Jonathan Clements's Blog, page 294
March 22, 2021
On the House
THIS IS THE STORY of how I thought I’d successfully timed the market—but didn’t.
I started investing in 2007, when the stock market peaked, which wasn’t great. But then came 2009 to 2019. Stocks enjoyed the longest and one of the strongest bull markets in history, averaging some 15% a year. Thanks to that great bull market, my wife and I found ourselves with more in our taxable mutual funds than we owed on our home mortgage.
Should we pay off our mortgage early or continue to let the money ride? It was an issue I struggled with. By late 2019, the stock market’s price-to-earnings ratio was near historic highs as share prices hit record levels. My philosophy: If you’re selling at all-time highs, you can’t be wrong, even if prices eventually and inevitably head higher.
I’ll admit to also being influenced by radio host and personal finance guru Dave Ramsey. Ramsey’s “God’s and grandma’s” advice is to get out of debt, stay out of debt, build an emergency fund, invest for retirement and then pay off your house early. Like most financial experts, Ramsey acknowledges that the math favors continuing to invest in stocks, which historically have averaged around 10% a year, rather than pay off a home mortgage with a 3.5% interest rate.
On the other hand, there’s a kind of magic to a paid-off home. As someone once pointed out, you can’t live in your mutual funds—plus, as I told my wife, if we hate being debt-free, we can easily remedy that problem.
After a few years of hemming and hawing, wearing down my wife, and getting some tax advice from an accountant, we decided to pay off the mortgage at the beginning of 2020. To break up the resulting capital gains tax bill from selling part of our mutual fund holdings, we opted to sell half the necessary amount at the end of 2019 and half at the beginning of 2020. By mid-January, everything was cashed out. I walked the final check into my mortgage company’s local branch. What a feeling—to be completely, 100% debt-free and just days before my 40th birthday.
What came next was even better. As the global economy shut down amid the pandemic, the stock market sank by a third. Clearly, I was a genius. I had just successfully timed the market.
But I also knew a few things about timing the market: It was supposedly impossible and—even if you managed to sell at the right time—you couldn’t reliably time it right on the way back in. Sure enough, even though I had successfully sold at the right time, I didn’t successfully “catch the falling knife.” Having just paid off my mortgage, I was fresh out of cash. With what little I had left, I invested in stock mutual funds in late February, but the market continued to fall precipitously from there.
The market then did what it does best—humble those who think they’ve figured it all out. This time, it was me. The meteoric recovery that ensued was astonishing and, by year-end 2020, the mutual funds we’d sold were 30% higher.
I never liked making the mortgage payments each month, but I’ll have to confess it was also distasteful to write checks to the IRS for our 2019 and 2020 capital gains. Nevertheless, I’m with Sinatra: I have too few regrets to mention. Yes, I missed out on the remarkable growth of a few hundred thousand dollars over the next year. But how would I have felt watching that same money sink 30% in February and March? Would I have sold at those lows? I don’t think so, but I can’t be certain.
Indeed, early last year, while the entire world was going crazy amid the global pandemic, recession and unprecedented lockdowns, I rested easy knowing no one could take our house away. And it isn’t as if we got no benefit from the 2020’s stock market rally. We had substantial money in retirement accounts—and those dollars rode the wave up.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts.
I started investing in 2007, when the stock market peaked, which wasn’t great. But then came 2009 to 2019. Stocks enjoyed the longest and one of the strongest bull markets in history, averaging some 15% a year. Thanks to that great bull market, my wife and I found ourselves with more in our taxable mutual funds than we owed on our home mortgage.
Should we pay off our mortgage early or continue to let the money ride? It was an issue I struggled with. By late 2019, the stock market’s price-to-earnings ratio was near historic highs as share prices hit record levels. My philosophy: If you’re selling at all-time highs, you can’t be wrong, even if prices eventually and inevitably head higher.
I’ll admit to also being influenced by radio host and personal finance guru Dave Ramsey. Ramsey’s “God’s and grandma’s” advice is to get out of debt, stay out of debt, build an emergency fund, invest for retirement and then pay off your house early. Like most financial experts, Ramsey acknowledges that the math favors continuing to invest in stocks, which historically have averaged around 10% a year, rather than pay off a home mortgage with a 3.5% interest rate.
On the other hand, there’s a kind of magic to a paid-off home. As someone once pointed out, you can’t live in your mutual funds—plus, as I told my wife, if we hate being debt-free, we can easily remedy that problem.
After a few years of hemming and hawing, wearing down my wife, and getting some tax advice from an accountant, we decided to pay off the mortgage at the beginning of 2020. To break up the resulting capital gains tax bill from selling part of our mutual fund holdings, we opted to sell half the necessary amount at the end of 2019 and half at the beginning of 2020. By mid-January, everything was cashed out. I walked the final check into my mortgage company’s local branch. What a feeling—to be completely, 100% debt-free and just days before my 40th birthday.
What came next was even better. As the global economy shut down amid the pandemic, the stock market sank by a third. Clearly, I was a genius. I had just successfully timed the market.
But I also knew a few things about timing the market: It was supposedly impossible and—even if you managed to sell at the right time—you couldn’t reliably time it right on the way back in. Sure enough, even though I had successfully sold at the right time, I didn’t successfully “catch the falling knife.” Having just paid off my mortgage, I was fresh out of cash. With what little I had left, I invested in stock mutual funds in late February, but the market continued to fall precipitously from there.
The market then did what it does best—humble those who think they’ve figured it all out. This time, it was me. The meteoric recovery that ensued was astonishing and, by year-end 2020, the mutual funds we’d sold were 30% higher.
I never liked making the mortgage payments each month, but I’ll have to confess it was also distasteful to write checks to the IRS for our 2019 and 2020 capital gains. Nevertheless, I’m with Sinatra: I have too few regrets to mention. Yes, I missed out on the remarkable growth of a few hundred thousand dollars over the next year. But how would I have felt watching that same money sink 30% in February and March? Would I have sold at those lows? I don’t think so, but I can’t be certain.
Indeed, early last year, while the entire world was going crazy amid the global pandemic, recession and unprecedented lockdowns, I rested easy knowing no one could take our house away. And it isn’t as if we got no benefit from the 2020’s stock market rally. We had substantial money in retirement accounts—and those dollars rode the wave up.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts.The post On the House appeared first on HumbleDollar.
March 21, 2021
Your Turn to Talk
NONE OF US IS WISER than all of us. We learn through storytelling. What if we brought those two ideas together? Welcome to HumbleDollar’s newest feature: Voices.
What purchase do you most regret? Is a home a good investment? On the Voices page, you’ll find these and other questions—10 in all. That list of 10 questions will change regularly. Think of the new page as your chance to share your wisdom and experience with your fellow readers, and your opportunity to learn from others. In the days ahead, a sampling of questions and answers from the Voices page will also appear on the homepage.
As part of the new feature’s launch, we had to introduce a new system for commenting. As before, you can use your credentials from Disqus, Facebook, Google (gmail), Twitter and WordPress to sign in. The downside: The new commenting system may not remember the username and password you previously used, so you'll need to sign in again. That's easy enough to do: Just click on the appropriate icon and follow the instructions.
Separately, be sure to check out the main articles page, which has been completely overhauled. The 1,400 or so articles that the site has published are now divvied up among 23 categories.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
What purchase do you most regret? Is a home a good investment? On the Voices page, you’ll find these and other questions—10 in all. That list of 10 questions will change regularly. Think of the new page as your chance to share your wisdom and experience with your fellow readers, and your opportunity to learn from others. In the days ahead, a sampling of questions and answers from the Voices page will also appear on the homepage.
As part of the new feature’s launch, we had to introduce a new system for commenting. As before, you can use your credentials from Disqus, Facebook, Google (gmail), Twitter and WordPress to sign in. The downside: The new commenting system may not remember the username and password you previously used, so you'll need to sign in again. That's easy enough to do: Just click on the appropriate icon and follow the instructions.
Separately, be sure to check out the main articles page, which has been completely overhauled. The 1,400 or so articles that the site has published are now divvied up among 23 categories.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.The post Your Turn to Talk appeared first on HumbleDollar.
CAPE Fear
IN THE ONGOING battle between those who believe that the stock market is in a bubble and those who don’t, you may have heard mention of something called CAPE, short for cyclically adjusted price-earnings ratio. Among market indicators, it has the strongest track record in predicting future market returns.
What does the CAPE ratio say about today’s market? It’s flashing red. According to CAPE, the U.S. stock market is more overpriced today than it has been at any time since the 2000 market peak. And other than that brief period, which didn’t end well, the ratio—which incorporates data going back 140 years—has never been higher.
Should you be concerned? Before I get into that question, some background: CAPE grew out of a 1988 study by Robert Shiller, a Yale University professor and Nobel laureate, and fellow economist John Campbell. Owing to both its pedigree and its track record, the CAPE ratio is highly respected.
CAPE is similar to a traditional P/E, or price-earnings, ratio in that it provides a measure of how expensive stocks are. If you aren’t familiar with the concept, a P/E ratio compares a company's share price to its earnings. It might tell you that a company’s stock is trading at, say, 25 or 30 times the company’s per-share earnings.
The "E" in a traditional P/E ratio is the company's earnings over the past year or its expected earnings over the coming year. While that’s generally a useful measure, it's subject to distortion because companies can have anomalous years from time to time—2020 being a perfect example. Shiller’s solution to this problem was to use not one year of corporate earnings, but a company's average earnings over 10 years.
The CAPE has logical appeal. It's also been proven. A Vanguard Group study found that the CAPE ratio had the strongest ability to predict market returns among 15 different metrics it tested.
It’s for these reasons that adherents of the Shiller P/E take it so seriously—and get so concerned when it’s running hot. But sometimes, in my opinion, its supporters get a little carried away, exaggerating its significance and overlooking potentially important nuances.
On that score, it was interesting to see Shiller himself weigh into the debate in a recent opinion piece. His opening line: “The stock market is already quite expensive.” But then, in an apparent contradiction, he went on to say, “But it is also true that stock prices are fairly reasonable right now.”
This is how Shiller explained the contradiction: Yes, the U.S. stock market is expensive by historical standards. It’s also the most expensive among the 26 countries he tracks. Shiller cautioned, however, that investors shouldn’t look at stocks in a vacuum. All investments need to be considered as part of a continuum of investment options. And, on a relative basis, stocks aren’t expensive—because bonds are expensive, too.
You might ask why this is relevant. If one asset is overpriced, does it matter if another one also is? For instance, if a Rolls-Royce is overpriced, I really don't care if Bentleys are, too. That just means they're both overpriced.
I understand that argument, but Shiller makes a good point. The relative valuation of assets is relevant because you need to store your money somewhere. That's why I think Shiller makes a fair point in saying that investments—even expensive investments—need to be considered on a relative basis, compared to the other available options.
To facilitate these comparisons, Shiller and two colleagues recently developed a modified version of CAPE that functions as a relative measure. Called the Excess CAPE Yield, or ECY, this new metric measures “the premium an investor might expect by investing in equities over bonds.” In other words, it answers this question: Relative to bonds, how attractive are stocks?
What's the answer? As of March 5, when Shiller’s piece was published, the ECY was right in line with its 20-year average, meaning that stocks were—relative to bonds—no more expensive than their historical average. More important, if you had to choose, stocks were more attractive. The reason: With stocks, Shiller notes, “at least there is a positive long-run expected return.”
In the weeks since Shiller's article was published, bond yields have risen, making stocks a little less attractive according to the ECY. But stocks still remain more attractive than bonds by this measure. What should you make of all this? I see three useful takeaways for individual investors:
1. Investments should always be evaluated as part of a continuum and relative to the available alternatives. It’s true that U.S. stocks might not look ideal right now, but you can only compare them to the set of available alternatives—not to the alternatives we wish we had.
2. As I've noted before, investment valuation is a lot like a Rorschach test. It really depends on how you choose to look at things, so don't let anyone—or any ratio—unduly influence you. Look around, and you'll find leading names in finance—from Jeremy Grantham to Ray Dalio to Mohamed El-Erian—holding forth. My advice: Don't entirely ignore them, but don't view their opinions as pronouncements from Sinai. Shiller himself acknowledges that the CAPE ratio, despite its good reputation, still only explains about a third of the market’s actual returns, making market forecasting as much art as it is science. In his words, “I wish my measurements provided clearer guidance, but they don’t."
3. Because none of us really knows which way things will go, I believe the only and best strategy is to hold a simple, well-diversified portfolio. It doesn't need to be any more complicated than that.
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.
What does the CAPE ratio say about today’s market? It’s flashing red. According to CAPE, the U.S. stock market is more overpriced today than it has been at any time since the 2000 market peak. And other than that brief period, which didn’t end well, the ratio—which incorporates data going back 140 years—has never been higher.
Should you be concerned? Before I get into that question, some background: CAPE grew out of a 1988 study by Robert Shiller, a Yale University professor and Nobel laureate, and fellow economist John Campbell. Owing to both its pedigree and its track record, the CAPE ratio is highly respected.
CAPE is similar to a traditional P/E, or price-earnings, ratio in that it provides a measure of how expensive stocks are. If you aren’t familiar with the concept, a P/E ratio compares a company's share price to its earnings. It might tell you that a company’s stock is trading at, say, 25 or 30 times the company’s per-share earnings.
The "E" in a traditional P/E ratio is the company's earnings over the past year or its expected earnings over the coming year. While that’s generally a useful measure, it's subject to distortion because companies can have anomalous years from time to time—2020 being a perfect example. Shiller’s solution to this problem was to use not one year of corporate earnings, but a company's average earnings over 10 years.
The CAPE has logical appeal. It's also been proven. A Vanguard Group study found that the CAPE ratio had the strongest ability to predict market returns among 15 different metrics it tested.
It’s for these reasons that adherents of the Shiller P/E take it so seriously—and get so concerned when it’s running hot. But sometimes, in my opinion, its supporters get a little carried away, exaggerating its significance and overlooking potentially important nuances.
On that score, it was interesting to see Shiller himself weigh into the debate in a recent opinion piece. His opening line: “The stock market is already quite expensive.” But then, in an apparent contradiction, he went on to say, “But it is also true that stock prices are fairly reasonable right now.”
This is how Shiller explained the contradiction: Yes, the U.S. stock market is expensive by historical standards. It’s also the most expensive among the 26 countries he tracks. Shiller cautioned, however, that investors shouldn’t look at stocks in a vacuum. All investments need to be considered as part of a continuum of investment options. And, on a relative basis, stocks aren’t expensive—because bonds are expensive, too.
You might ask why this is relevant. If one asset is overpriced, does it matter if another one also is? For instance, if a Rolls-Royce is overpriced, I really don't care if Bentleys are, too. That just means they're both overpriced.
I understand that argument, but Shiller makes a good point. The relative valuation of assets is relevant because you need to store your money somewhere. That's why I think Shiller makes a fair point in saying that investments—even expensive investments—need to be considered on a relative basis, compared to the other available options.
To facilitate these comparisons, Shiller and two colleagues recently developed a modified version of CAPE that functions as a relative measure. Called the Excess CAPE Yield, or ECY, this new metric measures “the premium an investor might expect by investing in equities over bonds.” In other words, it answers this question: Relative to bonds, how attractive are stocks?
What's the answer? As of March 5, when Shiller’s piece was published, the ECY was right in line with its 20-year average, meaning that stocks were—relative to bonds—no more expensive than their historical average. More important, if you had to choose, stocks were more attractive. The reason: With stocks, Shiller notes, “at least there is a positive long-run expected return.”
In the weeks since Shiller's article was published, bond yields have risen, making stocks a little less attractive according to the ECY. But stocks still remain more attractive than bonds by this measure. What should you make of all this? I see three useful takeaways for individual investors:
1. Investments should always be evaluated as part of a continuum and relative to the available alternatives. It’s true that U.S. stocks might not look ideal right now, but you can only compare them to the set of available alternatives—not to the alternatives we wish we had.
2. As I've noted before, investment valuation is a lot like a Rorschach test. It really depends on how you choose to look at things, so don't let anyone—or any ratio—unduly influence you. Look around, and you'll find leading names in finance—from Jeremy Grantham to Ray Dalio to Mohamed El-Erian—holding forth. My advice: Don't entirely ignore them, but don't view their opinions as pronouncements from Sinai. Shiller himself acknowledges that the CAPE ratio, despite its good reputation, still only explains about a third of the market’s actual returns, making market forecasting as much art as it is science. In his words, “I wish my measurements provided clearer guidance, but they don’t."
3. Because none of us really knows which way things will go, I believe the only and best strategy is to hold a simple, well-diversified portfolio. It doesn't need to be any more complicated than that.
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 CAPE Fear appeared first on HumbleDollar.
March 20, 2021
Blowing Bubbles
ARE FINANCIAL markets in a bubble? It’s a question I’ve never liked. I believe stocks and bonds are fairly valued most of the time, which means it’s extraordinarily difficult to beat the market averages and our best bet is to buy index funds.
But at the same time, during my adult life, there have been three key occasions when markets lost touch with reality: Japanese stocks and real estate in the late 1980s, technology stocks in the late 1990s and housing in the mid-2000s. And, no, these bubbles weren’t just obvious in retrospect. At the time, many experts warned that valuations were dangerously high. Those who listened had the chance to get out of harm’s way and thereby improve their financial results.
Should we also be looking to get out of harm’s way right now? I’ve heard people fret that there’s a bubble in bitcoin, special purpose acquisition companies (SPACs), Tesla, large-cap U.S. technology stocks and even the entire U.S. stock market.
That brings me to The Delusions of Crowds , the new book by friend and fellow author William Bernstein. Subtitled Why People Go Mad in Groups, Bernstein’s fascinating romp through history probes both financial and religious manias, including recent examples like the dot-com bubble and the Islamic State. “While religious and financial manias might seem to have little in common, the underlying forces that give them rise are identical: the desire to improve one’s well-being in this life or the next,” Bernstein writes.
Drawing on economist Hyman Minsky, Bernstein says there are four conditions necessary for a financial bubble to form: easy credit, exciting new technologies, amnesia about the prior bubble and bust, and the abandonment of old, prudent methods for valuing investments.
Recall the late 1990s. We had falling interest rates, the rapid adoption of the internet and all kinds of bizarre yardsticks used for valuing dot-com companies, including “eyeballs” and “burn rate.” Meanwhile, at that time, the last great stock market mania—the love affair with the Nifty Fifty stocks in the late 1960s and early 1970s—was a distant memory.
What about today? Do we also have the four necessary preconditions? Credit is certainly easy. Investors also seem willing to overlook today’s rich stock market valuations—or, in the case of bitcoin, no discernible value at all.
Meanwhile, we have enthusiasm over innovations like electric cars and blockchain technology, which might make you wary of Tesla and cryptocurrencies. But it would be hard to argue that online shopping, social media, smartphones and internet search engines still qualify as new technologies, so perhaps we shouldn’t declare a bubble in Amazon, Facebook, Apple and Alphabet (a.k.a. Google).
What about amnesia about the prior boom and bust? We saw the S&P 500 plunge 34% last year, but that bear market was over so quickly that maybe it doesn’t count. That leaves 2007-09 as the last big bust and that, I suspect, has become a distant memory for some.
If you’re like me and uncertain about all this bubble talk, Bernstein offers another set of criteria to consider. Roughly halfway through The Delusions of Crowds, he asks, “Is it possible to spot a bubble in real time?” He goes on to note that financial manias like the Mississippi Company, South Sea Company and the roaring 1920s stock market share four characteristics.
First, financial speculation becomes the primary topic of everyday conversation. Think about the constant chatter about tech stocks in the late 1990s and real estate in 2005 and 2006. Think about this year’s fascination with GameStop, Tesla and bitcoin.
Second, people start leaving their current jobs to speculate. Again, think about the folks who started day-trading stocks in the late 1990s or flipping homes in the mid-2000s. Think also about today’s Robinhood traders, though it seems these folks haven’t quit their day job, but rather merrily buy and sell stocks while working from home.
Third, scorn is heaped on the bubble’s naysayers. Those who questioned the value put on internet stocks in the late 1990s or the wisdom of loading up on real estate in 2005 and 2006 were met with ridicule. Ditto for anybody today who questions the rise in Tesla or bitcoin.
Finally, bubbles lead to ever more extreme predictions. Remember the 1999 bestseller Dow 36,000 ? How about the recent forecast that bitcoin will hit $1 million?
So are we in a bubble today? I posed that question to Bernstein. “What’s peculiar about right now is there are lots of little bubbles—bitcoin, GameStop, the Robinhood phenomenon, SPACs,” he says. “But they’re relatively circumscribed. There’s no mania about investing in the S&P 500 or a total market index fund.”
Indeed, I feel we’re a little too quick to slap the term “bubble” on any asset that’s recently performed well. U.S. growth stocks may have posted handsome gains over the past decade, but value stocks were left far behind and bonds today are offering scant competition for investor dollars. Yes, Tesla’s meteoric rise is unnerving. But historically, much of the market’s return has come from a minority of stocks that post spectacular gains, and Tesla could end up doing for the car business what Amazon has done for retail shopping.
What about bitcoin? Like Bernstein, I think it’s a bubble and I'm staying far away. The good news: Even if I’m wrong, it doesn’t much matter. I don’t need to own cryptocurrencies to reach my financial goals. A globally diversified stock portfolio, backed up by a safety net of short-term bonds, should serve me just fine.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
At age 33, Mike Zaccardi is financially independent, thanks in part to saving 90% of his post-tax income in recent years. Mike's response: "Big whoop."
When he turns age 70 later this year, Dennis Friedman will claim Social Security, the final piece of his retirement puzzle. Here are the five questions he asked as he wrapped up his planning.
"You don’t truly know someone until you’ve seen his or her tax return," plus 11 other financial planning truths, courtesy of the always insightful Adam Grossman.
Amid sharply increasing home prices, many folks are once again saying real estate is a great investment. Want to think rationally about housing? Joe Kesler offers six key ideas.
"Even if you eliminate active fund managers from your portfolio, you still need to grapple with three crucial decisions—all of which involve the sort of judgment call active investors must make," writes Phil Kernen.
What happens if you rely on the car rental insurance offered by your credit card—and you have an accident? Mike Flack found out.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
But at the same time, during my adult life, there have been three key occasions when markets lost touch with reality: Japanese stocks and real estate in the late 1980s, technology stocks in the late 1990s and housing in the mid-2000s. And, no, these bubbles weren’t just obvious in retrospect. At the time, many experts warned that valuations were dangerously high. Those who listened had the chance to get out of harm’s way and thereby improve their financial results.
Should we also be looking to get out of harm’s way right now? I’ve heard people fret that there’s a bubble in bitcoin, special purpose acquisition companies (SPACs), Tesla, large-cap U.S. technology stocks and even the entire U.S. stock market.
That brings me to The Delusions of Crowds , the new book by friend and fellow author William Bernstein. Subtitled Why People Go Mad in Groups, Bernstein’s fascinating romp through history probes both financial and religious manias, including recent examples like the dot-com bubble and the Islamic State. “While religious and financial manias might seem to have little in common, the underlying forces that give them rise are identical: the desire to improve one’s well-being in this life or the next,” Bernstein writes.
Drawing on economist Hyman Minsky, Bernstein says there are four conditions necessary for a financial bubble to form: easy credit, exciting new technologies, amnesia about the prior bubble and bust, and the abandonment of old, prudent methods for valuing investments.
Recall the late 1990s. We had falling interest rates, the rapid adoption of the internet and all kinds of bizarre yardsticks used for valuing dot-com companies, including “eyeballs” and “burn rate.” Meanwhile, at that time, the last great stock market mania—the love affair with the Nifty Fifty stocks in the late 1960s and early 1970s—was a distant memory.
What about today? Do we also have the four necessary preconditions? Credit is certainly easy. Investors also seem willing to overlook today’s rich stock market valuations—or, in the case of bitcoin, no discernible value at all.
Meanwhile, we have enthusiasm over innovations like electric cars and blockchain technology, which might make you wary of Tesla and cryptocurrencies. But it would be hard to argue that online shopping, social media, smartphones and internet search engines still qualify as new technologies, so perhaps we shouldn’t declare a bubble in Amazon, Facebook, Apple and Alphabet (a.k.a. Google).
What about amnesia about the prior boom and bust? We saw the S&P 500 plunge 34% last year, but that bear market was over so quickly that maybe it doesn’t count. That leaves 2007-09 as the last big bust and that, I suspect, has become a distant memory for some.
If you’re like me and uncertain about all this bubble talk, Bernstein offers another set of criteria to consider. Roughly halfway through The Delusions of Crowds, he asks, “Is it possible to spot a bubble in real time?” He goes on to note that financial manias like the Mississippi Company, South Sea Company and the roaring 1920s stock market share four characteristics.
First, financial speculation becomes the primary topic of everyday conversation. Think about the constant chatter about tech stocks in the late 1990s and real estate in 2005 and 2006. Think about this year’s fascination with GameStop, Tesla and bitcoin.
Second, people start leaving their current jobs to speculate. Again, think about the folks who started day-trading stocks in the late 1990s or flipping homes in the mid-2000s. Think also about today’s Robinhood traders, though it seems these folks haven’t quit their day job, but rather merrily buy and sell stocks while working from home.
Third, scorn is heaped on the bubble’s naysayers. Those who questioned the value put on internet stocks in the late 1990s or the wisdom of loading up on real estate in 2005 and 2006 were met with ridicule. Ditto for anybody today who questions the rise in Tesla or bitcoin.
Finally, bubbles lead to ever more extreme predictions. Remember the 1999 bestseller Dow 36,000 ? How about the recent forecast that bitcoin will hit $1 million?
So are we in a bubble today? I posed that question to Bernstein. “What’s peculiar about right now is there are lots of little bubbles—bitcoin, GameStop, the Robinhood phenomenon, SPACs,” he says. “But they’re relatively circumscribed. There’s no mania about investing in the S&P 500 or a total market index fund.”
Indeed, I feel we’re a little too quick to slap the term “bubble” on any asset that’s recently performed well. U.S. growth stocks may have posted handsome gains over the past decade, but value stocks were left far behind and bonds today are offering scant competition for investor dollars. Yes, Tesla’s meteoric rise is unnerving. But historically, much of the market’s return has come from a minority of stocks that post spectacular gains, and Tesla could end up doing for the car business what Amazon has done for retail shopping.
What about bitcoin? Like Bernstein, I think it’s a bubble and I'm staying far away. The good news: Even if I’m wrong, it doesn’t much matter. I don’t need to own cryptocurrencies to reach my financial goals. A globally diversified stock portfolio, backed up by a safety net of short-term bonds, should serve me just fine.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
At age 33, Mike Zaccardi is financially independent, thanks in part to saving 90% of his post-tax income in recent years. Mike's response: "Big whoop."
When he turns age 70 later this year, Dennis Friedman will claim Social Security, the final piece of his retirement puzzle. Here are the five questions he asked as he wrapped up his planning.
"You don’t truly know someone until you’ve seen his or her tax return," plus 11 other financial planning truths, courtesy of the always insightful Adam Grossman.
Amid sharply increasing home prices, many folks are once again saying real estate is a great investment. Want to think rationally about housing? Joe Kesler offers six key ideas.
"Even if you eliminate active fund managers from your portfolio, you still need to grapple with three crucial decisions—all of which involve the sort of judgment call active investors must make," writes Phil Kernen.
What happens if you rely on the car rental insurance offered by your credit card—and you have an accident? Mike Flack found out.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.The post Blowing Bubbles appeared first on HumbleDollar.
March 19, 2021
My Retirement Plan
I RECEIVED A LETTER from the Social Security Administration telling me I need to apply for benefits immediately. I turn age 70 this year and there’s no advantage to delaying my benefits any longer.
How does reaching 70 feel? I know I get cold easily and don’t move as fast when I’m exercising. I’m also not as sharp mentally. But I’m actually looking forward to my 70s. It will be a decade more about living and with less thinking about money.
My Social Security will be the last significant piece in my financial puzzle. Maybe I’ll do a few more Roth conversions and tweak my asset allocation as I grow older. But there’s really no major money decision that’ll fundamentally change my finances going forward.
My wife and I will rely on our investment portfolio of 35% stocks, 60% bonds and 5% cash, as well as Social Security, Medicare Part A and Part B for basic health insurance, United Healthcare Medicare Supplemental Insurance Plan G and United Healthcare Medicare Prescription Drug Plan.
This is our blue-collar financial and health care retirement plan built on sweat, sacrifices, endurance and hard work. There was no knockout punch, such as a hot stock or a large financial windfall. Instead, it came down to a steady stream of jabs, in the form of regular automatic investments over many years, primarily into low-cost broad market index funds.
Here are five questions I asked myself while creating our retirement plan:
1. Why not buy annuities for additional income? The one thing I’ve learned is that bad things happen and they can’t always be prevented. For instance, chronic health issues can be very costly. According to a 2020 survey by Genworth, the median annual cost of a private nursing home room is $105,852, while a semi-private room is $93,072.
The problem with buying an annuity is that it takes away the flexibility to respond to these types of changes in your retirement plan. With an annuity, you hand over control of your money to an insurance company in an exchange for guaranteed income. I’d rather hang on to the lump sum in case there’s an expensive unexpected event, especially in the earlier phase of our retirement.
2. How am I going to create income? We’ll use a total return approach, focusing on generating both income and capital gains. We’ll spend the interest, capital gains, dividends and fund distributions generated by our stocks, bonds and cash holdings. We’ll also have our Social Security, with my benefits as of age 70 and my wife’s as of her full retirement age. We feel confident we have sufficient savings that, if necessary, we can spend down part of our investment portfolio and not run out of money, no matter how long we live.
3. Why not choose a Medicare Advantage plan, with its lower premium? I chose federal-run Medicare over Medicare Advantage, the private insurance alternative that can have different rules for how you get medical services. For instance, under Medicare Advantage, you usually need a referral to see a specialist and for certain medical procedures. I didn’t want to be limited to a network of doctors and I wanted to make sure I can get immediate medical coverage anywhere in the U.S. I wanted more control over my health care and was willing to pay for it.
4. Why not buy a long-term-care insurance policy? The inability to forecast the true cost of a long-term-care policy over a long time horizon was a major concern for me. Policyholders have faced steep rate hikes over the years. It probably comes down to a lack of trust: I worry that an insurance company would try to price us out of coverage we’d bought years earlier.
I’ve also heard stories of insurers denying coverage to policyholders who felt they met the eligibility requirements. Eligibility is usually based on whether you need assistance in performing two of the six activities of daily living, such as bathing, dressing, eating, transferring (moving from bed to chair) and toileting. I was also aware the best time to buy long-term-care insurance is before your 60th birthday, because rates are lower, and felt it was probably too late to purchase coverage, even if I thought it was a good idea.
5. Will we run out of money? I believe the biggest threat to our retirement is our health. Large out-of-pocket health care expenses can deplete even a well-funded investment portfolio. Since we didn’t buy long-term-care insurance, the best way for us to guard against this financial threat is by protecting our mind and body. My wife and I try to live a healthy lifestyle by exercising, eating a healthy diet and getting enough sleep.
I’m the first to admit my decisions about our retirement plan haven’t always been based on sound financial principles. Instead, those decisions were sometimes predicated on experience. For instance, I remember a late friend—who was battling hepatitis—once telling me he was denied a medical procedure by his insurance carrier that he felt was vital for his well-being. As a last resort, he sat down on the floor in the lobby of that medical provider and refused to move until his request was granted. That image will always be etched in my brain. I can’t help but think of him when I make decisions about our health care in retirement.
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.
How does reaching 70 feel? I know I get cold easily and don’t move as fast when I’m exercising. I’m also not as sharp mentally. But I’m actually looking forward to my 70s. It will be a decade more about living and with less thinking about money.
My Social Security will be the last significant piece in my financial puzzle. Maybe I’ll do a few more Roth conversions and tweak my asset allocation as I grow older. But there’s really no major money decision that’ll fundamentally change my finances going forward.
My wife and I will rely on our investment portfolio of 35% stocks, 60% bonds and 5% cash, as well as Social Security, Medicare Part A and Part B for basic health insurance, United Healthcare Medicare Supplemental Insurance Plan G and United Healthcare Medicare Prescription Drug Plan.
This is our blue-collar financial and health care retirement plan built on sweat, sacrifices, endurance and hard work. There was no knockout punch, such as a hot stock or a large financial windfall. Instead, it came down to a steady stream of jabs, in the form of regular automatic investments over many years, primarily into low-cost broad market index funds.
Here are five questions I asked myself while creating our retirement plan:
1. Why not buy annuities for additional income? The one thing I’ve learned is that bad things happen and they can’t always be prevented. For instance, chronic health issues can be very costly. According to a 2020 survey by Genworth, the median annual cost of a private nursing home room is $105,852, while a semi-private room is $93,072.
The problem with buying an annuity is that it takes away the flexibility to respond to these types of changes in your retirement plan. With an annuity, you hand over control of your money to an insurance company in an exchange for guaranteed income. I’d rather hang on to the lump sum in case there’s an expensive unexpected event, especially in the earlier phase of our retirement.
2. How am I going to create income? We’ll use a total return approach, focusing on generating both income and capital gains. We’ll spend the interest, capital gains, dividends and fund distributions generated by our stocks, bonds and cash holdings. We’ll also have our Social Security, with my benefits as of age 70 and my wife’s as of her full retirement age. We feel confident we have sufficient savings that, if necessary, we can spend down part of our investment portfolio and not run out of money, no matter how long we live.
3. Why not choose a Medicare Advantage plan, with its lower premium? I chose federal-run Medicare over Medicare Advantage, the private insurance alternative that can have different rules for how you get medical services. For instance, under Medicare Advantage, you usually need a referral to see a specialist and for certain medical procedures. I didn’t want to be limited to a network of doctors and I wanted to make sure I can get immediate medical coverage anywhere in the U.S. I wanted more control over my health care and was willing to pay for it.
4. Why not buy a long-term-care insurance policy? The inability to forecast the true cost of a long-term-care policy over a long time horizon was a major concern for me. Policyholders have faced steep rate hikes over the years. It probably comes down to a lack of trust: I worry that an insurance company would try to price us out of coverage we’d bought years earlier.
I’ve also heard stories of insurers denying coverage to policyholders who felt they met the eligibility requirements. Eligibility is usually based on whether you need assistance in performing two of the six activities of daily living, such as bathing, dressing, eating, transferring (moving from bed to chair) and toileting. I was also aware the best time to buy long-term-care insurance is before your 60th birthday, because rates are lower, and felt it was probably too late to purchase coverage, even if I thought it was a good idea.
5. Will we run out of money? I believe the biggest threat to our retirement is our health. Large out-of-pocket health care expenses can deplete even a well-funded investment portfolio. Since we didn’t buy long-term-care insurance, the best way for us to guard against this financial threat is by protecting our mind and body. My wife and I try to live a healthy lifestyle by exercising, eating a healthy diet and getting enough sleep.
I’m the first to admit my decisions about our retirement plan haven’t always been based on sound financial principles. Instead, those decisions were sometimes predicated on experience. For instance, I remember a late friend—who was battling hepatitis—once telling me he was denied a medical procedure by his insurance carrier that he felt was vital for his well-being. As a last resort, he sat down on the floor in the lobby of that medical provider and refused to move until his request was granted. That image will always be etched in my brain. I can’t help but think of him when I make decisions about our health care in retirement.
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 My Retirement Plan appeared first on HumbleDollar.
March 18, 2021
Two Changes
WE'VE MADE TWO changes to the site in recent days—one's an improvement, the other's a modest inconvenience, but it's a necessary first step for a new feature we'll be introducing in the near future.
First, the improvement: The main articles page has been revamped, with the 1,400 or so articles that the site has published now divvied up among 23 categories.
Second, we've had to introduce a new system for commenting. As before, you can use your credentials from Disqus, Facebook, Google (gmail) and Twitter to sign in. The downside: The new commenting system may not remember the username and password you
previously used, so you'll need to sign in again. That's easy enough to do: Just click on the appropriate icon and follow the instructions.
What's the new feature we're planning to introduce? My lips are sealed. For now.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
First, the improvement: The main articles page has been revamped, with the 1,400 or so articles that the site has published now divvied up among 23 categories.
Second, we've had to introduce a new system for commenting. As before, you can use your credentials from Disqus, Facebook, Google (gmail) and Twitter to sign in. The downside: The new commenting system may not remember the username and password you
previously used, so you'll need to sign in again. That's easy enough to do: Just click on the appropriate icon and follow the instructions.What's the new feature we're planning to introduce? My lips are sealed. For now.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.The post Two Changes appeared first on HumbleDollar.
Housing Gone Wild
THERE’S SOMETHING very emotional about our homes—and how we think about their value. Take the conversation my wife and I had a couple of weeks ago.
“Did you see the house behind us went up for sale this week? They have it listed at 141% more than what we paid for our house.”
“Well, there’s no way their house is worth that much.”
“Oh really? I just talked to our neighbor—the one who’s a realtor—and he said they had five offers the first day it went up. It sold for more than the list price within 12 hours.”
“Wow, our house is much nicer than theirs. I wonder how much we could get.”
For many homeowners, the next step is to visit Zillow to get an estimate of their home’s worth. While I know the limitations of Zillow, I did just that. Sure enough, Zillow estimates our house is worth far more than we’d have guessed.
I follow the Montana property market closely and things are crazy here. We have minimal COVID-19 problems and we’re seeing lots of migration from the West Coast. The chance to enjoy Montana’s quality of life, while keeping a high-paid job working from home, is driving up real estate prices. Bozeman, for example, has seen the median house price jump from $435,000 to $575,000 in the last year, a 32% increase.
The boom appears to be everywhere. Redfin recently put out a report that shows home prices are at an all-time high, up 17% from last year. Thinking about building instead of buying? CNBC says softwood lumber prices are up 112% compared to a year ago.
These types of reports get everyone’s attention. Our home isn’t priced every day, like stocks and bonds are. When we suddenly realize the value is much higher than we thought, we can lose perspective. Want to think rationally about housing? Keep these six ideas in mind.
First, those who boast about their home price gains are often just bad accountants. Closing costs, homeowner’s insurance, real estate taxes and maintenance are just some of the expenses that non-accountants might forget to include when estimating their gain. Then there are those costly home improvements. Did the boastful neighbors add that $50,000 kitchen remodeling to their cost?
On top of that, how much of the estimated profit would disappear once inflation was factored in? According to the Bureau of Labor Statistics, housing prices have climbed 4.1% a year since 1967, barely above the 3.9% inflation rate.
Second, ponder how housing has performed compared to other investments. For the same period we’ve lived in our house, I calculated the return for one of our Vanguard Group funds, a small-cap growth ETF (symbol: VBK). While I’m moved emotionally when I realize how much our home has appreciated, I hardly ever think about the far larger 400%-plus rise in the Vanguard fund. To think clearly about our house as an investment requires us to dial down the emotion and view it in the context of other investments.
Third, while housing hasn’t historically been a great investment compared to alternatives, it is a great forced savings vehicle. With every monthly mortgage payment and every tick higher in property prices, we have more home equity. That gives us options in retirement. In fact, for most older Americans, home equity is the biggest single asset they own. Below are some Census Bureau statistics that were published last year by NewRetirement.com. They show average home equity by age:
Those ages 65 to 69 have $136,670 in home equity, totaling 61% of their net worth.
Those 70 to 74 have $153,300 in home equity, totaling 72% of their net worth.
Those 75 and older have $149,860 in home equity, totaling 75% of their net worth.
For middle class families, home equity—along with Social Security—looks to be essential for a comfortable retirement. There’s a variety of ways to tap into this equity, including downsizing, reverse mortgages or a traditional home equity loan. Problem is, many of these methods are expensive or cumbersome. I hope disruptive technology companies will come along and make extracting home equity cheaper and easier.
Fourth, with the politicians spending money without any fiscal restraint, I like having an investment in real estate to mitigate the risk of rapid inflation. If the Federal Reserve misjudges monetary policy and inflation comes roaring back, home prices should keep pace, plus rapid inflation would reduce the real cost of servicing mortgage debt.
Fifth, there are many non-financial reasons to own a house. It’s been described as the American dream. In fact, part of my time is spent working on affordable housing issues for financial institutions. It’s satisfying work—helping others to feel more connected to their community thanks to homeownership.
Finally, never forget the biggest payoff from owning a house: You get a place to live. Think of it as renting to yourself. If you had to rent the house you own, you might need to make annual rent payments equal to 6% to 8% of its value. A Zillow article even suggests a fair rent might be as much as 12% of a home’s value. My advice: Look at your housing costs as you would any other consumption expense. The investment gain and the forced savings are secondary considerations.
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.
“Did you see the house behind us went up for sale this week? They have it listed at 141% more than what we paid for our house.”
“Well, there’s no way their house is worth that much.”
“Oh really? I just talked to our neighbor—the one who’s a realtor—and he said they had five offers the first day it went up. It sold for more than the list price within 12 hours.”
“Wow, our house is much nicer than theirs. I wonder how much we could get.”
For many homeowners, the next step is to visit Zillow to get an estimate of their home’s worth. While I know the limitations of Zillow, I did just that. Sure enough, Zillow estimates our house is worth far more than we’d have guessed.
I follow the Montana property market closely and things are crazy here. We have minimal COVID-19 problems and we’re seeing lots of migration from the West Coast. The chance to enjoy Montana’s quality of life, while keeping a high-paid job working from home, is driving up real estate prices. Bozeman, for example, has seen the median house price jump from $435,000 to $575,000 in the last year, a 32% increase.
The boom appears to be everywhere. Redfin recently put out a report that shows home prices are at an all-time high, up 17% from last year. Thinking about building instead of buying? CNBC says softwood lumber prices are up 112% compared to a year ago.
These types of reports get everyone’s attention. Our home isn’t priced every day, like stocks and bonds are. When we suddenly realize the value is much higher than we thought, we can lose perspective. Want to think rationally about housing? Keep these six ideas in mind.
First, those who boast about their home price gains are often just bad accountants. Closing costs, homeowner’s insurance, real estate taxes and maintenance are just some of the expenses that non-accountants might forget to include when estimating their gain. Then there are those costly home improvements. Did the boastful neighbors add that $50,000 kitchen remodeling to their cost?
On top of that, how much of the estimated profit would disappear once inflation was factored in? According to the Bureau of Labor Statistics, housing prices have climbed 4.1% a year since 1967, barely above the 3.9% inflation rate.
Second, ponder how housing has performed compared to other investments. For the same period we’ve lived in our house, I calculated the return for one of our Vanguard Group funds, a small-cap growth ETF (symbol: VBK). While I’m moved emotionally when I realize how much our home has appreciated, I hardly ever think about the far larger 400%-plus rise in the Vanguard fund. To think clearly about our house as an investment requires us to dial down the emotion and view it in the context of other investments.
Third, while housing hasn’t historically been a great investment compared to alternatives, it is a great forced savings vehicle. With every monthly mortgage payment and every tick higher in property prices, we have more home equity. That gives us options in retirement. In fact, for most older Americans, home equity is the biggest single asset they own. Below are some Census Bureau statistics that were published last year by NewRetirement.com. They show average home equity by age:
Those ages 65 to 69 have $136,670 in home equity, totaling 61% of their net worth.
Those 70 to 74 have $153,300 in home equity, totaling 72% of their net worth.
Those 75 and older have $149,860 in home equity, totaling 75% of their net worth.
For middle class families, home equity—along with Social Security—looks to be essential for a comfortable retirement. There’s a variety of ways to tap into this equity, including downsizing, reverse mortgages or a traditional home equity loan. Problem is, many of these methods are expensive or cumbersome. I hope disruptive technology companies will come along and make extracting home equity cheaper and easier.
Fourth, with the politicians spending money without any fiscal restraint, I like having an investment in real estate to mitigate the risk of rapid inflation. If the Federal Reserve misjudges monetary policy and inflation comes roaring back, home prices should keep pace, plus rapid inflation would reduce the real cost of servicing mortgage debt.
Fifth, there are many non-financial reasons to own a house. It’s been described as the American dream. In fact, part of my time is spent working on affordable housing issues for financial institutions. It’s satisfying work—helping others to feel more connected to their community thanks to homeownership.
Finally, never forget the biggest payoff from owning a house: You get a place to live. Think of it as renting to yourself. If you had to rent the house you own, you might need to make annual rent payments equal to 6% to 8% of its value. A Zillow article even suggests a fair rent might be as much as 12% of a home’s value. My advice: Look at your housing costs as you would any other consumption expense. The investment gain and the forced savings are secondary considerations.
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 Housing Gone Wild appeared first on HumbleDollar.
March 17, 2021
Don’t Get Burned
WANT TO RUFFLE some feathers? All you have to do is utter “FIRE movement” on social media or in a crowded room of financial advisors. FIRE—short for financial independence/retire early—has grown ever more controversial as rising stock prices have fattened the portfolios of super-savers and brought their early retirement dreams closer to reality.
I fit the mold of the super-saver. I’ve saved 90% or more of my after-tax income over the past few years. Below, I’ll explain how. That sky-high savings rate is on top of the solid financial foundation I built early in my working life, beginning in high school when I bagged groceries at Publix Super Markets. Still, I’m not a vocal advocate for the FIRE movement.
For background, those who buy into the movement look to accumulate a portfolio equal to 25 times their annual spending or more. Based on a 4% withdrawal rate, that should be enough to cover your retirement living expenses.
To retire in their 40s or even their 30s, FIRE aficionados aim to save much more than they spend. They usually invest those savings in index funds, primarily U.S. total stock market funds. According to the stereotype, once these folks hit their target, they relax on a beach, put out a podcast, write a blog or do whatever else they please. In reality, many continue to work in some capacity to keep busy and healthy.
That’s the idea. Again, I don’t proclaim all this works as promised, nor do I subscribe to every FIRE movement nuance. But yes, at age 33, I am FI—financially independent—which is a nice thing. But I’m not about to spend my remaining days relaxing on a beach.
I need to stay active and social. No two ways about it. I also see being FI as more of a dimmer switch than some magical moment. There are so many risks out there—from a market crash to a health event to (God forbid) me finding that special someone. Certainly my “single dude” lifestyle would be far more expensive if I added a spouse, kids, a house and health issues.
So much can change over a retirement that, for the FIRE folks, might last six decades. Uncertainty is high. Right now, I’m financially independent according to all the metrics, having saved about 100 times my annual expenses. But I also know that could change quickly. I might go from 100 times to 50 times if my lifestyle changed. And then I might go from 50 times to 25 times if the stock market crashed.
Even with all that, maybe you’re a little jealous. “It must be nice,” you might say. How did I get here? Part luck, part intention. I was fortunate to hold a high-paying job in energy trading for six years, while keeping my annual expenses near $10,000. That allowed me to shovel massive amounts of money into the stock market every paycheck, much of it into tax-advantaged accounts. Matching 401(k) contributions from my employer were a handsome addition.
I also regularly maxed out my Roth IRA starting in 2005, when I was age 18 and working minimum wage jobs at a local golf course and at the grocery store. I took advantage of employer tuition reimbursement to help pay for college, and also when I got my MBA and Chartered Financial Analyst designation. My car has always been a beat-up, utilitarian but generally reliable set of wheels that gets good gas mileage. I have lived with roommates, renting a room to keep my housing expenses low. Health is another important factor. I’ve had no big health scares, though I did spend $3,000 on Lasik surgery a few years ago.
So now I’m FI and could RE—the retire early part. Big whoop. The work-from-home trend opened my eyes to the fact that I need to be around people. The past few months since I left fulltime work—and with the pandemic still raging—has left me feeling kind of, “Is this it?” Humans are tribal. We also need purpose. I could find that by serving at my church or once again bagging groceries at Publix. But I’m too greedy for that.
My focus now is finding purpose, while still making a decent chunk of change. It’s way too early for me to start drawing on my savings, considering a lot can—and likely will—change in my life in the years ahead. The FIRE movement doesn’t appreciate all of the risks, in my opinion.
Stuffing your IRAs and brokerage accounts with total market index funds, and then riding the stock market gravy train, works great in bull markets and when your life is on track. But a bear market can strike at any time, as can costly life events.
It’s one thing to retire early at age 50. At that juncture, you have 12 to 20 years until you start Social Security and 15 years until Medicare kicks in. Over that sort of timespan, there’s less variability in future outcomes. By contrast, retiring in your early 30s is a huge gamble. So much can happen. You’re also forgoing your best earnings years. The opportunity cost is significant. In addition, by exiting the workforce so early, you contribute far less to Social Security and your eventual monthly check will reflect that.
To retire early, you’ll obviously need more money if you’re a couple and even more if you have small mouths to feed. True, there are benefits to being married and pursuing FI. You can take advantage of the working spouse’s health insurance if just one of you retires early, plus the early retiree can later collect Social Security spousal benefits.
But even as a couple, you may feel compelled to skip one of life’s most meaningful experiences. Ask those who retired in their 30s or 40s if they have kids. Probably 90% will answer “no.” I’m not sure I want to be among that 90%.
What’s my point? FIRE devotees should carefully consider the costs and risks. On top of that, you may not enjoy some great ah-ha moment when you’re suddenly free from the nine-to-five rat race. Chasing FIRE? My advice: Be careful you don’t get burned.
Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He's a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles.
I fit the mold of the super-saver. I’ve saved 90% or more of my after-tax income over the past few years. Below, I’ll explain how. That sky-high savings rate is on top of the solid financial foundation I built early in my working life, beginning in high school when I bagged groceries at Publix Super Markets. Still, I’m not a vocal advocate for the FIRE movement.
For background, those who buy into the movement look to accumulate a portfolio equal to 25 times their annual spending or more. Based on a 4% withdrawal rate, that should be enough to cover your retirement living expenses.
To retire in their 40s or even their 30s, FIRE aficionados aim to save much more than they spend. They usually invest those savings in index funds, primarily U.S. total stock market funds. According to the stereotype, once these folks hit their target, they relax on a beach, put out a podcast, write a blog or do whatever else they please. In reality, many continue to work in some capacity to keep busy and healthy.
That’s the idea. Again, I don’t proclaim all this works as promised, nor do I subscribe to every FIRE movement nuance. But yes, at age 33, I am FI—financially independent—which is a nice thing. But I’m not about to spend my remaining days relaxing on a beach.
I need to stay active and social. No two ways about it. I also see being FI as more of a dimmer switch than some magical moment. There are so many risks out there—from a market crash to a health event to (God forbid) me finding that special someone. Certainly my “single dude” lifestyle would be far more expensive if I added a spouse, kids, a house and health issues.
So much can change over a retirement that, for the FIRE folks, might last six decades. Uncertainty is high. Right now, I’m financially independent according to all the metrics, having saved about 100 times my annual expenses. But I also know that could change quickly. I might go from 100 times to 50 times if my lifestyle changed. And then I might go from 50 times to 25 times if the stock market crashed.
Even with all that, maybe you’re a little jealous. “It must be nice,” you might say. How did I get here? Part luck, part intention. I was fortunate to hold a high-paying job in energy trading for six years, while keeping my annual expenses near $10,000. That allowed me to shovel massive amounts of money into the stock market every paycheck, much of it into tax-advantaged accounts. Matching 401(k) contributions from my employer were a handsome addition.
I also regularly maxed out my Roth IRA starting in 2005, when I was age 18 and working minimum wage jobs at a local golf course and at the grocery store. I took advantage of employer tuition reimbursement to help pay for college, and also when I got my MBA and Chartered Financial Analyst designation. My car has always been a beat-up, utilitarian but generally reliable set of wheels that gets good gas mileage. I have lived with roommates, renting a room to keep my housing expenses low. Health is another important factor. I’ve had no big health scares, though I did spend $3,000 on Lasik surgery a few years ago.
So now I’m FI and could RE—the retire early part. Big whoop. The work-from-home trend opened my eyes to the fact that I need to be around people. The past few months since I left fulltime work—and with the pandemic still raging—has left me feeling kind of, “Is this it?” Humans are tribal. We also need purpose. I could find that by serving at my church or once again bagging groceries at Publix. But I’m too greedy for that.
My focus now is finding purpose, while still making a decent chunk of change. It’s way too early for me to start drawing on my savings, considering a lot can—and likely will—change in my life in the years ahead. The FIRE movement doesn’t appreciate all of the risks, in my opinion.
Stuffing your IRAs and brokerage accounts with total market index funds, and then riding the stock market gravy train, works great in bull markets and when your life is on track. But a bear market can strike at any time, as can costly life events.
It’s one thing to retire early at age 50. At that juncture, you have 12 to 20 years until you start Social Security and 15 years until Medicare kicks in. Over that sort of timespan, there’s less variability in future outcomes. By contrast, retiring in your early 30s is a huge gamble. So much can happen. You’re also forgoing your best earnings years. The opportunity cost is significant. In addition, by exiting the workforce so early, you contribute far less to Social Security and your eventual monthly check will reflect that.
To retire early, you’ll obviously need more money if you’re a couple and even more if you have small mouths to feed. True, there are benefits to being married and pursuing FI. You can take advantage of the working spouse’s health insurance if just one of you retires early, plus the early retiree can later collect Social Security spousal benefits.
But even as a couple, you may feel compelled to skip one of life’s most meaningful experiences. Ask those who retired in their 30s or 40s if they have kids. Probably 90% will answer “no.” I’m not sure I want to be among that 90%.
What’s my point? FIRE devotees should carefully consider the costs and risks. On top of that, you may not enjoy some great ah-ha moment when you’re suddenly free from the nine-to-five rat race. Chasing FIRE? My advice: Be careful you don’t get burned.
Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He's a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles.
The post Don’t Get Burned appeared first on HumbleDollar.
March 16, 2021
We’re All Active
OVER THE PAST TWO decades, investors have increasingly shunned actively managed mutual funds, instead embracing index mutual funds and exchange-traded index funds. This has led to a contrived debate over whether active or passive investing is better.
My contention: It’s wrong to position indexing as somehow the mirror opposite of active management. Why? Even if you eliminate active mutual fund managers and their fees from your portfolio, you still need to grapple with three crucial investment decisions—all of which involve the sort of judgment call active investors must make.
1. What asset classes do you want to own? Research shows that asset allocation—your portfolio’s basic split between stocks, bonds and other asset classes—is the key decision in driving your investment returns and how likely you are to reach your financial goals.
Think about the past decade. If you look year by year, the top-performing asset classes have included inflation-indexed Treasury bonds (2011), emerging markets (2012 and 2017), small-cap stocks (2013 and 2016), real estate investment trusts (2014 and 2015), cash investments (2018) and large-cap U.S. stocks (2019 and 2020). There’s been plenty of turmoil in these different parts of the market and plenty of uncertainty about which asset classes will shine.
You—or your financial advisor—must decide how you want to allocate your money among these and other investment options. There’s no obviously right way to do this. Still, you need to make a decision—one that inevitably involves a judgment call.
2. Which investments will you use? Passive strategies have been around ever since Vanguard Group introduced the first index mutual fund in 1976. But the boom in passive investing over the past two decades has been driven by a different sort of index fund, those listed on the stock market. There are now more than 2,200 exchange-traded index funds (ETFs), according to Investment Company Institute data for December 2020. If you decide to build your desired portfolio using ETFs, you’ll need to choose from among 1,032 U.S. stock funds, 637 global stock funds, 413 bond funds, and 122 hybrid and commodity funds.
If you want large-cap U.S. stock exposure, should you buy a fund that mimics the S&P 500 or the Russell 1,000? Benchmarks such as these are largely rules-based portfolios. If they meet the rule, the security will most likely be added to the index. Some of the benchmarks are better known than others, but that doesn’t mean they’re a better choice.
To be competitive and stand out, many ETF sponsors now offer funds that are built using their own rules, which often reflect the trend toward “factor” investing. A factor may be driven by corporate sales, earnings, leverage, company size, valuation, momentum or almost anything else a fund sponsor thinks will attract investor dollars. Or you can decide to buy an ETF that focuses on specific industry sectors such as telecom, or financials, or technology. Does anything about navigating this landscape sound passive? Not a chance.
3. How much will you invest in each? After you select your asset classes and identify the funds you’ll use, how much should you put in each? The simplest method might be to put an equal amount in each, but that’s also the least thoughtful. Ideally, you would consider the risks of each fund and how they fit with your investment goals, and then allocate accordingly. Again, all this requires active decision-making.
So what is “passive investing”? All that means is we aren’t actively choosing among individual stocks, bonds and other securities, and incurring the associated costs. Instead, we’re simply buying the “market”—but even that’s subject to interpretation. The bottom line: Passive investing still leaves you with a host of decisions to make, all of which are undoubtedly active.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. His previous article was What? Spend It?
My contention: It’s wrong to position indexing as somehow the mirror opposite of active management. Why? Even if you eliminate active mutual fund managers and their fees from your portfolio, you still need to grapple with three crucial investment decisions—all of which involve the sort of judgment call active investors must make.
1. What asset classes do you want to own? Research shows that asset allocation—your portfolio’s basic split between stocks, bonds and other asset classes—is the key decision in driving your investment returns and how likely you are to reach your financial goals.
Think about the past decade. If you look year by year, the top-performing asset classes have included inflation-indexed Treasury bonds (2011), emerging markets (2012 and 2017), small-cap stocks (2013 and 2016), real estate investment trusts (2014 and 2015), cash investments (2018) and large-cap U.S. stocks (2019 and 2020). There’s been plenty of turmoil in these different parts of the market and plenty of uncertainty about which asset classes will shine.
You—or your financial advisor—must decide how you want to allocate your money among these and other investment options. There’s no obviously right way to do this. Still, you need to make a decision—one that inevitably involves a judgment call.
2. Which investments will you use? Passive strategies have been around ever since Vanguard Group introduced the first index mutual fund in 1976. But the boom in passive investing over the past two decades has been driven by a different sort of index fund, those listed on the stock market. There are now more than 2,200 exchange-traded index funds (ETFs), according to Investment Company Institute data for December 2020. If you decide to build your desired portfolio using ETFs, you’ll need to choose from among 1,032 U.S. stock funds, 637 global stock funds, 413 bond funds, and 122 hybrid and commodity funds.
If you want large-cap U.S. stock exposure, should you buy a fund that mimics the S&P 500 or the Russell 1,000? Benchmarks such as these are largely rules-based portfolios. If they meet the rule, the security will most likely be added to the index. Some of the benchmarks are better known than others, but that doesn’t mean they’re a better choice.
To be competitive and stand out, many ETF sponsors now offer funds that are built using their own rules, which often reflect the trend toward “factor” investing. A factor may be driven by corporate sales, earnings, leverage, company size, valuation, momentum or almost anything else a fund sponsor thinks will attract investor dollars. Or you can decide to buy an ETF that focuses on specific industry sectors such as telecom, or financials, or technology. Does anything about navigating this landscape sound passive? Not a chance.
3. How much will you invest in each? After you select your asset classes and identify the funds you’ll use, how much should you put in each? The simplest method might be to put an equal amount in each, but that’s also the least thoughtful. Ideally, you would consider the risks of each fund and how they fit with your investment goals, and then allocate accordingly. Again, all this requires active decision-making.
So what is “passive investing”? All that means is we aren’t actively choosing among individual stocks, bonds and other securities, and incurring the associated costs. Instead, we’re simply buying the “market”—but even that’s subject to interpretation. The bottom line: Passive investing still leaves you with a host of decisions to make, all of which are undoubtedly active.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. His previous article was What? Spend It?The post We’re All Active appeared first on HumbleDollar.
March 15, 2021
Rental Car Runaround
IF YOU’VE EVER rented a car, you’ll inevitability have heard the collision damage waiver (CDW) sales pitch. It sounds something like this: “I assume you want us to protect you bumper to bumper on the car, right?”
If you say, “yes, please,” then—for anywhere between $10 and $30 a day—the rental car will be covered for losses due to theft or damage, except for damage to certain portions of the car. Hint: Read the fine print. If you say, “no, thank you,” you need to be prepared to take on the risk yourself.
I don’t buy the CDW from car rental companies. I’ve studied the issue extensively, and I feel adequately covered by my auto insurance and by the auto rental collision damage waiver offered by the credit card I use to rent the car. You need to review all of this yourself to determine what’s best for you.
Auto rental CDW is a benefit offered by almost all credit cards. The benefit provides reimbursement, subject to the terms and conditions detailed in each card’s benefits guide, for damage due to theft or damage up to the actual cash value of most rental vehicles. Prior to renting a car, you should review the benefits guide for your credit card.
What happens if you file an auto rental CDW claim with your credit card company for damage to a rental car? I’ve checked the internet and I can’t find a single actual example of someone making a claim. So….
Prior to COVID-19, I rented a car in Edinburgh, Scotland, from Hertz using my USAA Visa credit card. I declined the auto rental CDW offered at the rental counter. Two days later, while driving entirely too fast on the Isle of Skye in an effort to reach Coruisk House before sundown, I clipped the only section of curb on the isle, resulting in a puncture to the sidewall of my left rear tire. I drove on the spare uneventfully but slowly for the balance of the trip.
When I returned the car to Hertz, I mentioned the flat tire. The attendant filled out a form describing the damage. She provided me with a hardcopy. I took a photo of it and the tire. Subsequently, Hertz charged my credit card $160 to cover the “tyre” damage.
When I returned to the U.S., I called USAA and—after numerous phone transfers—initiated an auto rental CDW claim. It was all pretty straightforward. USAA sent me an email with my claim number in the subject line. I then replied to the email with all relevant documents: contract, damage form, photos of the damage, credit card statement and so on. As it’s easy to leave your rental car contract in the car when you return it, be sure to photograph it as soon as you receive it at the rental car counter.
About two weeks later, I was contacted by a USAA representative, who was following up on my claim. The conversation was a little odd. He asked if I had purchased the CDW from Hertz, to which I replied, "No, because I was relying on the auto rental CDW insurance via my USAA Visa credit card." He offered that, "I always get the CDW from the rental car company myself. Call me a belt-and-suspenders kind of guy." He then asked if I still wanted to make a claim, to which I replied with a measured, "Yes… I do."
Subsequently, USAA informed me that it was waiting on documentation from Hertz that detailed the cost of the tire repair. While that seemed reasonable, I asked USAA why Hertz would be in a rush to provide such documentation and was met with silence. After waiting for resolution for more than a month, I decided to take matters into my own hands. As my father once said, "If you want something done right…." I contacted USAA to dispute the Hertz credit card charge for $160. I asked that Hertz provide documentation that detailed the cost of the tire repair.
About a month later, USAA informed me that my credit card dispute was resolved in my favor for the full $160. A few weeks after that, USAA informed me that my auto rental CDW claim was resolved in my favor—but this time for a lesser amount, $120. USAA couldn't give me the full $160 for some reason or another. I’m not sure exactly why and I didn't want to push it.
Planning to rent a car? Keep these three additional points in mind:
Normally, credit card auto rental CDW insurance is secondary to your auto insurance policy. Since my auto insurance policy does not provide overseas coverage—and neither does yours—my credit card auto rental CDW became the primary.
Prior to relying on your credit card for auto rental CDW insurance, read the fine print to fully understand what is and isn’t covered. Some credit cards do not provide coverage in Ireland, Jamaica or Israel. Some provide coverage for 15 days and others for 31 days. Almost all do not provide coverage for pickup trucks, vans and other high-end vehicles.
Your auto insurance should provide you liability insurance for your rental car in the U.S., though you should confirm this. If you don’t currently own a car, you may want to ask your insurance company about rental car liability insurance.
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.
If you say, “yes, please,” then—for anywhere between $10 and $30 a day—the rental car will be covered for losses due to theft or damage, except for damage to certain portions of the car. Hint: Read the fine print. If you say, “no, thank you,” you need to be prepared to take on the risk yourself.
I don’t buy the CDW from car rental companies. I’ve studied the issue extensively, and I feel adequately covered by my auto insurance and by the auto rental collision damage waiver offered by the credit card I use to rent the car. You need to review all of this yourself to determine what’s best for you.
Auto rental CDW is a benefit offered by almost all credit cards. The benefit provides reimbursement, subject to the terms and conditions detailed in each card’s benefits guide, for damage due to theft or damage up to the actual cash value of most rental vehicles. Prior to renting a car, you should review the benefits guide for your credit card.
What happens if you file an auto rental CDW claim with your credit card company for damage to a rental car? I’ve checked the internet and I can’t find a single actual example of someone making a claim. So….
Prior to COVID-19, I rented a car in Edinburgh, Scotland, from Hertz using my USAA Visa credit card. I declined the auto rental CDW offered at the rental counter. Two days later, while driving entirely too fast on the Isle of Skye in an effort to reach Coruisk House before sundown, I clipped the only section of curb on the isle, resulting in a puncture to the sidewall of my left rear tire. I drove on the spare uneventfully but slowly for the balance of the trip.
When I returned the car to Hertz, I mentioned the flat tire. The attendant filled out a form describing the damage. She provided me with a hardcopy. I took a photo of it and the tire. Subsequently, Hertz charged my credit card $160 to cover the “tyre” damage.
When I returned to the U.S., I called USAA and—after numerous phone transfers—initiated an auto rental CDW claim. It was all pretty straightforward. USAA sent me an email with my claim number in the subject line. I then replied to the email with all relevant documents: contract, damage form, photos of the damage, credit card statement and so on. As it’s easy to leave your rental car contract in the car when you return it, be sure to photograph it as soon as you receive it at the rental car counter.
About two weeks later, I was contacted by a USAA representative, who was following up on my claim. The conversation was a little odd. He asked if I had purchased the CDW from Hertz, to which I replied, "No, because I was relying on the auto rental CDW insurance via my USAA Visa credit card." He offered that, "I always get the CDW from the rental car company myself. Call me a belt-and-suspenders kind of guy." He then asked if I still wanted to make a claim, to which I replied with a measured, "Yes… I do."
Subsequently, USAA informed me that it was waiting on documentation from Hertz that detailed the cost of the tire repair. While that seemed reasonable, I asked USAA why Hertz would be in a rush to provide such documentation and was met with silence. After waiting for resolution for more than a month, I decided to take matters into my own hands. As my father once said, "If you want something done right…." I contacted USAA to dispute the Hertz credit card charge for $160. I asked that Hertz provide documentation that detailed the cost of the tire repair.
About a month later, USAA informed me that my credit card dispute was resolved in my favor for the full $160. A few weeks after that, USAA informed me that my auto rental CDW claim was resolved in my favor—but this time for a lesser amount, $120. USAA couldn't give me the full $160 for some reason or another. I’m not sure exactly why and I didn't want to push it.
Planning to rent a car? Keep these three additional points in mind:
Normally, credit card auto rental CDW insurance is secondary to your auto insurance policy. Since my auto insurance policy does not provide overseas coverage—and neither does yours—my credit card auto rental CDW became the primary.
Prior to relying on your credit card for auto rental CDW insurance, read the fine print to fully understand what is and isn’t covered. Some credit cards do not provide coverage in Ireland, Jamaica or Israel. Some provide coverage for 15 days and others for 31 days. Almost all do not provide coverage for pickup trucks, vans and other high-end vehicles.
Your auto insurance should provide you liability insurance for your rental car in the U.S., though you should confirm this. If you don’t currently own a car, you may want to ask your insurance company about rental car liability insurance.
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 Rental Car Runaround appeared first on HumbleDollar.
