Jonathan Clements's Blog, page 291
April 21, 2021
Stock Answer
ROUGHLY HALF of Americans don���t invest in the stock market. Why not?
According to a JPMorgan Chase survey, 42% say they don���t have enough money, with 63% believing you need at least $1,000 to start investing. But in fact, some financial firms have no required minimum, including the mutual funds offered by Fidelity Investments and Charles Schwab.
No doubt a lack of financial literacy also plays a role. The S&P Ratings Services Global Financial Literacy Survey asked folks around the world about notions like diversification, compound interest and borrowing costs. The survey found that just 57% of U.S. adults were financially literate. If folks don���t understand the basics of personal finance, maybe it���s no surprise they don���t invest in stocks.
A higher salary and more education also help to boost stock market participation. Gallup research found that investing in stocks is correlated with household income and amount of formal education. Unsurprisingly, a high percentage of those with a college or postgraduate degree invest in stocks. Similarly, 84% of those with household incomes of at least $100,000 own stocks, compared with 65% of those with incomes between $40,000 and $100,000. Owning stocks is also most prevalent among those ages 50 to 64.
According to Gallup, owning stocks ���was more common from 2001 to 2008, when an average 62% of U.S. adults said they owned stock���but it fell after the 2007-09 recession and has not fully rebounded.��� It���s easy to understand why. If you lost confidence in the financial markets during the Great Recession or saw your savings wiped out, it would be tough to own stocks. People won���t put their hard-earned money into a system they fear or don���t trust.
How can we get the uninvested to buy stocks or, preferably, stock funds? It isn���t an easy problem to fix���but it is important, because the consequences of not investing are enormous. One of the most common regrets among retirees is not saving more, according to a Global Atlantic survey. To avoid that fate, we need to start saving early in our career���and to put those savings in the stock market.
Investing brings with it the risk of market crashes, but not doing so can be far riskier���because it leaves you exposed to inflation. Inflation���s short-term impact is small, but as it compounds over the years, the effect snowballs. The spending power of a $100,000 cash balance shrinks to $67,300 at 2% inflation over 20 years. That���s a 33% drop. Compare that with this: From 1926 to 2015, there hasn���t been a single negative 20-year stretch for the S&P 500 stocks. In fact, notes blogger Ben Carlson, ���The worst total return over a 20-year period was 54%.���
The good news is, investing in the stock market has never been easier. To get started, you might take a small amount of your net worth and buy a target-date fund. That���ll give you a diversified portfolio that���s automatically rebalanced. Another option is the classic three-fund portfolio consisting of total market index funds, one focused on U.S. stocks, one on foreign stocks and one on bonds. Once you���ve bought your fund or funds, the next step is to dollar-cost average, so you buy more fund shares on a regular basis. Investing doesn���t have to be much more complicated than that.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows.��Follow Marc on Twitter��@BAMarc��and check out his earlier articles.
According to a JPMorgan Chase survey, 42% say they don���t have enough money, with 63% believing you need at least $1,000 to start investing. But in fact, some financial firms have no required minimum, including the mutual funds offered by Fidelity Investments and Charles Schwab.
No doubt a lack of financial literacy also plays a role. The S&P Ratings Services Global Financial Literacy Survey asked folks around the world about notions like diversification, compound interest and borrowing costs. The survey found that just 57% of U.S. adults were financially literate. If folks don���t understand the basics of personal finance, maybe it���s no surprise they don���t invest in stocks.
A higher salary and more education also help to boost stock market participation. Gallup research found that investing in stocks is correlated with household income and amount of formal education. Unsurprisingly, a high percentage of those with a college or postgraduate degree invest in stocks. Similarly, 84% of those with household incomes of at least $100,000 own stocks, compared with 65% of those with incomes between $40,000 and $100,000. Owning stocks is also most prevalent among those ages 50 to 64.
According to Gallup, owning stocks ���was more common from 2001 to 2008, when an average 62% of U.S. adults said they owned stock���but it fell after the 2007-09 recession and has not fully rebounded.��� It���s easy to understand why. If you lost confidence in the financial markets during the Great Recession or saw your savings wiped out, it would be tough to own stocks. People won���t put their hard-earned money into a system they fear or don���t trust.
How can we get the uninvested to buy stocks or, preferably, stock funds? It isn���t an easy problem to fix���but it is important, because the consequences of not investing are enormous. One of the most common regrets among retirees is not saving more, according to a Global Atlantic survey. To avoid that fate, we need to start saving early in our career���and to put those savings in the stock market.
Investing brings with it the risk of market crashes, but not doing so can be far riskier���because it leaves you exposed to inflation. Inflation���s short-term impact is small, but as it compounds over the years, the effect snowballs. The spending power of a $100,000 cash balance shrinks to $67,300 at 2% inflation over 20 years. That���s a 33% drop. Compare that with this: From 1926 to 2015, there hasn���t been a single negative 20-year stretch for the S&P 500 stocks. In fact, notes blogger Ben Carlson, ���The worst total return over a 20-year period was 54%.���
The good news is, investing in the stock market has never been easier. To get started, you might take a small amount of your net worth and buy a target-date fund. That���ll give you a diversified portfolio that���s automatically rebalanced. Another option is the classic three-fund portfolio consisting of total market index funds, one focused on U.S. stocks, one on foreign stocks and one on bonds. Once you���ve bought your fund or funds, the next step is to dollar-cost average, so you buy more fund shares on a regular basis. Investing doesn���t have to be much more complicated than that.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows.��Follow Marc on Twitter��@BAMarc��and check out his earlier articles.The post Stock Answer appeared first on HumbleDollar.
April 20, 2021
While We’re at It
FULL DISCLOSURE: I am the antithesis of the DIY guy. I was completely banned from home repairs many years ago after I set out to replace an electrical outlet���but switched off the wrong circuit breaker before doing so.
We���ve undertaken two major renovations in the past 12 years. The first was an addition to our vacation home. The second is ongoing���a new kitchen at the same house.
We spent months on the plans. In the case of the addition, we reviewed the architect���s drawings and, with the current kitchen project, the 3D computer-aided design models. We set a budget and got estimates for each step of these two projects, or so we thought.
In the case of the addition, we ended up about 50% over budget. To date with the kitchen, it���s close to the same, with more work still to come. Did we get ripped off by the builders? Not at all. We were undone by the ���while we���re at it��� syndrome. That and our own failure to ask more questions and pay closer attention to details. Notice I use ���our.��� I���m married to a lovely lady addicted to HGTV. Every new show she watches presents new ideas���even after the plans are approved and the budget set.
In the case of the addition, wainscoting, crown molding and a last-minute idea for French doors boosted the final tab. Oh, yes, do you want a full basement or crawl space? I���m not crawling anywhere.
Now for the current project. The pantry didn���t turn out the way my wife ���thought��� it would, despite approving the design. Add $3,000 to redo it. As naive as I am, it never occurred to me a new kitchen also meant all new appliances. Who knew a microwave can go into a drawer?
When setting our budget, we forgot to add in the plumber and electrician, because we were so focused on the big-ticket expense���the cabinets. What could it cost to hook up the new sink, dishwasher and fridge when nothing was being moved? More than $2,000, that���s what. Of course, cabinets need pulls and handles. They have to be just right, including those seahorse pulls. Those cost what? My wife hasn���t yet made the big reveal.
And then there���s the door from the kitchen to the laundry room. That old door just doesn���t look right. It���s a metal door because the laundry room used to be part of the garage, which is now a grandkid���s bedroom. Did I forget to mention that project? That one wasn���t too bad. We only decided after the fact to put in a sliding door between the new room and the laundry. Too bad we decided after it was done, which meant the contractor had to open up a wall.
As far as the new door goes, I bet you���re thinking, ���Just buy one.��� Is it ever that simple? It appears the door my wife envisions doesn���t exist. Can you say, ���Have one made to order���? My wife can. So far, we haven���t found anyone to give us a price. They seem reluctant to do so. That doesn't sound good, but at this point I���m conditioned to surprises. Last summer, we were looking for a new screen door and we found some lovely ones. That is until we learned they cost $3,000. That���s not going to happen. I can just imagine one of the grandkids poking a toy through the screen. Where���s the nearest Home Depot?
After reading this, I bet you think I���m upset about going over budget. Nope, it was expected. When we started the kitchen project, my wife and I agreed on a number. We naively were thinking about $35,000. As soon as we talked with the cabinet people, I knew that number was toast. When we picked the granite countertops, I knew the numbers were heading even further north.
The real shocker was the $700 fixture for the sink. All it does is turn the water on and off, hot or cold. Even at that price, I still have to touch it.
Once you have a new kitchen, other rooms look a bit shabby. According to my wife and HGTV, that is. Soooo, we���re on to painting the house inside and out, including the wood-stained trim from the 1980s to make it white, like the trim on the addition. See how this works? But I suspect that, if your wife is an HGTV addict, you already know that.
I find the secret to coping with special project spending is having the right mindset. I���m frugal by nature, which is why it took 30 years to get the kitchen project started. But once committed and once I know where the money is coming from, I���m all in. As with buying my dream car several years ago, the money is isolated in a bank account. Once it���s there, I don���t stress over spending it. My little secret: I put more into the account than the budget indicated.
Richard Quinn blogs at QuinnsCommentary.com. This is his 100th article for HumbleDollar. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
The post While We’re at It appeared first on HumbleDollar.
April 19, 2021
Healthy Gains
IT���S BEEN CALLED the stealth IRA. We���re talking here about health savings accounts, which offer a triple tax play. First, contributions are tax-deductible. Second, the accounts grow tax-deferred. Third, if the money is used to pay permitted medical expenses, there���s no tax on the sum withdrawn.
That might sound similar to an employer-sponsored flexible spending account for health care costs, but those are more restrictive. If much or all of the money isn���t spent by the end of the year, it���s forfeited. Think of health savings accounts (HSAs) as an improved version. Money in an HSA can be carried over indefinitely and the plan doesn���t cease with your job. Instead, the account stays with the employee���and, indeed, you don���t need to work for a large employer to set up an HSA.
To qualify for a health savings account, you must have insurance that���s classified as a high deductible health plan (HDHP). That���s defined as individual coverage with a deductible of $1,400 or above in 2021 or family coverage with a $2,800-plus deductible. The original intent of the HSA was to promote higher deductible plans, which should translate into both lower medical premiums and more thought before rushing off to see a doctor.
Oftentimes, employers will contribute to an HSA to lessen the risk that the accountholder can���t afford to pay the deductible. Even if your insurance plan has a $1,400-plus deductible, it���s a good idea to verify with the plan that it qualifies as an HDHP. My retiree medical plan originally didn���t qualify, but a few years ago the plan sent out a notice saying it now did, even though the deductible hadn���t changed.
The HSA contribution limits increased slightly in 2021. They���re $3,600 for an individual and $7,200 for a family, plus there���s a $1,000 catch-up contribution if you���re age 55 or above. You have until the mid-April tax filing deadline to make contributions for the prior year. This January, I contributed $4,600 to my HSA for 2021���the sum for an individual, plus my catch-up contribution���to get the account fully funded and invested early in the year.
My experience is with flex-spend accounts and employer-sponsored HSAs, both of which were easy to sign up for, thanks to my old employer���s benefits department. The good news is, even if your employer doesn���t offer HSAs, it���s possible as an individual to open an account at a brokerage firm or a bank. Many people who qualify for an HSA don���t have accounts, because their employer doesn���t offer them.
Where should you turn? Fidelity Investments recently eliminated fees for its HSA and it's seen good investment performance, according to the researchers at Morningstar. Another highly ranked HSA is from fee-free Lively, which is affiliated with TD Ameritrade. My current HSA charges a $45 annual fee. I���m in the process of switching to Lively using a trustee-to-trustee rollover.
Health savings accounts are especially attractive for high tax-bracket workers since the deduction is worth more than it is for those with lower incomes. To be sure, if you aren���t paying medical expenses, HSA contributions aren���t immediately accessible tax-free, as they are with Roth contributions. Still, the list of qualifying medical expenses is quite exhaustive. You can use an HSA to cover your deductible, copays, prescription drugs, and vision and dental care. The account can also be used to pay Medicare Part B, C and D premiums. In addition, it can be used for long-term-care insurance premiums���within limits. An HSA, however, can���t be used for Medigap or health insurance premiums.
While HSAs are intended to cover current medical costs, I���d also view the account as a way to notch tax-free growth, which you might then use to pay for medical expenses in retirement. But to get the most out of the account, you need to invest for long-term growth, rather than stashing the money in low-yield or no-yield safe investments. To leave the account to grow, consider paying cash for current medical bills���but be sure to save your medical receipts. You can use those receipts later to withdraw the amount involved from your account, while getting tax-free growth in the meantime.
Health savings accounts get a little trickier once you���re in or near retirement. If you aren���t currently on Medicare, you can contribute to an HSA, assuming you qualify. ��But once you���re on Medicare, funding an HSA can trigger taxes and penalties. The rules are tricky, as I explained in an earlier article.
Another important point: If the beneficiary of an inherited HSA isn���t your spouse, then the HSA will be fully taxable. There isn���t even a deferral period, as there is with an inherited IRA. That means a charity would be an excellent HSA beneficiary if you���re a single adult.
At age 61, my current plan is to contribute to my HSA until I turn 65. I keep some of the account in cash, but 80% or so is invested in the stock market. Once I turn 65, I may use the account to pay my Medicare and long-term-care insurance premiums, while leaving other accounts���notably my Roth IRA���to keep growing. The Roth account will be tax-free for my heirs and can continue to grow for 10 years after death. By contrast, the HSA would be immediately taxable to my children, so I plan to spend down that account first. An HSA has many virtues. Being a good inheritance isn���t one of them.
James McGlynn, CFA, RICP, is chief executive of
Next Quarter Century LLC
��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��
Retirement Planning Tips for Baby Boomers
. Check out his earlier articles.
That might sound similar to an employer-sponsored flexible spending account for health care costs, but those are more restrictive. If much or all of the money isn���t spent by the end of the year, it���s forfeited. Think of health savings accounts (HSAs) as an improved version. Money in an HSA can be carried over indefinitely and the plan doesn���t cease with your job. Instead, the account stays with the employee���and, indeed, you don���t need to work for a large employer to set up an HSA.
To qualify for a health savings account, you must have insurance that���s classified as a high deductible health plan (HDHP). That���s defined as individual coverage with a deductible of $1,400 or above in 2021 or family coverage with a $2,800-plus deductible. The original intent of the HSA was to promote higher deductible plans, which should translate into both lower medical premiums and more thought before rushing off to see a doctor.
Oftentimes, employers will contribute to an HSA to lessen the risk that the accountholder can���t afford to pay the deductible. Even if your insurance plan has a $1,400-plus deductible, it���s a good idea to verify with the plan that it qualifies as an HDHP. My retiree medical plan originally didn���t qualify, but a few years ago the plan sent out a notice saying it now did, even though the deductible hadn���t changed.
The HSA contribution limits increased slightly in 2021. They���re $3,600 for an individual and $7,200 for a family, plus there���s a $1,000 catch-up contribution if you���re age 55 or above. You have until the mid-April tax filing deadline to make contributions for the prior year. This January, I contributed $4,600 to my HSA for 2021���the sum for an individual, plus my catch-up contribution���to get the account fully funded and invested early in the year.
My experience is with flex-spend accounts and employer-sponsored HSAs, both of which were easy to sign up for, thanks to my old employer���s benefits department. The good news is, even if your employer doesn���t offer HSAs, it���s possible as an individual to open an account at a brokerage firm or a bank. Many people who qualify for an HSA don���t have accounts, because their employer doesn���t offer them.
Where should you turn? Fidelity Investments recently eliminated fees for its HSA and it's seen good investment performance, according to the researchers at Morningstar. Another highly ranked HSA is from fee-free Lively, which is affiliated with TD Ameritrade. My current HSA charges a $45 annual fee. I���m in the process of switching to Lively using a trustee-to-trustee rollover.
Health savings accounts are especially attractive for high tax-bracket workers since the deduction is worth more than it is for those with lower incomes. To be sure, if you aren���t paying medical expenses, HSA contributions aren���t immediately accessible tax-free, as they are with Roth contributions. Still, the list of qualifying medical expenses is quite exhaustive. You can use an HSA to cover your deductible, copays, prescription drugs, and vision and dental care. The account can also be used to pay Medicare Part B, C and D premiums. In addition, it can be used for long-term-care insurance premiums���within limits. An HSA, however, can���t be used for Medigap or health insurance premiums.
While HSAs are intended to cover current medical costs, I���d also view the account as a way to notch tax-free growth, which you might then use to pay for medical expenses in retirement. But to get the most out of the account, you need to invest for long-term growth, rather than stashing the money in low-yield or no-yield safe investments. To leave the account to grow, consider paying cash for current medical bills���but be sure to save your medical receipts. You can use those receipts later to withdraw the amount involved from your account, while getting tax-free growth in the meantime.
Health savings accounts get a little trickier once you���re in or near retirement. If you aren���t currently on Medicare, you can contribute to an HSA, assuming you qualify. ��But once you���re on Medicare, funding an HSA can trigger taxes and penalties. The rules are tricky, as I explained in an earlier article.
Another important point: If the beneficiary of an inherited HSA isn���t your spouse, then the HSA will be fully taxable. There isn���t even a deferral period, as there is with an inherited IRA. That means a charity would be an excellent HSA beneficiary if you���re a single adult.
At age 61, my current plan is to contribute to my HSA until I turn 65. I keep some of the account in cash, but 80% or so is invested in the stock market. Once I turn 65, I may use the account to pay my Medicare and long-term-care insurance premiums, while leaving other accounts���notably my Roth IRA���to keep growing. The Roth account will be tax-free for my heirs and can continue to grow for 10 years after death. By contrast, the HSA would be immediately taxable to my children, so I plan to spend down that account first. An HSA has many virtues. Being a good inheritance isn���t one of them.
James McGlynn, CFA, RICP, is chief executive of
Next Quarter Century LLC
��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��
Retirement Planning Tips for Baby Boomers
. Check out his earlier articles.The post Healthy Gains appeared first on HumbleDollar.
April 18, 2021
Inflation Ahead?
IN THE INVESTMENT world, inflation is the topic of the day. There are four key reasons:
Congress. Since March 2020, the federal government has dropped more than a trillion dollars of cash into the economy via stimulus checks and the Paycheck Protection Program. While many of the recipients were unemployed and needed these dollars to meet basic needs, others were not. The result: More money in people���s pockets allowed them to spend more, pushing up prices for many products. Many of these stimulus dollars also found their way into the stock market, which has helped lift share prices. This newly created wealth, in turn, has helped drive up prices for some big-ticket items, including��houses.
The Fed.��Last year, the Federal Reserve��announced a policy shift. Going forward, the central bank plans to put less emphasis on controlling inflation and more emphasis on maintaining full employment. The Fed will, in fact, permit inflation to run a little hotter than it might have in the past. In recent statements, Federal Reserve Chair Jerome Powell reiterated this stance, even as he acknowledged that super-low interest rates and a recovering economy are causing prices to rise.
Fear. In recent years, inflation has been very low by historical standards���often below 2%.��Still, it wasn���t all that long ago that inflation was north of 10%, contributing to the economic malaise of the 1970s. We���ve all read about the disastrous effects of high inflation in other countries. When Congress recently approved plans to spend another��trillion dollars on infrastructure and other initiatives, people started worrying more.
Expectations. Since the pandemic began, the Federal Reserve has held its federal funds rate near zero and has��communicated��that it plans to leave it at that level for at least a few more years. What do interest rates have to do with inflation? Implicit in the Fed���s position is the belief that the economy will remain weak enough to require the support of continued low interest rates. By extension, if the economy is weak, inflation should also remain low. That���s the Fed���s view. But investors seem to disagree. From a low around 0.5% last summer, the rate on 10-year Treasury notes climbed above 1.7% in recent weeks and ended Friday at 1.59%. When market interest rates jump like this, it���s an indirect sign that investors see inflation coming. In other words, investors aren���t buying the Fed���s assertion that inflation will remain low in the coming years.
If there���s reason to believe that higher inflation might be on its way, how can you protect your portfolio? Below I���ll describe how inflation normally affects three key asset classes: bonds, stocks and gold.
Bonds.��Because most bonds make fixed interest payments, they���re a poor investment when inflation starts rising. The only exceptions are floating-rate bonds, which are somewhat rare, and a few flavors of U.S. government bonds, including Treasury Inflation-Protected Securities (TIPS), which I recommend. TIPS are directly tied to the consumer price index. This guarantees that their interest payments will keep up with inflation.
How exactly do TIPS work? Twice a year, the government adjusts the price of TIPS bonds. When inflation is higher, it marks the price up. Interest payments are then recalculated using the bond���s new, higher price. But TIPS aren���t an entirely free lunch. When there's deflation, the government marks down the price of TIPS bonds, resulting in lower interest payments. Upon maturity, however, holders never get less than a bond's original principal value.
When you buy a TIPS bond, there is an inflation rate implied���often called the ���breakeven rate.��� Today, that breakeven rate is around 2.3%. If inflation turns out to be higher down the road, you���ll do better with TIPS than with regular Treasury bonds. On the other hand, if inflation is lower, you���ll be worse off. That���s why I recommend diversifying, holding both standard and inflation-protected bonds.
If you own a total bond market fund, it���s important to know that these funds don���t include TIPS. They include only standard Treasury bonds. If you own only a total market fund, I would supplement it with a separate TIPS holding.
Stocks.��These are much more resilient when inflation strikes. To understand why, consider this thought experiment: Suppose you���re the chief executive of an auto manufacturer. In ordinary times, it costs you $20,000 to make each car. You then add on 50% for the company's profit and sell them for $30,000. If you sell a million cars a year and earn $10,000 on each, your total company profits will be $10 billion.
Now suppose inflation hits, and suddenly your costs rise by 25%. Instead of $20,000, it costs you $25,000 to build each car. To maintain the same profit margin, you tack on 50% and sell each one for $37,500. If you still sell a million cars, but your profit margin is now $12,500 per car, your total company profits will rise to $12.5 billion. That���s exactly 25% higher than your company���s profits were before inflation struck. And since���all else being equal���share prices follow corporate profits, your company���s stock price should also rise by 25%, right in line with inflation.
This is a simplified example, but that���s the basic idea. As long as a company can raise its own prices to keep up with inflation, its stock price should keep up with inflation as well. To be sure, there are caveats. Some companies will find it harder to raise prices. But overall, stocks are, in my opinion, investors��� best protection against inflation.
Gold.��In the 1970s, when inflation was running high in the U.S., gold enjoyed a golden era, climbing from about $100 per ounce in 1976 to more than $700 in 1980. Ever since, gold has enjoyed a reputation as an ideal hedge against inflation. But unfortunately, it���s also been a poor long-term investment. Following that peak in 1980, gold dropped���and took 27 years to reclaim its prior high. On top of that, aside from that one period in the 1970s, gold has demonstrated very little correlation with inflation.
As I���ve noted��before, gold lacks intrinsic value, meaning that it doesn���t generate any income. That���s in contrast to other major types of assets. Many stocks produce dividends, bonds produce interest and real estate produces rent���but gold produces nothing. That���s why it shouldn���t be any surprise that its price meanders aimlessly over time, much like��bitcoin, and for the same reason. Both are viewed as inflation hedges. But in both cases, I believe it's a mirage.
Add your voice: Where do you see signs of inflation?
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.
Congress. Since March 2020, the federal government has dropped more than a trillion dollars of cash into the economy via stimulus checks and the Paycheck Protection Program. While many of the recipients were unemployed and needed these dollars to meet basic needs, others were not. The result: More money in people���s pockets allowed them to spend more, pushing up prices for many products. Many of these stimulus dollars also found their way into the stock market, which has helped lift share prices. This newly created wealth, in turn, has helped drive up prices for some big-ticket items, including��houses.
The Fed.��Last year, the Federal Reserve��announced a policy shift. Going forward, the central bank plans to put less emphasis on controlling inflation and more emphasis on maintaining full employment. The Fed will, in fact, permit inflation to run a little hotter than it might have in the past. In recent statements, Federal Reserve Chair Jerome Powell reiterated this stance, even as he acknowledged that super-low interest rates and a recovering economy are causing prices to rise.
Fear. In recent years, inflation has been very low by historical standards���often below 2%.��Still, it wasn���t all that long ago that inflation was north of 10%, contributing to the economic malaise of the 1970s. We���ve all read about the disastrous effects of high inflation in other countries. When Congress recently approved plans to spend another��trillion dollars on infrastructure and other initiatives, people started worrying more.
Expectations. Since the pandemic began, the Federal Reserve has held its federal funds rate near zero and has��communicated��that it plans to leave it at that level for at least a few more years. What do interest rates have to do with inflation? Implicit in the Fed���s position is the belief that the economy will remain weak enough to require the support of continued low interest rates. By extension, if the economy is weak, inflation should also remain low. That���s the Fed���s view. But investors seem to disagree. From a low around 0.5% last summer, the rate on 10-year Treasury notes climbed above 1.7% in recent weeks and ended Friday at 1.59%. When market interest rates jump like this, it���s an indirect sign that investors see inflation coming. In other words, investors aren���t buying the Fed���s assertion that inflation will remain low in the coming years.
If there���s reason to believe that higher inflation might be on its way, how can you protect your portfolio? Below I���ll describe how inflation normally affects three key asset classes: bonds, stocks and gold.
Bonds.��Because most bonds make fixed interest payments, they���re a poor investment when inflation starts rising. The only exceptions are floating-rate bonds, which are somewhat rare, and a few flavors of U.S. government bonds, including Treasury Inflation-Protected Securities (TIPS), which I recommend. TIPS are directly tied to the consumer price index. This guarantees that their interest payments will keep up with inflation.
How exactly do TIPS work? Twice a year, the government adjusts the price of TIPS bonds. When inflation is higher, it marks the price up. Interest payments are then recalculated using the bond���s new, higher price. But TIPS aren���t an entirely free lunch. When there's deflation, the government marks down the price of TIPS bonds, resulting in lower interest payments. Upon maturity, however, holders never get less than a bond's original principal value.
When you buy a TIPS bond, there is an inflation rate implied���often called the ���breakeven rate.��� Today, that breakeven rate is around 2.3%. If inflation turns out to be higher down the road, you���ll do better with TIPS than with regular Treasury bonds. On the other hand, if inflation is lower, you���ll be worse off. That���s why I recommend diversifying, holding both standard and inflation-protected bonds.
If you own a total bond market fund, it���s important to know that these funds don���t include TIPS. They include only standard Treasury bonds. If you own only a total market fund, I would supplement it with a separate TIPS holding.
Stocks.��These are much more resilient when inflation strikes. To understand why, consider this thought experiment: Suppose you���re the chief executive of an auto manufacturer. In ordinary times, it costs you $20,000 to make each car. You then add on 50% for the company's profit and sell them for $30,000. If you sell a million cars a year and earn $10,000 on each, your total company profits will be $10 billion.
Now suppose inflation hits, and suddenly your costs rise by 25%. Instead of $20,000, it costs you $25,000 to build each car. To maintain the same profit margin, you tack on 50% and sell each one for $37,500. If you still sell a million cars, but your profit margin is now $12,500 per car, your total company profits will rise to $12.5 billion. That���s exactly 25% higher than your company���s profits were before inflation struck. And since���all else being equal���share prices follow corporate profits, your company���s stock price should also rise by 25%, right in line with inflation.
This is a simplified example, but that���s the basic idea. As long as a company can raise its own prices to keep up with inflation, its stock price should keep up with inflation as well. To be sure, there are caveats. Some companies will find it harder to raise prices. But overall, stocks are, in my opinion, investors��� best protection against inflation.
Gold.��In the 1970s, when inflation was running high in the U.S., gold enjoyed a golden era, climbing from about $100 per ounce in 1976 to more than $700 in 1980. Ever since, gold has enjoyed a reputation as an ideal hedge against inflation. But unfortunately, it���s also been a poor long-term investment. Following that peak in 1980, gold dropped���and took 27 years to reclaim its prior high. On top of that, aside from that one period in the 1970s, gold has demonstrated very little correlation with inflation.
As I���ve noted��before, gold lacks intrinsic value, meaning that it doesn���t generate any income. That���s in contrast to other major types of assets. Many stocks produce dividends, bonds produce interest and real estate produces rent���but gold produces nothing. That���s why it shouldn���t be any surprise that its price meanders aimlessly over time, much like��bitcoin, and for the same reason. Both are viewed as inflation hedges. But in both cases, I believe it's a mirage.
Add your voice: Where do you see signs of inflation?
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 Inflation Ahead? appeared first on HumbleDollar.
April 17, 2021
The Art of Spending
I GREW UP IN a middle-class family in Kolkata, India. Like most folks, my relationship with money was shaped by my parents��� financial habits. They were on different sides of the saver-spender continuum. My homemaking mother strove to live beneath our family���s means and never seemed to feel deprived. By contrast, my father���even with a modest salary from his government job���was focused on the art of��spending.
At my mother���s insistence, my father bought most of our household supplies from wholesalers and cooperative stores, instead of the pricier local bazaar. Branded condiments and drink concentrates were missing from our grocery list, because my mother considered them overpriced. Instead, she joined a community food-processing center to learn how to make tomato ketchup, rose syrup and the like. She used to make enough for our family, as well as neighbors and relatives. My childhood friends still reminisce about the homemade mango-flavored drinks that she served them on hot summer days.
Meanwhile, my father had no problem paying up for convenience and life-enhancing extras. He wasn���t extravagant, but he wouldn���t be deterred by the price tag if he felt an item was worthwhile. Years before television became mainstream, he bought a black-and-white set for our home. A few years later, a basic refrigerator appeared in our kitchen to give my mother a break from daily cooking. To manage these expensive purchases, he���d set a financial goal and then save regularly toward the cost.
When I first started working, I continued to live with my parents and���similar to my father���made a few big purchases. I installed an inverter power generator to combat the frequent electricity cuts at that time. I learned to drive and bought a used car���our family���s first ever vehicle���for occasional commutes when public transport was inconvenient. Each purchase emptied my accumulated savings but was worth every paisa.
This balance between saving and spending, alas, eroded over time. My attitude toward money increasingly came to resemble my mother���s. Ironically, this change happened because I started earning more���thanks to taking jobs overseas. I had grown up in a city with an incredibly low cost of living. Faced with higher costs abroad, my resistance to spending kicked into high gear.
My first foreign assignment was three years in Mauritius as a software consultant. ���You should seriously consider it,��� encouraged my then-supervisor in Kolkata. The money sure sounded sweet. My salary and benefits in India would continue as is. The foreign firm would pay for housing, transportation and an annual vacation back home. I���d also get a generous cash allowance for living expenses. Overall, it looked like a great opportunity to boost my savings.
But I soon discovered that Mauritius was far more expensive than India. It wasn���t obvious at first. The currency name was the same and the quoted prices looked about the same as in India, creating the impression that costs were similar. Problem is, at the time, one Mauritian Rupee was worth almost two Indian Rupees. Effectively, things were twice as pricey. This realization proved to be a curse. From that point on, not only did everything look awfully expensive, but also this ���career opportunity��� lost its luster.
I suspect that many folks who work abroad confront the same dilemma. Faced with spending money, a mental currency calculator pops up and converts the local price to home currency. The price back home then acts as an anchor as you grapple with the local price���and the result is an unreasonable refusal to spend.
On top of that, the temporary aspect of overseas living creates a strong deterrent to spending. After all, any money saved will have greater purchasing power once you���re back home. Sadly, this penny-pinching attitude can also mean you miss opportunities to enjoy your time abroad, which is what happened to me in Mauritius.
After returning home, I took another position overseas, this time in Ireland. The cost of living in Dublin was much higher, but it wasn���t a surprise this time and the compensation package was far more generous. I saw my new gig as a chance to make up for the fun I missed in Mauritius. My wife and I toured Ireland, the U.K. and mainland Europe. My parents came over to spend a summer with us and to travel in Europe. I didn���t save much during those three years in Ireland, but the money was well spent.
My next move was to the U.S. as a fulltime employee of a large software company. The initial years were uneventful, until two things happened: I went through a divorce and I decided to settle permanently in the U.S. For the first time, I had to think hard about my long-term financial future. My big realization: Unlike my old job in India, the burden to save for retirement was largely on me. To get my financial house in order, I had a lot of catching up to do. My anti-spending defense mechanism was triggered once again. I turned into a tightwad and scrimped shamelessly.
I used to rent a spacious apartment close to my work, but now it seemed like an unaffordable luxury. I decided to buy a small townhome. It lacked daylight and the location wasn���t great, but the downgrade didn���t bother me. After all, beggars can���t be choosers���and the place cost me hundreds less each month. My work schedule was demanding, often spilling over into the weekend. Still, I insisted on getting my groceries from an Asian store that was a long drive away but had low prices, and I made it a point to cook all my meals. My socialization was reduced to occasional get-togethers with close friends over homemade food. I survived without a cellphone. I got so miserly that I���d refuse to go anywhere that involved parking fees.
The math of a six-figure income and the four-figure cost of living of a tightfisted bachelor did its magic. Not only did I pay off the mortgage in less than three years, but also I began saving for other goals. Still, my extreme thrift started to feel unsustainable.
Fortunately, it ended when I remarried. The role of husband and stepfather brought much-needed balance to my lifestyle. The biggest financial change: We needed a house in a better school district and a kid-friendly neighborhood for my stepdaughter. For me, reopening the spending floodgate was a big decision, but I realized it was a necessary step to start this new chapter in my life.
I credit my wife for her gentle nudges. She helped me to change my spending ways and overcome my anxiety at opening my wallet. I resumed spending generously on hobbies and travel, this time without any guilt. In a strange way, she and I have become what my parents used to be, but with a role reversal. I still resemble my mother in keeping a close eye on our savings. My wife reminds me of my father, who knew that spending well is equally important. Together, I feel we strike the right balance.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"I was watching TV and heard a teaser for that evening���s nightly news that went something like: 'Local financial advisor scams gold investors',��� recalls Mike Flack. "I almost crapped my pants."
Inflation. Divorce. Taxes. Investment costs. Reckless investing. John Goodell looks at the mathematics of financial misfortune. It isn't pretty.
"If there���s one certainty that came out of 2020, it���s that politicians excel at throwing money at people," writes Joe Kesler. "Does anyone believe that politicians would let our most popular entitlement program run out of money?"
Has this year's financial market turmoil left you feeling uncertain? Dennis Friedman offers nine pointers.
Jim and Jiab Wasserman moved back to Texas after three years in Spain. Their goal: Buy a car, furniture and all the other possessions that make life possible���and spend no more than $10,000.
"You need a mix of stocks, bonds and other asset classes that aren���t tightly correlated," writes Adam Grossman. "As you think about the risk posed by today's stock prices, this is, I think, the most important thing."
Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is��passionate about raising financial literacy and��enjoys helping others with their finances. Check out his earlier articles.
At my mother���s insistence, my father bought most of our household supplies from wholesalers and cooperative stores, instead of the pricier local bazaar. Branded condiments and drink concentrates were missing from our grocery list, because my mother considered them overpriced. Instead, she joined a community food-processing center to learn how to make tomato ketchup, rose syrup and the like. She used to make enough for our family, as well as neighbors and relatives. My childhood friends still reminisce about the homemade mango-flavored drinks that she served them on hot summer days.
Meanwhile, my father had no problem paying up for convenience and life-enhancing extras. He wasn���t extravagant, but he wouldn���t be deterred by the price tag if he felt an item was worthwhile. Years before television became mainstream, he bought a black-and-white set for our home. A few years later, a basic refrigerator appeared in our kitchen to give my mother a break from daily cooking. To manage these expensive purchases, he���d set a financial goal and then save regularly toward the cost.
When I first started working, I continued to live with my parents and���similar to my father���made a few big purchases. I installed an inverter power generator to combat the frequent electricity cuts at that time. I learned to drive and bought a used car���our family���s first ever vehicle���for occasional commutes when public transport was inconvenient. Each purchase emptied my accumulated savings but was worth every paisa.
This balance between saving and spending, alas, eroded over time. My attitude toward money increasingly came to resemble my mother���s. Ironically, this change happened because I started earning more���thanks to taking jobs overseas. I had grown up in a city with an incredibly low cost of living. Faced with higher costs abroad, my resistance to spending kicked into high gear.
My first foreign assignment was three years in Mauritius as a software consultant. ���You should seriously consider it,��� encouraged my then-supervisor in Kolkata. The money sure sounded sweet. My salary and benefits in India would continue as is. The foreign firm would pay for housing, transportation and an annual vacation back home. I���d also get a generous cash allowance for living expenses. Overall, it looked like a great opportunity to boost my savings.
But I soon discovered that Mauritius was far more expensive than India. It wasn���t obvious at first. The currency name was the same and the quoted prices looked about the same as in India, creating the impression that costs were similar. Problem is, at the time, one Mauritian Rupee was worth almost two Indian Rupees. Effectively, things were twice as pricey. This realization proved to be a curse. From that point on, not only did everything look awfully expensive, but also this ���career opportunity��� lost its luster.
I suspect that many folks who work abroad confront the same dilemma. Faced with spending money, a mental currency calculator pops up and converts the local price to home currency. The price back home then acts as an anchor as you grapple with the local price���and the result is an unreasonable refusal to spend.
On top of that, the temporary aspect of overseas living creates a strong deterrent to spending. After all, any money saved will have greater purchasing power once you���re back home. Sadly, this penny-pinching attitude can also mean you miss opportunities to enjoy your time abroad, which is what happened to me in Mauritius.
After returning home, I took another position overseas, this time in Ireland. The cost of living in Dublin was much higher, but it wasn���t a surprise this time and the compensation package was far more generous. I saw my new gig as a chance to make up for the fun I missed in Mauritius. My wife and I toured Ireland, the U.K. and mainland Europe. My parents came over to spend a summer with us and to travel in Europe. I didn���t save much during those three years in Ireland, but the money was well spent.
My next move was to the U.S. as a fulltime employee of a large software company. The initial years were uneventful, until two things happened: I went through a divorce and I decided to settle permanently in the U.S. For the first time, I had to think hard about my long-term financial future. My big realization: Unlike my old job in India, the burden to save for retirement was largely on me. To get my financial house in order, I had a lot of catching up to do. My anti-spending defense mechanism was triggered once again. I turned into a tightwad and scrimped shamelessly.
I used to rent a spacious apartment close to my work, but now it seemed like an unaffordable luxury. I decided to buy a small townhome. It lacked daylight and the location wasn���t great, but the downgrade didn���t bother me. After all, beggars can���t be choosers���and the place cost me hundreds less each month. My work schedule was demanding, often spilling over into the weekend. Still, I insisted on getting my groceries from an Asian store that was a long drive away but had low prices, and I made it a point to cook all my meals. My socialization was reduced to occasional get-togethers with close friends over homemade food. I survived without a cellphone. I got so miserly that I���d refuse to go anywhere that involved parking fees.
The math of a six-figure income and the four-figure cost of living of a tightfisted bachelor did its magic. Not only did I pay off the mortgage in less than three years, but also I began saving for other goals. Still, my extreme thrift started to feel unsustainable.
Fortunately, it ended when I remarried. The role of husband and stepfather brought much-needed balance to my lifestyle. The biggest financial change: We needed a house in a better school district and a kid-friendly neighborhood for my stepdaughter. For me, reopening the spending floodgate was a big decision, but I realized it was a necessary step to start this new chapter in my life.
I credit my wife for her gentle nudges. She helped me to change my spending ways and overcome my anxiety at opening my wallet. I resumed spending generously on hobbies and travel, this time without any guilt. In a strange way, she and I have become what my parents used to be, but with a role reversal. I still resemble my mother in keeping a close eye on our savings. My wife reminds me of my father, who knew that spending well is equally important. Together, I feel we strike the right balance.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"I was watching TV and heard a teaser for that evening���s nightly news that went something like: 'Local financial advisor scams gold investors',��� recalls Mike Flack. "I almost crapped my pants."
Inflation. Divorce. Taxes. Investment costs. Reckless investing. John Goodell looks at the mathematics of financial misfortune. It isn't pretty.
"If there���s one certainty that came out of 2020, it���s that politicians excel at throwing money at people," writes Joe Kesler. "Does anyone believe that politicians would let our most popular entitlement program run out of money?"
Has this year's financial market turmoil left you feeling uncertain? Dennis Friedman offers nine pointers.
Jim and Jiab Wasserman moved back to Texas after three years in Spain. Their goal: Buy a car, furniture and all the other possessions that make life possible���and spend no more than $10,000.
"You need a mix of stocks, bonds and other asset classes that aren���t tightly correlated," writes Adam Grossman. "As you think about the risk posed by today's stock prices, this is, I think, the most important thing."
Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is��passionate about raising financial literacy and��enjoys helping others with their finances. Check out his earlier articles.The post The Art of Spending appeared first on HumbleDollar.
April 16, 2021
Wooden Spoons
WE ARE STARTING from scratch. After living in Spain for three years, Jiab and I have returned to Dallas to be closer to family. We still have a home here, but���when we left three years ago���we sold all our furniture, cars and many other possessions to reduce storage costs. Now we have to reacquire those things that make living possible.
Fortunately, Jiab and I share a similar outlook as we reaccumulate. That outlook is inspired by Thorstein Veblen, who wrote the seminal 1899 work The Theory of the Leisure Class. His book is often considered the beginning of behavioral economics���the study of why people make both rational and irrational economic decisions. For instance, Veblen pointed out that a wooden spoon will serve most purposes just as well as a silver one, and yet it is the latter that���s more desired, despite costing far more. That���s irrational but very human.
Why do people value and desire silver spoons so much more? For Veblen, it came down to a single word, panache, or a way to flaunt our wealth and status by choosing to spend unnecessarily or unwisely. I would go further and add that the time needed to polish silver, the cost to safeguard it and the mental toll of worrying if the silver spoon is lost or damaged makes the silver spoon not worth it.
Jiab and I are secure in our finances, more thanks to Jiab, the realist. Meanwhile, I remain the economic theorist. We ran Monte Carlo simulations of our savings and feel we���re in a good position for retirement. Still, as we rebuild our things, we have chosen, whenever possible, to look for ���wooden spoons.���
I sent word to friends that we needed a reliable car. One friend had a daughter looking to sell her 14-year-old Honda Element, which we purchased for $3,000.
Jiab scours Facebook Marketplace every day for deals on furniture. We have found everything from a Tempur-Pedic king size mattress ($450) to a large TV ($45) to a carpeted stand for our cats ($25). The cat stand needed a bit of cleanup, but the rest were pretty much good to go.
We���ve hunted Salvation Army and Goodwill stores. We even learned about the extra discounts, such as 25% off on Saturdays and markdowns for furniture unbought after 12 days. We got a hardwood dining table and four chairs for $117, and we found a four-piece wrought iron and wicker garden furniture set for $175, snapping it up an hour after it had been put on display. We bought so many items that I rented a van ($35) to pick it all up and bring it home.
When we have bought new items, like shower curtains and bath towels, we looked to no-frills discount stores that sell discontinued or off-brand items.
It may sound like a hodgepodge of cheap stuff, but I can assure you we (as in Jiab) have a tasteful eye and look for items that go well together. We also realize that most of our social interactions are now in outdoor settings, like cafes, so we feel no need to spend lots of money to make the home a ���showplace.��� We want comfort and likability for us (and the cats).
When we sold all of our stuff three years ago, we netted about $10,000. We made it our goal to get established again by spending no more than that. We have yet to get some things, such as a motor scooter for short trips to the store and a full sofa set, but we are on course to stay within our budget, even counting the $3,000 car.
And then there���s the biggest ���spoon��� of all. We leased our home until September of this year, so we���ve had to rent a place for ourselves while we wait. There are plenty of Airbnbs and similar places available at monthly rates. Instead, Jiab and I found a two-bedroom, two-bathroom condo not far from our home. It was on the market for sale, but it hasn���t been updated in several years, so it���s not moving. We purposely rented it so we can check it out. If we like it enough (and, so far, we do), we plan to make an offer to buy it, renovate it ourselves and turn it into rental property when we move back into our home.
Texas chili lovers will debate ���with beans��� vs. ���without.��� But however you like it, trust me, it tastes just as good no matter what spoon you use.
Jim Wasserman is a former business litigation attorney who taught��economics and humanities for 20 years. Check out his previous articles.��Jim is the author of Media, Marketing, and Me, about��teaching behavioral economics and media literacy, as well as��Summa, a children's story for multiracial, multi-ethnic and multicultural families. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog at��YourThirdLife.com.
Fortunately, Jiab and I share a similar outlook as we reaccumulate. That outlook is inspired by Thorstein Veblen, who wrote the seminal 1899 work The Theory of the Leisure Class. His book is often considered the beginning of behavioral economics���the study of why people make both rational and irrational economic decisions. For instance, Veblen pointed out that a wooden spoon will serve most purposes just as well as a silver one, and yet it is the latter that���s more desired, despite costing far more. That���s irrational but very human.
Why do people value and desire silver spoons so much more? For Veblen, it came down to a single word, panache, or a way to flaunt our wealth and status by choosing to spend unnecessarily or unwisely. I would go further and add that the time needed to polish silver, the cost to safeguard it and the mental toll of worrying if the silver spoon is lost or damaged makes the silver spoon not worth it.
Jiab and I are secure in our finances, more thanks to Jiab, the realist. Meanwhile, I remain the economic theorist. We ran Monte Carlo simulations of our savings and feel we���re in a good position for retirement. Still, as we rebuild our things, we have chosen, whenever possible, to look for ���wooden spoons.���
I sent word to friends that we needed a reliable car. One friend had a daughter looking to sell her 14-year-old Honda Element, which we purchased for $3,000.
Jiab scours Facebook Marketplace every day for deals on furniture. We have found everything from a Tempur-Pedic king size mattress ($450) to a large TV ($45) to a carpeted stand for our cats ($25). The cat stand needed a bit of cleanup, but the rest were pretty much good to go.
We���ve hunted Salvation Army and Goodwill stores. We even learned about the extra discounts, such as 25% off on Saturdays and markdowns for furniture unbought after 12 days. We got a hardwood dining table and four chairs for $117, and we found a four-piece wrought iron and wicker garden furniture set for $175, snapping it up an hour after it had been put on display. We bought so many items that I rented a van ($35) to pick it all up and bring it home.
When we have bought new items, like shower curtains and bath towels, we looked to no-frills discount stores that sell discontinued or off-brand items.
It may sound like a hodgepodge of cheap stuff, but I can assure you we (as in Jiab) have a tasteful eye and look for items that go well together. We also realize that most of our social interactions are now in outdoor settings, like cafes, so we feel no need to spend lots of money to make the home a ���showplace.��� We want comfort and likability for us (and the cats).
When we sold all of our stuff three years ago, we netted about $10,000. We made it our goal to get established again by spending no more than that. We have yet to get some things, such as a motor scooter for short trips to the store and a full sofa set, but we are on course to stay within our budget, even counting the $3,000 car.
And then there���s the biggest ���spoon��� of all. We leased our home until September of this year, so we���ve had to rent a place for ourselves while we wait. There are plenty of Airbnbs and similar places available at monthly rates. Instead, Jiab and I found a two-bedroom, two-bathroom condo not far from our home. It was on the market for sale, but it hasn���t been updated in several years, so it���s not moving. We purposely rented it so we can check it out. If we like it enough (and, so far, we do), we plan to make an offer to buy it, renovate it ourselves and turn it into rental property when we move back into our home.
Texas chili lovers will debate ���with beans��� vs. ���without.��� But however you like it, trust me, it tastes just as good no matter what spoon you use.
Jim Wasserman is a former business litigation attorney who taught��economics and humanities for 20 years. Check out his previous articles.��Jim is the author of Media, Marketing, and Me, about��teaching behavioral economics and media literacy, as well as��Summa, a children's story for multiracial, multi-ethnic and multicultural families. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog at��YourThirdLife.com.The post Wooden Spoons appeared first on HumbleDollar.
April 15, 2021
My Worst Investment
WHILE READING the great books on investing, studying financial theory and reviewing our investment performance are essential to becoming a better investor, sometimes it can be useful to learn from the mistakes of others���because what not to do can be even more important than what to do. As Otto von Bismarck may have said, ���Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.���
Which brings me to me.
In 1995, I was a lieutenant in the U.S. Navy stationed in Pearl Harbor, Hawaii. I shared an office with another officer who was a Navy SEAL. Lieutenant O���Brien���or Obie, as he was called���was the prototypical SEAL, handsome, tall and perhaps the most confident man I���ve ever met. Obie walked the halls with a swagger that said, ���I don���t care what you just said, now listen to what I���m going to say.���
And I must admit that (for too long) I did. He and I would talk about investing and, while I���ve forgotten most of our conversations, I do specifically remember him saying, ���You need to get some hard assets.��� He then mentioned that he invested in gold and silver through a man named Barry Bellefontaine.
Mr. B had monthly seminars, which were held within walking distance of my apartment, which made it quite easy to attend, so I did. It was a typical hotel conference room setup, with rows of chairs, some soft drinks on a table and a sign-in desk. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation he had given.
He mentioned that he thought the stock market and Hawaii real estate were overvalued, that he had sold most of his stocks and his house, that inflation was coming, and that gold and silver were the way forward. Not just any gold and silver, though, but the collectible coins��� that he sold.
To this day, I���m not sure why, maybe it was the romance of old coins, or the historic allure of gold, or the idea of being able to actually hold an investment in my hands, or perhaps the confidence of Mr. B, but I bit hard. The main sales pitch revolved around purchasing 1991 brilliant uncirculated half-ounce American Gold Eagles, which until this point had the lowest mintage of any half-ounce Gold Eagles.
The idea was that this investment was a twofer: a play on rare coin collecting and the soon-to-be-increasing value of gold. After meeting one on one with him, I bought 20 Gold Eagles. I also wound up buying three Morgan silver dollars, including one that was quite rare, though I can���t remember exactly what the investment angle was. Man, was I eager. As I type this, I���m thankful I didn���t ���invest��� even more.
I can still remember leaving Mr. B's offices, slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took them to my bank, where I now had the added benefit of paying $100 a year to rent a safe deposit box.
Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady rise in the value of my coins. I went to a few more seminars, where now he was advocating that, in addition to gold and silver, I may want to invest in a couple of small-cap stocks listed on the Toronto Stock Exchange.
Then one day I was watching TV and heard a teaser for that evening���s nightly news that went something like: ���Local financial advisor scams gold investors, news at 11.��� Well, they had my attention and I tuned in at 11. There was the station's investigative reporter, mentioning how numerous locals may have been scammed by investing in rare coins and showing grainy undercover footage of guess who: Mr. B. It appears they couldn���t interview him, though, as he���d fled Hawaii on a boat to parts unknown. I almost crapped my pants.
I confirmed all the sordid details the next day when I tried to call Mr. B on the phone and then visit his offices. As I stood outside the locked door to his now vacant offices, it all fell into place:
He was a smooth operator���super smooth. Well dressed and coiffed, he always had an answer to every question.
The value of my ���collection��� on my monthly statements was Madoff-like in its consistency.
He had previously disclosed that he had sold his house in Hawaii. He was preparing for a quick getaway.
He didn���t do the hard sell. He cast his line, let me bite and then made me do all the work.
A few weeks later, I was contacted by a coin dealer, who offered to give me a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter who informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy, but my mood wasn���t helped when, at the end of the consultation, he asked if I���d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.
The U.S. Navy is big on compiling ���lessons learned.��� In this case, I think you���ll agree they���re quite obvious and there���s no need to recap, except for one final pointer: If you���re in the market for a house in Bali, be careful who you deal with.
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.
Which brings me to me.
In 1995, I was a lieutenant in the U.S. Navy stationed in Pearl Harbor, Hawaii. I shared an office with another officer who was a Navy SEAL. Lieutenant O���Brien���or Obie, as he was called���was the prototypical SEAL, handsome, tall and perhaps the most confident man I���ve ever met. Obie walked the halls with a swagger that said, ���I don���t care what you just said, now listen to what I���m going to say.���
And I must admit that (for too long) I did. He and I would talk about investing and, while I���ve forgotten most of our conversations, I do specifically remember him saying, ���You need to get some hard assets.��� He then mentioned that he invested in gold and silver through a man named Barry Bellefontaine.
Mr. B had monthly seminars, which were held within walking distance of my apartment, which made it quite easy to attend, so I did. It was a typical hotel conference room setup, with rows of chairs, some soft drinks on a table and a sign-in desk. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation he had given.
He mentioned that he thought the stock market and Hawaii real estate were overvalued, that he had sold most of his stocks and his house, that inflation was coming, and that gold and silver were the way forward. Not just any gold and silver, though, but the collectible coins��� that he sold.
To this day, I���m not sure why, maybe it was the romance of old coins, or the historic allure of gold, or the idea of being able to actually hold an investment in my hands, or perhaps the confidence of Mr. B, but I bit hard. The main sales pitch revolved around purchasing 1991 brilliant uncirculated half-ounce American Gold Eagles, which until this point had the lowest mintage of any half-ounce Gold Eagles.
The idea was that this investment was a twofer: a play on rare coin collecting and the soon-to-be-increasing value of gold. After meeting one on one with him, I bought 20 Gold Eagles. I also wound up buying three Morgan silver dollars, including one that was quite rare, though I can���t remember exactly what the investment angle was. Man, was I eager. As I type this, I���m thankful I didn���t ���invest��� even more.
I can still remember leaving Mr. B's offices, slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took them to my bank, where I now had the added benefit of paying $100 a year to rent a safe deposit box.
Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady rise in the value of my coins. I went to a few more seminars, where now he was advocating that, in addition to gold and silver, I may want to invest in a couple of small-cap stocks listed on the Toronto Stock Exchange.
Then one day I was watching TV and heard a teaser for that evening���s nightly news that went something like: ���Local financial advisor scams gold investors, news at 11.��� Well, they had my attention and I tuned in at 11. There was the station's investigative reporter, mentioning how numerous locals may have been scammed by investing in rare coins and showing grainy undercover footage of guess who: Mr. B. It appears they couldn���t interview him, though, as he���d fled Hawaii on a boat to parts unknown. I almost crapped my pants.
I confirmed all the sordid details the next day when I tried to call Mr. B on the phone and then visit his offices. As I stood outside the locked door to his now vacant offices, it all fell into place:
He was a smooth operator���super smooth. Well dressed and coiffed, he always had an answer to every question.
The value of my ���collection��� on my monthly statements was Madoff-like in its consistency.
He had previously disclosed that he had sold his house in Hawaii. He was preparing for a quick getaway.
He didn���t do the hard sell. He cast his line, let me bite and then made me do all the work.
A few weeks later, I was contacted by a coin dealer, who offered to give me a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter who informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy, but my mood wasn���t helped when, at the end of the consultation, he asked if I���d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.
The U.S. Navy is big on compiling ���lessons learned.��� In this case, I think you���ll agree they���re quite obvious and there���s no need to recap, except for one final pointer: If you���re in the market for a house in Bali, be careful who you deal with.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post My Worst Investment appeared first on HumbleDollar.
April 14, 2021
Five Lessons
COVID-19 WILL SOON, I hope, be in the rearview mirror. But as Winston Churchill said, ���Never let a good crisis go to waste.��� Here are five lessons I���m taking away from the pandemic:
1. Government spending. Some folks tell me they���re claiming Social Security retirement benefits as soon as they���re eligible because the system���s trust fund will be depleted within the next decade or so, at which point benefits could get cut. Claiming Social Security early could either be a really bad decision, because benefits go up some 8% for each year you delay, or it could be a really smart move if the politicians let the system run out of money.
My reaction: If there���s one certainty that came out of 2020, it���s that politicians on both sides of the aisle excel at throwing money at people. After watching stimulus checks, enhanced unemployment benefits and Paycheck Protection Program loans flow into the economy, does anyone believe that politicians would let our most popular entitlement program run out of money?
I think there���s little risk that politicians will get religion on deficits and cut Social Security���and we shouldn���t let that possibility impact one of our most important retirement decisions. You may have good reasons to take Social Security early, but I don���t think fear of possible benefit cuts should be a deciding factor.
2. Economic fragility. Remember how, just a few short months ago, we had big shortages of everything from hand sanitizer to swabs to toilet paper? My wife and I ordered some furniture last year that took more than four months to get delivered due to disruptions in the supply chain. The furniture would normally have been shipped in a week. I have friends who have been waiting months for a refrigerator. The disruptions are very real for many products.
I used to read books about the ���coming depression.��� I���ve discounted most of the advice, such as suggestions to load up on gold. But I���ve held onto the idea that we should have several weeks of food and essentials stored up. The pandemic has reinforced that belief.
Some of the cybersecurity training I���ve received has also been a wakeup call. The risk of bad actors hacking into our electrical grid and other infrastructure is unnerving. Knowing how disruptive a cyberwar could be to our economy strikes me as another reason to stockpile a few weeks of essential supplies.
3. Diversification���s benefits. The global stock market crash started on Feb. 20 last year. It was rapid and severe, but short lived. In fact, the S&P 500 went on to return more than 16%, including dividends, in 2020���an astonishing performance considering what the economy went through.
But for some individual stocks, the bear market continues. If you own cruise lines, airlines or hospitality stocks, you���re probably still underwater compared to where you started 2020. It isn���t a sin to own individual stocks and many do well with that strategy. But for those of us who prefer to lower risk through broad diversification, 2020 provided further validation.
4. Unnecessary spending. Last year, spending on travel, eating out, entertainment and gasoline all hit rock-bottom levels in the Kesler household. Yes, our spending on books and streaming services went up, but not nearly as much as we saved in other areas. It was eye-opening to see just how much the family budget could be cut. I bet you found your expenses also fell sharply.
As the pandemic eases, this is a great time to consider what things we really missed over the past year and are anxious to spend money on again. But it���s also a chance to ponder what expenses proved to be unimportant���and perhaps should be permanently cut from our budget.
5. Simple pleasures. Last year provided more opportunities than normal to enjoy the simple pleasure of exploring the mountains with my wife���and without a mask. After sitting through a day of Zoom meetings, nothing refreshes me more than being out in nature.
It was encouraging to see the trailheads much busier than I���ve ever seen them. Families took advantage of a safe and healthy way to reconnect with nature. I know not every location has a Yellowstone National Park nearby. Still, even cities provide green space and the chance to get outside. I hope folks will remember how great it���s been to escape into nature over the past year���and that the increase in outdoor recreation will continue long after the lockdown is over.
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.
1. Government spending. Some folks tell me they���re claiming Social Security retirement benefits as soon as they���re eligible because the system���s trust fund will be depleted within the next decade or so, at which point benefits could get cut. Claiming Social Security early could either be a really bad decision, because benefits go up some 8% for each year you delay, or it could be a really smart move if the politicians let the system run out of money.
My reaction: If there���s one certainty that came out of 2020, it���s that politicians on both sides of the aisle excel at throwing money at people. After watching stimulus checks, enhanced unemployment benefits and Paycheck Protection Program loans flow into the economy, does anyone believe that politicians would let our most popular entitlement program run out of money?
I think there���s little risk that politicians will get religion on deficits and cut Social Security���and we shouldn���t let that possibility impact one of our most important retirement decisions. You may have good reasons to take Social Security early, but I don���t think fear of possible benefit cuts should be a deciding factor.
2. Economic fragility. Remember how, just a few short months ago, we had big shortages of everything from hand sanitizer to swabs to toilet paper? My wife and I ordered some furniture last year that took more than four months to get delivered due to disruptions in the supply chain. The furniture would normally have been shipped in a week. I have friends who have been waiting months for a refrigerator. The disruptions are very real for many products.
I used to read books about the ���coming depression.��� I���ve discounted most of the advice, such as suggestions to load up on gold. But I���ve held onto the idea that we should have several weeks of food and essentials stored up. The pandemic has reinforced that belief.
Some of the cybersecurity training I���ve received has also been a wakeup call. The risk of bad actors hacking into our electrical grid and other infrastructure is unnerving. Knowing how disruptive a cyberwar could be to our economy strikes me as another reason to stockpile a few weeks of essential supplies.
3. Diversification���s benefits. The global stock market crash started on Feb. 20 last year. It was rapid and severe, but short lived. In fact, the S&P 500 went on to return more than 16%, including dividends, in 2020���an astonishing performance considering what the economy went through.
But for some individual stocks, the bear market continues. If you own cruise lines, airlines or hospitality stocks, you���re probably still underwater compared to where you started 2020. It isn���t a sin to own individual stocks and many do well with that strategy. But for those of us who prefer to lower risk through broad diversification, 2020 provided further validation.
4. Unnecessary spending. Last year, spending on travel, eating out, entertainment and gasoline all hit rock-bottom levels in the Kesler household. Yes, our spending on books and streaming services went up, but not nearly as much as we saved in other areas. It was eye-opening to see just how much the family budget could be cut. I bet you found your expenses also fell sharply.
As the pandemic eases, this is a great time to consider what things we really missed over the past year and are anxious to spend money on again. But it���s also a chance to ponder what expenses proved to be unimportant���and perhaps should be permanently cut from our budget.
5. Simple pleasures. Last year provided more opportunities than normal to enjoy the simple pleasure of exploring the mountains with my wife���and without a mask. After sitting through a day of Zoom meetings, nothing refreshes me more than being out in nature.
It was encouraging to see the trailheads much busier than I���ve ever seen them. Families took advantage of a safe and healthy way to reconnect with nature. I know not every location has a Yellowstone National Park nearby. Still, even cities provide green space and the chance to get outside. I hope folks will remember how great it���s been to escape into nature over the past year���and that the increase in outdoor recreation will continue long after the lockdown is over.
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 Five Lessons appeared first on HumbleDollar.
April 13, 2021
Two Words
I���VE LATELY BEEN having a hard time sleeping���and I have a pretty good idea why. It has to do with two words that keep bouncing around inside my head. If you let them, those two words will also keep you up at night. They���re powerful because there���s no end to them. You ask, ���What are the two terrible words?��� The answer: what if.
What ifs are about what could happen in the future and, if you let your imagination run wild, it���s usually something bad. I���ve been thinking a lot about my future. I don���t know if it has to do with turning age 70. I don���t think so. I actually feel pretty optimistic about the next decade. I���m looking forward to spending some quality time with my wife once this pandemic is under control.
Still, I���ve been thinking a lot about my wife���s future, too. What happens to her if I���m no longer around? Will she have trouble supporting herself financially? Questions like these keep popping up in my head. They shouldn���t, because I believe we have these kinds of things under control.
The trust we set up and our well-funded investment portfolio should help her weather any unforeseen financial challenges that come her way. Also, all our important documents and contacts are stored in a centralized location, so they���re easily accessible. If she needs professional advice, we have a relationship with a low-cost financial advisor, tax accountant, attorney and insurance agent.
When pondering what ifs, there always seems to be another one. The other day, I started thinking about household emergencies. What if the hot water tank leaks? What if the electric garage door won���t close? How do I prepare my wife for those kinds of hassles?
I realize the real problem resides with me. My wife is a fiercely independent and intelligent woman. She can handle these types of everyday headaches herself. She doesn���t need me to try to prepare for every problem that might occur in her life.
Trouble is, I want certainty, but life doesn���t offer much. If you���re like me, and sometimes you���re unsure and hesitant, especially when it comes to managing your portfolio, here are nine money tips:
1. What if international stocks outperform U.S. stocks? What if small-caps outperform large-caps? What if interest rates go up? This sort of endless uncertainty can paralyze investors.
What to do? Since you don���t know with certainty how each asset class will perform each year, you should own them all. By having a diversified portfolio with total U.S. stock, total international stock and total bond market��index funds, you���ll sleep better at night knowing you���ve addressed many of the what ifs in investing.
2. Another way to deal with the uncertainty of investing is to use dollar-cost averaging. If you have a lump sum to invest and you���re uncertain about the direction of the market, divide up the money into smaller amounts and invest it over six months or a year.
3. Don���t use an all-or-nothing approach to selling. If you can���t make up your mind whether to unload an investment or hang on, sell part of it. That way, you���re assured of being at least half-right.
4. Consolidate your financial accounts and limit the number of investments you own. Fewer holdings mean fewer decisions. A good example: target-date retirement funds. Buy just one of those, and you���ll have a professionally managed and hassle-free portfolio.
5. If you���re uncertain about your employer���s financial stability, invest no more than 5% of your money in the company���s stock. That way, even if the company gets in trouble and you lose your job, your portfolio won���t take too big a hit.
6. If you're uncertain about whether you can meet your financial goals, buy yourself a sanity check���by hiring a fee-only financial advisor.
7. Cash can do wonders in eliminating uncertainty, especially if you���re worried about financial emergencies. Try to keep at least six months of living expenses in cash investments.
8. Tune out cable financial networks, such as CNBC and Fox Business. The talking heads with their market opinions can make anyone second-guess his or her investments.
9. A little knowledge can go a long way in eliminating doubt. The more you know, the more you know what to do. There are many excellent books about investing. Read a few, and they should provide you with the necessary knowledge to manage your own money.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.
What ifs are about what could happen in the future and, if you let your imagination run wild, it���s usually something bad. I���ve been thinking a lot about my future. I don���t know if it has to do with turning age 70. I don���t think so. I actually feel pretty optimistic about the next decade. I���m looking forward to spending some quality time with my wife once this pandemic is under control.
Still, I���ve been thinking a lot about my wife���s future, too. What happens to her if I���m no longer around? Will she have trouble supporting herself financially? Questions like these keep popping up in my head. They shouldn���t, because I believe we have these kinds of things under control.
The trust we set up and our well-funded investment portfolio should help her weather any unforeseen financial challenges that come her way. Also, all our important documents and contacts are stored in a centralized location, so they���re easily accessible. If she needs professional advice, we have a relationship with a low-cost financial advisor, tax accountant, attorney and insurance agent.
When pondering what ifs, there always seems to be another one. The other day, I started thinking about household emergencies. What if the hot water tank leaks? What if the electric garage door won���t close? How do I prepare my wife for those kinds of hassles?
I realize the real problem resides with me. My wife is a fiercely independent and intelligent woman. She can handle these types of everyday headaches herself. She doesn���t need me to try to prepare for every problem that might occur in her life.
Trouble is, I want certainty, but life doesn���t offer much. If you���re like me, and sometimes you���re unsure and hesitant, especially when it comes to managing your portfolio, here are nine money tips:
1. What if international stocks outperform U.S. stocks? What if small-caps outperform large-caps? What if interest rates go up? This sort of endless uncertainty can paralyze investors.
What to do? Since you don���t know with certainty how each asset class will perform each year, you should own them all. By having a diversified portfolio with total U.S. stock, total international stock and total bond market��index funds, you���ll sleep better at night knowing you���ve addressed many of the what ifs in investing.
2. Another way to deal with the uncertainty of investing is to use dollar-cost averaging. If you have a lump sum to invest and you���re uncertain about the direction of the market, divide up the money into smaller amounts and invest it over six months or a year.
3. Don���t use an all-or-nothing approach to selling. If you can���t make up your mind whether to unload an investment or hang on, sell part of it. That way, you���re assured of being at least half-right.
4. Consolidate your financial accounts and limit the number of investments you own. Fewer holdings mean fewer decisions. A good example: target-date retirement funds. Buy just one of those, and you���ll have a professionally managed and hassle-free portfolio.
5. If you���re uncertain about your employer���s financial stability, invest no more than 5% of your money in the company���s stock. That way, even if the company gets in trouble and you lose your job, your portfolio won���t take too big a hit.
6. If you're uncertain about whether you can meet your financial goals, buy yourself a sanity check���by hiring a fee-only financial advisor.
7. Cash can do wonders in eliminating uncertainty, especially if you���re worried about financial emergencies. Try to keep at least six months of living expenses in cash investments.
8. Tune out cable financial networks, such as CNBC and Fox Business. The talking heads with their market opinions can make anyone second-guess his or her investments.
9. A little knowledge can go a long way in eliminating doubt. The more you know, the more you know what to do. There are many excellent books about investing. Read a few, and they should provide you with the necessary knowledge to manage your own money.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.The post Two Words appeared first on HumbleDollar.
April 12, 2021
Go Figure
A LOT OF INVESTMENT math focuses on how money grows over time. But as an attorney who���s worked with many clients hoping to retire in comfort, I find myself thinking more about risk���and how the math can work against us. Consider five sets of numbers:
Inflation���s toll: 0.98
Got cash? If you multiply that sum by 0.98, you���ll see your money���s purchasing power a year from now. This assumes 2% inflation, which is the Federal Reserve���s stated target. To be sure, inflation has averaged less than 2% over the past decade. But cumulatively, it has still totaled roughly 17%. An item that cost $10,000��in 2011 would cost $11,692.68��today. Think your wealth is safer sitting in cash? It isn���t.
Goodbye, marriage: 0.5
Half. That���s roughly what you���ll give up if you divorce. Just about any small-town family law attorney will tell you the annoying-but-true adage, ���It���s cheaper to keep her.��� Each state has its own laws that apply to the division of property in a divorce, but the number approaches 50% in many states. For instance, if you live in a community property state, the general rule of thumb is you give up 50% of commingled assets, regardless of who contributed what. While there are ways to hedge through pre- and post-nuptial agreements, divorce is a true wealth destroyer.
The taxman���s take: 0 to 0.2���or 0.1 to 0.37
Take the gain on any investment and multiply it by these numbers. The first two numbers tell you how much you might lose to federal taxes if you sell a winning investment that counts as a long-term capital gain, while the last two numbers are the potential tax hit if you have a short-term capital gain.
For couples with total taxable income of less than $80,800 in 2021, the long-term capital gains rate is 0%. Above that amount, the long-term capital gains rate is 15%, unless your taxable income exceeds $501,600, in which case it jumps to 20%. By contrast, short-term capital gains���which are triggered by selling winning investments owned for 365 days or less���are taxed at ordinary income tax rates, which means you���ll lose 10% to 37% of your gain to the taxman. Short-term capital gains are a killer of long-term��wealth��accumulation.
Those with lower incomes are less affected by the difference between short- and long-term capital gains. Suppose you���re married and your combined taxable income is just above $81,000. Your recent foray into GameStop may have resulted in a quick profit (though probably not), but your tax rate is going to be seven percentage points higher because you didn���t own the stock for more than a year.
The higher you go up the income spectrum, the more draconian this disparity gets. Those in the top tax bracket pay 17 percentage points more on their investment winners to Uncle Sam if they don���t wait 366 days to sell. Does that mean taxes should wag the investment dog? No, but most investors ought to care more than they do about the tax tab���and financial advisors often don���t care at all, as they merrily buy and sell investments in their clients��� portfolios.
Paying the help: 0.01 and 0.25
The fees paid to financial advisors have a negative compounding effect. Those fees are often around 1% a year���equal to multiplying your portfolio���s value by 0.01���but sometimes much higher. Paying 1% in fees over 40 years to an advisor trims a portfolio���s total gain by roughly 25%.
Investing recklessly: 0
Over the past year, many Americans have begun day trading and using leverage to boost their investment returns. If the market sells off, those who are extremely levered run the risk of losing all of their money. It���s a story that���s been repeated over and over again.
Anything multiplied by zero is zero. It goes without saying that it���s a lot harder to come back from zero than any other financial setback. Maybe that���s why Warren Buffett says, ���Rule No. 1 is to never lose money. Rule No. 2 is to never forget rule No. 1."
What���s the best solution to avoid the above killers of compounding? For starters, find a spouse whose value isn���t just in his or her earning power, but also in the incalculable love and support that he or she offers. Meanwhile, the rest of the unfortunate math outlined above can be avoided by doing one simple thing: Buy low-cost index funds and hold on through thick and thin. The math is simple���but following through is much harder.
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.
Inflation���s toll: 0.98
Got cash? If you multiply that sum by 0.98, you���ll see your money���s purchasing power a year from now. This assumes 2% inflation, which is the Federal Reserve���s stated target. To be sure, inflation has averaged less than 2% over the past decade. But cumulatively, it has still totaled roughly 17%. An item that cost $10,000��in 2011 would cost $11,692.68��today. Think your wealth is safer sitting in cash? It isn���t.
Goodbye, marriage: 0.5
Half. That���s roughly what you���ll give up if you divorce. Just about any small-town family law attorney will tell you the annoying-but-true adage, ���It���s cheaper to keep her.��� Each state has its own laws that apply to the division of property in a divorce, but the number approaches 50% in many states. For instance, if you live in a community property state, the general rule of thumb is you give up 50% of commingled assets, regardless of who contributed what. While there are ways to hedge through pre- and post-nuptial agreements, divorce is a true wealth destroyer.
The taxman���s take: 0 to 0.2���or 0.1 to 0.37
Take the gain on any investment and multiply it by these numbers. The first two numbers tell you how much you might lose to federal taxes if you sell a winning investment that counts as a long-term capital gain, while the last two numbers are the potential tax hit if you have a short-term capital gain.
For couples with total taxable income of less than $80,800 in 2021, the long-term capital gains rate is 0%. Above that amount, the long-term capital gains rate is 15%, unless your taxable income exceeds $501,600, in which case it jumps to 20%. By contrast, short-term capital gains���which are triggered by selling winning investments owned for 365 days or less���are taxed at ordinary income tax rates, which means you���ll lose 10% to 37% of your gain to the taxman. Short-term capital gains are a killer of long-term��wealth��accumulation.
Those with lower incomes are less affected by the difference between short- and long-term capital gains. Suppose you���re married and your combined taxable income is just above $81,000. Your recent foray into GameStop may have resulted in a quick profit (though probably not), but your tax rate is going to be seven percentage points higher because you didn���t own the stock for more than a year.
The higher you go up the income spectrum, the more draconian this disparity gets. Those in the top tax bracket pay 17 percentage points more on their investment winners to Uncle Sam if they don���t wait 366 days to sell. Does that mean taxes should wag the investment dog? No, but most investors ought to care more than they do about the tax tab���and financial advisors often don���t care at all, as they merrily buy and sell investments in their clients��� portfolios.
Paying the help: 0.01 and 0.25
The fees paid to financial advisors have a negative compounding effect. Those fees are often around 1% a year���equal to multiplying your portfolio���s value by 0.01���but sometimes much higher. Paying 1% in fees over 40 years to an advisor trims a portfolio���s total gain by roughly 25%.
Investing recklessly: 0
Over the past year, many Americans have begun day trading and using leverage to boost their investment returns. If the market sells off, those who are extremely levered run the risk of losing all of their money. It���s a story that���s been repeated over and over again.
Anything multiplied by zero is zero. It goes without saying that it���s a lot harder to come back from zero than any other financial setback. Maybe that���s why Warren Buffett says, ���Rule No. 1 is to never lose money. Rule No. 2 is to never forget rule No. 1."
What���s the best solution to avoid the above killers of compounding? For starters, find a spouse whose value isn���t just in his or her earning power, but also in the incalculable love and support that he or she offers. Meanwhile, the rest of the unfortunate math outlined above can be avoided by doing one simple thing: Buy low-cost index funds and hold on through thick and thin. The math is simple���but following through is much harder.
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 Go Figure appeared first on HumbleDollar.
