll enable you to reach them. Be conservative when projecting how fast your money will grow.
2. Become a disciplined saver. Learn to live below your means. Make it a habit to put away money every month. If you aren���t naturally disposed toward saving money, find ways to trick yourself into doing so, such as automating your savings program.
3. Start investing early and keep it up. Make time your ally. Begin setting aside money for your goals as soon as possible. Keep plugging away, contributing fixed amounts on a regular basis in both good markets and bad.
4. Invest with balance and diversification. For balance, invest across the three major asset classes: stocks, bonds and cash investments. For diversification, make sure you aren���t overly exposed to any single company, industry or investment style. For an individual, mutual funds and exchange-traded funds are the simplest, most effective vehicles for accomplishing these two strategies.
5. Control costs. Avoid funds with high annual expenses. The average mutual fund expense ratio was 0.63% in 2019, but there are funds that charge much, much less. While you watch your costs, don���t forget to minimize the bite from taxes.
6. Manage risk. Create a portfolio that���ll enable you to sleep at night. If you design an investment mix that fits with your objectives, time horizon, risk tolerance and financial situation, you should be able to endure volatile times in the markets without feeling that you need to make drastic changes to your portfolio.
7. Be a buy-and-hold investor.��Those who frequently trade stocks, bonds and funds rarely succeed over the long term. A surer path to success is to settle on a trusted financial firm or firms, set up a sensible portfolio and stick with it.
8. Avoid fads and ���can���t-miss��� opportunities. You���re sure to encounter people promoting alluring new investment opportunities in individual securities or narrow market sectors. Don���t be tempted to abandon your diversified strategy���or you could quickly undo all the good that you���ve accomplished.
9. Tune out distractions. Resist the barrage of news and information about the market���s daily movements. Much of this information is irrelevant to you as a buy-and-hold investor. The danger: It may tempt you to make investment moves that aren���t in your best long-term interest.
10. Maintain perspective. There will be good times and challenging times during your investment career. When times are good, be grateful, not greedy. When times are bad, be patient. Focusing on your long-term goals is a winning strategy for all seasons.
11. Give your portfolio an occasional tune-up. No investor should put his or her investment mix on autopilot. Periodic rebalancing will keep your portfolio aligned with its target asset allocation, while life changes may necessitate tweaking those targets.
12. Define ���enough.��� Know when you have enough money to meet your goals. You���ll be content and, more important, far less likely to reach for more and take unnecessary risks.
Even accounting for the stock market���s remarkable drop last year, at the start of the pandemic, we���ve enjoyed a strong bull market that goes all the way back to 2009���exceedingly long by historical standards. And long bull markets tend to lull people into a false sense that it���s easy to succeed as an investor. There���s a tired, but true, adage that says, ���Never confuse genius with a bull market.��� You don���t have to be a genius to achieve your investment goals. But if you���re a knowledgeable, disciplined and confident yet humble investor, you���ll end up looking like one.
Jack Brennan is chairman emeritus of Vanguard. He joined the company in 1982 and served as chief��executive officer from 1996 to 2008.The post Straight Talk appeared first on HumbleDollar.
April 26, 2021
Secret Sauce
I���VE READ A LOT of retirement books touting the ���keys to a successful retirement.��� Some have great ideas. But I think they miss a key ingredient. My contention: To have a successful retirement, we need to start with a proper understanding of work.
Admittedly, it���s a counterintuitive way of looking at retirement. But sometimes looking at a problem backward can help us find creative solutions. In other words, examine the opposite of retirement for lessons about retirement.
To that end, ponder this: What is it about work that���s rewarding that we never want to lose���and, once retired, what is it about work that we want to eliminate? If you can answer those two questions, you���ll be well on your way to designing the ideal retirement.
As I see it, work offers five rewards that we should strive to hang on to. First, it allows us to feel part of something bigger than ourselves. Many of us started our career with a vision of how we could change the world for the better. Teachers and health care workers epitomize this desire.
For some people, this drive is a reflection of their faith. In many religious traditions, work is seen as a way to honor God, care for the world he created and help others to thrive. Meanwhile, non-religious folks often get a similar sense of satisfaction from their work, especially when they feel it helps others to prosper. In all cultures, we see this universal desire to contribute to society���a desire that typically doesn���t disappear when we leave the workforce.
Second, I don���t think I���ve ever felt as alive as when I was fully engaged in creative learning at work. There���s something exhilarating when we have an ���aha moment��� and learn something new or find an innovative solution to a vexing problem. In retirement, I���d like to continue tapping into that exhilaration.
Third, work provides us with a sense of identity. I was a banker. I was comfortable with that identity for 40 years. Saying I���m ���retired��� doesn���t capture who I am today and isn���t how I want to define myself.
Fourth, work creates social bonds with co-workers. Spending time together striving to accomplish a noble purpose leads to close friendships.
Finally, work provides income. In many ways, that���s the easiest benefit to replace: If we save for the future by living on less than our salary, we���ll have income in retirement and can enjoy a financially stress-free life.
Given all these benefits, why would anyone leave behind meaningful work? Consider Jerry Seinfeld. Jack Welch, then chief executive of GE, offered Seinfeld $5 million a show, or $110 million total, to do one more season of Seinfeld. Seinfeld said ���no��� and walked away.
Why? One possible reason: He didn���t have time for anything else���like family. After the series ended, he got married and had children. It���s also been suggested that he wanted to go out on top. Seinfeld had devoted so much time to the show that he wasn���t able to lead a normal life, where he could gather material observing others.
While we aren���t in Seinfeld���s salary league, we can find common ground in the reasons he left. I���ve talked to friends who have worked for law and accounting firms who left because the time cost was too high.
On top of that, even noble professions can grind down workers with red tape and other distractions from their work���s main mission. For some folks, the toxic personalities in the workplace eventually become too much to bear.
How can we synthesize these insights to design an ideal retirement? Here are my six suggestions:
1. Ramp up creativity and learning. Last winter, I spent a few months in an active retirement community. One of the first things I noticed: There were hundreds of clubs available, where residents could learn and create. It reminded me of the thrill of going to college, but without the stress of final exams. My career provided creative outlets, but retirement potentially offers so many more.
2. Redesign work. A fulfilling retirement isn���t about 100% leisure. Instead, it should include some work and service to others. What���s changed is that we no longer have to put up with the nonsense of the workplace���because we aren���t doing it for a paycheck. The choices are countless: Churches, nonprofits and entrepreneurial efforts are all potential ways to continue with the best of our meaningful work without the baggage.
3. Redefine identity. As we step out of our old world, we need to fill the identity void with our new interests. ���What do you do?��� When I���m asked that today, I say, ���I���m a writer and bank consultant.��� That leads to much more rewarding conversations than recounting what I used to do.
4. Build deep friendships. We need to replace the work world���s social network with a new one. Work relationships can be intense because they���re centered on a shared pursuit of the organization���s goals. Losing those relationships leaves a hole we need to fill.
We will likely find that the quality of retirement friendships is correlated with the depth of our shared goals and aspirations. My advice: Look for friendships where you find yourself most passionate. Perhaps it���s a hobby or a cause you care deeply about. Friendships found in these areas are likely to be more enduring and satisfying.
5. Capture Kodak moments. Use the extra time offered by retirement to reconnect with family. Many of us missed some of those special family moments in our work years. I���m trying to make sure that doesn���t happen anymore.
6. Eliminate the toxins. ��Don���t waste a lot of time in this new season of life with toxic relationships or annoying red tape. We sometimes had to endure unusual personalities in the workplace. But if we���re prepared financially for retirement, this season of life shouldn���t require such pain.
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.
Admittedly, it���s a counterintuitive way of looking at retirement. But sometimes looking at a problem backward can help us find creative solutions. In other words, examine the opposite of retirement for lessons about retirement.
To that end, ponder this: What is it about work that���s rewarding that we never want to lose���and, once retired, what is it about work that we want to eliminate? If you can answer those two questions, you���ll be well on your way to designing the ideal retirement.
As I see it, work offers five rewards that we should strive to hang on to. First, it allows us to feel part of something bigger than ourselves. Many of us started our career with a vision of how we could change the world for the better. Teachers and health care workers epitomize this desire.
For some people, this drive is a reflection of their faith. In many religious traditions, work is seen as a way to honor God, care for the world he created and help others to thrive. Meanwhile, non-religious folks often get a similar sense of satisfaction from their work, especially when they feel it helps others to prosper. In all cultures, we see this universal desire to contribute to society���a desire that typically doesn���t disappear when we leave the workforce.
Second, I don���t think I���ve ever felt as alive as when I was fully engaged in creative learning at work. There���s something exhilarating when we have an ���aha moment��� and learn something new or find an innovative solution to a vexing problem. In retirement, I���d like to continue tapping into that exhilaration.
Third, work provides us with a sense of identity. I was a banker. I was comfortable with that identity for 40 years. Saying I���m ���retired��� doesn���t capture who I am today and isn���t how I want to define myself.
Fourth, work creates social bonds with co-workers. Spending time together striving to accomplish a noble purpose leads to close friendships.
Finally, work provides income. In many ways, that���s the easiest benefit to replace: If we save for the future by living on less than our salary, we���ll have income in retirement and can enjoy a financially stress-free life.
Given all these benefits, why would anyone leave behind meaningful work? Consider Jerry Seinfeld. Jack Welch, then chief executive of GE, offered Seinfeld $5 million a show, or $110 million total, to do one more season of Seinfeld. Seinfeld said ���no��� and walked away.
Why? One possible reason: He didn���t have time for anything else���like family. After the series ended, he got married and had children. It���s also been suggested that he wanted to go out on top. Seinfeld had devoted so much time to the show that he wasn���t able to lead a normal life, where he could gather material observing others.
While we aren���t in Seinfeld���s salary league, we can find common ground in the reasons he left. I���ve talked to friends who have worked for law and accounting firms who left because the time cost was too high.
On top of that, even noble professions can grind down workers with red tape and other distractions from their work���s main mission. For some folks, the toxic personalities in the workplace eventually become too much to bear.
How can we synthesize these insights to design an ideal retirement? Here are my six suggestions:
1. Ramp up creativity and learning. Last winter, I spent a few months in an active retirement community. One of the first things I noticed: There were hundreds of clubs available, where residents could learn and create. It reminded me of the thrill of going to college, but without the stress of final exams. My career provided creative outlets, but retirement potentially offers so many more.
2. Redesign work. A fulfilling retirement isn���t about 100% leisure. Instead, it should include some work and service to others. What���s changed is that we no longer have to put up with the nonsense of the workplace���because we aren���t doing it for a paycheck. The choices are countless: Churches, nonprofits and entrepreneurial efforts are all potential ways to continue with the best of our meaningful work without the baggage.
3. Redefine identity. As we step out of our old world, we need to fill the identity void with our new interests. ���What do you do?��� When I���m asked that today, I say, ���I���m a writer and bank consultant.��� That leads to much more rewarding conversations than recounting what I used to do.
4. Build deep friendships. We need to replace the work world���s social network with a new one. Work relationships can be intense because they���re centered on a shared pursuit of the organization���s goals. Losing those relationships leaves a hole we need to fill.
We will likely find that the quality of retirement friendships is correlated with the depth of our shared goals and aspirations. My advice: Look for friendships where you find yourself most passionate. Perhaps it���s a hobby or a cause you care deeply about. Friendships found in these areas are likely to be more enduring and satisfying.
5. Capture Kodak moments. Use the extra time offered by retirement to reconnect with family. Many of us missed some of those special family moments in our work years. I���m trying to make sure that doesn���t happen anymore.
6. Eliminate the toxins. ��Don���t waste a lot of time in this new season of life with toxic relationships or annoying red tape. We sometimes had to endure unusual personalities in the workplace. But if we���re prepared financially for retirement, this season of life shouldn���t require such pain.
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 Secret Sauce appeared first on HumbleDollar.
April 25, 2021
The TINA Trap
IN RECENT MONTHS, there���s been a lot of handwringing about the stock market. Thankfully, we seem to be on the back end of the pandemic, but things remain far from perfect in the economy. Millions are still unemployed. And the government has had to spend trillions to get us through, adding to a federal debt that was already enormous.
Today, the economy is far more fragile than it was pre-COVID. And yet the stock market just keeps cruising to new all-time highs. The S&P 500, including dividends, is up 12% this year. That���s on top of last year���s gain of more than 18%.
While the bond market receives less attention, there���s been a similar amount of handwringing there. The yield on the benchmark 10-year U.S. Treasury note, despite a recent rise, still stands at a meager 1.56%. Even a 30-year Treasury today offers investors just 2.24%.
This has many investors asking: If both stocks and bonds are causes for concern, is there anything behind door No. 3? Let's review the options.
Gold and cryptocurrency have been gaining attention because they're seen as effective hedges against inflation. But as I��noted��last week, they���re also risky because they lack intrinsic value. They're only worth what the next person is willing to pay for them. Yes, gold has a longer track record than cryptocurrency. But that��record��is unimpressive.
More broadly, commodities have appeal as a tool for diversifying portfolios. In addition to gold and silver, you can invest in everything from wheat and corn to crude oil and natural gas. There are index funds that make it easy to invest in a basket of commodities. The challenge, though, is that commodity prices are notoriously��volatile. In addition, they don't offer the inherent growth potential of stocks and they aren���t stable enough to replace bonds. For these reasons, they can play a role in a portfolio, but only a supporting one.
Private funds are another alternative. If the public markets are all trading at high levels, the thinking goes, maybe I can do better with a private fund. There���s logic to this, but these funds carry their own challenges: Compared to public funds, private funds have less transparency, lower liquidity, higher minimum investments and higher fees. They can also be a pain at tax time.
All of those drawbacks might be worth it if private funds were knocking it out of the park with their performance.��Some certainly do. But here���s the problem: According to a��study��by McKinsey, the dispersion of returns among private funds is much wider than among public funds. This means that when you���re investing in private funds, it���s much more important to choose the best funds. But those funds generally aren���t open to mainstream investors.
Why not? Private funds are capped by law in how many investors they can take on. If a fund manager has a top-quartile record, he or she would��much rather��take a seven-�� or eight-figure check from a university endowment than a smaller one from an individual investor. Bottom line: Even though some private funds have delivered enviable results, I don���t see them as a practical solution���certainly not for the majority of one���s portfolio.
Taken together, this lack of viable alternatives has given rise to the acronym TINA���there is no alternative. That is, there���s no alternative to the stock market. Investor frustration with TINA helps explain, I think, why we���re seeing some of the more bizarre corners of investment markets become so inflated. This includes things like dogecoin, which has gained��12,000% over the past year, and nonfungible tokens (NFTs), like the cartoon image of a cat that��sold��for $580,000.
Craziness like this is a symptom, in my opinion, of the fact that investors are searching high and low for something���anything���that offers better prospective returns than the stock market.
I have good news, though: You don���t need to buy into the TINA trap. Yes, the S&P 500 is pricey. But that���s not your only choice. There are other segments of the stock market that are still reasonably priced. Most obviously, this includes value stocks. The Russell 1000 Value Index, for example, is trading at 18 times forecasted earnings. That���s a steal compared to the Russell 1000 Growth Index, which is trading at 31 times.
Outside the U.S., the MSCI Europe, Australasia and Far East Index of developed countries is trading at 17 times expected earnings, and the MSCI index of emerging markets is trading at just 15 times. Do these markets deserve to trade at discounts to the U.S.? I think so. But the valuation gaps have grown over the past 10 years, meaning that these markets have become less expensive even on a��relative��basis.
How can you take advantage of these more attractive valuations? It isn���t difficult. All of these market segments can be accessed with simple index funds. If your existing portfolio consists of a total market index fund or an S&P 500 fund, that���s no problem. You could make the change in a retirement account, where there would be no tax impact. Meanwhile, in a taxable account, you could simply add a value-oriented fund or an international��fund the next time you have dollars to invest. Over time, this will give your portfolio a ���tilt��� toward the less expensive side of the market.
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.
Today, the economy is far more fragile than it was pre-COVID. And yet the stock market just keeps cruising to new all-time highs. The S&P 500, including dividends, is up 12% this year. That���s on top of last year���s gain of more than 18%.
While the bond market receives less attention, there���s been a similar amount of handwringing there. The yield on the benchmark 10-year U.S. Treasury note, despite a recent rise, still stands at a meager 1.56%. Even a 30-year Treasury today offers investors just 2.24%.
This has many investors asking: If both stocks and bonds are causes for concern, is there anything behind door No. 3? Let's review the options.
Gold and cryptocurrency have been gaining attention because they're seen as effective hedges against inflation. But as I��noted��last week, they���re also risky because they lack intrinsic value. They're only worth what the next person is willing to pay for them. Yes, gold has a longer track record than cryptocurrency. But that��record��is unimpressive.
More broadly, commodities have appeal as a tool for diversifying portfolios. In addition to gold and silver, you can invest in everything from wheat and corn to crude oil and natural gas. There are index funds that make it easy to invest in a basket of commodities. The challenge, though, is that commodity prices are notoriously��volatile. In addition, they don't offer the inherent growth potential of stocks and they aren���t stable enough to replace bonds. For these reasons, they can play a role in a portfolio, but only a supporting one.
Private funds are another alternative. If the public markets are all trading at high levels, the thinking goes, maybe I can do better with a private fund. There���s logic to this, but these funds carry their own challenges: Compared to public funds, private funds have less transparency, lower liquidity, higher minimum investments and higher fees. They can also be a pain at tax time.
All of those drawbacks might be worth it if private funds were knocking it out of the park with their performance.��Some certainly do. But here���s the problem: According to a��study��by McKinsey, the dispersion of returns among private funds is much wider than among public funds. This means that when you���re investing in private funds, it���s much more important to choose the best funds. But those funds generally aren���t open to mainstream investors.
Why not? Private funds are capped by law in how many investors they can take on. If a fund manager has a top-quartile record, he or she would��much rather��take a seven-�� or eight-figure check from a university endowment than a smaller one from an individual investor. Bottom line: Even though some private funds have delivered enviable results, I don���t see them as a practical solution���certainly not for the majority of one���s portfolio.
Taken together, this lack of viable alternatives has given rise to the acronym TINA���there is no alternative. That is, there���s no alternative to the stock market. Investor frustration with TINA helps explain, I think, why we���re seeing some of the more bizarre corners of investment markets become so inflated. This includes things like dogecoin, which has gained��12,000% over the past year, and nonfungible tokens (NFTs), like the cartoon image of a cat that��sold��for $580,000.
Craziness like this is a symptom, in my opinion, of the fact that investors are searching high and low for something���anything���that offers better prospective returns than the stock market.
I have good news, though: You don���t need to buy into the TINA trap. Yes, the S&P 500 is pricey. But that���s not your only choice. There are other segments of the stock market that are still reasonably priced. Most obviously, this includes value stocks. The Russell 1000 Value Index, for example, is trading at 18 times forecasted earnings. That���s a steal compared to the Russell 1000 Growth Index, which is trading at 31 times.
Outside the U.S., the MSCI Europe, Australasia and Far East Index of developed countries is trading at 17 times expected earnings, and the MSCI index of emerging markets is trading at just 15 times. Do these markets deserve to trade at discounts to the U.S.? I think so. But the valuation gaps have grown over the past 10 years, meaning that these markets have become less expensive even on a��relative��basis.
How can you take advantage of these more attractive valuations? It isn���t difficult. All of these market segments can be accessed with simple index funds. If your existing portfolio consists of a total market index fund or an S&P 500 fund, that���s no problem. You could make the change in a retirement account, where there would be no tax impact. Meanwhile, in a taxable account, you could simply add a value-oriented fund or an international��fund the next time you have dollars to invest. Over time, this will give your portfolio a ���tilt��� toward the less expensive side of the market.
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 The TINA Trap appeared first on HumbleDollar.
April 24, 2021
Hanging Tough
IS THIS A TIME to be fearful? In Berkshire Hathaway���s 1986 annual report, Warren Buffett wrote, ���We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.���
Make no mistake: There���s plenty of greed on display right now, whether it���s bitcoin, nonfungible tokens, Robinhood traders, GameStop or special purpose acquisition companies. All of this has some observers talking of a market bubble. Indeed, I suspect much of this nonsense ���will end in tears,��� a phrase my mother often used when trying to control her four rambunctious children.
And yet, despite this frenzy of foolishness, I find myself comfortable holding a portfolio that���s heavily tilted toward stocks. In fact, since the stock market���s startling rally began 13 months ago, I haven���t rebalanced my portfolio, which would mean paring back my stock funds to their target portfolio percentages. (Please, no scolding emails: I���ll probably get to it in the weeks ahead.) Why am I so sanguine? There are four reasons.
First, I���m globally diversified. It���s hard to get a good handle on stock market valuations right now because corporate earnings for the past 12 months have been so battered by the global pandemic���s economic slowdown. Still, suppose we compare Vanguard Total Stock Market ETF, which tracks the broad U.S. market, to Vanguard���s Total International Stock ETF. The stocks in the former are trading at 29.1 times trailing 12-month earnings, while the stocks in the latter are at 20.1. What about emerging markets? The shares held by Vanguard FTSE Emerging Markets ETF are at 18.3 times earnings.
Moreover, the U.S. stock fund has notched 13.8% a year over the past decade, for a cumulative gain of 264%, while its international counterpart has notched just 5.2% a year, for a 66% total gain. I���m not suggesting we naively assume that U.S. and overseas markets are destined to see a role reversal. Still, history suggests that no market or sector outperforms or underperforms forever���and that we should see some reversion to the mean.
Second, influenced by academic research, I have an overweight in value stocks and smaller companies. That brings us to another huge disparity in valuations, this time within the U.S. market. Let���s again look at three Vanguard funds. The firm���s S&P 500 Growth ETF holds large-cap growth stocks trading at 37.2 times earnings, its S&P 500 Value ETF owns large-cap value stocks that are at 23.4 times corporate profits and its Small-Cap Value ETF holds shares at 20.2 times earnings. Again, there���s been a large performance gap over the past decade, though it���s closer to five percentage points a year, rather than the almost nine-percentage-point annual gap for U.S. vs. foreign.
To be sure, the companies in the S&P Growth ETF have brighter prospects���at least from a business perspective. But will those brighter business prospects translate into better stock returns? They have over the past decade, but I suspect weaker performance lies ahead, given today���s heady valuations.
Third, I have plenty of cash to cover my costs in the years ahead. I���m still making enough to cover my living expenses, thanks mostly to my work for Creative Planning. But even if that went away, I have enough in short-term bond funds and cash investments to cover my living expenses for the next five years, which should be enough to ride out a market decline without being compelled to sell stocks.
Finally, as I argued last year, I don���t see any alternative to owning stocks. After factoring in taxes and inflation, cash investments and most bonds are priced to lose money. Readers have suggested more promising alternatives, such as buying rental real estate or becoming a partner in a small business. But I���m not inclined to take on the hassles and risk involved. The upshot: Despite the frothiness I see at the fringes of the financial markets, I���m sticking with stocks. That may prove to be the wrong choice in the short term, but I don���t see any long-run alternative.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"It appears the door my wife envisions doesn���t exist," writes Dick Quinn, describing their latest home remodeling project. "Can you say, 'Have one made to order'? My wife can."
Worried about health care costs in retirement? If you qualify, a great strategy is to fund a health savings account���and then leave it to grow tax-free, rather than using it for current medical costs, says James McGlynn.
"How can we get the uninvested to buy stocks?" asks Marc Bisbal Arias. "It isn���t an easy problem to fix���but it is important, because the consequences of not investing are enormous."
Funds that pick stocks using environmental, social and governance criteria have posted market-beating returns in recent years. But past performance may not be a good guide to the future, says Phil Kernen.
Inflation is today's big fear. What would its return mean for your portfolio? Adam Grossman looks at the implications for stocks, bonds and gold.
"What we once considered a liberating adventure to exotic places now seemed like isolation and alienation," writes Jiab Wasserman. "The opportunity cost of living in Spain rose to the point where it wasn���t worth it."
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
Make no mistake: There���s plenty of greed on display right now, whether it���s bitcoin, nonfungible tokens, Robinhood traders, GameStop or special purpose acquisition companies. All of this has some observers talking of a market bubble. Indeed, I suspect much of this nonsense ���will end in tears,��� a phrase my mother often used when trying to control her four rambunctious children.
And yet, despite this frenzy of foolishness, I find myself comfortable holding a portfolio that���s heavily tilted toward stocks. In fact, since the stock market���s startling rally began 13 months ago, I haven���t rebalanced my portfolio, which would mean paring back my stock funds to their target portfolio percentages. (Please, no scolding emails: I���ll probably get to it in the weeks ahead.) Why am I so sanguine? There are four reasons.
First, I���m globally diversified. It���s hard to get a good handle on stock market valuations right now because corporate earnings for the past 12 months have been so battered by the global pandemic���s economic slowdown. Still, suppose we compare Vanguard Total Stock Market ETF, which tracks the broad U.S. market, to Vanguard���s Total International Stock ETF. The stocks in the former are trading at 29.1 times trailing 12-month earnings, while the stocks in the latter are at 20.1. What about emerging markets? The shares held by Vanguard FTSE Emerging Markets ETF are at 18.3 times earnings.
Moreover, the U.S. stock fund has notched 13.8% a year over the past decade, for a cumulative gain of 264%, while its international counterpart has notched just 5.2% a year, for a 66% total gain. I���m not suggesting we naively assume that U.S. and overseas markets are destined to see a role reversal. Still, history suggests that no market or sector outperforms or underperforms forever���and that we should see some reversion to the mean.
Second, influenced by academic research, I have an overweight in value stocks and smaller companies. That brings us to another huge disparity in valuations, this time within the U.S. market. Let���s again look at three Vanguard funds. The firm���s S&P 500 Growth ETF holds large-cap growth stocks trading at 37.2 times earnings, its S&P 500 Value ETF owns large-cap value stocks that are at 23.4 times corporate profits and its Small-Cap Value ETF holds shares at 20.2 times earnings. Again, there���s been a large performance gap over the past decade, though it���s closer to five percentage points a year, rather than the almost nine-percentage-point annual gap for U.S. vs. foreign.
To be sure, the companies in the S&P Growth ETF have brighter prospects���at least from a business perspective. But will those brighter business prospects translate into better stock returns? They have over the past decade, but I suspect weaker performance lies ahead, given today���s heady valuations.
Third, I have plenty of cash to cover my costs in the years ahead. I���m still making enough to cover my living expenses, thanks mostly to my work for Creative Planning. But even if that went away, I have enough in short-term bond funds and cash investments to cover my living expenses for the next five years, which should be enough to ride out a market decline without being compelled to sell stocks.
Finally, as I argued last year, I don���t see any alternative to owning stocks. After factoring in taxes and inflation, cash investments and most bonds are priced to lose money. Readers have suggested more promising alternatives, such as buying rental real estate or becoming a partner in a small business. But I���m not inclined to take on the hassles and risk involved. The upshot: Despite the frothiness I see at the fringes of the financial markets, I���m sticking with stocks. That may prove to be the wrong choice in the short term, but I don���t see any long-run alternative.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"It appears the door my wife envisions doesn���t exist," writes Dick Quinn, describing their latest home remodeling project. "Can you say, 'Have one made to order'? My wife can."
Worried about health care costs in retirement? If you qualify, a great strategy is to fund a health savings account���and then leave it to grow tax-free, rather than using it for current medical costs, says James McGlynn.
"How can we get the uninvested to buy stocks?" asks Marc Bisbal Arias. "It isn���t an easy problem to fix���but it is important, because the consequences of not investing are enormous."
Funds that pick stocks using environmental, social and governance criteria have posted market-beating returns in recent years. But past performance may not be a good guide to the future, says Phil Kernen.
Inflation is today's big fear. What would its return mean for your portfolio? Adam Grossman looks at the implications for stocks, bonds and gold.
"What we once considered a liberating adventure to exotic places now seemed like isolation and alienation," writes Jiab Wasserman. "The opportunity cost of living in Spain rose to the point where it wasn���t worth it."
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 Hanging Tough appeared first on HumbleDollar.
April 23, 2021
Reversing Course
THREE YEARS AGO, Jim and I decided to retire to Spain. We were attracted by the promise of excellent health care, warm weather, low cost of living and travel throughout Europe. From there, we���d also be able to fly with relative easy to both the U.S. and Asia, allowing us to maintain family connections. All of this gave us a great quality of life for almost three years.
Then COVID-19 hit. Like everyone else, we had to say goodbye to many activities, events and travel. More important, we were cut off from family and friends. During the lockdown, we had more time to explore new things. But we also had time to reflect on the things we���d lost that had always been there, invisibly supporting us.
We came to realize three aspects of life were essential. First, it���s important for us to feel connected to loved ones and to reach them quickly in case of emergency, even if we were separated by thousands of miles. With the pandemic raging, Jim and I realized that if both of us became seriously ill in Spain or if one of our sons had an emergency back in the U.S., it was impossible for them to get to Spain and almost impossible for us to arrange a quick trip back. The unavailability of quick travel ���in the event��� was disturbing.
Second, living in a community with friends is crucial to our emotional well-being. It���s no surprise that the disruption strained mental health for everyone, causing increased stress and anxiety. Loneliness became more widespread. I���m fortunate to have a good companion like Jim. A few of the expats we knew felt such loneliness that they were willing to risk infection to meet others.
Third, as an expat, it isn���t easy to form deep friendships���those relationships where you become each other���s confidant. Such friendships build over time and grow out of shared experiences. Whenever expats get together, they share the commonality of being strangers in a strange land. But unfortunately, the expat���s transitory life makes forming sustained connections more difficult. We cross paths, and share stories over wine and tapas, but inevitably many are soon off to their next job assignment or their next exotic adventure.
Jim and I met many expats during our three years in Spain and belonged to expat social groups made up of people from around the world. Still, there's only a few whom we would truly call friends. By contrast, both Jim and I remained close to our friends in the U.S. and Thailand. In some cases, we became closer during COVID-19, despite the distance, checking in with each other regularly and offering mutual support.
In economics, opportunity cost is what we lose when we choose one option over others. In choosing to move to Spain, we accepted the opportunity cost of our decision, including knowing we would see family and longtime friends less frequently. We could stay connected via social media, but the true sustaining of our ties would be through regular face-to-face encounters when we or they traveled.
With the global pandemic, however, such in-person connections became impossible, made worse by not knowing when those opportunities would return. During the lockdown, catchups by telephone, FaceTime and Zoom with loved ones became the most precious moments in our day. But without the prospect of an actual rendezvous, they seemed cheaper and less fulfilling. We realized that there���s no substitute for meeting in person and being there for each other. This was amplified by my father���s sickness that ended with his passing away last December. My youngest brother in Atlanta and I weren���t able to travel to see him and to be there for our mom.
All of this led me to question whether our expat ���freedom��� was really worth it. What we once considered a liberating adventure to exotic places now seemed like isolation and alienation. I longed for more family connection. The opportunity cost of living in Spain rose to the point where it wasn���t worth it. It was like going to a favorite restaurant and finding that the prices had tripled. We still liked the food but weren���t willing to spend our money at the new prices. We could no longer accept the cost of living abroad.
Even though we had planned to return to the U.S. eventually, the pandemic sped our return and we���re now back living in Dallas. Reversing our earlier choice, we���re happy to give up living in paradise so we can be closer to family once again.
Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018.��Head to Linktree to learn more about Jiab, and also check out her earlier articles.
Then COVID-19 hit. Like everyone else, we had to say goodbye to many activities, events and travel. More important, we were cut off from family and friends. During the lockdown, we had more time to explore new things. But we also had time to reflect on the things we���d lost that had always been there, invisibly supporting us.
We came to realize three aspects of life were essential. First, it���s important for us to feel connected to loved ones and to reach them quickly in case of emergency, even if we were separated by thousands of miles. With the pandemic raging, Jim and I realized that if both of us became seriously ill in Spain or if one of our sons had an emergency back in the U.S., it was impossible for them to get to Spain and almost impossible for us to arrange a quick trip back. The unavailability of quick travel ���in the event��� was disturbing.
Second, living in a community with friends is crucial to our emotional well-being. It���s no surprise that the disruption strained mental health for everyone, causing increased stress and anxiety. Loneliness became more widespread. I���m fortunate to have a good companion like Jim. A few of the expats we knew felt such loneliness that they were willing to risk infection to meet others.
Third, as an expat, it isn���t easy to form deep friendships���those relationships where you become each other���s confidant. Such friendships build over time and grow out of shared experiences. Whenever expats get together, they share the commonality of being strangers in a strange land. But unfortunately, the expat���s transitory life makes forming sustained connections more difficult. We cross paths, and share stories over wine and tapas, but inevitably many are soon off to their next job assignment or their next exotic adventure.
Jim and I met many expats during our three years in Spain and belonged to expat social groups made up of people from around the world. Still, there's only a few whom we would truly call friends. By contrast, both Jim and I remained close to our friends in the U.S. and Thailand. In some cases, we became closer during COVID-19, despite the distance, checking in with each other regularly and offering mutual support.
In economics, opportunity cost is what we lose when we choose one option over others. In choosing to move to Spain, we accepted the opportunity cost of our decision, including knowing we would see family and longtime friends less frequently. We could stay connected via social media, but the true sustaining of our ties would be through regular face-to-face encounters when we or they traveled.
With the global pandemic, however, such in-person connections became impossible, made worse by not knowing when those opportunities would return. During the lockdown, catchups by telephone, FaceTime and Zoom with loved ones became the most precious moments in our day. But without the prospect of an actual rendezvous, they seemed cheaper and less fulfilling. We realized that there���s no substitute for meeting in person and being there for each other. This was amplified by my father���s sickness that ended with his passing away last December. My youngest brother in Atlanta and I weren���t able to travel to see him and to be there for our mom.
All of this led me to question whether our expat ���freedom��� was really worth it. What we once considered a liberating adventure to exotic places now seemed like isolation and alienation. I longed for more family connection. The opportunity cost of living in Spain rose to the point where it wasn���t worth it. It was like going to a favorite restaurant and finding that the prices had tripled. We still liked the food but weren���t willing to spend our money at the new prices. We could no longer accept the cost of living abroad.
Even though we had planned to return to the U.S. eventually, the pandemic sped our return and we���re now back living in Dallas. Reversing our earlier choice, we���re happy to give up living in paradise so we can be closer to family once again.
Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018.��Head to Linktree to learn more about Jiab, and also check out her earlier articles.The post Reversing Course appeared first on HumbleDollar.
April 22, 2021
Virtue’s Vice
IT���S BEEN A GREAT stretch for many mutual funds and exchange-traded funds that buy stocks based on environmental, social and governance (ESG) criteria. For instance, the actively managed Parnassus Core Equity Fund notched 19.3% a year over the three years through March 31, Fidelity U.S. Sustainability Index Fund has climbed 17.4% and iShares ESG Aware MSCI USA ETF 18.2%. All three funds look like winners compared to the S&P 500���s 16.8% annual total return.
Such results suggest you can do good and do well at the same���and investors have responded by showering ESG funds with money. But are past results a good guide to the future? It���s an open question whether the strong performance has been a luxury granted by a generally rising market, one that���s favored the growth stocks that many ESG funds own.
Today���s ESG investing is based on the view that how companies, say, respond to climate change, treat their workers and conduct their governance can positively impact their financial performance. That viewpoint grew out of���but is slightly different from���the earlier trend toward socially responsible investing (SRI). The latter has been practiced for decades and considers the environmental and social effects of investing and typically manifests itself in negative restrictions, such as no alcohol, tobacco or weapons companies. In effect, ESG investing rests on a financial argument, while SRI is more about a moral preference.
ESG investing, which is often traced to a United Nations initiative begun in the early 2000s, has grown rapidly over the past decade. The U.S. Sustainable Investing Foundation estimates that 25% of professionally managed assets now incorporate ESG criteria in their decision-making. As investors began paying more attention to ESG factors, they turned to ESG ratings agencies, which assemble data and produce ESG scores. But the challenges are numerous.
First, there are no agreed-upon standards for ESG disclosures. Each company can make its own assessment of what and how to disclose. Second, there���s no auditing process to verify the reported data. Third, there���s no common framework for ESG ratings. Each rating agency model is unique in terms of data inputs and weights applied. That means any one company���s rating can vary widely across agencies. Contrast this with the credit rating agencies, whose ratings are far more consistent for any given company, thanks to relatively exacting financial reporting standards. Put simply, ESG ratings are highly, highly subjective and the predictive nature of ESG scores should be viewed with healthy skepticism.
Most investors would agree with the concepts behind ESG investing. In theory, companies that prioritize ESG values are more likely to thrive than those that don���t. A business may make huge profits in the here and now, but if doing so results in them polluting their communities, mistreating their workers and fostering a toxic culture, those profits could quickly slip away.
Still, we shouldn���t put the cart before the horse. A company with strong ESG characteristics that reports weak cash flow, is run by an ineffective management team or holds little prospect for growth will be a bad investment any day. Ditto for a company with strong ESG ratings whose stock is wildly overpriced. If you���re actively managing a portfolio, it���s important to put the business and financial analysis first. Positive ESG factors are the icing on the cake.
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
. His previous��articles were Staying Safe,��We're All Active and��What? Spend It?
Such results suggest you can do good and do well at the same���and investors have responded by showering ESG funds with money. But are past results a good guide to the future? It���s an open question whether the strong performance has been a luxury granted by a generally rising market, one that���s favored the growth stocks that many ESG funds own.
Today���s ESG investing is based on the view that how companies, say, respond to climate change, treat their workers and conduct their governance can positively impact their financial performance. That viewpoint grew out of���but is slightly different from���the earlier trend toward socially responsible investing (SRI). The latter has been practiced for decades and considers the environmental and social effects of investing and typically manifests itself in negative restrictions, such as no alcohol, tobacco or weapons companies. In effect, ESG investing rests on a financial argument, while SRI is more about a moral preference.
ESG investing, which is often traced to a United Nations initiative begun in the early 2000s, has grown rapidly over the past decade. The U.S. Sustainable Investing Foundation estimates that 25% of professionally managed assets now incorporate ESG criteria in their decision-making. As investors began paying more attention to ESG factors, they turned to ESG ratings agencies, which assemble data and produce ESG scores. But the challenges are numerous.
First, there are no agreed-upon standards for ESG disclosures. Each company can make its own assessment of what and how to disclose. Second, there���s no auditing process to verify the reported data. Third, there���s no common framework for ESG ratings. Each rating agency model is unique in terms of data inputs and weights applied. That means any one company���s rating can vary widely across agencies. Contrast this with the credit rating agencies, whose ratings are far more consistent for any given company, thanks to relatively exacting financial reporting standards. Put simply, ESG ratings are highly, highly subjective and the predictive nature of ESG scores should be viewed with healthy skepticism.
Most investors would agree with the concepts behind ESG investing. In theory, companies that prioritize ESG values are more likely to thrive than those that don���t. A business may make huge profits in the here and now, but if doing so results in them polluting their communities, mistreating their workers and fostering a toxic culture, those profits could quickly slip away.
Still, we shouldn���t put the cart before the horse. A company with strong ESG characteristics that reports weak cash flow, is run by an ineffective management team or holds little prospect for growth will be a bad investment any day. Ditto for a company with strong ESG ratings whose stock is wildly overpriced. If you���re actively managing a portfolio, it���s important to put the business and financial analysis first. Positive ESG factors are the icing on the cake.
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
. His previous��articles were Staying Safe,��We're All Active and��What? Spend It?The post Virtue’s Vice appeared first on HumbleDollar.
