Jonathan Clements's Blog, page 298
February 11, 2021
Say No to FOMO
I’VE LATELY FACED one of the investment world’s greatest dangers: It’s called FOMO, or fear of missing out. If you pay attention to the financial news, you may be wrestling with this one, too.
Let’s start with bitcoin. I’ve studied it, but never invested. I’ve got friends who own the digital currency. I’m thrilled they’ve been wildly successful. But you know how awkward you feel when somebody tells an inside joke that you don’t get? Similarly, it’s a lonely feeling when those around you are enjoying a phenomenal rise in wealth—and you’re missing out.
I pulled up a chart as I type this. It shows that in the last 52 weeks bitcoin has surged from less than $10,000 to almost $45,000, an increase of some 350%. Or take a look at Tesla. I heard Elon Musk talk a few years ago and knew he was capable of great things. But I never saw the potential in Tesla. The company wasn’t making any money back then. Tesla is up 420% in the last 12 months.
How should we deal with FOMO? Having lived through many market cycles, I have six suggestions.
First, we need to be comfortable with who we are and what our goals are. I love entrepreneurs and the risks they take. But I have a confession: I never wanted to work 80 hours a week, like many entrepreneurs do. I love having a good work-life balance. And I don’t like concentrating my assets in one or two stocks, because I like to sleep at night.
I’m thankful that the world has risk-takers like Elon Musk. When I heard him talk, he was leveraged to the point where he didn’t have any more borrowing capacity. To be less than “all in” might lead him to lose focus, Musk said. I love that he’s like that. But I’m not wired that way.
Second, obsessing over someone else’s wealth takes the joy out of our own success. My 401(k) earned 17% last year. I’m thrilled. But if I focus on what I could’ve done in Tesla, I’d lose the joy of a fantastic investment year in the middle of a pandemic.
Third, we all have a circle of competence that gives us an edge over others. When we figure out what our edge is, we should take advantage of it, rather than try to imitate someone else.
For example, our human capital—our income-earning ability—is often our most valuable asset. There’s usually no greater return on investment than adding to our skillset and making ourselves more valuable to others.
In investing, it’s the same principle. I know banking. I have invested in bank stocks in the past. I’ve done well because I can make a decent estimate of when those stocks are undervalued. Technology stocks? It’s a different story.
Fourth, we need to temper our confidence by studying the history of bubbles. A number of them have popped during my investing lifetime. When I was working toward my MBA in the 1980s, I studied Japanese business methods because, at the time, the Japanese were crushing it. Then they hit a wall and their stock market collapsed. The Nikkei reached an all-time high in 1989 of 38,916. Today, it trades at 29,563. More than three decades later, it’s still 24% below its 1989 peak. That’s what a bubble popping can sound like.
More recently, the U.S. real estate bubble popped in 2006, and that wasn’t foreseen even by the elite economists at the Federal Reserve. But we also make the reverse mistake: I thought Amazon was a bubble in 2013. It was trading at nosebleed levels, and it wasn’t making any money or predicted to make a profit anytime soon. Today, it’s more than 1,000% higher.
Fifth, are you a conservative, diversified investor like me, but you secretly want to roll the dice every so often? I suggest taking some modest positions to scratch that itch.
My bitcoin friends are convinced the rally is just starting. As I see our currency being debased by so much government deficit spending, the outrageous predictions of bitcoin going to $500,000 strike me as plausible. Assuming I decide to get in, the next question is, how much?
Even when I feel I have Warren Buffett-like insight on some speculative investment, my rule of thumb is to allocate no more than 2% of my net worth. Allocating a small percentage is a reasonable way to get into the game without jeopardizing long-term goals. But it’ll never make you as rich as Elon Musk.
My final suggestion: Do you believe, like me, in owning a diversified portfolio of low-cost index funds? Take comfort that you likely already own a sliver of Tesla and other highfliers. After all, that’s how I earned 17% on my retirement funds last year.
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.
Let’s start with bitcoin. I’ve studied it, but never invested. I’ve got friends who own the digital currency. I’m thrilled they’ve been wildly successful. But you know how awkward you feel when somebody tells an inside joke that you don’t get? Similarly, it’s a lonely feeling when those around you are enjoying a phenomenal rise in wealth—and you’re missing out.
I pulled up a chart as I type this. It shows that in the last 52 weeks bitcoin has surged from less than $10,000 to almost $45,000, an increase of some 350%. Or take a look at Tesla. I heard Elon Musk talk a few years ago and knew he was capable of great things. But I never saw the potential in Tesla. The company wasn’t making any money back then. Tesla is up 420% in the last 12 months.
How should we deal with FOMO? Having lived through many market cycles, I have six suggestions.
First, we need to be comfortable with who we are and what our goals are. I love entrepreneurs and the risks they take. But I have a confession: I never wanted to work 80 hours a week, like many entrepreneurs do. I love having a good work-life balance. And I don’t like concentrating my assets in one or two stocks, because I like to sleep at night.
I’m thankful that the world has risk-takers like Elon Musk. When I heard him talk, he was leveraged to the point where he didn’t have any more borrowing capacity. To be less than “all in” might lead him to lose focus, Musk said. I love that he’s like that. But I’m not wired that way.
Second, obsessing over someone else’s wealth takes the joy out of our own success. My 401(k) earned 17% last year. I’m thrilled. But if I focus on what I could’ve done in Tesla, I’d lose the joy of a fantastic investment year in the middle of a pandemic.
Third, we all have a circle of competence that gives us an edge over others. When we figure out what our edge is, we should take advantage of it, rather than try to imitate someone else.
For example, our human capital—our income-earning ability—is often our most valuable asset. There’s usually no greater return on investment than adding to our skillset and making ourselves more valuable to others.
In investing, it’s the same principle. I know banking. I have invested in bank stocks in the past. I’ve done well because I can make a decent estimate of when those stocks are undervalued. Technology stocks? It’s a different story.
Fourth, we need to temper our confidence by studying the history of bubbles. A number of them have popped during my investing lifetime. When I was working toward my MBA in the 1980s, I studied Japanese business methods because, at the time, the Japanese were crushing it. Then they hit a wall and their stock market collapsed. The Nikkei reached an all-time high in 1989 of 38,916. Today, it trades at 29,563. More than three decades later, it’s still 24% below its 1989 peak. That’s what a bubble popping can sound like.
More recently, the U.S. real estate bubble popped in 2006, and that wasn’t foreseen even by the elite economists at the Federal Reserve. But we also make the reverse mistake: I thought Amazon was a bubble in 2013. It was trading at nosebleed levels, and it wasn’t making any money or predicted to make a profit anytime soon. Today, it’s more than 1,000% higher.
Fifth, are you a conservative, diversified investor like me, but you secretly want to roll the dice every so often? I suggest taking some modest positions to scratch that itch.
My bitcoin friends are convinced the rally is just starting. As I see our currency being debased by so much government deficit spending, the outrageous predictions of bitcoin going to $500,000 strike me as plausible. Assuming I decide to get in, the next question is, how much?
Even when I feel I have Warren Buffett-like insight on some speculative investment, my rule of thumb is to allocate no more than 2% of my net worth. Allocating a small percentage is a reasonable way to get into the game without jeopardizing long-term goals. But it’ll never make you as rich as Elon Musk.
My final suggestion: Do you believe, like me, in owning a diversified portfolio of low-cost index funds? Take comfort that you likely already own a sliver of Tesla and other highfliers. After all, that’s how I earned 17% on my retirement funds last year.
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 Say No to FOMO appeared first on HumbleDollar.
February 10, 2021
Retirement Preview
THE PANDEMIC HAS given many folks a taste of what retirement could be like. An abrupt end to work. A loss of social connection. Trying to make ends meet on a much lower income. Many haven’t been happy with the experience.
Worried that your retirement could be similar? Here are eight lessons we can learn from the pandemic, all drawn from my new book, Retirement Heaven or Hell:
1. Retirement can be a shock. In fact, it’s quite similar to what people experienced during the pandemic. Sure, it might have felt good for a little while, not having to set an alarm, not having to deal with a long, brutal commute and not having a demanding work schedule that left you exhausted. But at some point, being forced to shelter in place got a little irritating, and people began to feel antsy and depressed. Indeed, some started eating and drinking too much to mute the anxiety and tedium they were experiencing.
2. Life without work can be boring. The virus showed us how miserable our days can be if we have too much time on our hands. The weeks slowed to a crawl for people who couldn’t work. They had trouble remembering what day it was, because it didn’t matter. Without a plan for how to spend our time, this is how our retirement could be, too.
3. Strong relationships are crucial. During the pandemic, we’ve been forced to spend long periods of time alone, with little social interaction. Being isolated has made us appreciate the value of the relationships we have with family and friends. We all crave social connection—and we need to make sure our retirement plan addresses that need.
4. Quitting work strains marriages. Once the pandemic’s initial restrictions were lifted, divorce applications spiked. Sadly, divorce rates among retirees are also on the rise, with dire emotional and financial consequences. Whether it’s retirement or a pandemic, many couples have trouble adjusting to increased togetherness.
5. Good health can save our life—and our finances. Older people, and people of any age who had serious underlying medical conditions such as hypertension, obesity, diabetes and cardiovascular disease, have been at greater risk of severe illness during the pandemic. To reduce the risk of ending up in a hospital and being put on a ventilator, it’s been crucial to stay healthy. The good news: Many of the pre-existing conditions that put us at greater risk can be reversed through positive lifestyle changes, such as exercising and eating right.
These are also key anti-aging strategies. Incorporating an exercise routine into our retirement, along with eating right, will lower the amount of money we’ll have to spend on health care, which is one of retirement’s largest expenses.
6. We need a purpose. During the pandemic’s initial lockdown, if we couldn’t work from home, there often wasn’t much for us to do that felt meaningful. Some of us woke up to the fact that having a job—any job—was far better than puttering around the house, killing time.
Similarly, when we retire, we need to fill the big hole left by the disappearance of our fulltime job—something that replaces the positive aspects of our career, that’s challenging, that requires learning new things, that allows us to contribute and that makes us feel a part of something bigger.
7. Retirement often isn’t planned. It’s estimated that 42% of jobs eliminated during the pandemic aren’t coming back. That’s bad news for those near retirement age. There’s a perception that older workers want salaries that are too high, aren’t up to date on certain skills and won’t mesh well with younger colleagues.
Because of that perception, as the the economy recovers and hiring picks up, workers age 50 and older may find they’re last in line. It will likely take a long time for them to find a job and, in many cases, that job will come with a significant pay cut. Because of the lack of work opportunities, some people who were solidly middle class will be pushed into retirement earlier than they planned. They’ll be forced to draw on their retirement assets earlier than scheduled, with grim consequences for their retirement standard of living.
8. Maybe money can buy happiness. COVID-19 has given many families a taste of what it’s like to live on a limited income—an issue they could also face in retirement. Even those with a lot of money were miserable because there was no place to spend it. They couldn’t go on vacation or go to the mall. They were forced to self-isolate at home, experiencing firsthand how lackluster life can seem when we can’t use money to brighten our days. Our retirement could also be like that if we don’t prepare financially.
Has the pandemic left you frustrated and unhappy? My advice: Learn from that—and make sure your retirement doesn’t turn out to be a repeat.
Mike Drak is a 38-year veteran of the financial services industry. He’s the author of
Retirement Heaven or Hell
, which was just published, as well as an earlier book,
Victory Lap Retirement
. Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to
BoomingEncore.com
.
Worried that your retirement could be similar? Here are eight lessons we can learn from the pandemic, all drawn from my new book, Retirement Heaven or Hell:
1. Retirement can be a shock. In fact, it’s quite similar to what people experienced during the pandemic. Sure, it might have felt good for a little while, not having to set an alarm, not having to deal with a long, brutal commute and not having a demanding work schedule that left you exhausted. But at some point, being forced to shelter in place got a little irritating, and people began to feel antsy and depressed. Indeed, some started eating and drinking too much to mute the anxiety and tedium they were experiencing.
2. Life without work can be boring. The virus showed us how miserable our days can be if we have too much time on our hands. The weeks slowed to a crawl for people who couldn’t work. They had trouble remembering what day it was, because it didn’t matter. Without a plan for how to spend our time, this is how our retirement could be, too.
3. Strong relationships are crucial. During the pandemic, we’ve been forced to spend long periods of time alone, with little social interaction. Being isolated has made us appreciate the value of the relationships we have with family and friends. We all crave social connection—and we need to make sure our retirement plan addresses that need.
4. Quitting work strains marriages. Once the pandemic’s initial restrictions were lifted, divorce applications spiked. Sadly, divorce rates among retirees are also on the rise, with dire emotional and financial consequences. Whether it’s retirement or a pandemic, many couples have trouble adjusting to increased togetherness.
5. Good health can save our life—and our finances. Older people, and people of any age who had serious underlying medical conditions such as hypertension, obesity, diabetes and cardiovascular disease, have been at greater risk of severe illness during the pandemic. To reduce the risk of ending up in a hospital and being put on a ventilator, it’s been crucial to stay healthy. The good news: Many of the pre-existing conditions that put us at greater risk can be reversed through positive lifestyle changes, such as exercising and eating right.
These are also key anti-aging strategies. Incorporating an exercise routine into our retirement, along with eating right, will lower the amount of money we’ll have to spend on health care, which is one of retirement’s largest expenses.
6. We need a purpose. During the pandemic’s initial lockdown, if we couldn’t work from home, there often wasn’t much for us to do that felt meaningful. Some of us woke up to the fact that having a job—any job—was far better than puttering around the house, killing time.
Similarly, when we retire, we need to fill the big hole left by the disappearance of our fulltime job—something that replaces the positive aspects of our career, that’s challenging, that requires learning new things, that allows us to contribute and that makes us feel a part of something bigger.
7. Retirement often isn’t planned. It’s estimated that 42% of jobs eliminated during the pandemic aren’t coming back. That’s bad news for those near retirement age. There’s a perception that older workers want salaries that are too high, aren’t up to date on certain skills and won’t mesh well with younger colleagues.
Because of that perception, as the the economy recovers and hiring picks up, workers age 50 and older may find they’re last in line. It will likely take a long time for them to find a job and, in many cases, that job will come with a significant pay cut. Because of the lack of work opportunities, some people who were solidly middle class will be pushed into retirement earlier than they planned. They’ll be forced to draw on their retirement assets earlier than scheduled, with grim consequences for their retirement standard of living.
8. Maybe money can buy happiness. COVID-19 has given many families a taste of what it’s like to live on a limited income—an issue they could also face in retirement. Even those with a lot of money were miserable because there was no place to spend it. They couldn’t go on vacation or go to the mall. They were forced to self-isolate at home, experiencing firsthand how lackluster life can seem when we can’t use money to brighten our days. Our retirement could also be like that if we don’t prepare financially.
Has the pandemic left you frustrated and unhappy? My advice: Learn from that—and make sure your retirement doesn’t turn out to be a repeat.
Mike Drak is a 38-year veteran of the financial services industry. He’s the author of
Retirement Heaven or Hell
, which was just published, as well as an earlier book,
Victory Lap Retirement
. Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to
BoomingEncore.com
.The post Retirement Preview appeared first on HumbleDollar.
February 9, 2021
Settling Down
I’M TOLD THAT younger investors tend to trade more. That’s because those of us in our 20s and early 30s tend to be more confident—and perhaps overconfident—and that leads us to actively manage our portfolios as we seek to outpace the market averages. On top of that, it takes time to learn what works and what doesn’t, and that can also lead to frequent trading.
That brings me to 2021 and the four key portfolio changes I’m making:
1. Sell actively managed funds. Over the past few months, I’ve reduced my holdings of actively managed stock funds by 85%. I still think these funds could perform well, but I now believe index funds are more likely to deliver decent performance—and without the risk of lagging behind the market.
“Attempting to beat the market must also introduce the risk of underperforming the market as well,” writes financial advisor Ashby Daniels in How I Invest My Money . “If we don’t need to beat the market to achieve our financial goals, what sense would it make to introduce the possibility of moving us further from our goals?”
In other words, why chase higher returns that may never materialize at the expense of risking an investment return I’d be happy with? The opportunity cost is too high.
Still, selling my actively managed funds has been hard. First, it meant realizing losses and admitting my mistake. Second, I couldn’t help thinking, “What if these funds start outperforming?” But fearing I’ll miss potential gains wasn’t a good reason to stick with these investments. If I were constructing a portfolio from scratch, I wouldn’t invest in these funds, so why hang on to them?
In the past few months, two friends asked me how to start investing. I found myself recommending low-cost index funds. That made me realize my holdings didn’t reflect my views—and that prompted my portfolio makeover.
2. Add other asset classes. I started the year with just two index funds: Vanguard Group’s S&P 500 index fund and its European stock index fund. I wanted broader stock exposure, so I recently added Vanguard's global and emerging market stock index funds.
Because different parts of the stock market tend to be highly correlated, I also wanted to add an uncorrelated asset class, such as real estate investment trusts, gold or commodities. I ended up picking real estate investment trusts, because they offer exposure to physical assets and they kick off regular income.
3. Increase my stock exposure. In an article last July, I wrote that I didn’t want more than 70% of my money in stocks. Now, I believe it could be a bit higher, given that I won’t need this money for the foreseeable future.
In fact, I’ve ended up with less in stocks than I intended. Amid the pandemic, I drastically cut back on travel, eating out and entertainment. These account for most of my discretionary spending. Because I don’t usually spend much anyway, my savings rate increased significantly—and I accumulated a lot of cash. To bring that down, I’m planning to raise my monthly stock market investments.
4. Simplify my finances. My ideal portfolio is one that requires little maintenance. In the past, I opened checking accounts at different banks, looking for higher yields. But the extra interest I received was modest and probably not worth the effort, plus I had to deal with the mental clutter of more paperwork and passwords.
Similarly, the active mutual funds I used to own resulted in multiple investment accounts, each with the respective fund management firm. But with the brokerage firm I now use to buy index funds, everything is in one place.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.
That brings me to 2021 and the four key portfolio changes I’m making:
1. Sell actively managed funds. Over the past few months, I’ve reduced my holdings of actively managed stock funds by 85%. I still think these funds could perform well, but I now believe index funds are more likely to deliver decent performance—and without the risk of lagging behind the market.
“Attempting to beat the market must also introduce the risk of underperforming the market as well,” writes financial advisor Ashby Daniels in How I Invest My Money . “If we don’t need to beat the market to achieve our financial goals, what sense would it make to introduce the possibility of moving us further from our goals?”
In other words, why chase higher returns that may never materialize at the expense of risking an investment return I’d be happy with? The opportunity cost is too high.
Still, selling my actively managed funds has been hard. First, it meant realizing losses and admitting my mistake. Second, I couldn’t help thinking, “What if these funds start outperforming?” But fearing I’ll miss potential gains wasn’t a good reason to stick with these investments. If I were constructing a portfolio from scratch, I wouldn’t invest in these funds, so why hang on to them?
In the past few months, two friends asked me how to start investing. I found myself recommending low-cost index funds. That made me realize my holdings didn’t reflect my views—and that prompted my portfolio makeover.
2. Add other asset classes. I started the year with just two index funds: Vanguard Group’s S&P 500 index fund and its European stock index fund. I wanted broader stock exposure, so I recently added Vanguard's global and emerging market stock index funds.
Because different parts of the stock market tend to be highly correlated, I also wanted to add an uncorrelated asset class, such as real estate investment trusts, gold or commodities. I ended up picking real estate investment trusts, because they offer exposure to physical assets and they kick off regular income.
3. Increase my stock exposure. In an article last July, I wrote that I didn’t want more than 70% of my money in stocks. Now, I believe it could be a bit higher, given that I won’t need this money for the foreseeable future.
In fact, I’ve ended up with less in stocks than I intended. Amid the pandemic, I drastically cut back on travel, eating out and entertainment. These account for most of my discretionary spending. Because I don’t usually spend much anyway, my savings rate increased significantly—and I accumulated a lot of cash. To bring that down, I’m planning to raise my monthly stock market investments.
4. Simplify my finances. My ideal portfolio is one that requires little maintenance. In the past, I opened checking accounts at different banks, looking for higher yields. But the extra interest I received was modest and probably not worth the effort, plus I had to deal with the mental clutter of more paperwork and passwords.
Similarly, the active mutual funds I used to own resulted in multiple investment accounts, each with the respective fund management firm. But with the brokerage firm I now use to buy index funds, everything is in one place.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.The post Settling Down appeared first on HumbleDollar.
February 8, 2021
College Crapshoot
A LIFE OF FRUGALITY might mean your children graduate college debt-free, which is a major accomplishment. But what about your happy-go-lucky neighbors, who spent every dime they earned and never saved for college?
At issue here is the Free Application for Federal Student Aid (FAFSA), which is the basis for the all-important expected family contribution (EFC). The whole thing can seem like one big crapshoot, as I can now attest.
The EFC may determine that your spendthrift neighbors’ kids also get to graduate debt-free. Alternatively, even though they have no assets to be assessed, the EFC may require a substantial contribution from their income each year. On top of that, even an EFC of zero is no guarantee that a university will offer your child a full ride, plus the aid package may include substantial loans rather than much-coveted grant money.
Retirement accounts are ignored in the FAFSA calculation, as is home equity, though some colleges may look at both when doling out the financial aid they control. Still, prioritizing retirement accounts and building up home equity is crucial if you’d rather not be expected to spend a quarter of your net worth or more on college costs.
Once the FAFSA is filled out, your EFC is instantly displayed onscreen, formulaically derived from investments, income and “prior prior year” tax returns. For a thrifty soul like myself, the EFC is trouble and, indeed, double trouble with twins. Worse, in another three years their younger brother could also start college, leaving me with a trifecta of savings-chomping scholars.
Recently passed by Congress, the 2021 omnibus spending bill includes changes to simplify the FAFSA process and dumps the term EFC, with all its negative baggage, replacing it with a new “student aid index.” We’ll learn more when the index is implemented for next year’s financial aid cycle.
My EFC this year doesn’t reflect the loss of my husband’s income, the fact that I stopped working after my husband died to stay home with the kids, that I have no employment income this year and that my twin daughters will lose their survivor annuities when they graduate high school. The FAFSA cheerily assumes that all sources of income will continue, that you won’t be needing emergency fund dollars and that it’s pretty easy to save for a secure retirement.
Should my girls get accepted to their dream school, I can write the school’s financial aid office and see if the college has anything to offer. This is an inefficient process, but better than nothing. It’s possible that, in the end, they’ll receive only loans.
I have yet to decide how I feel about these very young adults incurring debt. It seems obvious that 18-year-olds, who haven’t worked or saved much, can’t understand the effort required to pay off loans. Nor are they able to weigh the long-term consequences of spending borrowed money to earn a degree with a demonstrated low return on that financial investment.
In December, John Bogle’s Little Book of Common Sense Investing accompanied my holiday letter to my twins, encouraging them foremost to continue their fiscal education. In that note, I made this promise: “If you do well in college, I will help pay till you get your undergraduate degree. If college doesn’t go well, or you find opportunities that you prefer to college, it’s fine to get started in a job and a life and career right away.”
So where does all this leave my daughters and me? Here are five takeaways:
Loss of a spouse is the gift that keeps on taking. In terms of the current FAFSA, a single-parent family receives less than half the income protection that couples receive.
It bites to see a large dollar number spit out of the EFC formula. But look at it instead as a measure of success. I created the potential for a debt-free college education because, as a younger parent, I believed that was an important goal and worth saving for.
The EFC doesn’t necessarily determine what I’ll pay next year for my twins’ college education. I could pay much less if they decide on community college or a state university, or if they attend college near home so they save on room and board. Or I could pay much more, by caving on expensive dream college or falling back on the necessary safety school. If you look to be paying plenty, have a frank talk with your young adults. Maybe you’ll agree to pay for one year only, with all subsequent years dependent upon making a “B” average. Or maybe they should take out loans or work summers to have more skin in the game.
There are nearly 5,000 two- and four-year degree-granting institutions in the U.S. Most are eagerly looking for students who will succeed based on each school’s strengths and attributes. Studies suggest that, for most students, limited advantage is accrued by paying top dollar for an elite degree.
The pragmatic and practical thinking of a tuition-paying parent can be quite distinct from the diffuse interests or starry aspirations of the senior selecting a school and course of study. Be kind to each other. Both are right. Neither is wrong.
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.
At issue here is the Free Application for Federal Student Aid (FAFSA), which is the basis for the all-important expected family contribution (EFC). The whole thing can seem like one big crapshoot, as I can now attest.
The EFC may determine that your spendthrift neighbors’ kids also get to graduate debt-free. Alternatively, even though they have no assets to be assessed, the EFC may require a substantial contribution from their income each year. On top of that, even an EFC of zero is no guarantee that a university will offer your child a full ride, plus the aid package may include substantial loans rather than much-coveted grant money.
Retirement accounts are ignored in the FAFSA calculation, as is home equity, though some colleges may look at both when doling out the financial aid they control. Still, prioritizing retirement accounts and building up home equity is crucial if you’d rather not be expected to spend a quarter of your net worth or more on college costs.
Once the FAFSA is filled out, your EFC is instantly displayed onscreen, formulaically derived from investments, income and “prior prior year” tax returns. For a thrifty soul like myself, the EFC is trouble and, indeed, double trouble with twins. Worse, in another three years their younger brother could also start college, leaving me with a trifecta of savings-chomping scholars.
Recently passed by Congress, the 2021 omnibus spending bill includes changes to simplify the FAFSA process and dumps the term EFC, with all its negative baggage, replacing it with a new “student aid index.” We’ll learn more when the index is implemented for next year’s financial aid cycle.
My EFC this year doesn’t reflect the loss of my husband’s income, the fact that I stopped working after my husband died to stay home with the kids, that I have no employment income this year and that my twin daughters will lose their survivor annuities when they graduate high school. The FAFSA cheerily assumes that all sources of income will continue, that you won’t be needing emergency fund dollars and that it’s pretty easy to save for a secure retirement.
Should my girls get accepted to their dream school, I can write the school’s financial aid office and see if the college has anything to offer. This is an inefficient process, but better than nothing. It’s possible that, in the end, they’ll receive only loans.
I have yet to decide how I feel about these very young adults incurring debt. It seems obvious that 18-year-olds, who haven’t worked or saved much, can’t understand the effort required to pay off loans. Nor are they able to weigh the long-term consequences of spending borrowed money to earn a degree with a demonstrated low return on that financial investment.
In December, John Bogle’s Little Book of Common Sense Investing accompanied my holiday letter to my twins, encouraging them foremost to continue their fiscal education. In that note, I made this promise: “If you do well in college, I will help pay till you get your undergraduate degree. If college doesn’t go well, or you find opportunities that you prefer to college, it’s fine to get started in a job and a life and career right away.”
So where does all this leave my daughters and me? Here are five takeaways:
Loss of a spouse is the gift that keeps on taking. In terms of the current FAFSA, a single-parent family receives less than half the income protection that couples receive.
It bites to see a large dollar number spit out of the EFC formula. But look at it instead as a measure of success. I created the potential for a debt-free college education because, as a younger parent, I believed that was an important goal and worth saving for.
The EFC doesn’t necessarily determine what I’ll pay next year for my twins’ college education. I could pay much less if they decide on community college or a state university, or if they attend college near home so they save on room and board. Or I could pay much more, by caving on expensive dream college or falling back on the necessary safety school. If you look to be paying plenty, have a frank talk with your young adults. Maybe you’ll agree to pay for one year only, with all subsequent years dependent upon making a “B” average. Or maybe they should take out loans or work summers to have more skin in the game.
There are nearly 5,000 two- and four-year degree-granting institutions in the U.S. Most are eagerly looking for students who will succeed based on each school’s strengths and attributes. Studies suggest that, for most students, limited advantage is accrued by paying top dollar for an elite degree.
The pragmatic and practical thinking of a tuition-paying parent can be quite distinct from the diffuse interests or starry aspirations of the senior selecting a school and course of study. Be kind to each other. Both are right. Neither is wrong.
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 College Crapshoot appeared first on HumbleDollar.
February 7, 2021
Just Resting
IN THE FAMILY TREE of investors that began with Benjamin Graham sits a quiet, 100-year-old firm called Tweedy, Browne. This week, it published a chart that offered a new angle on a key debate in the world of personal finance: Is value investing dead—or just resting?
Before I get into the details of the Tweedy chart, I’ll back up and first recap the concept of value investing and why there's a debate about it.
What does it mean to be a value stock? The simplest definition: It’s a stock selling for less than it’s currently worth. Investors who favor value stocks like to say that they're trying to buy $1 for 90 cents, and preferably less, with the hope that the price eventually rises to $1.
The opposite of a value stock is a growth stock. Unlike value investors, growth investors aren’t as concerned with finding stocks that look like bargains today. Instead, their focus is on strong, fast-growing companies. Their view is that the share price of a growing company will inevitably rise to reflect the company’s continued success.
How exactly is a stock determined to be a value stock? In some ways, value is in the eye of the beholder. To some, Amazon shares at $3,350 represent a bargain. Because its future looks so bright, they think the stock’s actually worth far more. Other investors, meanwhile, might look at Amazon’s price-earnings ratio of 80—double the overall market average—and see a stock that looks wildly overpriced. In short, value is subjective.
But for practical purposes, the companies that build stock market indexes are the formal arbiters of growth and value, and they each have a methodology for categorizing stocks. For example, here’s how Standard & Poor’s makes the distinction between growth and value:
A stock goes into the value category if it’s inexpensive according to three ratios: price-to-earnings, price-to-book value and price-to-sales.
A stock goes in the growth category if, as you might guess, it has exhibited strong growth in sales or profits, or has posted strong short-term share price gains.
If value stocks are stocks selling at bargain levels, isn’t that a bad sign? Strong companies have popular stocks and popular stocks tend to be expensive. If a stock is inexpensive, you might conclude that the company is financially weak. That may be true in some cases, but not all. Consider the five largest companies in the S&P 500 Value Index: Berkshire Hathaway, JP Morgan, Walt Disney, Johnson & Johnson and Intel. They might not be as strong as the five largest in S&P’s Growth Index—Apple, Microsoft, Amazon, Facebook and Tesla—but I would hardly call them weak.
The more important point is this: The valuations on value stocks are much lower than those of their growth peers. And lower valuations tend to be correlated with higher future returns. The logic is simple: All things being equal, it's better to pay less for something than more. This is a value investor's primary concern.
Benjamin Graham offered the analogy of a cigar butt on the ground, used and soggy. The idea of picking it up seems distasteful, so it's hard to imagine anyone paying much for it. But there might be one puff left in it. If it’s lying on the ground and costs you nothing, then it does technically represent a value. You're getting it for less than it's worth. This analogy is a little hokey, but it helps illustrate why a bargain price isn't necessarily a bad thing. A company might not be flawless—it might not be Apple or Amazon—but, if the stock is inexpensive relative to its value, then it could be a profitable investment.
How have value stocks performed? Over time, value stocks have performed demonstrably better than growth stocks. Over the past 90 or so years, value stocks have, on average, outperformed growth stocks by 4.5 percentage points per year. On an annual basis, value stocks have beaten growth stocks more than 60% of the time.
What does that mean in dollar terms? Between 1970 and 2019, $1,000 invested in growth stocks would have turned into $72,000. But if you had invested that same $1,000 in value stocks, it would have ballooned to $153,000.
But more recently, this trend has reversed in dramatic fashion. Over the past 10 years, growth stocks have returned 17.2% a year, while value stocks have returned far less—just 10.5% a year. It’s been a spectacularly disappointing time for value investors.
If value stocks have lagged for so long, isn’t that a sign that maybe times have changed—and that what worked in the past doesn’t work anymore? I don’t subscribe to the idea that “value is dead.” If you refer back to the numbers above, you’ll note that value stocks still delivered 10.5% a year, which is right in line with—if not slightly above—the overall market’s long-term return. The only problem is that it pales in comparison to growth stocks, which have been firing on all cylinders. Like a person of average height standing next to an NBA player, it’s an unfair comparison, and I believe it leads to the wrong conclusion.
My view is that recent years—in which we’ve seen multiple companies cross the $1 trillion mark for the first time—have been an anomaly. If you were to run down the list of the top companies in the value category, I think you’d agree they’re not bad companies. They’re just not colossuses like Apple or Amazon. In fact, the top holding in the value basket, Berkshire Hathaway, is the company that Warren Buffett runs. This is a world-class company by any standard.
This brings me back to the Tweedy, Browne chart. It's titled “The Historical Tug of War Between Growth and Value,” and it illustrates how the market has oscillated between periods of outperformance by growth and value. In recent years, growth has trounced value. But just before that, value outpaced growth for seven years in a row, from 2000 to 2006.
What does this mean for structuring a portfolio? If the market oscillates between growth and value, and growth has been dominant in recent years, does that mean it’s time to load up on value? Here’s my view:
The long-term data clearly favor value stocks. Yes, the market oscillates, but—as Tweedy’s chart illustrates—value has notched many more winning years than growth.
There’s a logical reason to believe value will outperform from this point forward. Growth stocks are priced for perfection, while value stocks have margin for error. The price-to-earnings ratio of growth stocks today is 39. For value stocks, it’s a more reasonable 22.
But things can change. There was a point in the past, I’m sure, when the historical data would have argued in favor of buying the manufacturers of stage coaches and buggy whips.
The bottom line: I wouldn't give up on value. What I recommend is a tilt toward value stocks—that is, a modest overweight. While the jury is still out, my view is that value is just resting, not dead.
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.
Before I get into the details of the Tweedy chart, I’ll back up and first recap the concept of value investing and why there's a debate about it.
What does it mean to be a value stock? The simplest definition: It’s a stock selling for less than it’s currently worth. Investors who favor value stocks like to say that they're trying to buy $1 for 90 cents, and preferably less, with the hope that the price eventually rises to $1.
The opposite of a value stock is a growth stock. Unlike value investors, growth investors aren’t as concerned with finding stocks that look like bargains today. Instead, their focus is on strong, fast-growing companies. Their view is that the share price of a growing company will inevitably rise to reflect the company’s continued success.
How exactly is a stock determined to be a value stock? In some ways, value is in the eye of the beholder. To some, Amazon shares at $3,350 represent a bargain. Because its future looks so bright, they think the stock’s actually worth far more. Other investors, meanwhile, might look at Amazon’s price-earnings ratio of 80—double the overall market average—and see a stock that looks wildly overpriced. In short, value is subjective.
But for practical purposes, the companies that build stock market indexes are the formal arbiters of growth and value, and they each have a methodology for categorizing stocks. For example, here’s how Standard & Poor’s makes the distinction between growth and value:
A stock goes into the value category if it’s inexpensive according to three ratios: price-to-earnings, price-to-book value and price-to-sales.
A stock goes in the growth category if, as you might guess, it has exhibited strong growth in sales or profits, or has posted strong short-term share price gains.
If value stocks are stocks selling at bargain levels, isn’t that a bad sign? Strong companies have popular stocks and popular stocks tend to be expensive. If a stock is inexpensive, you might conclude that the company is financially weak. That may be true in some cases, but not all. Consider the five largest companies in the S&P 500 Value Index: Berkshire Hathaway, JP Morgan, Walt Disney, Johnson & Johnson and Intel. They might not be as strong as the five largest in S&P’s Growth Index—Apple, Microsoft, Amazon, Facebook and Tesla—but I would hardly call them weak.
The more important point is this: The valuations on value stocks are much lower than those of their growth peers. And lower valuations tend to be correlated with higher future returns. The logic is simple: All things being equal, it's better to pay less for something than more. This is a value investor's primary concern.
Benjamin Graham offered the analogy of a cigar butt on the ground, used and soggy. The idea of picking it up seems distasteful, so it's hard to imagine anyone paying much for it. But there might be one puff left in it. If it’s lying on the ground and costs you nothing, then it does technically represent a value. You're getting it for less than it's worth. This analogy is a little hokey, but it helps illustrate why a bargain price isn't necessarily a bad thing. A company might not be flawless—it might not be Apple or Amazon—but, if the stock is inexpensive relative to its value, then it could be a profitable investment.
How have value stocks performed? Over time, value stocks have performed demonstrably better than growth stocks. Over the past 90 or so years, value stocks have, on average, outperformed growth stocks by 4.5 percentage points per year. On an annual basis, value stocks have beaten growth stocks more than 60% of the time.
What does that mean in dollar terms? Between 1970 and 2019, $1,000 invested in growth stocks would have turned into $72,000. But if you had invested that same $1,000 in value stocks, it would have ballooned to $153,000.
But more recently, this trend has reversed in dramatic fashion. Over the past 10 years, growth stocks have returned 17.2% a year, while value stocks have returned far less—just 10.5% a year. It’s been a spectacularly disappointing time for value investors.
If value stocks have lagged for so long, isn’t that a sign that maybe times have changed—and that what worked in the past doesn’t work anymore? I don’t subscribe to the idea that “value is dead.” If you refer back to the numbers above, you’ll note that value stocks still delivered 10.5% a year, which is right in line with—if not slightly above—the overall market’s long-term return. The only problem is that it pales in comparison to growth stocks, which have been firing on all cylinders. Like a person of average height standing next to an NBA player, it’s an unfair comparison, and I believe it leads to the wrong conclusion.
My view is that recent years—in which we’ve seen multiple companies cross the $1 trillion mark for the first time—have been an anomaly. If you were to run down the list of the top companies in the value category, I think you’d agree they’re not bad companies. They’re just not colossuses like Apple or Amazon. In fact, the top holding in the value basket, Berkshire Hathaway, is the company that Warren Buffett runs. This is a world-class company by any standard.
This brings me back to the Tweedy, Browne chart. It's titled “The Historical Tug of War Between Growth and Value,” and it illustrates how the market has oscillated between periods of outperformance by growth and value. In recent years, growth has trounced value. But just before that, value outpaced growth for seven years in a row, from 2000 to 2006.
What does this mean for structuring a portfolio? If the market oscillates between growth and value, and growth has been dominant in recent years, does that mean it’s time to load up on value? Here’s my view:
The long-term data clearly favor value stocks. Yes, the market oscillates, but—as Tweedy’s chart illustrates—value has notched many more winning years than growth.
There’s a logical reason to believe value will outperform from this point forward. Growth stocks are priced for perfection, while value stocks have margin for error. The price-to-earnings ratio of growth stocks today is 39. For value stocks, it’s a more reasonable 22.
But things can change. There was a point in the past, I’m sure, when the historical data would have argued in favor of buying the manufacturers of stage coaches and buggy whips.
The bottom line: I wouldn't give up on value. What I recommend is a tilt toward value stocks—that is, a modest overweight. While the jury is still out, my view is that value is just resting, not dead.
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 Just Resting appeared first on HumbleDollar.
February 6, 2021
Unhappy Results
HAPPINESS RESEARCH fascinates me—and I’m not alone. Many of the insights uncovered by economists and psychologists have caught on with the general public, influencing countless life decisions.
Do you favor experiences over possessions? Do you strive to keep your commute short? Do you pause occasionally to ponder the good things in your life? Whether you realize it or not, you’ve likely been influenced by happiness research.
But it turns out that there are two popular insights that we need to unlearn—because they haven’t held up to close scrutiny:
Have you heard that happiness caps out at an income of $75,000 a year?
Have you heard that 50% of life satisfaction is determined by our happiness set point and 10% by our life’s circumstances—which means the remaining 40% is up to us?
Both ideas are appealing. We like the idea that those with far higher incomes aren’t necessarily happier. We like the idea that we have plenty of room to improve our own happiness. That likely explains why these two notions have become so popular. But two recent studies suggest neither may be true.
Capping out. Happiness research traces its origins to a 1974 study by economist Richard Easterlin. He found that, while the standard of living in the U.S. and elsewhere had climbed over time, reported happiness hadn’t. It seems we care less about our absolute income and more about how we compare to others. This trend has continued, with happiness levels barely budging in the U.S. over the past half-century, despite our rising standard of living.
Does that mean that those with lower incomes are destined, on average, to be less happy? A 2010 study offered hope. It found that, while folks with higher incomes were more likely to express satisfaction with their life, earning a huge income didn’t necessarily result in greater day-to-day happiness. In fact, the study found that, on average, day-to-day happiness capped out at around $75,000 in annual income and didn’t improve if you earned more.
But just released research debunks this finding, and convincingly so. The new study involved more than 33,000 working-age Americans, who—using an app—were queried regularly throughout the day about their feelings, offering a real-time look at their emotional state. It turns out that happiness doesn’t cap out at $75,000, but instead keeps climbing.
To be sure, the new study didn’t find that happiness rose in lockstep with raw income. Instead, the gap in reported well-being between folks earning $20,000 and those earning $60,000 was similar to the difference between a $60,000 household and one that earns $180,000. The implication: As income rises, it takes more and more money to make a noticeable difference in well-being. Still, more dollars did help.
Does this mean money definitely buys happiness? Conceivably, the causation could run the other way: Maybe happier people tend to earn more. The results could also partly reflect a “focusing illusion”: Higher-income participants in the study, knowing they’re relatively fortunate, might have been more inclined to give positive responses when asked about their emotional state.
Even if the results hold up to further scrutiny, and I suspect they will, we’re talking here about averages. The ornery old guy down the road may indeed be rich and miserable. Moreover, while money may bolster happiness, it’s hardly the only ingredient in a happy life. Other factors—notably the state of our health, the robustness of our social network and how we choose to spend our time—are also crucial.
Boosting happiness. A 2005 study offered a compelling way to think about happiness, all captured in a simple pie chart labeled, “What Determines Happiness?” The chart had three slices: set point at 50%, circumstances at 10% and intentional activity at 40%.
In other words, 60% of our individual happiness might be the result of a genetically determined set point and difficult-to-change life circumstances—things like where we live, what job we have and how much we make. But, the study contended, the other 40% depends on how we choose to lead our life.
Not surprisingly, this notion was eagerly embraced, especially by the self-help movement. Happiness, it seemed, was within our control. But is it? A 2019 study argues there may be less room for improvement than the earlier research suggested.
The 2019 study’s authors write that, “The idea that individuals’ life circumstances account for only 10% of the variance in well-being seems to be based on a misunderstanding…. Likewise, there is only very limited evidence to place the figure for the heritability of well-being as low as (precisely) 50%. Consequently, there is little reason to believe that 40% is a reliable estimate of the variance in chronic happiness attributable to intentional activity.”
The bottom line: We don’t have as much control over our happiness as we’d like to think. But that doesn’t mean we can’t boost our happiness a little by, say, volunteering, making more time for friends and family, avoiding unnecessary financial stress and favoring experiences over possessions. Such steps may be life enhancing, but we shouldn’t kid ourselves: They probably aren’t life altering.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Children are messy and expensive—but still a great investment. Joe Kesler makes the case for kids.
Buy aggressively when markets fall. All-time highs are a great time to invest. It’s tough to stick with what you know when emotions run high. Marc Bisbal Arias discusses the three lessons he learned in 2020.
Planning your post-pandemic travels? After spending three years traversing four continents, Mike Flack has a few pointers on how to save money on accommodation.
The Pacific Rim surges, small stocks shine, the yield curve steepens and large-cap growth struggles (unless your name is Tesla). Bill Ehart looks at the latest market trends.
Alarmed by last week's stock market "short squeeze"? Adam Grossman explains what happened—and talks about what everyday investors should do now.
Managing our finances should be a year-round endeavor, but there's something about a new year that gets folks thinking about money. 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.
Do you favor experiences over possessions? Do you strive to keep your commute short? Do you pause occasionally to ponder the good things in your life? Whether you realize it or not, you’ve likely been influenced by happiness research.
But it turns out that there are two popular insights that we need to unlearn—because they haven’t held up to close scrutiny:
Have you heard that happiness caps out at an income of $75,000 a year?
Have you heard that 50% of life satisfaction is determined by our happiness set point and 10% by our life’s circumstances—which means the remaining 40% is up to us?
Both ideas are appealing. We like the idea that those with far higher incomes aren’t necessarily happier. We like the idea that we have plenty of room to improve our own happiness. That likely explains why these two notions have become so popular. But two recent studies suggest neither may be true.
Capping out. Happiness research traces its origins to a 1974 study by economist Richard Easterlin. He found that, while the standard of living in the U.S. and elsewhere had climbed over time, reported happiness hadn’t. It seems we care less about our absolute income and more about how we compare to others. This trend has continued, with happiness levels barely budging in the U.S. over the past half-century, despite our rising standard of living.
Does that mean that those with lower incomes are destined, on average, to be less happy? A 2010 study offered hope. It found that, while folks with higher incomes were more likely to express satisfaction with their life, earning a huge income didn’t necessarily result in greater day-to-day happiness. In fact, the study found that, on average, day-to-day happiness capped out at around $75,000 in annual income and didn’t improve if you earned more.
But just released research debunks this finding, and convincingly so. The new study involved more than 33,000 working-age Americans, who—using an app—were queried regularly throughout the day about their feelings, offering a real-time look at their emotional state. It turns out that happiness doesn’t cap out at $75,000, but instead keeps climbing.
To be sure, the new study didn’t find that happiness rose in lockstep with raw income. Instead, the gap in reported well-being between folks earning $20,000 and those earning $60,000 was similar to the difference between a $60,000 household and one that earns $180,000. The implication: As income rises, it takes more and more money to make a noticeable difference in well-being. Still, more dollars did help.
Does this mean money definitely buys happiness? Conceivably, the causation could run the other way: Maybe happier people tend to earn more. The results could also partly reflect a “focusing illusion”: Higher-income participants in the study, knowing they’re relatively fortunate, might have been more inclined to give positive responses when asked about their emotional state.
Even if the results hold up to further scrutiny, and I suspect they will, we’re talking here about averages. The ornery old guy down the road may indeed be rich and miserable. Moreover, while money may bolster happiness, it’s hardly the only ingredient in a happy life. Other factors—notably the state of our health, the robustness of our social network and how we choose to spend our time—are also crucial.
Boosting happiness. A 2005 study offered a compelling way to think about happiness, all captured in a simple pie chart labeled, “What Determines Happiness?” The chart had three slices: set point at 50%, circumstances at 10% and intentional activity at 40%.
In other words, 60% of our individual happiness might be the result of a genetically determined set point and difficult-to-change life circumstances—things like where we live, what job we have and how much we make. But, the study contended, the other 40% depends on how we choose to lead our life.
Not surprisingly, this notion was eagerly embraced, especially by the self-help movement. Happiness, it seemed, was within our control. But is it? A 2019 study argues there may be less room for improvement than the earlier research suggested.
The 2019 study’s authors write that, “The idea that individuals’ life circumstances account for only 10% of the variance in well-being seems to be based on a misunderstanding…. Likewise, there is only very limited evidence to place the figure for the heritability of well-being as low as (precisely) 50%. Consequently, there is little reason to believe that 40% is a reliable estimate of the variance in chronic happiness attributable to intentional activity.”
The bottom line: We don’t have as much control over our happiness as we’d like to think. But that doesn’t mean we can’t boost our happiness a little by, say, volunteering, making more time for friends and family, avoiding unnecessary financial stress and favoring experiences over possessions. Such steps may be life enhancing, but we shouldn’t kid ourselves: They probably aren’t life altering.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Children are messy and expensive—but still a great investment. Joe Kesler makes the case for kids.
Buy aggressively when markets fall. All-time highs are a great time to invest. It’s tough to stick with what you know when emotions run high. Marc Bisbal Arias discusses the three lessons he learned in 2020.
Planning your post-pandemic travels? After spending three years traversing four continents, Mike Flack has a few pointers on how to save money on accommodation.
The Pacific Rim surges, small stocks shine, the yield curve steepens and large-cap growth struggles (unless your name is Tesla). Bill Ehart looks at the latest market trends.
Alarmed by last week's stock market "short squeeze"? Adam Grossman explains what happened—and talks about what everyday investors should do now.
Managing our finances should be a year-round endeavor, but there's something about a new year that gets folks thinking about money. 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 Unhappy Results appeared first on HumbleDollar.
February 5, 2021
The Case for Kids
I RECENTLY HIT the “pay now” button on what I believe will be the last of 20 years of college tuition bills. That’s right, we have five kids. All went to college. None took out student loans.
Was it worth it—not just paying the tuition bills, but the decision to have children in the first place? It’s a pressing question. A birth dearth is hitting the U.S. and other countries around the world, as many adults opt to go childless. Today, roughly half of all countries have fertility rates that are so low that the population is either stagnant or shrinking.
That brings me to today’s topic: the case for children. It’s a complex subject. I don’t want to suggest I know how others ought to decide. Everybody’s situation is unique and shouldn’t be judged by anyone else—and certainly not by me. Still, I think those of us with good stories about raising kids should share our experiences. We can balance out today’s narrative that children are more trouble than they’re worth.
I remember the subtle pressure in the 1980s and ‘90s from others, as our family kept growing. Folks expressed concerns about having so many children. I suppose that, if you treasure a quiet and peaceful life above all else, having kids may not be a good idea. Children are messy and bring chaos.
I remember answering the door, only to come face to face with our upset neighbor. He was a prominent doctor in the community and complained about my kids shooting at the deer in the backyard from our second story bedroom windows.
“Thank you, Dr. Smith, for letting me know. I’ll take care of it.” Ugh.
But probably the greatest reason the U.S. no longer has a fertility rate necessary to maintain a stable population is related to financial concerns. The U.S. Department of Agriculture estimates the cost of raising a child through age 17 is more than $230,000. That number sounds ridiculously high to me. Still, whatever the right number is, the cost is daunting when you’re just getting started.
I went back and looked at our financial records and found that, when our first child was born, we had a paltry net worth of $12,000. On top of that, my salary was modest. Why did my wife and I believe we could support a family? I’m a conservative banker and my tribe doesn’t believe “faith” is a business plan. So why did we do it? There were five reasons—some of which were clear to us at the time and some of which only became clear later.
First, rather than just complain about our culture, we thought our best opportunity to change the world was by having children. Today, by God’s grace, we have two entrepreneurs, one banker, one IT guy and a social worker. In addition, thanks to marriage, we now have two health care workers and an oil man in the family. The world is better as a result of their service to others. We now know we changed the world for the better.
I’m a finance guy, so I can’t help but estimate the financial return on investment. All five kids have good jobs. What if I assume they average $100,000 a year in earnings over a 40-year career? What kind of impact could that have?
Assuming they give away 10% of their income, as we taught them, they’ll have contributed $2 million to charities over their careers. Social Security and Medicare contributions at current rates would be $3 million. State, local and federal taxes come in at an estimated $4 million. I’d call that a decent return on investment.
Second, having children matures us. If I’d never advanced in my career, we would have struggled to raise five children. But the financial challenge of having kids meant I approached my career with a new fervor. As we awaited the birth of our first son, I studied hard for the CPA exam. Next was an MBA program, which I completed while working. That led to some nice raises and promotions.
Third, by necessity, having children squeezed a lot of ugly selfishness out of me. I’m a selfish person by nature. But selfless service to family prepared me for selfless service at work and to charitable organizations.
Fourth, researchers say children don’t necessarily make people happier at first. But ultimately, the satisfaction of a purposeful life devoted to family trumps any temporary happiness we give up.
Finally, as we age, it can become harder to find true purpose, joy and passion. But having three grandchildren sure helps.
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.
Was it worth it—not just paying the tuition bills, but the decision to have children in the first place? It’s a pressing question. A birth dearth is hitting the U.S. and other countries around the world, as many adults opt to go childless. Today, roughly half of all countries have fertility rates that are so low that the population is either stagnant or shrinking.
That brings me to today’s topic: the case for children. It’s a complex subject. I don’t want to suggest I know how others ought to decide. Everybody’s situation is unique and shouldn’t be judged by anyone else—and certainly not by me. Still, I think those of us with good stories about raising kids should share our experiences. We can balance out today’s narrative that children are more trouble than they’re worth.
I remember the subtle pressure in the 1980s and ‘90s from others, as our family kept growing. Folks expressed concerns about having so many children. I suppose that, if you treasure a quiet and peaceful life above all else, having kids may not be a good idea. Children are messy and bring chaos.
I remember answering the door, only to come face to face with our upset neighbor. He was a prominent doctor in the community and complained about my kids shooting at the deer in the backyard from our second story bedroom windows.
“Thank you, Dr. Smith, for letting me know. I’ll take care of it.” Ugh.
But probably the greatest reason the U.S. no longer has a fertility rate necessary to maintain a stable population is related to financial concerns. The U.S. Department of Agriculture estimates the cost of raising a child through age 17 is more than $230,000. That number sounds ridiculously high to me. Still, whatever the right number is, the cost is daunting when you’re just getting started.
I went back and looked at our financial records and found that, when our first child was born, we had a paltry net worth of $12,000. On top of that, my salary was modest. Why did my wife and I believe we could support a family? I’m a conservative banker and my tribe doesn’t believe “faith” is a business plan. So why did we do it? There were five reasons—some of which were clear to us at the time and some of which only became clear later.
First, rather than just complain about our culture, we thought our best opportunity to change the world was by having children. Today, by God’s grace, we have two entrepreneurs, one banker, one IT guy and a social worker. In addition, thanks to marriage, we now have two health care workers and an oil man in the family. The world is better as a result of their service to others. We now know we changed the world for the better.
I’m a finance guy, so I can’t help but estimate the financial return on investment. All five kids have good jobs. What if I assume they average $100,000 a year in earnings over a 40-year career? What kind of impact could that have?
Assuming they give away 10% of their income, as we taught them, they’ll have contributed $2 million to charities over their careers. Social Security and Medicare contributions at current rates would be $3 million. State, local and federal taxes come in at an estimated $4 million. I’d call that a decent return on investment.
Second, having children matures us. If I’d never advanced in my career, we would have struggled to raise five children. But the financial challenge of having kids meant I approached my career with a new fervor. As we awaited the birth of our first son, I studied hard for the CPA exam. Next was an MBA program, which I completed while working. That led to some nice raises and promotions.
Third, by necessity, having children squeezed a lot of ugly selfishness out of me. I’m a selfish person by nature. But selfless service to family prepared me for selfless service at work and to charitable organizations.
Fourth, researchers say children don’t necessarily make people happier at first. But ultimately, the satisfaction of a purposeful life devoted to family trumps any temporary happiness we give up.
Finally, as we age, it can become harder to find true purpose, joy and passion. But having three grandchildren sure helps.
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 The Case for Kids appeared first on HumbleDollar.
February 4, 2021
Get a Room
IN SEPTEMBER 2017, my wife and I sold our home, our car and almost all of our earthly possessions. What remained fit in a storage pod measuring 12 feet by eight feet by eight feet. We then spent the next three years traveling across four continents and staying in more than 200 rooms. Along the way, I learned a few things about booking lodgings that could make your travels a little cheaper.
We used Airbnb 40% of the time and Booking 35%. On the other days, we stayed with friends or negotiated directly with hotels. Staying with friends is obviously the most economical option, though it can have long-term costs.
Airbnb rents mostly private apartments or houses, which are generally more affordable and get you access to a kitchen. Booking has both hotel rooms and private Airbnb-like apartments. The latter tend to be a little more corporate. Negotiating directly with a hotel can help you avoid some service fees, though most will only negotiate on the margin.
They all use bait-and-switch pricing. You enter the dates of your stay and click search. You notice an apartment you like for $100 a day. Since your stay is for seven days, you’d expect to be charged $700—and you’d be wrong. When you click "book," the price is now magically $810, due to taxes, more taxes, cleaning fees, service fees and so on. On Booking, there may be additional taxes and fees directly owed to the hotel upon checking in or checking out.
We took to using Booking as a safety net. Consider booking fully cancellable accommodation that meets your minimum requirements for price, location, quality and so on. Then, between now and the fully cancellable date, scour the internet for accommodation that’s better and cheaper. Payment may be charged prior to the fully cancellable date, so—if you cancel—you’ll have to wait for the refund to hit your credit card. If this is a foreign transaction, changes in the exchange rate could cause the refund to be more or less than the initial charge. If it’s less, call your credit card company to ask for the difference. If it’s more….
Do not book accommodation that doesn’t include photos of the bathroom. "Trust but verify" all important amenities. In Japan, you still have the option to book a smoking room. I didn't verify. Febreze can only do so much. I rented a place in Ann Arbor, Michigan, in the summer and failed to notice that it didn’t have air-conditioning. Fans, even five of them, can only do so much.
If there’s an issue, complain. Your potentially negative online review has power. If the issue can’t be resolved to your satisfaction, ask for satisfaction. In Reykjavik, Iceland, I had one night—worth $135—refunded due to an incredibly loud party next door. In Ann Arbor, I had $130 refunded after complaining about the smell and cleanliness.
After booking, and prior to your first night’s stay, contact your host with any requests or just to say “hello.” Making a connection with your host will only make your stay more pleasant. Hosts have good intel about the area, and they can save you money if you have issues or need to extend your stay.
Airbnb offers the ability to negotiate, so use it. If you don't like the price you see, feel free to click the "contact host" button and ask for a lower price. This worked 65% of the time. Booking doesn’t offer a way to contact the host, making negotiation impossible. This is most likely not an oversight.
If your stay is open-ended and you need to extend, contact your host and offer to extend at a lower rate. Prior to making your offer, try to determine if the place is available, either using the online calendar or by attempting to book it. By dealing directly with the owner, you may sidestep service fees, cleaning fees and so on. If you make your offer in cash, you may save even more. This has worked almost every time.
Airbnb and Booking have ratings and reviews for each property. Booking has a review score with a scale of zero to 10. The scores and reviews tend to be tougher than those on Airbnb. I have a theory why. Most of the properties on the site are either hotels or corporate apartments, as opposed to people’s homes. People don't mind telling Marriott the shortcomings of its properties, but have trouble giving a homeowner the same feedback. Also, because most of the properties are hotels, the quantity of feedback is significantly larger.
Airbnb scores its properties with zero to five stars. The number of stars and the reviews tend to be overly generous. I think people are reluctant to give accurate feedback to people just like themselves. This is especially true if the owners have some personal contact with the guest before or during the stay. To me, five stars mean the Ritz-Carlton: scrupulously clean, seamless check-in, 500-thread-count sheets. But on Airbnb, I’ve booked so many five-star properties that have come up woefully short that now, when I book a five-star property, I expect a four-star experience.
On Airbnb, you can typically get a discount for longer stays. These discounts generally work in increments of seven, 14 and 30 days. Result: If you can stay seven days instead of six, you can probably get a better daily rate. If you’re planning to negotiate a better rate on Airbnb, it’s useful to know the discount you get for extending your stay. For example, if you plan to stay for 13 days, but a 14-day stay gets you a 20% discount, this could be useful knowledge when negotiating. Also, some cities will charge less tax, or no tax at all, for stays 30 days or longer. The upshot: If your plan is to stay only 29 days, extending your stay by one day could save you money.
Negotiating directly with hotels can be frustratingly futile. Almost all front desk employees and managers will only match online rates, which is less than ideal. Our best results came from establishing a relationship with the manager after check-in, which often proved useful when negotiating future stays.
Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. His previous articles were Lost Abroad, Making the Call and Trading Places.
We used Airbnb 40% of the time and Booking 35%. On the other days, we stayed with friends or negotiated directly with hotels. Staying with friends is obviously the most economical option, though it can have long-term costs.
Airbnb rents mostly private apartments or houses, which are generally more affordable and get you access to a kitchen. Booking has both hotel rooms and private Airbnb-like apartments. The latter tend to be a little more corporate. Negotiating directly with a hotel can help you avoid some service fees, though most will only negotiate on the margin.
They all use bait-and-switch pricing. You enter the dates of your stay and click search. You notice an apartment you like for $100 a day. Since your stay is for seven days, you’d expect to be charged $700—and you’d be wrong. When you click "book," the price is now magically $810, due to taxes, more taxes, cleaning fees, service fees and so on. On Booking, there may be additional taxes and fees directly owed to the hotel upon checking in or checking out.
We took to using Booking as a safety net. Consider booking fully cancellable accommodation that meets your minimum requirements for price, location, quality and so on. Then, between now and the fully cancellable date, scour the internet for accommodation that’s better and cheaper. Payment may be charged prior to the fully cancellable date, so—if you cancel—you’ll have to wait for the refund to hit your credit card. If this is a foreign transaction, changes in the exchange rate could cause the refund to be more or less than the initial charge. If it’s less, call your credit card company to ask for the difference. If it’s more….
Do not book accommodation that doesn’t include photos of the bathroom. "Trust but verify" all important amenities. In Japan, you still have the option to book a smoking room. I didn't verify. Febreze can only do so much. I rented a place in Ann Arbor, Michigan, in the summer and failed to notice that it didn’t have air-conditioning. Fans, even five of them, can only do so much.
If there’s an issue, complain. Your potentially negative online review has power. If the issue can’t be resolved to your satisfaction, ask for satisfaction. In Reykjavik, Iceland, I had one night—worth $135—refunded due to an incredibly loud party next door. In Ann Arbor, I had $130 refunded after complaining about the smell and cleanliness.
After booking, and prior to your first night’s stay, contact your host with any requests or just to say “hello.” Making a connection with your host will only make your stay more pleasant. Hosts have good intel about the area, and they can save you money if you have issues or need to extend your stay.
Airbnb offers the ability to negotiate, so use it. If you don't like the price you see, feel free to click the "contact host" button and ask for a lower price. This worked 65% of the time. Booking doesn’t offer a way to contact the host, making negotiation impossible. This is most likely not an oversight.
If your stay is open-ended and you need to extend, contact your host and offer to extend at a lower rate. Prior to making your offer, try to determine if the place is available, either using the online calendar or by attempting to book it. By dealing directly with the owner, you may sidestep service fees, cleaning fees and so on. If you make your offer in cash, you may save even more. This has worked almost every time.
Airbnb and Booking have ratings and reviews for each property. Booking has a review score with a scale of zero to 10. The scores and reviews tend to be tougher than those on Airbnb. I have a theory why. Most of the properties on the site are either hotels or corporate apartments, as opposed to people’s homes. People don't mind telling Marriott the shortcomings of its properties, but have trouble giving a homeowner the same feedback. Also, because most of the properties are hotels, the quantity of feedback is significantly larger.
Airbnb scores its properties with zero to five stars. The number of stars and the reviews tend to be overly generous. I think people are reluctant to give accurate feedback to people just like themselves. This is especially true if the owners have some personal contact with the guest before or during the stay. To me, five stars mean the Ritz-Carlton: scrupulously clean, seamless check-in, 500-thread-count sheets. But on Airbnb, I’ve booked so many five-star properties that have come up woefully short that now, when I book a five-star property, I expect a four-star experience.
On Airbnb, you can typically get a discount for longer stays. These discounts generally work in increments of seven, 14 and 30 days. Result: If you can stay seven days instead of six, you can probably get a better daily rate. If you’re planning to negotiate a better rate on Airbnb, it’s useful to know the discount you get for extending your stay. For example, if you plan to stay for 13 days, but a 14-day stay gets you a 20% discount, this could be useful knowledge when negotiating. Also, some cities will charge less tax, or no tax at all, for stays 30 days or longer. The upshot: If your plan is to stay only 29 days, extending your stay by one day could save you money.
Negotiating directly with hotels can be frustratingly futile. Almost all front desk employees and managers will only match online rates, which is less than ideal. Our best results came from establishing a relationship with the manager after check-in, which often proved useful when negotiating future stays.
Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. His previous articles were Lost Abroad, Making the Call and Trading Places.The post Get a Room appeared first on HumbleDollar.
February 3, 2021
Better Next Time
LAST YEAR WAS MY first bear market. I’ve been thinking a lot about it and about the astonishing stock market recovery that followed, so I’m better prepared for next time around. Here are three lessons I learned in 2020:
Lesson No. 1: Buy aggressively when markets fall. When the market crashed last February and March, I invested more in stocks. But I regret not having invested a lot more, despite having cash available. In hindsight, I should have been much more aggressive. Even though I had set myself some guidelines about how much to invest in a bear market, I was worried about “catching a falling knife,” as Wall Street pundits put it.
True, this was one of history’s fastest recoveries after one of the quickest crashes, so there was little time to react. Yes, stocks could have taken longer to rebound. Still, I shouldn’t make excuses: I have decades of investing ahead of me and a market that’s down 30% is already a great buying opportunity.
Lesson No. 2: It’s tough to stick with what you know when emotions run high. “There’s a difference between knowing what you’re supposed to do, and actually having the nerve to do it in the moment,” writes Maria Konnikova in The Biggest Bluff , where she details her journey to becoming a professional poker player.
It’s one thing to know the strategy and a whole different story to be prepared mentally, she says. I knew the theory: When the market falls, you should double down. But with the whole world apparently going crazy and stocks falling at unprecedented speed, it was harder than I expected to stick with what I knew was right. Indeed, with the stock market plunging day after day, it was difficult enough to make my regular investments, let alone buy more.
How we feel affects how we act, says Konnikova. To guide my actions, I now have a written plan to refer to, which includes specific actions to take at certain times, regardless of my feelings. I’ll also have this article printed out to review, in case I have second thoughts about acting. Will this prevent me from sabotaging my own strategy? I can’t say for sure, but it’s better to have a plan than no plan at all.
Lesson No. 3: All-time highs are a great time to invest. When I started investing, I chose actively managed funds, because I was worried about the S&P 500’s rich valuations. The roaring bull market that started in 2009 surely had to stop at some point, I told myself. And with financial pundits saying U.S. stock were overvalued, I didn’t feel at ease buying index funds and hence indiscriminately purchasing a broad swath of the stock market, with no regard to each company’s valuation.
I’ve since changed my mind. Last August, J.P. Morgan published research analyzing the S&P 500’s return if you invested at all-time highs and comparing those results to what happened if you bought on other days. The counterintuitive conclusion? Buying at all-time highs has historically led to better performance.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.
Lesson No. 1: Buy aggressively when markets fall. When the market crashed last February and March, I invested more in stocks. But I regret not having invested a lot more, despite having cash available. In hindsight, I should have been much more aggressive. Even though I had set myself some guidelines about how much to invest in a bear market, I was worried about “catching a falling knife,” as Wall Street pundits put it.
True, this was one of history’s fastest recoveries after one of the quickest crashes, so there was little time to react. Yes, stocks could have taken longer to rebound. Still, I shouldn’t make excuses: I have decades of investing ahead of me and a market that’s down 30% is already a great buying opportunity.
Lesson No. 2: It’s tough to stick with what you know when emotions run high. “There’s a difference between knowing what you’re supposed to do, and actually having the nerve to do it in the moment,” writes Maria Konnikova in The Biggest Bluff , where she details her journey to becoming a professional poker player.
It’s one thing to know the strategy and a whole different story to be prepared mentally, she says. I knew the theory: When the market falls, you should double down. But with the whole world apparently going crazy and stocks falling at unprecedented speed, it was harder than I expected to stick with what I knew was right. Indeed, with the stock market plunging day after day, it was difficult enough to make my regular investments, let alone buy more.
How we feel affects how we act, says Konnikova. To guide my actions, I now have a written plan to refer to, which includes specific actions to take at certain times, regardless of my feelings. I’ll also have this article printed out to review, in case I have second thoughts about acting. Will this prevent me from sabotaging my own strategy? I can’t say for sure, but it’s better to have a plan than no plan at all.
Lesson No. 3: All-time highs are a great time to invest. When I started investing, I chose actively managed funds, because I was worried about the S&P 500’s rich valuations. The roaring bull market that started in 2009 surely had to stop at some point, I told myself. And with financial pundits saying U.S. stock were overvalued, I didn’t feel at ease buying index funds and hence indiscriminately purchasing a broad swath of the stock market, with no regard to each company’s valuation.
I’ve since changed my mind. Last August, J.P. Morgan published research analyzing the S&P 500’s return if you invested at all-time highs and comparing those results to what happened if you bought on other days. The counterintuitive conclusion? Buying at all-time highs has historically led to better performance.
Marc Bisbal Arias holds a bachelor's degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.The post Better Next Time appeared first on HumbleDollar.
February 2, 2021
Winter of Discontent
WELCOME TO OUR inaugural monthly personal-finance update. I was all ready to write about January’s robust stock market—and then the GameStop saga garnered national headlines, with short-selling hedge funds losing billions, everyday investors crowing and politicians piping up. Some bashed Wall Street for allegedly thwarting retail traders, while others worried about the financial system’s stability.
Amid the tumult, the S&P 500 fell into the red for the year-to-date, despite blockbuster earnings reports from two of the market’s longtime leaders, Microsoft and Apple. Renewed concerns about the economic impact of COVID-19 also weighed on the market.
Still, small-company stocks’ gains weren’t entirely erased—further proof for the so-called January Effect, the tendency for small stocks to outperform during the year’s first month. Vanguard Small-Cap ETF (symbol: VB) held on for a 2% gain, despite losing nearly 5% in the month’s final week. But the S&P 500 closed the month down 1%. Does that put the kibosh on 2021? The January Barometer, sometimes confused with the January Effect, posits that as goes January, so goes the year. But such Wall Street lore is more proverbial than tradeable.
Should auld acquaintance be forgot? Large-cap U.S. growth stocks, seemingly so unbeatable for so long, reached peak outperformance in early September. As a group, the stocks continued to lag behind small caps in January, with Vanguard Growth ETF (VUG) down 1%. Tesla (TSLA), up 12% last month, was the biggest exception, though Microsoft and Google’s parent Alphabet gained 4% and nearly 5%, respectively. Vanguard Small-Cap Growth ETF (VBK) and Vanguard Small-Cap Value ETF (VBR) both gained some 2%, as their investment styles sparkled, as they have for the past three months, with advances of 26% and 28%, respectively.
Truth be told, the Vanguard Extended Market ETF (VFX), which tracks small- and mid-cap stocks, bested both of them over one month (+3%) and three months (+30%). The latter result was powered by former index component Tesla, which is up nearly 600% over the past year and is now the nation’s fifth-largest company by stock market capitalization. The electric car maker was added to the S&P 500 index on Dec. 21 and is no longer held in Vanguard Extended Market.
Asia ascendant. Some of the best action around the globe in January was along the Pacific Rim. BlackRock’s iShares MSCI China ETF (MCHI) gained 8% and iShares MSCI Taiwan ETF (EWT) was up 4%, despite significant declines in the final week. That drove broader emerging markets funds higher, with Vanguard FTSE Emerging Markets ETF (VWO) climbing 3%.
Based on reported data, China was the only major economy to grow in 2020, apparently helped by aggressive containment of COVID-19. Foreign stocks as a whole slightly outperformed the S&P 500 in January, as reflected in a 0.4% gain for Vanguard FTSE All-World ex-U.S. ETF (VEU). But foreign small-caps didn’t get the memo that it was time to shine, with Vanguard FTSE All-World ex-U.S. Small-Cap ETF (VSS) down 0.6% last month.
Steeper curve. In recent memory, the yield curve—the relationship of longer-term Treasury bond yields to those of shorter-term Treasury yields—has been somewhat flat. No more. The Federal Reserve has pushed short-term rates to the floor, while optimism about a recovery has pulled long-term yields higher. Whereas the short and intermediate areas of the curve used to offer an attractive mix of income and safety, yields there are now low both in absolute terms and relative to longer-term yields.
The yield advantage of 10-year Treasurys over two-year Treasurys recently hit its highest level since mid-2017. But before you don your climbing gear, realize that even the 30-year yield, which ended January at 1.87%, is far lower than it was two years ago, when the long bond yielded 2.99%. That’s a lot of room for rates to rise and hence for investors to lose a ton of money in a long-term Treasury fund.
For instance, the Vanguard Long-Term Treasury ETF (VGLT) has an average duration—a measure of interest-rate sensitivity—of 18.6 years. That suggests that if long-term rates were to rise one percentage point—say, back to 2019 levels—the fund’s price would fall more than 18%. (On the other hand, it would gain that much if interest rates fell one percentage point.) The Vanguard fund slumped 3.5% in January, but still has a gain of nearly 6% for the past 12 months. Perhaps online savings accounts, yielding in the half-percentage-point range, are better places today to park your safe money.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.
The post Winter of Discontent appeared first on HumbleDollar.
