Jonathan Clements's Blog, page 317

About That 4%

IT’S SCARY TO RETIRE with a pool of money, knowing how you handle it determines your financial security for the next 25 years or so. It must seem even scarier to everyday Americans who don’t think they can count on Social Security.

A recent Tweet caught my eye. It linked to an article about the problems with the so-called 4% rule. As you might recall, the 4% rule states that, if you withdraw 4% of your portfolio’s value in the first year of retirement and thereafter step up the dollar amount withdrawn with inflation, you have a good shot at making your money last 30 years.

What’s the problem with the 4% rule? The article mentioned that people don’t spend the same amount each year, past investment results may not predict future returns and people’s finances could be upended by major life changes.

Meanwhile, others have argued that the rule is outdated. What’s the problem? Interest rates aren’t what they used to be, plus individuals may not feel comfortable with the assumed investment mix.

Getting worried? Yet other critics say the 4% rule results in retirees not spending enough, thereby leaving an unnecessarily large estate. I’m guessing that isn’t a problem for most. Still, it seems we have critics saying that the 4% rule leads to both too little spending and too much. Neat trick, wouldn’t you say?

I was particularly puzzled by the criticism that people don’t spend the same amount each year. If you’re living on a pension or Social Security, your spending will also vary from year to year. So why is this criticism directed at the 4% withdrawal rate? If you’re managing your own income flow, at least you have flexibility not found with a fixed monthly pension.

For many people, the key retirement planning question is, “How much income can I count on for the rest of my life?” Let’s assume you were earning $50,000 a year before you quit the workforce and you want that same income in retirement. First, subtract your Social Security benefit from the $50,000. That might leave you needing to generate $32,000 a year from savings. To that end, you could buy an immediate fixed annuity that’ll pay $32,000 a year for life. Today, that annuity would cost a 65-year-old man around $550,000.

Alternatively, you could manage the money yourself. Based on the 4% rule, you’d need to retire with $800,000 to generate $32,000. The good news: Unlike the annuity, the 4% rule should result in a growing income stream. For instance, after withdrawing $32,000 in the first year of retirement, you might pull out $32,960 in year two, assuming 3% inflation.

Still, there’s a tradeoff. With the annuity, you have guaranteed income for life—but you’ve turned over $550,000 to an insurance company and you’ve left yourself vulnerable to inflation. Meanwhile, with the 4% rule, there are no guarantees. Maybe your annual income will rise with inflation and you’ll leave excess funds to your heirs—or maybe you’ll run out of money and die broke.

Keep in mind that nothing says you have to withdraw the exact sum specified by the 4% rule. If you need less, take less. Alternatively, take the amount based on the formula from your long-term investment portfolio, but add some of the money to your emergency fund. That’ll give you a financial buffer if, say, we have a year with a significant market downturn and withdrawing the full amount specified by the 4% rule doesn’t seem prudent. Here are five additional pointers:

In addition to the nest egg you’ll use to generate income, aim to start your retirement with a reserve fund.
If you’re using the 4% rule, modify it annually based on your spending needs. Don’t need the full inflation increase? Don’t take it.
Make sure your living expenses are less than your expected income, so you have some wiggle room.
Budget for health care. It’s a big item, but not as big as some suggest. You see projections that retirees will spend hundreds of thousands on health care. Maybe, maybe not. The predictable annual cost is what matters. For most, that’ll be Medicare Part B and D premiums, plus Medigap premiums. Yes, Medicare does involve some modest out-of-pocket costs. But the real wildcard is long-term care. It won’t affect many, but those affected could face huge costs: About 2.4% of the population over age 65 is in a nursing home, though many of those are there on a temporary basis.
Consider combining an immediate annuity with retirement assets where you use the 4% rule. That way, you’ll have steady income from Social Security and the annuity—but you’ll still retain control of part of your nest egg.

As you navigate all of this, you will have the added complication of taking required minimum distributions (RMDs) from your retirement accounts. Interestingly, the RMD schedule starts close to 4%. At age 72, the required withdrawal rate is 3.9%, rising to 4.37% at age 75, 5.35% at age 80 and 6.76% at age 85. The upshot: There may be those who say that withdrawing 4% plus an inflation increase is too much, and yet the IRS effectively insists that retirement account investors withdraw that sort of amount—though just because the IRS insists doesn’t mean you have to spend the entire sum.

Is any retirement income guidance totally reliable? I doubt it. You’ll inevitably need to make adjustments along the way. Still, I think the 4% rule is helpful. My advice: Be more conservative than the rule suggests—and, if you’re married, that’s doubly true, because you need to make your money last for two lifetimes.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Banking from A to F, It Took Decades and Making Cents. Follow Dick on Twitter @QuinnsComments.

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Working the Numbers

THIS YEAR’S TAX DAY was the strangest I can remember. Amid the pandemic, the filing deadline had been pushed back to July 15, three months later than usual. And for me, it was our most complicated tax year ever. I had both retirement income and income from various in-state and out-of-state consulting gigs.

But the biggest complication stemmed from last year’s sale of our second home. This was a vacation home that we rented part-time and also used ourselves. The year you sell such a house brings special tax considerations. You can recapture losses that weren’t allowed in previous years. But you also have to recapture depreciation previously used. You have to break down the realized capital gain into personal and business portions. The business portion is further broken down into land and building, because you can depreciate buildings but not land. And that’s just federal taxes. Pennsylvania, where I live, treats it as a straight capital gain. I was happy I had three extra months to research all of this.

We fought our way through these complications, got our taxes filed and tax bills paid—and I furthered my financial education. In fact, I’d encourage everyone to take a little time to review their tax return and see what they can learn. Here are five of my favorite questions to ask:

1. What’s your income? For tax purposes, there are multiple definitions of income, including adjusted gross income (AGI) and taxable income. AGI is your gross income minus so-called above-the-line deductions. It includes both earned and unearned income. This is the starting point for calculating your tax bill. AGI is also the key to determining your eligibility for various deductions and credits. Meanwhile, your taxable income is the income used to calculate how much tax you owe. It starts with your AGI, but then you subtract either the standard deduction or your itemized deductions.

2. What are your deductions? These reduce the amount of income that’s taxed. The most common above-the-line deductions include retirement account contributions, health insurance premiums and self-employment taxes. These deductions are available before deciding whether to claim the standard deduction or to itemize. One way to reduce your tax bill is to increase these deductions. For many folks, the most effective strategy is to boost their 401(k) contributions—and this is typically also the best strategy for their long-term financial health.

3. Do you itemize or take the standard deduction? The Tax Cut and Jobs Act of 2017 greatly increased the standard deduction and put limits on what you can itemize. The items on Schedule A—the itemized deduction form—are some of the biggest and most important line items in a family’s budget. The upshot: Even if you end up claiming the standard deduction, it’s worth taking a close look at your itemized deductions.

I recently helped my son and daughter-in-law review their tax return. They bought their first home in mid-2019, but their standard deduction still turned out to be $118 greater than their itemized deductions. I noted that in 2020, when they’ll pay a full year of mortgage interest, they’d likely have more than enough to itemize. I recommended keeping track of medical expenses and charitable contributions, as these could become more valuable.

One strategy for those on the cusp of itemizing: Bundle several years of charitable contributions into one tax year, so you’re able to itemize your deductions. A donor-advised fund is a good way to accomplish this.

4. What’s your marginal tax bracket? This is the tax rate you pay on your last dollar of income. It depends on your filing status and your taxable income. There are currently seven federal income tax rates, ranging from 10% to 37%. Sound (relatively) straightforward? There are, alas, complications caused by the phase-in and phase-out of various credits, as well as the impact of other taxes.

The Tax Foundation has a good analysis of how these interact to create tax brackets beyond the seven standard ones. Take married filers who claim the standard deduction and are in the 24% bracket, which means their total income is between $195,851 and $351,400. Once their income hits $250,000, an additional 0.9% Medicare tax is imposed. Similarly, the phase-in and phase-out of the earned income tax credit and child tax credit can skew your marginal rate.

5. What’s your effective tax rate? TurboTax provides a good summary of your federal tax situation. It gives you an effective tax rate, which is your total income tax bill divided by your gross income. That rate is probably lower than you thought. On the other hand, if you add in your payroll, state, local, real estate and sales taxes, you may discover your total annual tax bill is far higher than you ever imagined.

Richard Connor is  a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Summer Job, Don’t Leave a Mess and Treasure Hunting . Follow Rick on Twitter  @RConnor609 .

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July’s Hits

THERE’S SO MUCH more to managing money than just picking investments. Indeed, we can likely add far more value to our financial life by focusing on topics like buying the right home and when to claim Social Security—which may help explain last month’s most popular articles:

“My son-in-law—who’s a financial advisor to high net worth families—casually said to me, ‘You’re wealthy’,” recalls Dick Quinn. “What? Me wealthy? I’m not even close to qualifying as one of his clients.”
Want to buy a second home? If you also plan to rent it out part of the time, check out the five tips from Rick Connor.
Claiming Social Security benefits at age 62 is often a mistake—but not always, as James McGlynn explains.
“When I walked away with nearly $60,000 in tax-free profit from the sale of that first house, I was hooked on home improvements,” says Kristine Hayes, recounting her battles with sheetrock and water leaks.
Five tech stocks account for 20% of the S&P 500. Everyday investors are trading leveraged ETFs. Folks are taking stock tips from the founder of a sports website. “Warning signs?” asks Adam Grossman.
So a 30-something investor walks into a financial salesman’s office….
“Mental resilience is the ultimate contrarian strategy,” writes Isaac Cathey. “My family’s intuitive confidence—that the world wasn’t ending and that the market would surely recover soon enough—kept us on track.”

Meanwhile, July’s most popular newsletters were My Four Goals and 15 Ways to Happy.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Take the Low Road, Just Another Day and Almost Zero.

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Don’t Be That Person

THE TRICKY THING about investing is that there’s no single “right” approach. In an earlier article, I described the approach I favor—what I call the five minds of the investor, which involves being part optimist, pessimist, analyst, economist and psychologist.

But there are many other ways to be successful: You might invest in real estate, or follow a quantitative investment strategy, or invest in private companies. There are plenty of people who do very well with these approaches.

That said, there are also many investing styles that look like they might work, but often don’t. Want to fare well financially? Here are five common approaches to investing that you should probably avoid:

1. The Raconteur. A raconteur is no ordinary storyteller. According to Merriam-Webster’s dictionary, a raconteur is “a person who excels in telling anecdotes.” That’s exactly what’s dangerous about this approach to investing. Though their evidence might be anecdotal, raconteurs truly believe they are using facts to support their views.

Suppose a raconteur is trying to research a consumer electronics company. He or she might speak with someone who works for the company or might try one of its products. In both cases, the raconteur is collecting real data, but it’s too limited to be conclusive. Nonetheless, that information can be woven together into a story that sounds compelling.

Raconteurs, in fact, love to invoke the concept of “buy what you know,” an idea popularized by Fidelity Investments veteran Peter Lynch. In the introduction to his book One Up on Wall Street, Lynch argued that individual investors should buy stock in companies that they know and understand. “If you stay half-alert,” he wrote, “you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall….”

He goes on to describe how he discovered several winning stocks—including Taco Bell, Dunkin’ Donuts and Apple—using just that method. But raconteurs overlook one key fact: It isn’t that simple. Yes, Lynch recommended that investors keep their eyes open for new ideas. But he didn’t stop there. Read the rest of Lynch’s book, and you’ll quickly see that anecdotes were just his starting point. He then moved on to hard analysis.

The bottom line: Lynch didn’t achieve his astounding results just by hanging around the shopping mall. Sure, that’s where he collected many ideas. But then he spent hours reading financial statements and speaking with corporate executives to learn more.

2. The Statistician. If the weakness of raconteurs is that they gloss over the need for reliable data, statisticians go to the opposite extreme: They’ve never met a spreadsheet they didn’t like.

Statisticians love to pore over companies’ financial statements, including sales figures, profit margins and more. Then they build models to forecast where those numbers might go in the future. Ask statisticians to tell you the r-squared on their latest regression analysis, and you’ll make their day.

The problem with this approach: While the math might be impressive, spreadsheets still can’t forecast the future. They can’t foresee things that will impact the overall economy, such as a pandemic. They can’t predict things that might impact specific industries, such as technology changes, price wars or even floods. And they can’t predict things that might impact specific companies, including competition and regulatory challenges. I speak from experience here. I used to do this kind of work, and I learned the hard reality that world events can upend even the most detailed analysis.

3. The Gunslinger. A few weeks back, I talked about David Portnoy, who may be the most prominent of today’s day traders. Portnoy’s signature line: “Stocks only go up. They only go up.”

But while Portnoy might be the most well-known, he’s hardly alone. Day trading has seen a significant resurgence this year due to the pandemic. And day traders aren’t the only gunslingers. The reality is that plenty of professional investors fall into that category, too. Look at a typical actively managed mutual fund, and you’ll see a turnover figure of nearly 100%. What this means is that fund managers are, on average, buying and selling almost every single one of their holdings during the course of a year. While it might be fun to be a gunslinger, the data show that this isn’t a good strategy for professionals or individuals.

4. The Philosopher. The philosopher is similar in many ways to the statistician. But philosophers focus on bigger, longer-term trends. One of today’s most well-known philosophers is Nouriel Roubini.

An economics professor at New York University, he earned the nickname Dr. Doom for being one of the first (and only) to predict the 2008 recession. Among his current concerns: the potential for military conflict with Iran, a crash in U.S. Treasury bonds resulting from conflict with China, desertification in East Africa that could create “biblical-scale locust swarms” and the risk that the current pandemic turns into a “Greater Depression.” Could Roubini be right with these doomsday predictions? Of course.

But here’s the trouble with philosopher-style investing: Any one of these predictions could come true—or they might not. So what’s an investor to do? Should you sell everything and hide out in a bunker? The bottom line: The philosopher might sound like a sage—and might even be right over some time period. But it’s hard to translate these prophesies into practical solutions.

5. The Pragmatist. The pragmatist sees himself as the voice of reason, attempting to integrate the raconteur’s stories, the statistician’s numbers, the gunslinger’s bravado and the philosopher’s worries. Among these other four, the pragmatist sees himself as the only rational person in the room—unbiased and unemotional.

In a lot of ways, that’s a good thing. It’s certainly better than any of these approaches in isolation. The problem, however, is that combining these four approaches doesn’t necessarily lead to a better answer. Pragmatists still can’t see around corners. That’s why, as an alternative, I recommend the five minds approach—which offers an asset allocation framework that’s usable even when the future is unknowable.

Adam M. Grossman’s previous articles include Skewed Impression, What to Worry About and Fed Up.  Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Take the Low Road

“BUYING THE DIP.” It’s a phrase often uttered with contempt by Wall Street strategists and money managers, who look down their nose at everyday investors who instinctively shovel more money into stocks simply because share prices have fallen.

Commentators “caution against” it, dismiss it as “not an investment strategy,” predict it’s going to “die,” argue it could get “very, very nasty” and contend that—when everyday investors buy on dips—it’s a “contrarian signal.” And I got all that based on a quick internet search.

Guess what? I love buying the dip.

It’s been a huge contributor to my financial success—to a degree that’s almost embarrassing, because buying the dip can seem perilously close to market timing. But it really isn’t. Market timing is about predicting which way the stock market is headed and then making major portfolio shifts from stocks to cash, or vice versa. It’s a strategy that’s rightfully frowned upon, because there’s no surefire way to forecast what will happen next in the stock market.

By contrast, when you invest more in stocks during a market dip, you aren’t guessing the market’s direction. Instead, you’re reacting to what the market has already done. In that sense, it’s similar to rebalancing. When you rebalance, your goal is to bring your portfolio back into line with your target asset allocation. When you buy the dip, you’re helping that goal along—and, if it means you’re adding new savings to your overall portfolio, that’s all the better.

But isn’t it naïve to buy stocks simply because they’ve fallen in price? It may indeed be naïve to sink more money into any one stock, because there’s every chance that the stock will fall and then keep on falling. But that’s never happened with the broad market. After every global stock market swoon, the overall market has always recovered and gone higher, even as many companies—and sometimes entire countries—are left behind.

Among strategists and money managers, it would no doubt be deemed more sophisticated to consider market valuations before buying the dip. But here’s the problem: If you’d avoided stocks because valuations were rich, you would likely have spent much—and perhaps all—of the past three decades sitting on the market’s sidelines, while the S&P 500-stock index soared almost 1,500%.

If valuations shouldn’t guide your buying, what should? If you’re sinking more money into a globally diversified stock portfolio, I don’t think there’s anything wrong with taking your cues from recent market action. If prices are down today, it’s probably a decent time to buy a little more of your total stock market index fund—and, if prices are down sharply, it’s likely a great time to do so.

No, price isn’t the same as value. But given that traditional valuation metrics don’t seem to tell us anything about short-term performance and relatively little about long-run returns, price may be the most reliable guide to value that we have—and falling prices may be as good a buy signal as we’re going to get.

I’ve always preferred to add to my stock funds on down days. Why wouldn’t I? And during big market downdrafts, including both 2007-09 and this year’s bear market, I moved hefty sums from bonds to stocks, while also scrounging up new savings to add to my stock portfolio. What if the market rally of recent months turns into another rapid retreat? You’ll find me buying yet again.

The Wall Street crowd may sniff at this knee-jerk reaction to market declines. But if we shouldn’t buy on dips, what’s the alternative? Buy on market rallies instead? Would that make more sense?

The truth is, belittling those who buy the dip is yet another instance of Wall Street’s ongoing and unjustified denigration of everyday investors. Wall Street’s hope: Investors will be bullied into paying up for the Street’s “sophisticated” investment services, which just happen to have a long and sorry history of market-lagging performance. Maybe all those “professionals” would post better results if they, too, bought on dips.

What they’d discover is that it takes mental fortitude. When stock prices fall, many investors—amateurs and professionals—are scared off. It requires a certain temperament, along with years of investment experience, to ignore the crowd and the prophets of doom. Want to make good money? Next time the broad market is worth less, do yourself a favor: Step up to the plate and buy more.

Latest Articles

HERE ARE THE SIX other articles published by HumbleDollar this week:

“The reality is that stocks, on average, aren’t such a good investment—but some stocks are great investments,” writes Adam Grossman. “This is why I’m such a strong believer in index fund investing.”
After 35 years, Dennis Friedman sold his condo for more than four times what he paid. A good investment? He has his doubts.
Instead of budgeting, Dick Quinn keeps the household finances on track using six bank accounts. It really isn’t that complicated. Honest.
“Daddy’s little girl has to ‘grow up’ in her investing experience,” reckons Bill Ehart. “That means finding out whether she can watch an investment plunge 50% and stick with it.”
On Wednesday, HumbleDollar introduced its new daily market report. It won’t appear again.
Everyday investors are supposedly trading up a storm and driving stock prices higher. This is the stuff of entertaining articles. It’s just a shame it isn’t true, says Mike Zaccardi.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Just Another Day, Almost Zero and My Four Goals.

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Needing to Know

YEARS AGO, when the kids were teenagers, single Dad here was cooking dinner. You guessed it, hot dogs.

I skillfully picked one up from the hot pan with my fingers and tossed it in a bun.

When my daughter began to imitate me, I nearly shrieked. She lacked my years of experience in gauging exactly how hot the sides of the dog would be, how far from the splattering grease I needed to position my fingers, how many milliseconds I had to release the dog into the waiting bun.

But something else was behind my horror and sense of guilt.

It wasn’t just that my hands already had been cut and smashed and scalded many a time and that I wanted better for my little girl’s precious fingers. Rather, it’s that we make decisions differently when loved ones are involved. By ourselves, we may jaywalk, drive aggressively and invest with borrowed money. I’m guilty on all counts. We are willing to take greater risks for ourselves than for our children.

The hot dog incident came to mind as I helped my daughter with her Roth IRA. I was recommending a 2060 target-date fund comprised of index funds, but thought about mixing it up a bit. How about a modest small-cap value stake, like Daddy has? That would reduce her exposure to the foreign stocks I’m skeptical of and to the runaway mega-cap tech stocks that scare me, both heavily represented in the target-date fund.

But in my effort to guide her financial future, I fell into old, bad habits of thought. I was tempted to act like a know-it-all. Since I wanted to protect her, I had to know what small caps would do next, didn’t I?

I wanted to trot out the charts, look at the moving averages, gauge the distance from the 52-week highs and lows. Are the small-cap value exchange-traded funds (ETFs) still red hot as they rebound from the March lows—or have they pulled back for a better buying opportunity? Are they the worst possible investment ahead of a potential pandemic-induced depression?

I felt all the destructive emotions, the angst of uncertainty, the fear of being wrong and the lust for the illusion of control. It was all nonsense.

Experience teaches us that we can succeed as investors—in fact, we must proceed as investors—without knowing how things will turn out. The more we realize we don’t know, the more prudent and balanced our decisions are likely to be.

What did I need to know to recommend small caps to her? I needed to know not the 50-day moving average, but the 40-year body of research showing that shares of undervalued, lesser-known companies have been the best investments over the long term and should continue to be. I needed to know, as I do from my own experience with multiple bear markets, that a slug of small-cap value could position her for big gains when the overly popular large-cap growth stocks—which today dominate the major market indexes—inevitably fall to earth.

But rather than just encouraging her to buy the ETF on my say-so, which she did, I should have explained the rationale more fully to her. Daddy’s little girl has to “grow up” in her investing experience someday. That means getting her fingers burned, her heart broken, and finding out whether she can watch an investment plunge 50% and stick with it. She needs to know that’s likely to happen several times in her investing career. She needs to know that risk is the price we pay for the chance at a 2,000%-plus return over 40 years. She needs to know that it’s a mistake to sell when the market breaks because such a move is almost certainly driven by fear—the fear that keeps us out of the market until after it rebounds and starts hitting new highs, as the U.S. market has always done.

She’s old enough for “the talk,” even though my talk will be far more boring than the one her mother gave her as a teenager. Maybe I’ll just have her read this.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Played for Fools, Right from Wrong and Red Flags . 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 .

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No Vacation

I SOLD MY CONDO last month and the first thing I wanted to do was celebrate. It was such a relief to get rid of it, because owning a second home requires spending precious time maintaining it. At age 69, I can think of better ways to spend my time than looking after a vacation home.

At first, I was reluctant to put the condo up for sale. I had lived there for more than three decades. It’s walking distance to the beach, and there are plenty of good restaurants and bars in the area. Also, in the neighborhood, I have many friends who are like family to me. I thought that, if I hung onto the condo, it might make a nice vacation home that we could visit during the year. The condo is also fairly close to our new primary residence.

The upshot: Selling was a difficult decision, but not one that I regret. Whenever I want to visit my old stomping ground for a lengthy period, I can always rent a place.

During the sale, the buyer told my real estate agent that I was making a lot of money on the property, because I bought it 35 years ago, when prices were far lower. Yes, I purchased the condo for $91,000 and sold it for $380,000. But did I really make a lot of money owning this condo?

If you subtract the $91,000 I paid for the condo and the $24,000 I owed in closing costs, I netted $265,000. But you also need to subtract the other expenses I incurred:

Tens of thousands of dollars in mortgage interest
35 years of property taxes
35 years of home insurance
35 years of homeowners’ association fees
Countless repairs
Remodeling costs

So did I really make a lot of money owning this condo? If it hadn’t been my primary residence—and thus provided me with a place to live—and instead the condo had been a second home, I wouldn’t consider it a great investment. I could have done far better investing the money in an S&P 500-index fund.

The S&P 500 has historically produced a total return in the 9% to 10% range, while real estate prices have outpaced inflation, but not by much. It’s also far less expensive to own an S&P 500-index fund, with annual expenses of perhaps 0.03%, or three cents for every $100 invested.

Of course, you can get some tax deductions from owning a vacation home and you can rent it out when you aren’t there. But is that enough to make it a worthwhile investment? I don’t think so.

Another thing to remember: An index fund doesn’t call you up in the middle of the night and complain about a leaky water heater. Yes, you can get someone to manage the property for you, but that means yet another expense.

I get it. It’s nice to have a vacation home in a place you really enjoy visiting. I, too, have a special place I visit many times during the year. But I realize one of the reasons it’s special is because I don’t own a second home there.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Changing My Mind, Error of My Ways and Anybody’s Guess. Follow Dennis on Twitter @DMFrie.

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Just Another Day

WELCOME TO OUR new daily market report, which we’re going to run exactly once, which is probably once too many. In market action yesterday, stock prices fluctuated—a development that shocked market observers who noted they hadn’t seen anything like that since the day before.

“If we can stay above the psychologically important 3,200 barrier, that’ll create an important support level that could build a base for a new bull market,” opined market strategist Ross Nodamus, who sits anxiously by his phone every market close, hoping some reporter will call and ask him to opine.

“Investors took a breather after last week’s rally,” continued Nodamus, who talked to precisely zero investors before cavalierly summarizing their mood. “They’re looking for stocks that will hit the ball out of the park, but these days it seems like nothing will reliably go through the uprights,” he said, adding to his illustrious history of completely meaningless sports analogies.

“It was yet another day when the sellers showed their hand, but buyers were hard to find,” said technical analyst Josephine Grandville, who has long struggled with the notion that every share sold is bought by someone. “Based on the VIX, the 200-day moving average, the put-call ratio and the odd lot indicator, the market clearly lacks conviction.”

The meandering market frustrates many market observers. “The market is fixated on consumer confidence,” noted money manager Firth Curtile, who lately can’t talk about anything else. “In the wake of recent earnings reports, it’s befuddled and yearning for direction.” When pressed, Curtile conceded he’d never heard of anthropomorphism.

“I know this is only anecdotal evidence, but I can tell how fearful investors are from the comments I’m getting from friends and family,” said hedge fund manager Rob M. Blind, whose specialty is anecdotal evidence of no analytical value.

“All this is setting us up for a vicious bear market,” reckoned Margaret Wolf, manager of the Perennially Bearish Fund, who—while convinced of the market’s ultimate direction—declined to specify when the downturn might occur, thus preserving her unassailable record as a forecaster.

As with the stock market, fixed-income experts remain sharply divided. “Bond prices rose, driving down yields,” insisted bond fund manager Rusk de Fawlt. Nonsense, countered Sterrill Chimp’s chief economist, Harry Joseph Cologne. “Yields fell, pushing up bond prices,” he argued.

Meanwhile, investors are looking ahead to Thursday’s report on initial jobless claims, which means it’s probably already fully reflected in current share prices and thus won’t make a jot of difference.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Almost Zero, My Four Goals and 15 Ways to Happy.

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Cooking Up a Story

I’VE PREPARED countless meals over the past few months—a result of COVID-19, which continues to have a big impact on daily life, especially here in Florida. Still, I’ve come to enjoy cooking and eating at home has saved me a ton of money.

But not all coronavirus habits have been good for our financial health. That brings me to the (supposed) rise of the Robinhood trader. By now, we’ve all seen the headlines and read the stories.

During the first half of 2020, one of the great narratives was the surge in trading among millennials and the generation that followed them, Gen Z. The storyline: These small traders were bidding up bankrupt company stocks, while also making COVID-19 plays like Zoom even hotter. These smalltime players have even been fingered for the recent stellar market performance of Tesla.

I love a good yarn as much as the next guy. But in this case, the evidence just isn’t there. A few weeks ago, Goldman Sachs produced a research note showing that, yes, individual investors are trading stocks and options more actively. But can we put some numbers on that?

It turns out we can.

Goldman’s researchers calculated small-sized buy and sell orders for stocks and options as a percent of total trading activity. Result? Small traders have lately accounted for about 2% of stock trading volume and 13% of options volume. These may not be perfect indicators of small investor activity, but they’re probably not too far off. What individual stocks have small investors been trading? The ones you’d probably expect: Tesla, Netflix, Chipotle, Beyond Meat and Zoom.

What’s driving the increase in retail trading volume? Three factors seem to be at play:

Commission-free trades. Brokerage commissions basically went to zero over the past two years as brokerage firms have fought to keep and increase their business.
COVID-19. The pandemic, lockdowns, working from home and online college classes have made people restless. That, I suspect, has triggered this increase in gambling—and, yes, gambling is what these traders are doing.
Trading apps. Robinhood, as well as the major brokerage firms, have apps that make it easier than ever to trade with the swipe of a finger.

Still, we need to keep this trend in perspective. Households directly hold about a third of U.S. individual stocks. Yet small retail trades represent just 2% to 2.5% of total trading volume. Buys and sells by everyday investors are not only a fraction of total market volume, but also trading is small relative to what individuals own. Think of it this way: It’s like you have $100,000 invested in stocks and you let yourself trade with $7,500 of your portfolio.

If individuals aren’t driving the market, who is? Who’s the head chef? The Fed.

Just kidding. The big players are pension funds, foreign investors, mutual funds and other institutional investors. They account for far more of the stock market’s trading volume than individual investors. Who are the biggest players? That would be computer-driven high frequency traders.

The upshot: Millennials and Gen Z aren’t turning the stock market into a giant casino, pumping and dumping stocks left and right. It may seem that way, given all the articles about “story stocks” and day traders. But make no mistake: There are far bigger cooks in the kitchen.

Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Please Ignore This, Reading the Signs and Inflection Point. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.

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Banking from A to F

YOU MAY HAVE heard me say this before: I don’t think people need to budget if they have an effective spending and saving system. Recently, a reader of my blog challenged me on that point, arguing that you need a budget to ensure you’ll have enough to pay off your credit cards in full.

Au contraire, as we say here in New Jersey.

You may also have heard of the envelope method, where some people place money in envelopes for specific expenses. I follow that approach. But instead of envelopes, I use bank accounts—six of them to be exact, which I designate with letters A through F. I also embrace technology to help with saving and bill paying, and I leverage credit cards to garner rewards. You see, I’m not your stereotypical senior citizen.

Don’t worry: I don’t pay bank fees. The accounts are all linked and always hold sufficient combined balances to get free banking.

My income is from a pension and Social Security. My pension arrives on the first of the month, while our Social Security benefits get deposited on the second and fourth Wednesday. When that happens, this happens:

Checking account (A). Receives pension deposit.
Checking account (B). Receives a set amount from account A to cover all ongoing monthly bills.
Checking account (C). Receives a set amount from account A that my wife uses for her monthly expenses. Things like clothes, nails, haircare, gifts and donations.
Savings account (D). Receives the Social Security checks. These are segregated because we try to live on my pension alone.
Savings account (E). Receives a set amount each month from account A and is designated my wife’s savings.
Savings account (F). Receives a set amount from account A and is designated my savings.

Don’t get me wrong, none of this is really my money or her money. While these accounts have specific purposes, we aren’t so inflexible that we don’t move money from here to there if it’s necessary—but it’s also rare. I’ve been known to pay for my wife’s hair salon visits from account A. Similarly, account C has bailed me out on occasion.

As complex as this may appear, keep in mind it’s all done automatically. After the transfers occur at the beginning of the month, account A’s remaining balance tells me what we have left for discretionary spending.

Nearly all of our monthly bills are paid automatically, either withdrawn from account B by the vendor or charged to a credit card to accrue rewards. The funds to pay those credit cards are already in account B as of the first of each month.

Confused yet?

Savings account D, which holds our Social Security, is designated as travel money. If we don’t travel, which is likely for the next year or more, it becomes an extra emergency fund or, as happened recently, a help-replace-a-car fund. A car helps you travel, right?

Once a year, I review our fixed monthly costs and adjust the amount transferred each month from A to B. If that goes up, as it always does, then I automatically know I’ll have less discretionary spending money available in account A. Yes, inflation on a fixed income is real.

On the other hand, our current health crisis has clearly demonstrated that we can get by on less. No trips to the mall, haircuts, biweekly salon visits, travel or dining out does actually save money. I’ve even been denied my daily cup of (plain) Starbucks coffee.

I noted that my income is a pension and Social Security, but that’s not 100% true. I have dividends and tax-free interest to fall back on. For now, that money is reinvested, but it’s also there to cope with inflation. If I need to build up cash reserves, I can stop reinvesting for a while.

So, you see, you really don’t need a budget. You just need a good banking app and some obsessive behavior about money—plus a partner who’s likeminded (sort of).

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include It Took Decades, Making Cents and Scared Debtless. Follow Dick on Twitter @QuinnsComments.

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