Jonathan Clements's Blog, page 295
March 13, 2021
Twelve Truths
AT LEAST ONCE A DAY, I find myself saying, “Another truism of financial planning is....” To be honest, I don’t know whether the 12 concepts below meet the strict definition of "truism," but I’ve found them hugely helpful in navigating the world of personal finance:
1. There are always two answers to every question. There’s the mathematical answer and there’s the “how do you feel about it” answer. It’s okay—and, in fact, it’s to be expected—that these answers differ. But ideally, you want to make choices that satisfy both needs.
2. Taxes aren’t always a bad thing. Sometimes, they’re far better than the alternative. A short-term gain, for example, is always better than a loss. It may also make sense to realize a gain if you’re trying to take down the risk in your portfolio. To be sure, no one likes taxes. But zero taxes may not be a sensible goal, either.
3. There are many roads to Rome. There are lots of ways to build a successful financial plan. Some people—usually the proverbial brother-in-law—love to talk about how great they’re doing with their investments. That’s fine. Let them talk. But remember that other people don’t need to be wrong for you to be right.
4. I’m only half-joking when I say you don’t truly know someone until you’ve seen his or her tax return. Think twice before modeling other people’s financial strategies. They may not be doing exactly what you think they’re doing. The fact is, you can rarely tell what’s going on in someone else’s house from the outside.
5. Once your balance sheet is beyond a certain size, risk is optional. Imagine you’re Bill Gates. If you kept all your money under the mattress, it wouldn't be a problem. It would erode due to inflation, but you’d still have enough for more than one lifetime. Alternatively, you could keep every dollar invested in stocks, and that wouldn't be a problem either, because you could weather market downturns unscathed. Bill Gates is at an extreme, but as your assets grow, this dynamic will become more and more applicable—and risk will become more and more optional.
6. Risk tolerance is a moving target. By the time you’ve reached a certain age, you’ve likely experienced multiple market downturns. As a result, you might feel that you understand your tolerance for risk. But that might not be the case. You only know what it’s like to endure downturns in one phase of life. You don’t yet know what it’s like to handle a downturn at a different stage—such as when you’re retired and drawing down your portfolio. In short, risk tolerance changes as you change. It isn’t hardcoded into your DNA.
7. All data is, by definition, backward-looking while all decisions are, by definition, forward-looking. This is a critical concept. You should view historical numbers as a guide, but don’t spend too much time trying to apply higher order math to your financial plan. In financial planning, greater precision only provides the illusion of greater accuracy. This is one of the reasons I don’t put too much stock in Monte Carlo analysis.
8. Utility is in the eye of the beholder. Economics 101 teaches that every consumer wants to “maximize utility.” I suppose that’s true, but not in the way that it’s normally presented. Utility shouldn't be measured strictly in dollars. Don't let anyone else—or any textbook—tell you that your choices are sub-optimal. Everyone derives happiness differently, and that’s okay.
9. None of us is average. There’s the old joke about the six-foot man who drowned in a river that was five feet deep on average. This is another reason you don’t want to worship too seriously at the altar of historical data. Long-run averages rarely align with any one person’s investing timeframe. That’s why I take sequence-of-return risk very seriously. Through no fault of our own, some of us will end up above average, while others will end up below.
10. None of us is (fully) equipped to manage investments. That’s because investing requires a split personality. As I’ve outlined in my “five minds” framework, investing requires that you simultaneously channel the minds of an optimist, a pessimist, an analyst, an economist and a psychologist. I’m an advocate for intentionally seeking out contrary opinions. If you're a pessimist, for example, find an optimist to bounce ideas off.
11. There’s little value in kicking yourself. If you made a financial decision that didn’t work out, don’t berate yourself. To be sure, there’s value in reflecting on decisions. But nothing that happens in the world of investing provides an iron-clad guarantee of what will happen the next time.
12. Financial planning becomes easier with each passing year. The future is, of course, full of uncertainty. How much will you earn? How much will you save? What will the market do? What about my health? What about inflation? But as each year goes by, the future moves a step closer and a little bit of that uncertainty falls away. The upshot: Don’t worry if your financial plan feels like it’s built on a large number of assumptions. It’ll get easier.
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.
1. There are always two answers to every question. There’s the mathematical answer and there’s the “how do you feel about it” answer. It’s okay—and, in fact, it’s to be expected—that these answers differ. But ideally, you want to make choices that satisfy both needs.
2. Taxes aren’t always a bad thing. Sometimes, they’re far better than the alternative. A short-term gain, for example, is always better than a loss. It may also make sense to realize a gain if you’re trying to take down the risk in your portfolio. To be sure, no one likes taxes. But zero taxes may not be a sensible goal, either.
3. There are many roads to Rome. There are lots of ways to build a successful financial plan. Some people—usually the proverbial brother-in-law—love to talk about how great they’re doing with their investments. That’s fine. Let them talk. But remember that other people don’t need to be wrong for you to be right.
4. I’m only half-joking when I say you don’t truly know someone until you’ve seen his or her tax return. Think twice before modeling other people’s financial strategies. They may not be doing exactly what you think they’re doing. The fact is, you can rarely tell what’s going on in someone else’s house from the outside.
5. Once your balance sheet is beyond a certain size, risk is optional. Imagine you’re Bill Gates. If you kept all your money under the mattress, it wouldn't be a problem. It would erode due to inflation, but you’d still have enough for more than one lifetime. Alternatively, you could keep every dollar invested in stocks, and that wouldn't be a problem either, because you could weather market downturns unscathed. Bill Gates is at an extreme, but as your assets grow, this dynamic will become more and more applicable—and risk will become more and more optional.
6. Risk tolerance is a moving target. By the time you’ve reached a certain age, you’ve likely experienced multiple market downturns. As a result, you might feel that you understand your tolerance for risk. But that might not be the case. You only know what it’s like to endure downturns in one phase of life. You don’t yet know what it’s like to handle a downturn at a different stage—such as when you’re retired and drawing down your portfolio. In short, risk tolerance changes as you change. It isn’t hardcoded into your DNA.
7. All data is, by definition, backward-looking while all decisions are, by definition, forward-looking. This is a critical concept. You should view historical numbers as a guide, but don’t spend too much time trying to apply higher order math to your financial plan. In financial planning, greater precision only provides the illusion of greater accuracy. This is one of the reasons I don’t put too much stock in Monte Carlo analysis.
8. Utility is in the eye of the beholder. Economics 101 teaches that every consumer wants to “maximize utility.” I suppose that’s true, but not in the way that it’s normally presented. Utility shouldn't be measured strictly in dollars. Don't let anyone else—or any textbook—tell you that your choices are sub-optimal. Everyone derives happiness differently, and that’s okay.
9. None of us is average. There’s the old joke about the six-foot man who drowned in a river that was five feet deep on average. This is another reason you don’t want to worship too seriously at the altar of historical data. Long-run averages rarely align with any one person’s investing timeframe. That’s why I take sequence-of-return risk very seriously. Through no fault of our own, some of us will end up above average, while others will end up below.
10. None of us is (fully) equipped to manage investments. That’s because investing requires a split personality. As I’ve outlined in my “five minds” framework, investing requires that you simultaneously channel the minds of an optimist, a pessimist, an analyst, an economist and a psychologist. I’m an advocate for intentionally seeking out contrary opinions. If you're a pessimist, for example, find an optimist to bounce ideas off.
11. There’s little value in kicking yourself. If you made a financial decision that didn’t work out, don’t berate yourself. To be sure, there’s value in reflecting on decisions. But nothing that happens in the world of investing provides an iron-clad guarantee of what will happen the next time.
12. Financial planning becomes easier with each passing year. The future is, of course, full of uncertainty. How much will you earn? How much will you save? What will the market do? What about my health? What about inflation? But as each year goes by, the future moves a step closer and a little bit of that uncertainty falls away. The upshot: Don’t worry if your financial plan feels like it’s built on a large number of assumptions. It’ll get easier.
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 Twelve Truths appeared first on HumbleDollar.
Watch Your Wallet
AS A BANKER, I got a ringside seat from which to watch the many ways that people are separated from their hard-earned money. Some are illegal. Some are legal, but unethical. And many, while legal and ethical, would be unnecessary with a little more knowledge about managing money.
For me, the most disturbing experiences were when scammers extracted money from the naïve and innocent. I’ve seen the pain of customers who found out that their elderly mother had given her life savings to a manipulative TV preacher. Unfortunately, there isn’t a lot that can be done in such situations.
Even sadder are the lonely people who develop an online romance with someone overseas. To come to the U.S., somebody convinced one of my customers to wire funds, so he could get a passport and airline ticket. But that wasn’t enough. Just send a little more, he told her numerous times. Finally, the lightbulb came on that this might be a scam.
Have you heard of the Nigerian prince scam? I didn’t believe any sophisticated person would fall for such a crazy scheme. But a customer of mine got a fax from a “prince” trapped in Nigeria. The fax promised that if my customer, an accountant no less, would wire $20,000, it would allow the prince to wire my customer millions. Unfortunately, my customer bought it and lost not only his money, but also his reputation.
Rather than absorb the loss and move on, my customer decided to fly to Nigeria to “get his money back.” He didn’t get his money back, but at least he came back alive.
Today, many scams are high tech. It’s become common for computer hackers to demand ransom in return for unlocking vital computer systems. I’ve talked to businesses that have had to pay the ransom in bitcoin—or risk seeing their business fail.
Selling fear. One of the earliest books I read on investing was How to Prosper During the Coming Bad Years, published in 1979. It scared me that we were on the brink of destruction. I didn’t have much money, but I bought goldmining stocks in countries I couldn’t even find on a map. I later learned that fear sells books and newsletters. But it doesn’t lead to clear thinking or prosperity.
Today’s marketers still seek to get your money through fear tactics. I recently saw an economist’s newsletter that included an impressive array of charts, all showing how the stock market is in a bubble. His pitch? The future doesn’t belong to passive low-cost index investors like me. Rather, I should turn my money over to him, because he’s going to be an expert stock picker as the markets crash.
As I look back over the past 10 years, I find headlines every year suggesting the market might be in a bubble—and yet there was no devastating market collapse. Here’s a sample:
In LinkedIn IPO, Hints of Another Tech Bubble? (NPR, May 26, 2011)
Nobel Prize Winner Warns of US Stock Market Bubble (CNBC, Dec. 2, 2013)
Un-Oh. Is the Stock Market in a Bubble Again? (CNN Money, June 23, 2016)
Whenever you find yourself making a decision out of fear, ask yourself if you’re being manipulated by somebody’s sales strategy. Someday, the markets will go down. But don’t let a fearmonger sell you something by playing on that concern. Instead, structure your portfolio so you’re confident you can weather a market downturn.
Promising performance. One of my favorite quotes about money is from Upton Sinclair, who said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
I saw this firsthand a few years ago. At the time, I was a regional president for a large bank. The bank gave me sales goals for referring business to the trust department. I was able to help a trust department money manager secure a pension fund overseeing tens of millions of dollars. It was a good account.
Each year, the money manager would bring a host of colorful charts to the trustees of the pension plan and explain how well he had managed their money. In truth, the plan underperformed the broad market. But he was smooth. By the end of the meeting, he had the trustees convinced he had done a great job and that they were smart fiduciaries for hiring him.
After one of these meetings, I commented to the money manager that the pension plan could eliminate his high six-figure fee and have better results by investing in low-cost index funds. He didn’t appreciate the comment. I realized one of the reasons he was such a good salesman was that he believed his own spin. As Sinclair noted, his fee depended on him not understanding the powerful argument for low-cost index-fund investing.
Paying dearly. There may be good reasons people outsource the managing of their money. Some may have no knowledge of financial markets or are too busy to manage their own investments. If you decide to let someone manage your money, make it a point to understand the fees. It can be eye-opening.
I did a little research earlier this year on the fee schedules of two trust companies. My wife and I are getting around to updating our estate plan. I wanted to see the cost, should something happen to me, of letting a trust department handle financial matters for my wife.
I’ll use $500,000 to illustrate. I already know the cost to keep our money in a diversified fund like Vanguard Total Stock Market ETF. The cost would be 0.03% of the total invested, or $150 a year on $500,000.
On the other hand, a Montana bank trust department would charge $6,000 a year, which would be in addition to money management fees. Total fees could easily run $8,500 annually for the trust department to manage $500,000.
A national brokerage firm’s trust department was similar. Its fee would run $7,500, not including the cost of the funds bought. Total fees could easily be $10,000 a year or more, depending on the fees assessed by the mutual funds and other investments purchased.
I’m just a banker, not a rocket scientist, but I can calculate the difference between $150 and $10,000 pretty easily. Would my wife get a better return from active managers than I get by keeping our money at Vanguard Group? Maybe. But if the past decade is a fair indicator, those active managers will probably lag behind a passive, low-cost approach—and they’ll do so consistently.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Experiences aren’t nearly so valuable if you don’t have someone to share them with," writes Dennis Friedman. "The wine you drink and the food you eat in retirement will taste better if you’re sharing them with friends."
Confident that U.S. stocks are in a bubble? Next comes the hard part, says Adam Grossman: figuring out what to do.
"We’re installing a new kitchen, windows and deck," writes Dick Quinn. "My wife says she wants to be sure it’s ready for the kids, so they don’t have to do any work after our death. But do they want the house?"
Health care. Cost of retirement. Buying and selling homes. Cost of raising children. Pratima Gulati details the many ways that U.S. financial life differs from her native India.
"Some years, I felt like I was pouring water into a draining tub, buying into a falling market," recalls Catherine Horiuchi. "I had no idea how to avoid such losses. So I continued on my lazy path."
Hard work never hurt anyone. Curiosity killed the cat. There’s no free lunch. These and other sayings may be helpful in the rest of your life—but they could hurt you when managing money, says Sanjib Saha.
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.
For me, the most disturbing experiences were when scammers extracted money from the naïve and innocent. I’ve seen the pain of customers who found out that their elderly mother had given her life savings to a manipulative TV preacher. Unfortunately, there isn’t a lot that can be done in such situations.
Even sadder are the lonely people who develop an online romance with someone overseas. To come to the U.S., somebody convinced one of my customers to wire funds, so he could get a passport and airline ticket. But that wasn’t enough. Just send a little more, he told her numerous times. Finally, the lightbulb came on that this might be a scam.
Have you heard of the Nigerian prince scam? I didn’t believe any sophisticated person would fall for such a crazy scheme. But a customer of mine got a fax from a “prince” trapped in Nigeria. The fax promised that if my customer, an accountant no less, would wire $20,000, it would allow the prince to wire my customer millions. Unfortunately, my customer bought it and lost not only his money, but also his reputation.
Rather than absorb the loss and move on, my customer decided to fly to Nigeria to “get his money back.” He didn’t get his money back, but at least he came back alive.
Today, many scams are high tech. It’s become common for computer hackers to demand ransom in return for unlocking vital computer systems. I’ve talked to businesses that have had to pay the ransom in bitcoin—or risk seeing their business fail.
Selling fear. One of the earliest books I read on investing was How to Prosper During the Coming Bad Years, published in 1979. It scared me that we were on the brink of destruction. I didn’t have much money, but I bought goldmining stocks in countries I couldn’t even find on a map. I later learned that fear sells books and newsletters. But it doesn’t lead to clear thinking or prosperity.
Today’s marketers still seek to get your money through fear tactics. I recently saw an economist’s newsletter that included an impressive array of charts, all showing how the stock market is in a bubble. His pitch? The future doesn’t belong to passive low-cost index investors like me. Rather, I should turn my money over to him, because he’s going to be an expert stock picker as the markets crash.
As I look back over the past 10 years, I find headlines every year suggesting the market might be in a bubble—and yet there was no devastating market collapse. Here’s a sample:
In LinkedIn IPO, Hints of Another Tech Bubble? (NPR, May 26, 2011)
Nobel Prize Winner Warns of US Stock Market Bubble (CNBC, Dec. 2, 2013)
Un-Oh. Is the Stock Market in a Bubble Again? (CNN Money, June 23, 2016)
Whenever you find yourself making a decision out of fear, ask yourself if you’re being manipulated by somebody’s sales strategy. Someday, the markets will go down. But don’t let a fearmonger sell you something by playing on that concern. Instead, structure your portfolio so you’re confident you can weather a market downturn.
Promising performance. One of my favorite quotes about money is from Upton Sinclair, who said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
I saw this firsthand a few years ago. At the time, I was a regional president for a large bank. The bank gave me sales goals for referring business to the trust department. I was able to help a trust department money manager secure a pension fund overseeing tens of millions of dollars. It was a good account.
Each year, the money manager would bring a host of colorful charts to the trustees of the pension plan and explain how well he had managed their money. In truth, the plan underperformed the broad market. But he was smooth. By the end of the meeting, he had the trustees convinced he had done a great job and that they were smart fiduciaries for hiring him.
After one of these meetings, I commented to the money manager that the pension plan could eliminate his high six-figure fee and have better results by investing in low-cost index funds. He didn’t appreciate the comment. I realized one of the reasons he was such a good salesman was that he believed his own spin. As Sinclair noted, his fee depended on him not understanding the powerful argument for low-cost index-fund investing.
Paying dearly. There may be good reasons people outsource the managing of their money. Some may have no knowledge of financial markets or are too busy to manage their own investments. If you decide to let someone manage your money, make it a point to understand the fees. It can be eye-opening.
I did a little research earlier this year on the fee schedules of two trust companies. My wife and I are getting around to updating our estate plan. I wanted to see the cost, should something happen to me, of letting a trust department handle financial matters for my wife.
I’ll use $500,000 to illustrate. I already know the cost to keep our money in a diversified fund like Vanguard Total Stock Market ETF. The cost would be 0.03% of the total invested, or $150 a year on $500,000.
On the other hand, a Montana bank trust department would charge $6,000 a year, which would be in addition to money management fees. Total fees could easily run $8,500 annually for the trust department to manage $500,000.
A national brokerage firm’s trust department was similar. Its fee would run $7,500, not including the cost of the funds bought. Total fees could easily be $10,000 a year or more, depending on the fees assessed by the mutual funds and other investments purchased.
I’m just a banker, not a rocket scientist, but I can calculate the difference between $150 and $10,000 pretty easily. Would my wife get a better return from active managers than I get by keeping our money at Vanguard Group? Maybe. But if the past decade is a fair indicator, those active managers will probably lag behind a passive, low-cost approach—and they’ll do so consistently.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Experiences aren’t nearly so valuable if you don’t have someone to share them with," writes Dennis Friedman. "The wine you drink and the food you eat in retirement will taste better if you’re sharing them with friends."
Confident that U.S. stocks are in a bubble? Next comes the hard part, says Adam Grossman: figuring out what to do.
"We’re installing a new kitchen, windows and deck," writes Dick Quinn. "My wife says she wants to be sure it’s ready for the kids, so they don’t have to do any work after our death. But do they want the house?"
Health care. Cost of retirement. Buying and selling homes. Cost of raising children. Pratima Gulati details the many ways that U.S. financial life differs from her native India.
"Some years, I felt like I was pouring water into a draining tub, buying into a falling market," recalls Catherine Horiuchi. "I had no idea how to avoid such losses. So I continued on my lazy path."
Hard work never hurt anyone. Curiosity killed the cat. There’s no free lunch. These and other sayings may be helpful in the rest of your life—but they could hurt you when managing money, says Sanjib Saha.
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 Watch Your Wallet appeared first on HumbleDollar.
March 12, 2021
Subject to Revision
DURING MY SCHOOL days growing up in India, my exposure to English literature was confined to textbooks that reprinted essays and short stories, or portions thereof. One of them was a humorous piece by Stephen Leacock from his book
Winnowed Wisdom
.
The excerpt was titled “Old Proverbs Made New” and it seemed funny even to a middle-schooler with a limited grasp of the English language. It argued, with examples, that proverbs get outdated and need to be rewritten. It recently dawned on me that Leacock’s contention also applies to personal finance. Here are eight popular sayings, along with my tweaks:
1. Hard work never hurt anyone. Yes, it does. In fact, successful investing requires so little effort that laziness is almost a virtue. Working too hard at investing can do more harm than good to our long-term performance.
For instance, we might try hard to time the market, only to find that it doesn’t really work. We might expend too much effort finding the next highflying stock, only to watch our hard-earned money slip away. We might burn midnight oil overdiversifying our investments, only to end up with an unruly, complicated mess. On the other hand, a simple portfolio, consisting of a few low-cost diversified funds, needs nothing more than occasional rebalancing. Hard work can hurt investment results.
2. Proof of the pudding is in the eating. Intuitively, this sounds right, doesn’t it? The final result should be the only way to judge something’s quality. This is true for cases where there’s little room for uncertainty. It doesn’t, however, apply to financial and investment decisions. Why not? Because luck and randomness contribute to the outcome. It’s difficult to separate luck from skill.
In her bestselling book Thinking in Bets , Annie Duke explains that the measure of a great decision isn’t whether the eventual outcome is great. Instead, it’s about the process and thinking behind the decision. A great decision increases the odds of a great outcome but doesn’t guarantee it. The proof of the pudding is in the making.
3. Slow and steady wins the race. I’ve always loved this lesson from Aesop’s fable. I try to practice it whenever I can. The slow-and-steady mantra works equally well in investments and financial success. Why, then, am I complaining?
My objection is to the part about “winning the race.” Our financial life is not a competition. There’s nothing to win and nobody else to beat. It’s about getting there and enjoying the journey along the way. Slow and steady enjoys the race.
4. Curiosity killed the cat. I couldn’t disagree more. Whether we manage our own investments, or let our friendly financial advisor do it for us, or blindly assume a family member is making prudent money decisions on our behalf, curiosity can be our best defense against nasty surprises.
How? Curiosity raises awareness, busts assumptions and reveals blind spots. Unless we’re curious, we may never know for sure if the family member is making good financial choices. We may overlook the hidden fees or risks associated with the investment and insurance products we bought. We may not question whether the advisor’s compensation model is the best one for us. Curiosity saves the cat’s wallet.
5. A penny saved is a penny earned. Lowering our living costs by a penny may indeed be the same as earning a penny more, assuming we ignore the pesky issue of income taxes. But what if we actually save that penny, so we can spend it at some point in the future? That penny saved is the same as earning the future value of that penny, not its face value. Invest it wisely and we could end up with more than a penny. A penny saved beats a penny earned.
6. A bird in the hand is worth two in the bush. Not in finance and investments. We’re often better served by letting the bird in hand go and patiently awaiting a superior reward in the future. Take Social Security. The most popular age for claiming Social Security is 62. While some need to claim early because they have no other financial choice, most people are better off waiting until age 70. In reality, alas, very few people wait. They give up higher lifetime guaranteed inflation-adjusted income to grab whatever is available now. The “bird in hand” mentality proves unwise.
Similarly, I’ve seen folks hesitate to contribute to a workplace retirement account, simply because they have to wait a long time before they can withdraw the money without penalty. They’d much rather pay taxes now and get their hands on the cash. A bird in the hand leaves many in the bush.
7. There’s no free lunch. Evidently, whoever coined this popular adage overlooked personal finance. No, I’m not talking about the dubious free meal investment seminars that regulators caution us against. I’m talking about genuinely free lunches.
Looking to reduce your investment portfolio’s risk? Try combining investments that are loosely or negatively correlated with one another. The overall risk of a diversified portfolio will be less than the weighted average risk of its individual constituents. The reduced volatility is your free lunch.
Can’t afford to make 401(k) contributions? At least put in enough to get the employer’s match. Even if you withdraw after vesting and pay a 10% penalty, you’ll still retain the remainder of your employer’s contribution—another free lunch. Trying to build a small emergency fund from a meager paycheck? If you’re eligible, stash dollars in a Roth IRA. You can take back the money at any time, while leaving open the option of tax-free growth. In investing, there is such a thing as a free lunch.
8. A little knowledge is a dangerous thing. Expertise and specialized training may be necessary in many situations, but not always. With a little knowledge and initiative, we can do many things ourselves.
Not convinced? Consider our physical health. Elementary knowledge—eating balanced meals, avoiding junk food, staying physically active and so on—goes a long way toward a healthy lifestyle. We don’t need to be doctors or nutritionists to lead a healthy life.
The ingredients of emotional well-being are also simple: Show gratitude and care, count blessings, nurture friendships and so on. A degree in psychology is missing from this list. Likewise, we don’t need a PhD in finance to be successful with money. Things like living within our means, keeping costs low and investing for the long term are the necessary and sufficient ingredients. A little knowledge can be a powerful 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 excerpt was titled “Old Proverbs Made New” and it seemed funny even to a middle-schooler with a limited grasp of the English language. It argued, with examples, that proverbs get outdated and need to be rewritten. It recently dawned on me that Leacock’s contention also applies to personal finance. Here are eight popular sayings, along with my tweaks:
1. Hard work never hurt anyone. Yes, it does. In fact, successful investing requires so little effort that laziness is almost a virtue. Working too hard at investing can do more harm than good to our long-term performance.
For instance, we might try hard to time the market, only to find that it doesn’t really work. We might expend too much effort finding the next highflying stock, only to watch our hard-earned money slip away. We might burn midnight oil overdiversifying our investments, only to end up with an unruly, complicated mess. On the other hand, a simple portfolio, consisting of a few low-cost diversified funds, needs nothing more than occasional rebalancing. Hard work can hurt investment results.
2. Proof of the pudding is in the eating. Intuitively, this sounds right, doesn’t it? The final result should be the only way to judge something’s quality. This is true for cases where there’s little room for uncertainty. It doesn’t, however, apply to financial and investment decisions. Why not? Because luck and randomness contribute to the outcome. It’s difficult to separate luck from skill.
In her bestselling book Thinking in Bets , Annie Duke explains that the measure of a great decision isn’t whether the eventual outcome is great. Instead, it’s about the process and thinking behind the decision. A great decision increases the odds of a great outcome but doesn’t guarantee it. The proof of the pudding is in the making.
3. Slow and steady wins the race. I’ve always loved this lesson from Aesop’s fable. I try to practice it whenever I can. The slow-and-steady mantra works equally well in investments and financial success. Why, then, am I complaining?
My objection is to the part about “winning the race.” Our financial life is not a competition. There’s nothing to win and nobody else to beat. It’s about getting there and enjoying the journey along the way. Slow and steady enjoys the race.
4. Curiosity killed the cat. I couldn’t disagree more. Whether we manage our own investments, or let our friendly financial advisor do it for us, or blindly assume a family member is making prudent money decisions on our behalf, curiosity can be our best defense against nasty surprises.
How? Curiosity raises awareness, busts assumptions and reveals blind spots. Unless we’re curious, we may never know for sure if the family member is making good financial choices. We may overlook the hidden fees or risks associated with the investment and insurance products we bought. We may not question whether the advisor’s compensation model is the best one for us. Curiosity saves the cat’s wallet.
5. A penny saved is a penny earned. Lowering our living costs by a penny may indeed be the same as earning a penny more, assuming we ignore the pesky issue of income taxes. But what if we actually save that penny, so we can spend it at some point in the future? That penny saved is the same as earning the future value of that penny, not its face value. Invest it wisely and we could end up with more than a penny. A penny saved beats a penny earned.
6. A bird in the hand is worth two in the bush. Not in finance and investments. We’re often better served by letting the bird in hand go and patiently awaiting a superior reward in the future. Take Social Security. The most popular age for claiming Social Security is 62. While some need to claim early because they have no other financial choice, most people are better off waiting until age 70. In reality, alas, very few people wait. They give up higher lifetime guaranteed inflation-adjusted income to grab whatever is available now. The “bird in hand” mentality proves unwise.
Similarly, I’ve seen folks hesitate to contribute to a workplace retirement account, simply because they have to wait a long time before they can withdraw the money without penalty. They’d much rather pay taxes now and get their hands on the cash. A bird in the hand leaves many in the bush.
7. There’s no free lunch. Evidently, whoever coined this popular adage overlooked personal finance. No, I’m not talking about the dubious free meal investment seminars that regulators caution us against. I’m talking about genuinely free lunches.
Looking to reduce your investment portfolio’s risk? Try combining investments that are loosely or negatively correlated with one another. The overall risk of a diversified portfolio will be less than the weighted average risk of its individual constituents. The reduced volatility is your free lunch.
Can’t afford to make 401(k) contributions? At least put in enough to get the employer’s match. Even if you withdraw after vesting and pay a 10% penalty, you’ll still retain the remainder of your employer’s contribution—another free lunch. Trying to build a small emergency fund from a meager paycheck? If you’re eligible, stash dollars in a Roth IRA. You can take back the money at any time, while leaving open the option of tax-free growth. In investing, there is such a thing as a free lunch.
8. A little knowledge is a dangerous thing. Expertise and specialized training may be necessary in many situations, but not always. With a little knowledge and initiative, we can do many things ourselves.
Not convinced? Consider our physical health. Elementary knowledge—eating balanced meals, avoiding junk food, staying physically active and so on—goes a long way toward a healthy lifestyle. We don’t need to be doctors or nutritionists to lead a healthy life.
The ingredients of emotional well-being are also simple: Show gratitude and care, count blessings, nurture friendships and so on. A degree in psychology is missing from this list. Likewise, we don’t need a PhD in finance to be successful with money. Things like living within our means, keeping costs low and investing for the long term are the necessary and sufficient ingredients. A little knowledge can be a powerful 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 Subject to Revision appeared first on HumbleDollar.
March 11, 2021
My Lazy Investing
MY FIRST JOB AFTER college was at a global engineering firm. A roommate also worked there. It was a tedious office job, but my bosses thought I had potential and encouraged me to study engineering, which I didn’t.
Instead, I quit and went to graduate school to study linguistics, a field where I observed the most professors having the most fun. My last paycheck at the engineering firm included an extra sum. It was a refund for a retirement account that had failed to vest because I hadn’t stayed long enough. This shocked me, since I hadn’t the foggiest sense that someday I would be old and need retirement funds. I didn’t know there was such a thing as a defined benefit plan. I spent the windfall, probably on rent and books, with nary a second thought.
At my second job, I paid attention when bosses talked about the company’s 401(k) plan and insurance coverage. I worked there five years and, when I left, that money stayed in place. A lazy investor, I let it ride until I later rolled it over into my retirement account at my next employer.
Throughout the remainder of my working life, I never cashed out that money. In fact, thereafter, I let all saved dollars ride, remembering that first little retirement check that got away.
Some friends worked on picking better investments in an effort to boost their performance, but that sounded like extra effort with limited return for time invested. I just saved a little more, assuming my results were a little weaker. I’d ask others only general questions and tried to stay away from the worst investment mistakes, even when banner headlines managed to pierce my general disinterest in personal finance.
During the dot-com boom, I met a couple of guys at a conference mixer, who were discussing their hot investments, including the grocery service Webvan. I asked why they owned the stock, given Webvan’s apparently flawed business model. “What do I care?” said one. “I’m selling that stock tomorrow.” That day, I gave up owning anything other than mutual funds. I figured it would take a lot of time to be knowledgeable enough about individual stocks, and I was too busy with family and career.
Instead, I followed a “random walker” dollar-cost-averaging investment model, saving what I could of each paycheck and periodically noting whether my retirement accounts were growing. I didn’t switch in and out of funds based on returns, and I didn’t accelerate my contributions when markets were weak, strategies that might have boosted earnings, if I were correct and lucky, or might have cost a lot.
Some years, I felt like I was pouring water into a draining tub, buying into a falling market. But I was no expert. I never spent enough time studying finance, so I had no idea how to avoid such bear market losses, if that’s even possible. I couldn’t outsmart expert investors and industry insiders. So I continued on my lazy path.
As I grew older, the cost of retirement became clearer. Once I hit age 50, I took advantage of catch-up contributions. This was a choice made out of fear, not savvy, and also a lazy way to “spend” my salary increases, since my living expenses were pretty steady at that point.
Whenever a market correction occurred, I would open my retirement plan statements with trepidation. Even with ongoing contributions, my total balance sometimes declined. I’d look happily at the portion of my portfolio in bond funds that retained the value of recent contributions. In other years, and over time, I noticed how little my bond funds grew. The bulk of my money, held in diversified stock index funds, had done much better. This encouraged me to keep contributing to a balanced portfolio that had slightly more in stocks than my risk-averse nature might prefer.
I have time now to reflect on the outcome of four decades of work and investing. I’m no market expert and there was nothing remarkable about the funds I selected. But over time, I built a secure foundation for retirement. Looking back, three things strike me:
Investment returns appear small year to year. Stepping back and looking at longer-term results encourages you to let your money ride.
Bond fund returns look great during a down market. But that’s a partial story. If you look at returns for the whole of your investments over several years, you might be inspired to contribute a bit more to a total stock market index fund. This perspective may be especially valuable for working women, who in the aggregate earn less, have less to put aside and tend to be more risk averse.
As you go through life, retain or roll over retirement accounts, rather than spend them along the way. Multiple small retirement accounts will eventually build into something significant, just as rivulets flow together into mighty rivers.
Catherine Horiuchi recently retired from the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.
Instead, I quit and went to graduate school to study linguistics, a field where I observed the most professors having the most fun. My last paycheck at the engineering firm included an extra sum. It was a refund for a retirement account that had failed to vest because I hadn’t stayed long enough. This shocked me, since I hadn’t the foggiest sense that someday I would be old and need retirement funds. I didn’t know there was such a thing as a defined benefit plan. I spent the windfall, probably on rent and books, with nary a second thought.
At my second job, I paid attention when bosses talked about the company’s 401(k) plan and insurance coverage. I worked there five years and, when I left, that money stayed in place. A lazy investor, I let it ride until I later rolled it over into my retirement account at my next employer.
Throughout the remainder of my working life, I never cashed out that money. In fact, thereafter, I let all saved dollars ride, remembering that first little retirement check that got away.
Some friends worked on picking better investments in an effort to boost their performance, but that sounded like extra effort with limited return for time invested. I just saved a little more, assuming my results were a little weaker. I’d ask others only general questions and tried to stay away from the worst investment mistakes, even when banner headlines managed to pierce my general disinterest in personal finance.
During the dot-com boom, I met a couple of guys at a conference mixer, who were discussing their hot investments, including the grocery service Webvan. I asked why they owned the stock, given Webvan’s apparently flawed business model. “What do I care?” said one. “I’m selling that stock tomorrow.” That day, I gave up owning anything other than mutual funds. I figured it would take a lot of time to be knowledgeable enough about individual stocks, and I was too busy with family and career.
Instead, I followed a “random walker” dollar-cost-averaging investment model, saving what I could of each paycheck and periodically noting whether my retirement accounts were growing. I didn’t switch in and out of funds based on returns, and I didn’t accelerate my contributions when markets were weak, strategies that might have boosted earnings, if I were correct and lucky, or might have cost a lot.
Some years, I felt like I was pouring water into a draining tub, buying into a falling market. But I was no expert. I never spent enough time studying finance, so I had no idea how to avoid such bear market losses, if that’s even possible. I couldn’t outsmart expert investors and industry insiders. So I continued on my lazy path.
As I grew older, the cost of retirement became clearer. Once I hit age 50, I took advantage of catch-up contributions. This was a choice made out of fear, not savvy, and also a lazy way to “spend” my salary increases, since my living expenses were pretty steady at that point.
Whenever a market correction occurred, I would open my retirement plan statements with trepidation. Even with ongoing contributions, my total balance sometimes declined. I’d look happily at the portion of my portfolio in bond funds that retained the value of recent contributions. In other years, and over time, I noticed how little my bond funds grew. The bulk of my money, held in diversified stock index funds, had done much better. This encouraged me to keep contributing to a balanced portfolio that had slightly more in stocks than my risk-averse nature might prefer.
I have time now to reflect on the outcome of four decades of work and investing. I’m no market expert and there was nothing remarkable about the funds I selected. But over time, I built a secure foundation for retirement. Looking back, three things strike me:
Investment returns appear small year to year. Stepping back and looking at longer-term results encourages you to let your money ride.
Bond fund returns look great during a down market. But that’s a partial story. If you look at returns for the whole of your investments over several years, you might be inspired to contribute a bit more to a total stock market index fund. This perspective may be especially valuable for working women, who in the aggregate earn less, have less to put aside and tend to be more risk averse.
As you go through life, retain or roll over retirement accounts, rather than spend them along the way. Multiple small retirement accounts will eventually build into something significant, just as rivulets flow together into mighty rivers.
Catherine Horiuchi recently retired from the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.The post My Lazy Investing appeared first on HumbleDollar.
March 10, 2021
A World Apart
WHEN WE MOVED to California from India in spring 2014, it was a culture shock—and not just because of the much higher standard of living. Financial life in the U.S. is very different. Here are just some of the surprises that my husband and I have encountered over the past seven years:
Health care. I remember walking into my first U.S. doctor's appointment. I froze—unaware that I had to pay a $50 copay for each visit, despite having insurance. It was my first reality check: So this is how health care works in the U.S. It seemed that the insurance company was at the center of the experience. Another reality check: To get the benefit of our insurance plan, I needed to choose a doctor from the insurance company's list of providers—or I'd have to pay through the nose.
By contrast, where we lived in India, health care was readily available at affordable prices. Patients can choose which doctor to see. They pay cash for a visit, which would be far less than $50, even without insurance. In the U.S., if a specialist appointment is needed, it can take a few weeks or months. In India, it's all possible in less than a week. Admittedly, health care in the U.S. is far superior. But the whole system seems intended to make life easier for insurance companies, not patients.
Retirement. Yes, we have Social Security here in the U.S., but it's designed to be a safety net, keeping seniors out of poverty. If you want a more comfortable retirement, serious planning is involved—saving large sums each month, picking the right retirement accounts, selecting suitable investments. In India, if you want a comfortable retirement, you pretty much have to do the same things, except the amount you need to save is far smaller, thanks to the lower cost of living.
The support system for seniors is incredibly expensive here, whether at home or in a nursing home. Consider this comparison: My grandmother in Delhi had an in-home nurse for $300 a month. The upshot: If we retire here in the U.S., especially in a high-cost area like Silicon Valley, we will—based on a 4% withdrawal rate—need millions saved just to cover basic expenses.
Real estate. When we bought our condo in 2017, home prices were steep, but there was a pleasant surprise: very low interest rates. We locked in a 30-year mortgage at 3%. When we lived in India, such low rates were unheard of. Mortgages run between 6% and 10%, a reflection of the higher inflation generated by a fast-growing developing economy.
The real estate market here is also easier to research, thanks to websites like Redfin and Zillow, which offer a host of housing data. Back home, you need a dedicated agent to do all the legwork for you. The quality of schools also impacts the price of real estate here in the U.S. This isn't a factor in India. Public schools aren’t great, so far more families send their children to private schools. That means local public schools aren’t a consideration when house hunting. Instead, the only thing that seems to drive home prices is the vibrancy of the local economy.
We haven't sold a home here in the U.S., but we're already bracing ourselves for the commission, which is typically 5% to 6% of the final sales price, far above the 0.5% to 2% commission paid in India.
Children. Before having our first child in 2018, we didn't give much thought to the financial implications, beyond wanting to contribute a large sum to a 529 plan every year. Education is highly valued in India. Our goal is to fully fund four years of college for our daughter.
Like other new parents, we've faced the usual array of direct costs, like childcare, clothing and health care. But as our daughter approaches her third birthday, it's the indirect costs we're worried about more. We need to start thinking about school districts, plus our condo now feels small. Here in Silicon Valley, if we want a moderately sized single-family home in a good school district, we'll need to save a few hundred thousand dollars—just so we can make a 20% down payment.
Pratima Gulati is a human resource professional in Silicon Valley. She has an MBA and a keen interest in personal finance. Pratima's previous article was Land of Opportunity.
Health care. I remember walking into my first U.S. doctor's appointment. I froze—unaware that I had to pay a $50 copay for each visit, despite having insurance. It was my first reality check: So this is how health care works in the U.S. It seemed that the insurance company was at the center of the experience. Another reality check: To get the benefit of our insurance plan, I needed to choose a doctor from the insurance company's list of providers—or I'd have to pay through the nose.
By contrast, where we lived in India, health care was readily available at affordable prices. Patients can choose which doctor to see. They pay cash for a visit, which would be far less than $50, even without insurance. In the U.S., if a specialist appointment is needed, it can take a few weeks or months. In India, it's all possible in less than a week. Admittedly, health care in the U.S. is far superior. But the whole system seems intended to make life easier for insurance companies, not patients.
Retirement. Yes, we have Social Security here in the U.S., but it's designed to be a safety net, keeping seniors out of poverty. If you want a more comfortable retirement, serious planning is involved—saving large sums each month, picking the right retirement accounts, selecting suitable investments. In India, if you want a comfortable retirement, you pretty much have to do the same things, except the amount you need to save is far smaller, thanks to the lower cost of living.
The support system for seniors is incredibly expensive here, whether at home or in a nursing home. Consider this comparison: My grandmother in Delhi had an in-home nurse for $300 a month. The upshot: If we retire here in the U.S., especially in a high-cost area like Silicon Valley, we will—based on a 4% withdrawal rate—need millions saved just to cover basic expenses.
Real estate. When we bought our condo in 2017, home prices were steep, but there was a pleasant surprise: very low interest rates. We locked in a 30-year mortgage at 3%. When we lived in India, such low rates were unheard of. Mortgages run between 6% and 10%, a reflection of the higher inflation generated by a fast-growing developing economy.
The real estate market here is also easier to research, thanks to websites like Redfin and Zillow, which offer a host of housing data. Back home, you need a dedicated agent to do all the legwork for you. The quality of schools also impacts the price of real estate here in the U.S. This isn't a factor in India. Public schools aren’t great, so far more families send their children to private schools. That means local public schools aren’t a consideration when house hunting. Instead, the only thing that seems to drive home prices is the vibrancy of the local economy.
We haven't sold a home here in the U.S., but we're already bracing ourselves for the commission, which is typically 5% to 6% of the final sales price, far above the 0.5% to 2% commission paid in India.
Children. Before having our first child in 2018, we didn't give much thought to the financial implications, beyond wanting to contribute a large sum to a 529 plan every year. Education is highly valued in India. Our goal is to fully fund four years of college for our daughter.
Like other new parents, we've faced the usual array of direct costs, like childcare, clothing and health care. But as our daughter approaches her third birthday, it's the indirect costs we're worried about more. We need to start thinking about school districts, plus our condo now feels small. Here in Silicon Valley, if we want a moderately sized single-family home in a good school district, we'll need to save a few hundred thousand dollars—just so we can make a 20% down payment.
Pratima Gulati is a human resource professional in Silicon Valley. She has an MBA and a keen interest in personal finance. Pratima's previous article was Land of Opportunity.The post A World Apart appeared first on HumbleDollar.
March 9, 2021
About the House
MY FATHER WAS A CAR salesman who, for many years, worked totally on commission, with no paid vacation. In 1953, when I was 10 years old, we went to Cape Cod for a week. A friend gave him a tip on a great place to stay. In his enthusiasm, my father booked for a week and paid in advance.
The place turned out to be worse than a Second World War army barracks. My mother refused to stay. To get his money back, we all agreed that I would have a sudden asthma attack, necessitating our immediate departure. That worked, my parents got their money back and we then stayed in several places on the Cape, ending up in Chatham. Even at age 10, I was hooked.
Fast forward to 1976. I’m married with four children, ages one to six. In a moment of enthusiasm, I said, “Let’s go to Cape Cod.” Amazingly, most of the places I remembered from 1953 were still there. From that summer on, we spent vacations on the Cape in a motel or a rented house. On every trip, I expressed my goal to buy a vacation home in Chatham, as unrealistic as that was. I even subscribed to a local newspaper. Every week, I longingly checked the homes for sale. After several years, my family didn’t want to hear about my daydreaming anymore, but I kept looking.
In February 1987, I found a house that was old, but appeared financially feasible for us. I was warned that if I didn’t buy a place this time, the family was never going house-hunting again. By mistake, we went to the wrong real estate office and they showed us a new house that was in our price range.
After some wrangling, we got a 30-year mortgage at 9¾% to buy the place. I was delighted, as was my family, partly because they wouldn’t have to listen to me each time the Cape Cod Times arrived.
When I say wrangling, I mean it. At the last minute, the bank decided it wanted us to make a larger down payment. I didn’t have more to give and was resigned to losing my dream house. Not my wife. She phoned the bank, and threatened to call every real estate office on Cape Cod and tell them how the bank did business. She was determined to avoid more of my vocal daydreaming. The upshot: There was no additional down payment. My lasting regret was that my father died the next year and never saw the house.
An observer looking at this financial move would be aghast. It was the year before the oldest of our four children headed to college—and the start of a 10-year spell when one, two or three of them would be in college.
To afford the house, we rented it most of the summer. The rent and the tax breaks made it all possible in those early years. By 1997, we could afford to stop renting. All the rental income was necessary, but the way several renters treated my dream was disturbing. We had a rule of no pets, because of family allergies, and yet one renter was observed taking his dog out of the car trunk at the house after hiding it from the rental agent.
As interest rates dropped, we sought to refinance the mortgage. But since we bought at the peak of the market, we had no equity. We were refused several times. Once again, my wife stepped in and called the bank, reminding them of the past wrangling at the time of purchase and saying that, if it didn’t let us refinance, sooner or later we’d go elsewhere. Her contact said to give him a week and he would see what he could do. A week later, we received a letter saying our mortgage rate had been dropped to 7½%, no paperwork, no fuss. I think they had a special file on her.
Fourteen years ago, we made additions, nearly doubling the size of the house, so it now sleeps 12 comfortably. We’re in process of installing a new kitchen, new windows and a new deck, as well as painting the place.
Why, after all these years, and with my wife now age 81 and me 77, would we do all this? My wife says she wants to be sure it’s ready for the kids and grandchildren, so they don’t have to do any work after our death. But do they want the house? Do all of them want it?
A couple of years ago, our estate planning lawyer asked a similar question. The last thing I want is fighting among our children over the house. The lawyer asked whether, in addition to wanting the house, could our children afford to keep it. She also asked what it cost each year to maintain the house, cover the property taxes and so on. I threw out a number, which she doubted was accurate. Turns out my estimate was half of the true cost. Who knew?
We’ve attempted to solve the problem with a special provision in our living trust, which now owns the house, with our kids named as beneficiaries. The value of the house will be determined after my wife and I die. Currently, it’s about $500,000. If one or more of our kids don’t want to keep the place, they’ll receive one quarter of the value. The remaining children will have their cash share of the estate reduced proportionally.
Because I anticipate all four won’t be able to afford the annual expenses associated with the house, we also set aside $100,000—which will be adjusted annually for inflation between now and our death—to be used for property taxes and ongoing expenses. That $100,000 should last at least 10 years. All four kids will also receive additional money from the estate, but I’m pretty sure they’ll need that for their own retirement.
Now, if only I could make sure that—after my wife and I die—there’s no squabbling over who gets to use the house when. What can I say? Good luck with that.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, he was a compensation and benefits executive. Follow Dick on Twitter @QuinnsComments and check out his earlier articles.
The post About the House appeared first on HumbleDollar.
March 8, 2021
Best If Shared
I KEPT THE LANDLINE number that my mother had when she was alive. I thought there might be friends I wasn’t aware of who would try to phone her. Indeed, I received calls from people like Helen who lives in Arizona, Cheryl in Colorado and Jan from Michigan. Eventually, however, the phone went silent, except for those annoying sales calls.
But I still kept the phone number. I just couldn’t give it up. It was costing me an extra $50 a month, but I didn’t care. I would happily pay $500 to talk to anyone from my mother’s past, especially those who kept her company in her later years. They were an integral part of my mother’s retirement.
Maybe I’m too sentimental, but on my cell phone I still have three voicemails from my mother. I can’t bring myself to delete them—and yet I can’t listen to them, either. It would be too painful to hear her voice. Maybe one day, but not today. Since I was her primary caregiver, she was a big part of my life. I’m lucky to have been able to share the early years of my own retirement with her.
I got a phone call one day from the wife of one of my best friends. Leo, whom I’d known for 35 years, had passed away. He had been battling a chronic illness. As retirees, we used to have lunch every week, and sometimes we went fishing and hiking in Big Sur and Big Bear. I’ll miss our getaways and conversations that usually started with, “Do you remember when we….”
Just recently, Greg—my auto mechanic—called and informed me he was closing his business. He was emotional and said, “I wanted you to hear it from me since we’ve been friends for such a long time.” We would sometimes talk for hours while he worked on my car. We had many things in common. We both married later in life and recently that became our main topic of conversation. I’ll miss hanging out at his shop, but we’ll still remain good friends.
Why am I telling you this stuff? What does this have to do with retirement and money?
When I read articles about retirement, plenty of them focus on money. How much should you save? What mutual funds or exchange-traded funds should you invest in? Should you use the 4% rule when drawing down an investment portfolio? There are also a lot of articles about the best places to retire.
I think most of these articles miss what retirement is all about. It’s about more than money and where you live. Instead, it’s about the people in your life. You can’t put a price tag on them, but these folks can be just as valuable as your investment portfolio.
They say two of the most precious commodities that money can buy is financial independence and time—a chance to live in the moment, to do the things you want to do when you want to do them. Isn’t that the essence of retirement? Isn’t that the true reason we save for retirement?
Problem is, those experiences aren’t nearly so valuable if you don’t have someone to share them with. I can tell you for certain that the wine you drink and the food you eat in retirement will taste better if you’re sharing them with friends.
You might feel there’s less need for friends because you have a large family. But having a supportive network of friends in old age has greater benefits. You tend to do things you enjoy with your friends, while many of the things you do with family are out of a sense of obligation.
While you’re planning your retirement, it would be wise to contemplate who you’re going to spend it with. That’s especially true if you don’t know what you’re going to do in retirement, because your friends and family can help you find your way.
I’m lucky to have a wonderful wife and a core group of friends who I would do anything for and who I believe would do the same for me. If you have enough good people in your life, you have the makings of a great 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.
But I still kept the phone number. I just couldn’t give it up. It was costing me an extra $50 a month, but I didn’t care. I would happily pay $500 to talk to anyone from my mother’s past, especially those who kept her company in her later years. They were an integral part of my mother’s retirement.
Maybe I’m too sentimental, but on my cell phone I still have three voicemails from my mother. I can’t bring myself to delete them—and yet I can’t listen to them, either. It would be too painful to hear her voice. Maybe one day, but not today. Since I was her primary caregiver, she was a big part of my life. I’m lucky to have been able to share the early years of my own retirement with her.
I got a phone call one day from the wife of one of my best friends. Leo, whom I’d known for 35 years, had passed away. He had been battling a chronic illness. As retirees, we used to have lunch every week, and sometimes we went fishing and hiking in Big Sur and Big Bear. I’ll miss our getaways and conversations that usually started with, “Do you remember when we….”
Just recently, Greg—my auto mechanic—called and informed me he was closing his business. He was emotional and said, “I wanted you to hear it from me since we’ve been friends for such a long time.” We would sometimes talk for hours while he worked on my car. We had many things in common. We both married later in life and recently that became our main topic of conversation. I’ll miss hanging out at his shop, but we’ll still remain good friends.
Why am I telling you this stuff? What does this have to do with retirement and money?
When I read articles about retirement, plenty of them focus on money. How much should you save? What mutual funds or exchange-traded funds should you invest in? Should you use the 4% rule when drawing down an investment portfolio? There are also a lot of articles about the best places to retire.
I think most of these articles miss what retirement is all about. It’s about more than money and where you live. Instead, it’s about the people in your life. You can’t put a price tag on them, but these folks can be just as valuable as your investment portfolio.
They say two of the most precious commodities that money can buy is financial independence and time—a chance to live in the moment, to do the things you want to do when you want to do them. Isn’t that the essence of retirement? Isn’t that the true reason we save for retirement?
Problem is, those experiences aren’t nearly so valuable if you don’t have someone to share them with. I can tell you for certain that the wine you drink and the food you eat in retirement will taste better if you’re sharing them with friends.
You might feel there’s less need for friends because you have a large family. But having a supportive network of friends in old age has greater benefits. You tend to do things you enjoy with your friends, while many of the things you do with family are out of a sense of obligation.
While you’re planning your retirement, it would be wise to contemplate who you’re going to spend it with. That’s especially true if you don’t know what you’re going to do in retirement, because your friends and family can help you find your way.
I’m lucky to have a wonderful wife and a core group of friends who I would do anything for and who I believe would do the same for me. If you have enough good people in your life, you have the makings of a great 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 Best If Shared appeared first on HumbleDollar.
March 7, 2021
Coping With Crazy
FOR MORE THAN a year, veteran investment manager Jeremy Grantham has been arguing that the U.S. stock market is in a bubble. And not just an ordinary bubble, but “an epic bubble... one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
And yet, despite Grantham’s concerns, the market has only continued to march higher. In a recent interview, Grantham reiterated his concerns in even stronger terms. He cited these worrying signs:
Valuations are at extreme levels. Among the valuation indicators that Grantham tracks, eight out of 10 point to a market that is even more overvalued than it was at the peak of the tech bubble in 2000.
Not only are share prices increasing, but also they’re increasing at an accelerating pace. Prices are rising at two to three times their normal rates, says Grantham.
“Crazy behavior” is widespread. As an example, Grantham points to the boom in special purpose acquisition companies, or SPACs. These investments, Grantham says, are simply a “license to rip investors off.”
By his own admission, Grantham is a contrarian—so contrarian that Harvard Business School once featured his firm in a case study. And yet his three-part indictment has a lot of validity. I’m not quite as worried as Grantham, but as I commented last week, aspects of today's market do remind me of The Emperor's New Clothes.
But here's the problem with bubbles: Unfortunately, there just isn't a whole lot that can be done about them. In terms of futility, it's maybe not as bad as complaining about the weather, but it's close. Consider the challenges:
Even if you had an ironclad guarantee that Grantham is right—that the U.S. market will face a reckoning—it's impossible to know when that day will come. The frothiest part of the market has weakened in recent weeks, with Snowflake, Tesla, Teladoc, Zoom and Peloton all down more than 30%. Maybe this is the sign that the music has stopped. It might be—or it might just be a temporary setback. That's the tough thing about the market: Sentiment can turn quickly.
Just as it did in the mid-1990s, the market could continue to go higher before it goes lower. As a result, the future low might be no lower than where the market stands today.
Assuming the market does drop at some point, you won’t know in advance how steep the drop will be.
The shape and duration of every downturn are different. When the market does drop, it will be impossible to know—again, in advance—how long it will stay down.
Just as we saw last year, external forces, including government action, can intervene in the market at any time. When the Federal Reserve stepped in with its bazooka on March 23 last year, everything changed overnight. These kinds of things happen all the time. Sometimes they're positive, sometimes negative, but always unpredictable.
Given these challenges, what action can or should you take? Here’s the prescription I recommend:
If you’ve been experimenting with some of the market’s highflyers, including bitcoin, consider yourself fortunate, take your gains and move to higher ground. What if the gains are short term and would trigger a big tax? I can’t predict where any stock will end up, but I encourage investors not to lose sight of this reality: A short-term gain is always preferable to any loss.
If you're in your working years and have a long runway before retirement, you shouldn't fret at all. In fact, you should hope and pray that Grantham is right. A market downturn will enable you to add to your investments at lower prices. Counterintuitive as it sounds, young people should welcome a downturn.
If you’re losing sleep about the market, that’s usually a sign you should revisit your portfolio’s asset allocation. Ideally, your allocation should be structured so you’re insulated at all times from a potential multi-year market downturn. The operating framework I recommend is to assume that the market could drop 50% at any time, and that it might take five or seven years after that to recover.
Be sure to rebalance your portfolio diligently, if not religiously. This, of course, includes rebalancing between stocks and bonds. But don’t forget to rebalance within asset classes. Jeremy Grantham’s view is that you should move substantially all of your stocks out of the U.S. and into emerging markets. That’s too extreme for me, but the general premise is useful: If an asset class has run up in value, you should happily take some of those gains and move them into an asset class that’s been lagging.
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.
And yet, despite Grantham’s concerns, the market has only continued to march higher. In a recent interview, Grantham reiterated his concerns in even stronger terms. He cited these worrying signs:
Valuations are at extreme levels. Among the valuation indicators that Grantham tracks, eight out of 10 point to a market that is even more overvalued than it was at the peak of the tech bubble in 2000.
Not only are share prices increasing, but also they’re increasing at an accelerating pace. Prices are rising at two to three times their normal rates, says Grantham.
“Crazy behavior” is widespread. As an example, Grantham points to the boom in special purpose acquisition companies, or SPACs. These investments, Grantham says, are simply a “license to rip investors off.”
By his own admission, Grantham is a contrarian—so contrarian that Harvard Business School once featured his firm in a case study. And yet his three-part indictment has a lot of validity. I’m not quite as worried as Grantham, but as I commented last week, aspects of today's market do remind me of The Emperor's New Clothes.
But here's the problem with bubbles: Unfortunately, there just isn't a whole lot that can be done about them. In terms of futility, it's maybe not as bad as complaining about the weather, but it's close. Consider the challenges:
Even if you had an ironclad guarantee that Grantham is right—that the U.S. market will face a reckoning—it's impossible to know when that day will come. The frothiest part of the market has weakened in recent weeks, with Snowflake, Tesla, Teladoc, Zoom and Peloton all down more than 30%. Maybe this is the sign that the music has stopped. It might be—or it might just be a temporary setback. That's the tough thing about the market: Sentiment can turn quickly.
Just as it did in the mid-1990s, the market could continue to go higher before it goes lower. As a result, the future low might be no lower than where the market stands today.
Assuming the market does drop at some point, you won’t know in advance how steep the drop will be.
The shape and duration of every downturn are different. When the market does drop, it will be impossible to know—again, in advance—how long it will stay down.
Just as we saw last year, external forces, including government action, can intervene in the market at any time. When the Federal Reserve stepped in with its bazooka on March 23 last year, everything changed overnight. These kinds of things happen all the time. Sometimes they're positive, sometimes negative, but always unpredictable.
Given these challenges, what action can or should you take? Here’s the prescription I recommend:
If you’ve been experimenting with some of the market’s highflyers, including bitcoin, consider yourself fortunate, take your gains and move to higher ground. What if the gains are short term and would trigger a big tax? I can’t predict where any stock will end up, but I encourage investors not to lose sight of this reality: A short-term gain is always preferable to any loss.
If you're in your working years and have a long runway before retirement, you shouldn't fret at all. In fact, you should hope and pray that Grantham is right. A market downturn will enable you to add to your investments at lower prices. Counterintuitive as it sounds, young people should welcome a downturn.
If you’re losing sleep about the market, that’s usually a sign you should revisit your portfolio’s asset allocation. Ideally, your allocation should be structured so you’re insulated at all times from a potential multi-year market downturn. The operating framework I recommend is to assume that the market could drop 50% at any time, and that it might take five or seven years after that to recover.
Be sure to rebalance your portfolio diligently, if not religiously. This, of course, includes rebalancing between stocks and bonds. But don’t forget to rebalance within asset classes. Jeremy Grantham’s view is that you should move substantially all of your stocks out of the U.S. and into emerging markets. That’s too extreme for me, but the general premise is useful: If an asset class has run up in value, you should happily take some of those gains and move them into an asset class that’s been lagging.
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 Coping With Crazy appeared first on HumbleDollar.
March 6, 2021
Nine Roads to Ruin
THERE ARE MANY WAYS to fritter away our wealth. Pay high investment costs. Day trade stocks. Buy timeshares. Marry a spender. Purchase variable annuities. Retire too early. Buy leveraged exchange-traded funds. Mimic the spending of our wealthy friends. The list goes on and on.
But anybody can ruin themselves slowly—and plenty of people do. What’s really attention grabbing is when it happens quickly. Want to blow up your financial life? Here are nine ways to ruin yourself in a hurry:
1. Sell stocks short. If you buy an individual stock or bond, the most you can lose is your original investment. That would be unpleasant, but not nearly as unpleasant as seeing your entire portfolio implode.
That brings us to short-selling. We were reminded earlier this year of its dangers, compliments of GameStop and the hedge funds that bet on its share price decline. Those hedge funds had borrowed GameStop stock and then sold it, hoping to buy back the shares at much lower prices. Instead, GameStop’s shares soared and the hedge funds—facing potentially unlimited losses—were forced to buy back the stock at far higher prices.
Because of those potentially unlimited losses, short-selling is one of the most dangerous games on Wall Street. Lots of folks like to “play” the market with a sliver of their portfolio. If you do that, for goodness’ sake, don’t sell stocks short, because an apparently small bet could cost you far more than you ever imagined.
2. Invest heavily in your employer’s stock. If you think your employer’s shares are a solid investment, ponder the poor folks who work at PG&E. What could be safer than a utility, the quintessential widows-and-orphans stock? Its shares have shed 80% of their value over the past five years.
What if you work for a highflying technology company? Surely you’d want to invest heavily in its shares? A decade ago, I was in Los Gatos, California, at a business dinner. Sitting next to me was a former employee of JDS Uniphase, which had been one of the hottest stocks of the 1990s, only to lose almost all its value when the tech bubble burst. My dinner companion recounted how employees were given a special number to call if they wanted to cash out their stock options, which—for him—were at one point worth more than $1 million. “All I had to do was pick up the phone,” he lamented. He never made the call.
My advice: Limit any one individual stock to no more than 5% of your stock portfolio’s value—and that’s especially true if it’s your employer’s shares. Remember, your employer is the most dangerous stock you can own, because you could potentially end up both out of work and holding a fistful of worthless shares.
3. Forgo disability insurance. Our most valuable asset is our human capital, our income-earning ability. What if we can’t work because of illness or an accident? If we have enough set aside to retire, it may not matter, at least financially. It may also not matter if our employer offers good disability coverage.
But if our employer doesn’t—or if we’re self-employed—we could be in deep financial trouble. Yes, Social Security offers disability benefits. But despite stories of perfectly healthy people receiving Social Security disability benefits, the reality is that qualifying is awfully tough. You need to have a condition that’s sufficiently severe that it could cause death or prevent you from working for 12 months, plus benefits aren’t especially generous. The upshot: If you don’t have coverage and your nest egg isn’t large, disability insurance is crucial.
4. Invest on margin. If you want to short a stock, you need to open a margin account, which allows you to borrow against your portfolio’s value. You can also use a margin account to “go long” stocks—increasing your stock market exposure by using borrowed money to purchase additional shares. Such margin borrowing can super-charge your returns when the stock market is climbing.
But what if stocks go down instead? You could get wiped out, or close to it. Suppose you have $50,000 in stocks and then borrow another $50,000 on margin, thus doubling your stock market exposure to $100,000. If the market tumbles 29%, you’d not only lose almost $30,000, but also you could get a margin call because your borrowing—as a percent of your account’s value—is now too high. If you don’t have cash or securities to add to the account, you could be forced to sell part of your holdings, thus locking in your losses.
That said, I’m not completely against margin accounts. They can be a useful backup source of emergency money that allow folks to deal with short-term financial problems without disrupting their portfolio and potentially triggering capital gains taxes. But the borrowing should only be short term and only represent a modest percentage of a portfolio.
5. Get divorced. My greatest happiness comes from those who surround me. But so, too, have my biggest bills—a few of which I didn’t expect. Want to avoid large financial hits? Think long and hard before you marry, because unmarrying could cost you half of everything. I’ve twice been divorced and both periods rank among the worst times in my life.
There are, alas, other ways that family can cost you dearly. Thinking of lending money to family or cosigning their loans? I’ve lent money to my daughter and everything’s gone smoothly, but I’m starting to think that’s unusual, because I’ve heard so many horror stories.
Another tip: Talk to your parents about their retirement finances, including how they’d cope with long-term-care costs. If our parents—or our adult children—find themselves in dire financial straits, it’s awfully hard to say “no,” at which point their problems are ours. Did I mention that a private room in a nursing home now costs almost $106,000 a year?
6. Sell naked call options. Many conservative investors like to write so-called covered calls. This involves selling call options against the stocks they own, which earns them extra income in the form of a call premium. The downside: If the stocks involved rise above the “strike price,” they’ll get “called away” by the buyers of the call options. That means the option sellers miss out on the gains over and above the strike price. I’m not a fan of writing covered calls, but it is indeed a conservative strategy.
Now, consider a slightly different scenario: What if we write call options—but we don’t own the underlying stock? Suddenly, the strategy goes from conservative to hugely dangerous. Indeed, selling uncovered calls is the equivalent of selling a stock short and, as with shorting, the potential loss is huge if the shares involved shoot higher.
7. Don’t bother with health insurance. Many folks view health insurance as a way to pay for their annual physical or the occasional prescription. But, as I see it, those are just fringe benefits. So why buy health insurance? The two key benefits are the medical-cost discounts negotiated by the insurance company—and the policy’s annual out-of-pocket maximum, which puts a cap on your financial pain. Without those two benefits, there’s a grave risk that major medical costs could land you in bankruptcy court.
8. Sell put options. As with selling call options, you can earn extra income—in the form of option premiums—by selling put options. But that income is modest compared to the risk involved. When you sell a put option, you commit to buying the underlying stock at the strike price during the life of the option’s contract. If the underlying shares stay at or above the strike price, that isn’t a problem. But if the stock plunges, you could be in deep trouble.
To be sure, the potential loss isn’t as great as with a naked call option, because a stock can only lose 100% of its value, while its potential gain is unlimited. Still, that loss could be devastating, unless the potential hit on the put option is small compared to your total portfolio’s size.
9. Skip umbrella liability insurance. It’s hard to know how likely we are to get sued. Statistics are hard to come by because many lawsuits are quietly settled, rather than contested in court. Still, given the potentially crippling cost, you want to protect yourself.
Your homeowner’s and auto insurance will include some liability coverage, but it might be capped at, say, $300,000. For further protection, consider adding an umbrella policy. You might be able to purchase a $1 million policy for just a few hundred dollars a year. In addition to that financial protection, an umbrella policy should ensure that the insurance company’s lawyers go to bat on your behalf, should you have the misfortune to be sued.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
John Goodell is leaving active duty with the U.S. Army—and leaving behind a hugely generous pension. "Few of us would describe ourselves as a slave to money. Why then become a slave to a pension?"
The S&P 500 climbed 2.8% in February, with plenty going on beneath the surface, including healthy gains for small and mid-cap value. Bill Ehart looks at the month that was.
"Be careful of consensus thinking," warns Adam Grossman. "It's seldom a reliable guide to the future. Today’s markets are in the grip of several particularly strong stories, with a range of opinions that's too narrow."
Should you fund the 401(k), prepay the mortgage, build up an emergency fund or stash your dollars elsewhere? Rick Connor offers his take on the hierarchy of savings.
"Bitcoin may eventually match its original vision," writes Phil Kernen. "For now, however, bitcoin is less a currency than an asset whose price has been bid up—one with an unstable value that produces no income."
Did you miss any of these? Check out the seven most popular articles published by HumbleDollar last month.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
But anybody can ruin themselves slowly—and plenty of people do. What’s really attention grabbing is when it happens quickly. Want to blow up your financial life? Here are nine ways to ruin yourself in a hurry:
1. Sell stocks short. If you buy an individual stock or bond, the most you can lose is your original investment. That would be unpleasant, but not nearly as unpleasant as seeing your entire portfolio implode.
That brings us to short-selling. We were reminded earlier this year of its dangers, compliments of GameStop and the hedge funds that bet on its share price decline. Those hedge funds had borrowed GameStop stock and then sold it, hoping to buy back the shares at much lower prices. Instead, GameStop’s shares soared and the hedge funds—facing potentially unlimited losses—were forced to buy back the stock at far higher prices.
Because of those potentially unlimited losses, short-selling is one of the most dangerous games on Wall Street. Lots of folks like to “play” the market with a sliver of their portfolio. If you do that, for goodness’ sake, don’t sell stocks short, because an apparently small bet could cost you far more than you ever imagined.
2. Invest heavily in your employer’s stock. If you think your employer’s shares are a solid investment, ponder the poor folks who work at PG&E. What could be safer than a utility, the quintessential widows-and-orphans stock? Its shares have shed 80% of their value over the past five years.
What if you work for a highflying technology company? Surely you’d want to invest heavily in its shares? A decade ago, I was in Los Gatos, California, at a business dinner. Sitting next to me was a former employee of JDS Uniphase, which had been one of the hottest stocks of the 1990s, only to lose almost all its value when the tech bubble burst. My dinner companion recounted how employees were given a special number to call if they wanted to cash out their stock options, which—for him—were at one point worth more than $1 million. “All I had to do was pick up the phone,” he lamented. He never made the call.
My advice: Limit any one individual stock to no more than 5% of your stock portfolio’s value—and that’s especially true if it’s your employer’s shares. Remember, your employer is the most dangerous stock you can own, because you could potentially end up both out of work and holding a fistful of worthless shares.
3. Forgo disability insurance. Our most valuable asset is our human capital, our income-earning ability. What if we can’t work because of illness or an accident? If we have enough set aside to retire, it may not matter, at least financially. It may also not matter if our employer offers good disability coverage.
But if our employer doesn’t—or if we’re self-employed—we could be in deep financial trouble. Yes, Social Security offers disability benefits. But despite stories of perfectly healthy people receiving Social Security disability benefits, the reality is that qualifying is awfully tough. You need to have a condition that’s sufficiently severe that it could cause death or prevent you from working for 12 months, plus benefits aren’t especially generous. The upshot: If you don’t have coverage and your nest egg isn’t large, disability insurance is crucial.
4. Invest on margin. If you want to short a stock, you need to open a margin account, which allows you to borrow against your portfolio’s value. You can also use a margin account to “go long” stocks—increasing your stock market exposure by using borrowed money to purchase additional shares. Such margin borrowing can super-charge your returns when the stock market is climbing.
But what if stocks go down instead? You could get wiped out, or close to it. Suppose you have $50,000 in stocks and then borrow another $50,000 on margin, thus doubling your stock market exposure to $100,000. If the market tumbles 29%, you’d not only lose almost $30,000, but also you could get a margin call because your borrowing—as a percent of your account’s value—is now too high. If you don’t have cash or securities to add to the account, you could be forced to sell part of your holdings, thus locking in your losses.
That said, I’m not completely against margin accounts. They can be a useful backup source of emergency money that allow folks to deal with short-term financial problems without disrupting their portfolio and potentially triggering capital gains taxes. But the borrowing should only be short term and only represent a modest percentage of a portfolio.
5. Get divorced. My greatest happiness comes from those who surround me. But so, too, have my biggest bills—a few of which I didn’t expect. Want to avoid large financial hits? Think long and hard before you marry, because unmarrying could cost you half of everything. I’ve twice been divorced and both periods rank among the worst times in my life.
There are, alas, other ways that family can cost you dearly. Thinking of lending money to family or cosigning their loans? I’ve lent money to my daughter and everything’s gone smoothly, but I’m starting to think that’s unusual, because I’ve heard so many horror stories.
Another tip: Talk to your parents about their retirement finances, including how they’d cope with long-term-care costs. If our parents—or our adult children—find themselves in dire financial straits, it’s awfully hard to say “no,” at which point their problems are ours. Did I mention that a private room in a nursing home now costs almost $106,000 a year?
6. Sell naked call options. Many conservative investors like to write so-called covered calls. This involves selling call options against the stocks they own, which earns them extra income in the form of a call premium. The downside: If the stocks involved rise above the “strike price,” they’ll get “called away” by the buyers of the call options. That means the option sellers miss out on the gains over and above the strike price. I’m not a fan of writing covered calls, but it is indeed a conservative strategy.
Now, consider a slightly different scenario: What if we write call options—but we don’t own the underlying stock? Suddenly, the strategy goes from conservative to hugely dangerous. Indeed, selling uncovered calls is the equivalent of selling a stock short and, as with shorting, the potential loss is huge if the shares involved shoot higher.
7. Don’t bother with health insurance. Many folks view health insurance as a way to pay for their annual physical or the occasional prescription. But, as I see it, those are just fringe benefits. So why buy health insurance? The two key benefits are the medical-cost discounts negotiated by the insurance company—and the policy’s annual out-of-pocket maximum, which puts a cap on your financial pain. Without those two benefits, there’s a grave risk that major medical costs could land you in bankruptcy court.
8. Sell put options. As with selling call options, you can earn extra income—in the form of option premiums—by selling put options. But that income is modest compared to the risk involved. When you sell a put option, you commit to buying the underlying stock at the strike price during the life of the option’s contract. If the underlying shares stay at or above the strike price, that isn’t a problem. But if the stock plunges, you could be in deep trouble.
To be sure, the potential loss isn’t as great as with a naked call option, because a stock can only lose 100% of its value, while its potential gain is unlimited. Still, that loss could be devastating, unless the potential hit on the put option is small compared to your total portfolio’s size.
9. Skip umbrella liability insurance. It’s hard to know how likely we are to get sued. Statistics are hard to come by because many lawsuits are quietly settled, rather than contested in court. Still, given the potentially crippling cost, you want to protect yourself.
Your homeowner’s and auto insurance will include some liability coverage, but it might be capped at, say, $300,000. For further protection, consider adding an umbrella policy. You might be able to purchase a $1 million policy for just a few hundred dollars a year. In addition to that financial protection, an umbrella policy should ensure that the insurance company’s lawyers go to bat on your behalf, should you have the misfortune to be sued.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
John Goodell is leaving active duty with the U.S. Army—and leaving behind a hugely generous pension. "Few of us would describe ourselves as a slave to money. Why then become a slave to a pension?"
The S&P 500 climbed 2.8% in February, with plenty going on beneath the surface, including healthy gains for small and mid-cap value. Bill Ehart looks at the month that was.
"Be careful of consensus thinking," warns Adam Grossman. "It's seldom a reliable guide to the future. Today’s markets are in the grip of several particularly strong stories, with a range of opinions that's too narrow."
Should you fund the 401(k), prepay the mortgage, build up an emergency fund or stash your dollars elsewhere? Rick Connor offers his take on the hierarchy of savings.
"Bitcoin may eventually match its original vision," writes Phil Kernen. "For now, however, bitcoin is less a currency than an asset whose price has been bid up—one with an unstable value that produces no income."
Did you miss any of these? Check out the seven most popular articles published by HumbleDollar last month.
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 Nine Roads to Ruin appeared first on HumbleDollar.
March 5, 2021
What? Spend It?
HISTORY IS FULL of fringe investments that make headlines after rapid—and often inexplicable and indefensible—price increases. Bitcoin is one of the latest examples, leaving even casual observers asking, “What is it and should I buy some?”
First traded in 2009, bitcoin is the best-known cryptocurrency. Thousands of others have been introduced, but many have since died. That’s one problem with trying to pick the right digital currency to purchase: There are low barriers to entry. All it takes is a computer and the necessary skills to create a better digital currency. If their latest attempt doesn’t take off, entrepreneurs can always try again.
While economy-wide acceptance of bitcoin remains elusive, we may have seen a turning point with the recent announcements by PayPal that it would process bitcoin transactions, and by Tesla that it had stashed $1.5 billion of corporate cash in bitcoin and would start accepting them as payment for cars. Still, for now, using bitcoin as a digital currency—rather than just as a speculators’ plaything—faces three key challenges.
1. Unstable value. Bitcoin’s value routinely changes daily by 1% to 3%, and the change over a month or year can be staggering. By comparison, the exchange rate between the U.S. dollar and the euro has an average daily change of less than 1% and a monthly change of less than 3%.
Bitcoin also has a history of jaw-dropping declines. For instance, after hitting a high of $1,150 in November 2013, the price of one bitcoin dropped to $500 by mid-December and didn’t recover for four years. It touched $19,000 in late 2017, only to drop 83% to $3,200 a year later. As of yesterday, it stood at $48,000.
People don’t want investments or debts denominated in a currency where price swings are that dramatic, though speculators might. If I purchase one bitcoin for $20,000 and it doubles to $40,000, I may feel good for a moment. But if the value of my bitcoin drops to $5,000 instead, the items I hoped to purchase with that currency now cost a whole lot more.
2. Slow processing speed. To protect the security of the blockchain technology that makes digital currency so secure, processing is slow. As a result, there are practical limits on the number of daily transactions. That can cause even simple transactions to take days. The blockchain network processes about seven transactions per second. As users increase, so too will wait times. By comparison, one large credit card company processes close to 150 million transactions per day, or about 1,700 per second, with more capacity available. The slow processing speed of digital currency transactions is a significant roadblock to widespread use.
3. High transaction fees. These fees weren’t part of the original system. As bitcoin has grown over the past decade, users must wait longer for their transactions to be added to the blockchain. Transaction fees were introduced as an incentive mechanism to allow users to move to the head of the line. While this may benefit a lucky few, it does nothing to address the problem of processing speed and the massive amount of power required for blockchain transactions generally. Furthermore, while the fees may help prioritize some deals over others, the costs alone could make most transactions impractical.
Because of the above drawbacks, very few owners of bitcoin use it as currency. Rather, they’re using them to speculate that the price of a non-income producing asset will continue to rise. They may also hold them to shield transactions from others, notably government authorities.
There are fewer doubts about whether digital currencies will one day play a much larger role in economic activity. Rather, it’s a question of when. Even central banks are paying attention. According to a survey by the Bank for International Settlements, 10% of all central banks expect to issue their own digital currencies within the next three years. Even the Federal Reserve is studying the idea.
Bitcoin may eventually gain traction in ways that match its original vision, that of a global currency independent of interference by banks or government. For now, however, bitcoin is less a currency than simply an asset whose price has been bid up—one with an unstable value that produces no income. My advice: If you insist on buying bitcoin or any other digital currency, do so only with money you can afford to lose.
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
.
First traded in 2009, bitcoin is the best-known cryptocurrency. Thousands of others have been introduced, but many have since died. That’s one problem with trying to pick the right digital currency to purchase: There are low barriers to entry. All it takes is a computer and the necessary skills to create a better digital currency. If their latest attempt doesn’t take off, entrepreneurs can always try again.
While economy-wide acceptance of bitcoin remains elusive, we may have seen a turning point with the recent announcements by PayPal that it would process bitcoin transactions, and by Tesla that it had stashed $1.5 billion of corporate cash in bitcoin and would start accepting them as payment for cars. Still, for now, using bitcoin as a digital currency—rather than just as a speculators’ plaything—faces three key challenges.
1. Unstable value. Bitcoin’s value routinely changes daily by 1% to 3%, and the change over a month or year can be staggering. By comparison, the exchange rate between the U.S. dollar and the euro has an average daily change of less than 1% and a monthly change of less than 3%.
Bitcoin also has a history of jaw-dropping declines. For instance, after hitting a high of $1,150 in November 2013, the price of one bitcoin dropped to $500 by mid-December and didn’t recover for four years. It touched $19,000 in late 2017, only to drop 83% to $3,200 a year later. As of yesterday, it stood at $48,000.
People don’t want investments or debts denominated in a currency where price swings are that dramatic, though speculators might. If I purchase one bitcoin for $20,000 and it doubles to $40,000, I may feel good for a moment. But if the value of my bitcoin drops to $5,000 instead, the items I hoped to purchase with that currency now cost a whole lot more.
2. Slow processing speed. To protect the security of the blockchain technology that makes digital currency so secure, processing is slow. As a result, there are practical limits on the number of daily transactions. That can cause even simple transactions to take days. The blockchain network processes about seven transactions per second. As users increase, so too will wait times. By comparison, one large credit card company processes close to 150 million transactions per day, or about 1,700 per second, with more capacity available. The slow processing speed of digital currency transactions is a significant roadblock to widespread use.
3. High transaction fees. These fees weren’t part of the original system. As bitcoin has grown over the past decade, users must wait longer for their transactions to be added to the blockchain. Transaction fees were introduced as an incentive mechanism to allow users to move to the head of the line. While this may benefit a lucky few, it does nothing to address the problem of processing speed and the massive amount of power required for blockchain transactions generally. Furthermore, while the fees may help prioritize some deals over others, the costs alone could make most transactions impractical.
Because of the above drawbacks, very few owners of bitcoin use it as currency. Rather, they’re using them to speculate that the price of a non-income producing asset will continue to rise. They may also hold them to shield transactions from others, notably government authorities.
There are fewer doubts about whether digital currencies will one day play a much larger role in economic activity. Rather, it’s a question of when. Even central banks are paying attention. According to a survey by the Bank for International Settlements, 10% of all central banks expect to issue their own digital currencies within the next three years. Even the Federal Reserve is studying the idea.
Bitcoin may eventually gain traction in ways that match its original vision, that of a global currency independent of interference by banks or government. For now, however, bitcoin is less a currency than simply an asset whose price has been bid up—one with an unstable value that produces no income. My advice: If you insist on buying bitcoin or any other digital currency, do so only with money you can afford to lose.
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
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